Mkango Resources: Identifying the right production strategy in the rare earth mining sector

----Interview with William Dawes, Chief Executive Officer and Director of Mkango Resources Ltd, and Alexander Lemon, President and Director of Mkango Resources Ltd.

Asian Metal: Good Morning Will and Alex and thank you very much for coming in today. There has been some exciting news from Malawi with the release of the final stage II drilling results for the Songwe deposit.
Asian Metal: In today’s increasingly competitive RE mining sector, different rare earth projects have chosen to emphasize different aspects of their respective deposits. While some maintain that a high TREO grade is critical, others believe the ratio of HREOs to LREOs is of the utmost importance. What are the most important factors to consider when evaluating a rare earth deposit and which characteristics differentiate the Songwe deposit from its competitors?
Will: The key factors we think are important are similar to any resource project; firstly it’s the in situ value, that is, the gross value per ton of rock in the ground. What feeds into in situ value is obviously the mix of rare earths, most importantly the proportion of critical rare earths, which as defined by the US department of Energy are neodymium, europium, terbium dysprosium and yttrium. It is important you have a good in situ value with a relatively high proportion of the heavy rare earths and the critical rare earths. We think these value proportions are very important as they are major drivers of project economics.
The second factor to consider is the mineralogy and the recovery because effectively it is the mineralogy which drives the processing costs and the processing costs which drive the operating costs. Mining costs for our project would be fairly low, particularly in comparison to the in situ value, as it would likely be an open pit operation. The mineralogy and processing are the key components.
Thirdly it is important to consider project infrastructure. Malawi is a country that has a stable working environment with a lot of new infrastructure projects planned and underway. There’s a new railway line being built across southern Malawi. There are new roads being put in place; we will have a tarred road being built a large proportion of the way to the project site. There are also new power stations in the planning stages. At our current stage, Malawi is an ideal place to operate and I think that in the future the business environment will only improve. We have looked at a lot of projects around the world and we chose to really focus in on Malawi because the mineral potential is so strong and the work environment is excellent.
In summary, the key strengths of the Songwe deposit are a good in situ value, good proportion of heavy and critical rare earths, well defined mineralogy, good and improving infrastructure, and a favourable operating environment.
Asian Metal: The past few years have seen RE mining ventures surface in a wide range of both geographically and topographically diverse areas. With the exception of Lynas’ Kangkunde deposit, Mkango is the only rare earth venture operating in Malawi. What advantages does the Malawi location offer and how does Mkango plan to capitalize on these unique attributes?
Will: Malawi is a rare earth mineral province, which has been known for approximately fifty to sixty years. The mineral potential is very large and the rare earth potential is very large, but it is under explored. There was some work done in the late eighties, which was very useful because it formed a platform for the next stage of exploration, but there is still a tremendous amount of exploration potential. At present, there are a number of other projects underway in Malawi in relation to rare earths, niobium, uranium and other commodities but we believe there is significant potential for expansion of Malawi’s mineral sector.
It’s not like parts of the world that have been explored over many years and where many of the mineral opportunities are already well documented. We believe there is good potential for new discoveries in Malawi for all different types of mineral deposits using modern technologies and building on the work completed in the past.
Asian Metal: What are Mkango’s plans in terms of exporting finished rare earth products and importing necessary input materials?
Will: There is a new railway line being built by Vale from Tete province through Southern Malawi to Nacala, which is a deep water port. Since we would be producing a high value product, the actual transport side of things is not a major cost. But in terms of bringing in machinery, leaching reagents, and other necessary inputs, it will definitely be a major attribute.
Asian Metal: A sound production strategy is critical to the success of any RE mining venture. While Molycorp and Great Western Minerals Group have adopted vertically integrated models focused on the production of high value products (i.e. permanent magnets or PM alloys), other ventures are considering cutting back on capital expenditures by only advancing production to the rare earth concentrate phase. What is Mkango’s current production strategy?
Will: Mkango is looking to go as far downstream as is warranted by the project economics. We would ultimately like to go as far downstream as possible, but we are really looking to keep our options open at the moment. At present, we would not be looking to scope a billion dollar operation but something more modest initially, albeit with expansion options, given the nature of this sector and the current market environment.
