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What Does The Recent U.S. ORE Act Mean For Investors In Rare Earths And Battery Metals?

This article first appeared in Trend Investing on June 1, 2020; therefore all data is as of this date.

The US has finally made a bolder move to secure critical materials and safer supply chains from within the US and perhaps from their allies. In April 2020 a bill was finally passed regarding forming a US uranium reserve, and then in May 2020 two bills [Acts] involving rare earths and other key battery materials were put forward.

A background of recent US support for critical materials

Details from the two recent Acts

The US ‘ORE Act’ (Ted Cruz introduced)

Essentially the US ‘onshoring rare earths’ [ORE] Act is exactly what the title says. That is, it aims to bring back rare earths mining and processing to the US. The Act also goes one step further and includes the ‘battery materials’ that will be vital in the next decade as electric vehicles [EVs] and energy storage boom. Rare earths will also be essential for modern electronics, magnets, solar & wind projects, as well as US military applications.

In all the ORE Act covers six key critical materials – rare earths, scandium, lithium, cobalt, graphite, and manganese.

The ORE Act is designed to help miners and buyers. It states:

For buyers: “There shall be allowed as a deduction for the taxable year an amount equal to 200% of the cost paid or incurred by the taxpayer for the purchase or acquisition of critical minerals and metals which have been extracted from deposits in the United States.”

For miners: “Special allowance for non residential real property used in the extraction of critical minerals and metals within the United States. New Structures—In the case of any qualified real property— 15‘‘[A][I] if such property is placed in service on or after the date of enactment of this sub-section, the depreciation deduction provided by section 167[A]) for the taxable year in which such property is placed in service shall include an allowance equal to 100 percent of the adjusted basis of such property.”

For miners: “A grant awarded under subsection [A] may not exceed $10,000,000. [C] ECONOMIC VIABILITY. —In awarding grants under subsection [A], the Secretary of Defense shall give priority to projects the Secretary determines are likely to be economically viable over the long term. [D] SECONDARY RECOVERY. — In awarding grants under subsection [A] during a fiscal year, the Secretary of Defense shall seek to award not less than 30 percent of the total amount of grants awarded during that fiscal year for projects relating to secondary recovery of critical minerals and metals. [E] AUTHORIZATION OF APPROPRIATIONS. —There are authorized to be appropriated to the Secretary of Defense $50,000,000 for each of fiscal years 2021 through 2024 to carry out the grant program…” Noting each grant is to limited to US$10 million each and to finance pilot projects for the development of critical minerals or metals deposits in the USA only.

The American Critical Mineral Exploration and Innovation Act of 2020 (Michael Waltz introduced)

  • Permitting Reform: The Federal permitting process has been identified time and again as a major impediment to the production of critical minerals. It can take 7-10 years to permit a new mine in the U.S., while Canada and Australia can accomplish the same feat in about 2-3 years. It directs the lead Federal agency to complete the permitting process with maximum efficiency and effectiveness, including by establishing and adhering to timelines, clear and quantifiable performance goals, early collaboration with interested parties, and other metrics. This bill also allows for a sufficiency determination under NEPA and establishes a framework for a memorandum of agreement between all parties to ensure timeliness and certainty.
  • Recycling, Efficiency, and Alternatives: This legislation directs the Secretary of Energy to establish a research and development program to accelerate innovation in advanced critical minerals development strategies and technologies, in order to make better use of domestic resources and eliminate national reliance on minerals and mineral materials that are subject to supply disruptions.
  • Critical Mineral Designations: This bill prioritizes establishing a clear strategy for reducing our dependence on our adversaries by directing the Secretary of the Interior to identify vulnerabilities in the minerals supply chain and publish and periodically update a list of critical minerals to inform U.S. policy.
  • Support Innovation at Mining Schools: Prioritizes investments in the future of the mining sector by providing support to mining schools to spur innovation. The bill establishes a grant program for research, and demonstration projects related to the production of critical minerals at U.S. mining schools and programs.
  • Managing Mineral Resources: In our quest to support stable domestic supply chains, the last thing the U.S. should do is put vast swathes of public lands off limits to development – especially before knowing if valuable resources are present. This bill directs the U.S.G.S. to complete updated resource assessments for each critical mineral. It also requires that mineral resource assessments are considered in the land management process, and also ensures that large, unilateral mineral withdrawals do not take place without Congressional approval.”

