On the morning of September 14, Great Western Minerals Group (GWMGF.PK) President and CEO Jim Engdahl held the company’s fourth CEO conference call. I became interested in Great Western through a friend who follows the rare earths industry very closely. According to the company:
“Great Western Minerals Group Ltd. is an integrated Rare Earths processor. Its specialty alloys are used in the battery, magnet, automotive, and aerospace industries. Produced at the Company’s wholly-owned subsidiaries Less Common Metals Limited in Birkenhead, U.K. and Great Western Technologies Inc. in Troy, Michigan, these alloys contain aluminium, nickel, cobalt and Rare Earth Elements. As part of the Company’s vertical integration strategy, GWMG has signed an Off-take Agreement for 100% of the Rare Earth Elements produced at the former producing Steenkampskraal mine in South Africa and holds 100% ownership in Rare Earth Extraction Co. Limited, the owner of the Steenkampskraal mine. GWMG also holds interests in five Rare Earth exploration and development properties in North America and Africa.”
Because Great Western trades on the pink sheets and has a low stock price, the company gets little analyst coverage and almost no institutional buying interest. Accordingly, it sounded like individual retail investors dominated the Q&A session following Engdahl’s brief remarks. The tone of the discussion sounded more like an evening chat than a formal bean-counting party. The knowledgeable investors on the call sounded like true fans of the stock, giving the Q&A a more personal tone than I am accustomed to hearing in these kinds of meetings.
So, I took particular interest in the consistent recommendations from these investors that Great Western fund the company using equity rather than debt or a junior venture. One investor estimated that Great Western would only need to dilute its stock by 10% to obtain necessary funding. He stated he would be much happier going to the equity market than using some other method of funding with a foreign country.
Another investor was extremely worried that Great Western might follow the example of some hapless copper companies which have done “stupid” offtake deals that destroyed shareholder value. He kept grilling the CEO for an explanation on how he calculated the cost of capital. Engdahl tried to reassure this investor, apparently with little success, that Great Western is not doing long-term deals (“only” 3-5 years) despite having earlier noting long-term ties with customers as a major advantage of JVs and offtake deals. The CEO noted that the rare earth industry is unique given the rapid appreciation in price that has forced some hard adjustments. Near the beginning of the call, Engdahl explained that he is extremely confident that the company could arrange for financing on its terms despite the skittishness in markets. Great Western seeks to use a junior venture (JV) or offtake agreement as a top choice. There is “real and substantive interest in this option” because partners get certainty of supply. Dilution is his least preferred option for financing. By the end of the call, he seemed to acquiesce a bit by stating he would actively investigate using equity as an option for financing.
The “controversy” surrounding Great Western’s future financing will be fascinating to track.
Here are my other notes from the conference call. This is not a complete transcript; it represents highlights that caught my personal interest.
My notes from the conference call:
- Most of the money [profit] is in downstream activity where Great Western specializes.
- Low capex provides large competitive advantage. Big issue is on schedule, on budget, and according to plan: “Yes we are.”
- Separation plant most advanced in the world.
- In response to concerns about nationalization in South Africa: Normal political discourse going on right now. Great Western is working with locals. Rare earths have no value until refined (so nationalization is not as much of a threat. Local employees share in the profits of the mining company.
- Have no problem Dai Ichi Steel and Toyota rare earth deals. They are just looking for diversification in supply. Great Western is supplying 50%. See previous news release.
- Company considers getting a listing on AMEX almost monthly at every board meeting. Also considering a reverse stock split to get more attention from “conservative” investment houses.
- Cash resources about $1.5M. Put out most of capital required for this month and next month.
- The Molycorp deal for dysprosium-free wind turbines will not impact Great Western given overall shortages.
- Great Western has spent $8-9 millions to-date out of a total budget of $30 million. Hoping a good portion will come from the exercise of the warrants. Have been trying to encourage investors holding warrants at 45 cents to exercise to avoid dilution, but not offering incentives so that people who have already exercised do not feel like they have been treated unfairly.
- Canadian companies must minimally operate at Canadian standards when offshore.
- Trying to change the image of company from just an exploration company and to a mining and manufacturing company. Money will be made in the processing downstream (80%); 20% is in the mining.
- Besides Molycorp, Great Western has the only other integrated model in the game.
- First movers in the rare earth industry will have a “smorgasbord.”
- The few explorers who make it will be looking for partners like Great Western.
- There will be about 10 REE companies in 2020 when the smoke clears.
- There will be some normalcy in the industry by then.
- Cerium and Lanthanum are anywhere from 60-80% of any deposit. There will be continued pressure on certain light REEs from the magnet industry (focusing on light vs heavy REEs is a bit misleading).
- More mines in production will create more supply for Cerium and Lanthanum.
Be careful out there!
Long: Molycorp (MCP)