It is really the same as any business opportunity; you need to weigh all the risks and rewards. Clearly the further you go downstream the more marketing becomes something that you need to deal with. We are close to putting out our resource estimate, so we are still in a relatively early stage, but we are working to build dialogue with some of the major RE end user to make sure the necessary marketing relationships are in place when we reach production in the future. We may not be signing the major contracts for RE magnets, or even for RE magnet raw materials, in the immediate future, but we want to make sure that the relationships with the relevant parties exist. When it comes to marketing and distribution, relationships are often times the critical factor.
Asian Metal: The escalating Senkaku/Diaoyu island dispute and the looming possibility of a Chinese suspension of rare earth exports to Japan has reminded the world that China’s dominant position in the rare earth sector can be leveraged towards political objectives. In your own opinion, what steps must the ROW RE sector take to avoid potentially market damaging supply disruptions and to ensure a secure global supply model? How does Mkango fit into this model?
Will: What the global ROW sector needs is a feasible diversity of supply that can be sourced from real projects and developed by real companies in stable regimes. It is important for consumers to have stable prices in order to generate confidence on the demand side and justify R&D which will benefit the entire sector in the longer term. I also think access to capital is going to be absolutely critical going forward for the sector.
Mkango fits into this model because our initial strategy would be to scope an initially modest scale of operation that will fulfil a niche area in the market and represent a more achievable goal for the group. We are focused on developing a project that makes economic sense and are willing to adopt different strategies to accomplish this goal, drawing upon all of the expertise we have in the technical, financial, and operating side of project development.
Asian Metal: Price levels for virtually all rare earth products have plummeted since mid-2011 highs, and in the case of most rare earth markets, a poor outlook for downstream consumption in the near future suggests downwards pricing trends are likely to continue. What is your outlook for RE markets during the next 6 months and which materials within the Mkango rare earth oxide (REO) basket are likely to benefit from demand growth in the long term?
Will: There have been concerns about cerium oversupply with the additional production coming on stream, which is why there is a lot of focus on the heavy rare earths and the critical rare earths. We have encouraging levels of heavy and critical rare earths in our total rare earth oxide grade, equating to significant proportions from an in-situ value perspective, and are optimistic about the sector because we think it is a great opportunity in the long run. The market requires both stable prices and a secure diversified supply chain in order to support current global demand and catalyze research and development into new technologies. Projects outside of China will assist R&D efforts by ensuring security of supply for many of the downstream industries.
In the long term, we are optimistic markets will realize a diversified supply chain with sustained stable price levels, but in the short to medium term, there is a potential for another price spike if ROW projects see additional delays to production and if the global economy sees an uptick in demand. Nevertheless, there is a huge number of unpredictable variables that can entirely change the future outlook for the RE sector so no one really know exactly what’s going to happen. At present, our main focus is positioning ourselves to minimize CAPEX and operating costs.
Alex: it is not such a negative thing for prices to be coming off from what they were last year. Last year’s prices were hugely inflated and, in the case of many applications, were not sustainable. The recent decline represents a market normalization of sorts and hopefully a degree of price stability will be attained in the medium term through the introduction of new ROW supply sources. There are so many applications being researched as well as new applications already in the development pipeline that rely upon these materials and the introduction of a stable and secure supply chain will be critical to their eventual success.
Although recent progress at the Songwe deposit has been encouraging, several other potential RE mining ventures are farther along in terms of their respective mine production timelines. How does Mkango plan to mitigate these early-to-market advantages and which hurdles pose the largest challenge to the current Mkango production timeline?
Will:It is not always best to be first to the market in an emerging commodity sector. In a lot of other industries, where you have a complex and evolving production process, if you are first to the market you may be taking on more risk in terms of financing, technical and other aspects.
At the same time, we have also realized that the knowledge base about rare earth mineralogy and processing outside of China is increasing as companies start to reach the production stage. Is it best to be taking more risk as one of the first companies to production? We have taken the perspective that a company who enters the market slightly later with a smaller level of production actually stands to realize superior project economics due to greater ability to manage risk. At present, we are very happy where we are in terms of a production timeline.
Asian Metal: Thank you, Will and Alex, for your time today and we look forward to the release of the Songwe Hill project’s maiden resource estimate.