Source: Highlights – American Critical Mineral Exploration and Innovation Act of 2020

On May 29, 2020 Reuters reported (regarding the above Act):

U.S. House bill aims to boost domestic mining of strategic minerals. Republicans in the U.S. House of Representatives plan to introduce legislation on Thursday to bolster domestic mining and processing of minerals used in high-tech equipment. The bill, which contains provisions worth roughly $2 billion over 10 years, is the latest in a string of recent U.S. legislation attempting to craft a national strategy to produce more lithium, rare earths and other so-called strategic minerals. The cornerstone of the bill is a provision requiring federal agencies to streamline the mining permit review process.

A look at companies with the ORE Act’s six critical materials and with deposits in the USA only

In this article I focus ‘only’ on companies with US deposits of the ORE Act six critical materials.

Companies with rare earths deposits in the USA

MP Materials is the only US rare earth deposit producer, but processing is done in China.

MP Materials (private)

MP Materials is majority owned by Chicago hedge fund JHL Capital Group and New York’s QVT Financial LP, while China’s Shenghe Resources Holding Co. Ltd. [SHA: 600392] holds a 9.9% stake. MP Materials owns and operates Mountain Pass, the only rare earth mining and processing site in North America. They plan to soon have some rare earths processing in the USA.

Rare Element Resources [GR:R8V](OTCQB:REEMF) – Price = USD 0.96

Rare Element Resources 100% own the Bear Lodge Project in Wyoming USA, which has key critical rare earths, as well as an estimated 40+ year mine life. The company states they have “unique and proprietary RE recovery/processing technology.” Their grade is 3.05% total rare earth oxide [TREO].

The Company has successfully extracted NdPr from their ore using a Germany facility. The Company recently stated their plans for 2020 which include: “Additional testwork is planned for 2020 and will include the economic optimization of process steps, developing scale-up design criteria for a demonstration plant, and confirmation of operating and capital costs estimates.”

Market cap is USD 100m. Investors can view the company presentation here.

Texas Mineral Resources Corp. (TMRC”) (OTCQB:TMRC) – Price = USD 1.92 / USA Rare Earth LLC

TMRC’s flagship Round Top Project is located in Hudspeth County, Texas. The project is dominated by rhyolite ore enriched in rare earth elements (REEs), especially heavy rare earths (HREEs), as well as several other critical elements including lithium. It is reported that the Project “offers a 130-year supply of the critical minerals.”

TMRC has a development agreement with USA Rare Earth LLC (“USA Rare Earth”) whereby the partner will earn up to 70% interest in the Round Top project once its $10 million investment leads to a Bankable Feasibility Study. Thereafter USA Rare Earth can earn an additional 10% interest with a $3 million cash payment to TMRC.

A recent Reuters report stated:

Texas Mineral Resources Corp and privately held USA Rare Earth said they will spend $10 million to $12 million to build the pilot plant in Colorado, near industry consultants and academics. The partners plan to move the pilot plant to Texas by 2021 and have full-scale production by 2023.

Current market cap is USD 111m. You can view an investor presentation here.

Ucore Rare Metals Inc. (“Ucore”) [TSXV:UCU] [GR:U9U] (OTCQX:UURAF) Price = CAD 0.15

Ucore is a development-stage mining company focused on establishing rare metal resources with near term production potential. With multiple projects across North America, Ucore’s primary focus is the 100% owned Bokan–Dotson Ridge REE property in Alaska, USA. The Company state that their project has “the highest grade heavy rare earth project within the United States based on NI 43-101 standards……The Bokan Property is particularly enriched with heavy rare earth elements, including the critical elements dysprosium, terbium and yttrium.”

Ucore have developed a new technology to process rare earths and other metals (lithium, cobalt etc) at a cost competitive basis. The potential exists also for recycling from scrap materials or tailings.

Current market cap is CAD 62m.

Non-US deposits but plans for a US processing plant

Companies with scandium deposits in the USA

There are currently no US scandium deposit producers. Many of the rare earths projects in the above section will produce some scandium as a by-product.

NioCorp Developments [TSX:NB] [FSE:BR3](OTCQX:NIOBF) – Price = CAD 0.70

NioCorp is developing North America’s only niobium/scandium/titanium project located near Elk Creek, Nebraska. All three of NioCorp’s planned products have been determined to be ‘critical minerals’ by the U.S. Government. The Company state: “The Elk Creek Project is the highest grade niobium project in North America, as well as the largest prospective producer of scandium in the world.”

