Peter Strachan: How Hastings has battled to the front of the rare earth queue

Peter Strachan is a capital markets veteran, resources analyst and lover of the oil and gas game. The brains behind the popular weekly StockAnalysis investment letter, which launched in 2003, Peter has worked in capital markets for over 35 years, and is a qualified metallurgist and geologist.

Tightly held rare earth element (REE) project developer Hastings Technology Metals (ASX:HAS), plans a staged development of its extensive, neodymium and praseodymium (NdPr) rich, Yangibana REE mineralisation in Western Australia’s Gascoyne region, with main construction commencing by the December quarter of 2023.

It aims to deliver up to 37,000 tonnes per annum of concentrate over the first three years of its initial 17 years mine life, containing approximately 27% total rare earth oxides (TREO) to refineries by March 2025.

Construction of an in-house hydrometallurgical refinery on the Pilbara coast, at Onslow will follow, converting concentrate into 15,000 tonnes per annum of mixed rare earth carbonate (MREC) grading 59% TREO, for sale to off-take partners.

Finalising funding by December ‘23

Hastings has a market capitalisation near $170 million. The company is poised in readiness for project development.

It has net cash of approximately $110 million ahead of finalising debt of $380 million and additional equity to fund Stage I development, along with ramp-up working capital and Onslow location holding costs.

The company is now targeting to raise approximately $190 million in equity for stage I development by December 2023.

Stage II development is expected to be supported by operating cash flow and possibly additional debt funding in 2026.

Creating value through the development process

The company estimates that after spending $500 million to finalise construction of an initial REE concentrate stage plus associated costs, the standalone development will have a net present value (NPV₁₁) of $538 million and would deliver an annual EBITDA of $174 million to the company, once in operation.

Further capital spending of $478 million to build the Onslow refinery (Stage 2) is estimated to boost total project NPV₁₁ to $1.02 billion and generate an annual EBITDA of $251 million.

A recently announced Neo strategic partner Heads of Agreement, could facilitate improved Stage 2 economics at Stage 1 through a tolling arrangement.

Technical advances offer further value adding

Metallurgical test work to support engineering design has shown that the Yangibana ore readily upgrades more than 20 times using a purpose designed combination of conventional minerals processing techniques including crushing, grinding and rare earth phosphate flotation.

Further test work has revealed excellent sorting characteristics for the Yangibana ore. Addition of an ore sorting circuit not only brings lower grade mineralisation into a profitable production window, but also improves metallurgical recovery into a concentrate, which would further enhance the value proposition for shareholders.

The concentrator will be designed with provision for an ore sorting upgrade.

Strong markets for REEs

Agreements for the sale of up to 16,500 tonnes of MREC from Stage II are already in place, including a binding offtake contract with Thyssenkrupp AG for up to two-thirds of annual production volume.

Concentrate offtake discussions are ongoing with rare earth oxides producers in Australia and offshore.

Globally, a push to decarbonise industry and transport, combined with a desire by users to ensure a high level of ESG compliance and diversify REE supply away from China, which has an 80% dominance of supply and processing, ensures that REE supply from Australian producers will be eagerly sought by the industry.

Project revenue from Yangibana will be 90% driven by the rich Nd/Pr content of its mineralisation. These metals find increasing use in permanent magnets, used in generators and electric motors, found in wind turbines and electric vehicles, radar guidance systems, mobile devices, and speakers.

Yangibana is estimated to supply 6-8% of global demand for NdPr in 2025 while demand for NdFeB alloys used in permanent magnets is set to see 167% demand growth by 2040, according to industry watchers.

In October 2022, Hastings purchased a strategic 19.9% holding in Canadian listed, rare-earth processor and permanent magnet materials manufacturer, Neo Performance Materials Inc for C$15 per share.

Despite a 68% decline in Neo’s price since that transaction, due to tight operating margins as REE prices fell into 2023, the connection with Neo offers Hastings access to significant value adding opportunities within the REE business.

REE pricing outlook is buoyant

In the decade leading up to 2021, the price of neodymium ranged from US$47 to US$91 per kilogram, but by February ’22 it peaked at around US$239 per kilogram and is currently trading at near US$84 per kilogram.

Hastings relies on industry forecast groups to set a price of US$129 per kilogram for the NdPr, which seems like a fair estimate given the outlook for the REE market, even in the face of some likely substitution by heavier ferrite permanent magnets in the case of Tesla power systems.

Mine-life expansion holds further upside

The Yangibana project has Resources and Reserves totalling 29.9 million tonnes and 20.9 million tonnes respectively, both grading around 0.32% Nd₂O₃ + Pr₆O₁₁.

However, the company estimates that mapped occurrences of mineralisation that are yet to be drilled into Resource category at Yangibana, set an exploration target for 40 to 60 million tonnes, which would double mine life to over 33 years.

Directors buying

In the light of developments towards cash flow and projected valuation upside for the company, based on its feasibility studies, it is not surprising to see that directors and executives of the company have been buying shares on the market.

Executive chairman Charles Lew paid $393,799 to add 190,000 shares since early February ‘23, lifting his holding to 6.735 million shares, while finance director Guy Robinson, recently lifted his stake to 62,616 shares after adding 13,000 shares at a cost of $20,330.

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