Lithium’s magnetic attraction
Rare Earth Minerals (LONDON:REMP) aspires to be the go-to lithium and rare earths investment company on the London Stock Exchange. Its strategy is to develop a global portfolio of exploration and producing assets through direct and indirect investments. To this end it has acquired stakes in strategically located Northern American lithium projects.
Its main investment is the Sonora Lithium Project in Northern Mexico, in which it holds a 40.06% effective interest, with the remainder owned by Bacanora Minerals (LONDON:BCNB). Lithium demand growth is driven mainly by electrical vehicle lithium-ion battery use, exemplified by Tesla Motors (NASDAQ:TSLA.O)’ intention to build the world’s largest lithium-ion battery factory in Nevada.
Increasing stake in Sonora Lithium Project
REM’s largest investment is in Bacanora Minerals’ (TSX-V:BCN) Sonora Lithium Project in north Mexico where it holds both direct project stakes and is a shareholder in Bacanora (REM invested £5.1m over the last 17 months increasing its stake to 14.37%). REM's CEO Kiran Morzaria was appointed to BCN’s board in September 2014 and on 12 February 2015 REM requisitioned a meeting of BCN’s shareholders to seek the appointment of REM chairman David Lenigas to BCN’s board. This is aligned with REM’s strategy to engage in both active and passive investments.
Indirect interests add further lithium & REE exposure
REM has a small 3% indirect interest in Western Lithium (TO:WLC), which recently started to sell (from October 2014) high-tech drilling muds for the US oil industry from its Hectatone Organoclay Plant in Nevada. WLC’s resource is also clay-based and is potentially another candidate to supply Tesla’s battery factory. Other REM investments are in the Yangibana and Greenland rare earths projects.
Valuation: Project assessments at very early stage
Our base case valuation is for the key Sonora Lithium Project, for which REM has commissioned its own scoping study. This outlines 34.6Mtpa of run-of-mine (ROM) ore with an average output of 69.8kt of battery-grade lithium carbonate (LCE) or equivalent over a 20-year mine life; we tentatively estimate that production will start in 2017, which is based on BCN timelines. The study details capex of US$485m and a US$6,500/t LCE price and we apply a 10% discount rate to reflect general equity risk. On this basis we value REM’s effective 40.06% of Sonora at 2.40p per share. Further value is geared to the value of the Magdalena Borates project 100% owned by BCN, and in which REM has an effective 14.37% interest, and REM’s 30% direct interest in the Yangibana REE project in Western Australia (see page 2).
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