Based on the updated 2019 Feasibility Study, the post-tax NPV8% was US$2.1b and post-tax IRR was 25.8%. CapEx was US$1.14b with a 2.86-year after-tax payback period, and a 36 year LOM. Average annual EBITDA of US$370m. In the FS scandium was the main contributor to revenues at ~60% (US$12.532b out of US$20.807b), with a LOM production of 3,410 Sc2O3 [MT] at US$3,676/kg Sc2O3.

75% of the Company’s niobium and 12.6% of scandium production is already under sales contracts for the first 10 years of production.

NioCorp’s market cap is C$164m. Analyst’s consensus target price is C$1.20, representing 69% upside. Investors can view the company presentation here.

2019 Elk Creek FS highlights

Source

Companies with lithium deposits in the USA

Albemarle is the only current US lithium deposit producer but their small US operations are almost insignificant to their overall revenues.

  • Albemarle (ALB) has a small lithium brine production operation in the Clayton Valley, Nevada. Their main lithium projects are JVs in Chile and Australia. They also have a significant business in bromine and also refining catalysts. Market cap is US$8.14b.
  • Lithium Americas [TSX:LAC] (OTC:LAC) has a large lithium clay project called Thacker Pass in Nevada which plans to have a DFS completed by mid 2020, based on 20,000tpa lithium hydroxide and 2,000 tpa lithium carbonate (“Phase 1”). Their flagship project is a JV project in Argentina with Ganfeng Lithium. Market cap is C$510m.
  • Standard Lithium Ltd (TSXV: SLL) [GR: S5L] (OTCQX:STLHF) operates a JV with Lanxess’ South Plant existing facility in southern Arkansas, USA, which is an existing bromine extraction facility from brine. Standard has a direct lithium extraction demonstration plant at the facility. You can read more here. Market cap is C$88m.
  • ioneer Ltd [ASX:INR] [GR:4G1] (OTCPK:GSCCF) has a lithium-boron deposit located close to existing infrastructure in southern Nevada, USA. The April 2020 DFS resulted in an after-tax NPV of US$1.265b and IRR of 20.8%, CapEx of US$785m, 26 year LOM. Market cap is A$193m.
  • Cypress Development Corp. (TSXV:CYP) (OTCQB:CYDVF) owns a lithium clay project known as the Clayton Valley Lithium Project in Nevada, USA. Their May 2020 PFS resulted in an after-tax NPV-8% of US$1.052b and an IRR of 25.8%. Capex was US$493m with a +40-year mine life. Market cap is C$19m.
  • Piedmont Lithium [ASX:PLL] (PLL) owns the lithium spodumene Piedmont Lithium Project in North Carolina, USA. Their integrated project PFS resulted in a post-tax NPV8% of 1.07b and IRR of 26%. CapEx of US$168m (mine/concentrator) + US$377m (chemical plant) with a 25 year LOM. Market cap is US$64m.

Companies with cobalt deposits in the USA

There are no companies currently producing cobalt in the US. The following juniors have US cobalt deposits.

  • Jervois Mining [ASX:JRV] [TSX-V: JRV] [FRA: IHS] (OTCQB:JRVMF) (merged with eCobalt Solutions [TSX:ECS] (ECSIF)) owns the Idaho Cobalt operations (“ICO”) near Salmon, Idaho, USA. The Project has high grade cobalt, as well as copper and gold; and a partially completed mine site. It is the largest NI 43 -101 compliant cobalt resource in the USA, with 5.24Mt M+I resource @ 0.44% Co, 0.69% Cu, 0.53 g /t Au; and +1.57Mt Inf. resources @ 0.35% Co, 0.44% Cu, 0.45 g /t Au. The Company is working on a new FS (due mid 2020), as well as a Scoping Study for an Idaho refinery. Subject to funding the project hopes to begin production by mid 2022. Analyst’s consensus price target is C$0.46, representing 168% upside on the current price (C$0.17). Market cap is A$109m. A solid choice for an advanced high grade US project.

Aerial view of the Idaho Cobalt operations

Source: Company presentation

  • First Cobalt [TSXV:FCC] (OTCQB:FTSSF) owns the the Iron Creek Cobalt Project located in Lemhi County, Idaho, USA. The 2019 Resource estimate resulted in an Indicated Resource of 2.2 million tonnes at 0.32% cobalt equivalent (0.26% cobalt and 0.61% copper) for 12.3 million pounds of contained cobalt and 29 million pounds of contained copper as well as an Inferred Resource of 2.7 million tonnes at 0.28% cobalt equivalent (0.22% cobalt and 0.68% copper) for an additional 12.7 million pounds of contained cobalt and 40 million pounds of contained copper.

First Cobalt also owns the Greater Cobalt Project and a refinery, both in Canada. A recent refinery DFS (25ktpa cobalt sulphate production, CapEx $56m) was completed, as there is a supply deal with ore from Glencore. The post-tax NPV8% was $139m with a 53% after-tax IRR, representing a payback period of only 1.8 years. The refinery has a replacement value of at least US$78m.

First Cobalt market cap is C$56m. Analyst’s consensus price target is C$0.60, representing 315% upside on the current price (C$0.145). Looks to be an absolute bargain buy.

Source: Company presentation

  • Cruz Cobalt [CSE:CRUZ] (OTCPK:BKTPF) is a project generator with six cobalt projects located in Canada and one in Idaho. Cruz’s Idaho Star Cobalt Prospect is located in Idaho, USA. The 80 acre property consists of 4 contiguous claims within the prolific Idaho cobalt belt.
  • Global Energy Metals [TSXV:GEMC] [GR:5GE1] (GBLEF) owns the early stage underexplored Lovelock Mine & Treasure Box Projects in Nevada, USA. You can read more here.

Companies with graphite deposits in the USA

The US currently produces no graphite.

  • Westwater Resources (WWR) (formerly Alabama Graphite) owns the COOSA Graphite Project and the Bama Mine Project located in the historic, past-producing, ‘Alabama Graphite Belt’ of Alabama, USA. You can read more here. The above projects also have vanadium potential. Westwater also has lithium and uranium projects. Market cap is USD 12m. Looks very cheap.

Westwater Resources summary

Source: Company presentation

Companies with manganese deposits in the USA

According to a 2017 US Geological Survey (USGS):

The United States has no manganese production or reserves of manganese ore and is totally reliant on imports of this mineral commodity……. As a result, manganese ore is not mined in the United States, with the exception of ultra-low-grade manganese schists that contain less than 5percent manganese at two mines in South Carolina—the Grover and the Martin Mines……..The United States has relatively large tonnages of resources in several districts, but the larger deposits are low grade and well below economic viability in current economic and technological scenarios.

There may be some potential for non-US deposits and companies to benefit from allied countries

  • Companies doing critical materials processing in the USA, even if the ore comes from an allied country may have potential to fill any US supply gaps. An example would be Lynas Corporation [ASX:LYC] with their rare earths ore coming from Australia and a future planned processing plant in the USA.
  • US allied countries such as Canada and Australia have potential to meet the US demand for critical materials, especially when the US is not able to meet demand from US based deposits. Manganese may be an example where the US would work with an ally country, given their shortage of economic deposits.

Risks

  • Legislation risk (and risk in the details) – There are several different Acts currently being considered with no guarantees they will be passed. They may be modified or delayed, or the November 2020 election may have an impact. The general theme is projects must involve critical materials with deposits in the USA. It may also be that only US incorporated companies will qualify, but time will tell what will be enacted. The new rules may include US processing facilities and non-US companies with US based operations.
  • Commodity oversupply and price falls – Mining companies may do poorly if there exists an oversupply forcing prices lower. Best to own the lower cost producers.
  • The usual mining risks – Permitting, project funding, environmental and production risks.
  • Currency and management risks.
  • Stock market risks – Liquidity, sentiment.

Further reading

Conclusion

Recent bills submitted to the US Government have focused on the US government supporting US based critical material projects. The most likely beneficiaries are rare earths (including scandium) and battery materials (lithium, cobalt, graphite, and manganese).

For now my top picks would be Rare Element Resources, NioCorp Developments, Cypress Development Corp., Jervois Mining, First Cobalt and Westwater Resources. First Cobalt would be my number one pick due to their low valuation and near term refinery production potential (with Glencore ore); and later complemented by their own US and Canada cobalt projects.

Feel free to mention any companies I may have overlooked in the comments section below. As usual all comments are welcome.

Disclosure: I am/we are long Albermarle (ALB), Lynas Corporation [ASX:LYC], Lithium Americas [TSX:LAC], First Cobalt [TSXV:FCC]. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information in this article is general in nature and should not be relied upon as personal financial advice.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

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