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REM: A song for Sonora

By Laura Syrett
Published: Friday, 20 March 2015

UK AIM-listed Rare Earth Minerals Plc has taken Bacanora Minerals Ltd’s Sonora lithium project under its wing and is now singing, or rather shouting, from the top of the wall about the project’s credentials. Laura Syrett, Acting Editor, speaks to REM’s CEO, Kiran Morzaria, about his company’s ambitions for the Mexico-based deposit.

This year looks likely to be a pivotal one for British resources specialist, Rare Earth Minerals Plc. (REM).

The high performing AIM-listed company describes itself as an investment business with its sights set on "a diverse portfolio of direct and indirect interests in exploration and producing rare earth minerals and/or other metals projects and assets" – a modus operandi that gives it plenty of scope to flirt with the hottest minerals on the market.

"We try to take assets at both project level – something that maybe the public can’t get hold of – and at public level and, if we can, we try to assist those companies using the expertise that we have to progress them," REM’s CEO, Kiran Morzaria, explained. 

So far, the company has stakes in four projects, two developing lithium and two exploring for rare earths. Despite its name, recently REM’s focus hasn’t been on rare earths, but rather on promoting one asset in particular – the Sonora lithium project in Mexico, operated by TSX-V and AIM-quoted Bacanora Minerals Ltd.

"We’ve been shouting from the top of the wall about the Sonora lithium project," Morzaria told IM. "But we do have a couple of rare earths plays." 

These plays are the Yangibana rare earths deposit in Western Australia, in which REM holds a 30% "free carry" interest to bankable feasibility stage (BFS), meaning that all of the work at the deposit is currently being funded by its partner, ASX-listed Hastings Rare Metals Ltd, and Narsaq, which Morzaria describes as a "very speculative, early stage" rare earths project in southern Greenland.

REM’s fourth interest is a 3% stake in TSX-V-listed Western Lithium Corp., which is developing the King’s Valley hectorite lithium project in northern Nevada, US. This holding is a pure "strategic investment", according to Morzaria.

"Our involvement [in Western] is partly because of the development of the whole of the North American electric vehicle market and the Tesla Gigafactory being constructed in Nevada – when you question, where that lithium [is] going to be sourced from, we feel that locality and geography may be part of the decision-making process," he said.

Morzaria added that Western’s locational advantages notwithstanding, the project’s cost structure sits slightly higher than Bacanora’s – "hence, we are more heavily invested in Sonora".

AIMing high

REM’s involvement in Sonora is designed to help Bacanora bring the Mexican lithium project up the development curve. Its investment amounts to a 40% total economic interest, with its actual ownership consisting of a 30% stake in the El Fleur/Sauz concessions; a 15% holding in the La Ventana concession; and a 30% stake in the Buenavista, Megalit and San Gabriel portions of the project.

"I like to call it just the Sonora lithium project," Morzaria said. "Its joint venture structure can sometimes take away from the value of the whole project – it confuses the story because it’s all about different divisions by artificial boundaries, when in fact geology doesn’t pay any attention to boundaries."

Bacanora first came into REM’s fold in early 2013. As investor positivity towards lithium on the Toronto market began to wane in the wake of the commodity boom collapse in 2012, REM responded by assisting Bacanora to get a second listing in London. The company was admitted to trading on AIM on 25 July 2014 at a price of £0.86/share ($1.27/share*), up nearly 43% on the Canadian dollar (C$) 0.69/share ($0.54/share) value it had been trading at on the TSX-V a month earlier. 

Part of the reason for this impressive performance by Bacanora’s stock is due to REM’s buy-in, Morzaria concedes, but he also feels that the AIM market is more receptive to the lithium story than the now rather jaded TSX-V.

"I think AIM is a deeper market in terms of liquidity if you’ve got the right story and the right project. Capital raisings [for Bacanora] on AIM never been much of an issue for us," he said.

In February 2015, the company’s valuation of C$102.2m, or around £54.4m in London, ranked it in the 10 largest mining firms by market cap on the TSX-V, earning it a place in the 'TSX-Venture 50’. On AIM, the company was ranked 16th out of the listed mining companies at the end of February, right behind REM’s own spot at number 15 based on its market cap of £59.9m in London.

One of the ways REM has looked to promote Sonora has been through increasing its public exposure through frequent project updates on AIM and via the bellicose Twitter feed of REM’s chairman, Australian-born entrepreneur David Lenigas.

Lenigas’ use of social media to push REM’s projects has earned him something of a reputation among fund managers and brokers, but the onshore oil and gas executive turned mining investor has met his critics head on with an unapologetic reinforcement of his approach.

"Life is too short and great opportunities don’t hang around for procrastinators. We know what we want," Lenigas replied recently to a Twitter follower who accused him of being opportunistic and aggressive.

He has also sought to dispel the idea that REM is only focused on lithium. "Every[one] keeps forgetting about our 30% currently free carried interest in Yangibana REE play in Oz. I haven’t," he tweeted at the beginning of March.

Around the same time, Lenigas publicly disavowed his interest in becoming the CEO of Bacanora, but shortly afterwards accepted a position on the company’s board.

According to Morzaria, having direct management control of its investments is not part of REM’s strategy. "The most appropriate move for [Bacanora] was to bring in somebody with experience in the lithium industry. Commissioning a plant and successfully steering a project through its PFS [pre-feasibility study] and BFS are some of the more challenging hurdles a junior lithium company has to negotiate – we’ve seen that with other companies that have had trouble along the way," he said.

Sonora

Formed from an old player lake, the Sonora lithium project is formed from fluvial-lacustrine sediments that contain lithium-bearing clays, deposited in a sedimentary basin. 

Spread across three main licence areas – El Fleur/Sauz, La Ventana and Megalit – the project has an indicated resource of 121m tonnes at 3,120 parts per million (ppm) lithium (Li) at El Fleur/Sauz, for 1.2m tonnes lithium carbonate equivalent (LCE) and 75m tonnes at 3,174 ppm Li at La Ventana, for 12.01m tonnes LCE, according to REM’s February 2015 investor presentation. Resource definition is underway at Megalit.

According to the preliminary economic assessments of the sites, El Fleur/Sauz is capable of producing up to 69,800 tpa battery grade LCE and La Ventana up to 35,000 tpa LCE. "Whether the market is capable of absorbing that is another matter, but [this is] just showing a maximum of what can be done on El Fleur/Sauz," said Morzaria.

Part of the reason both Bacanora and Western’s projects caught REM’s interest is that they are open-pittable and therefore cheaper to mine overall, according to Morzaria, who compared Sonora to "more costly" underground project’s such as Rio Tinto’s Jadar project in Serbia, which is also a lacustrine sedimentary basin deposit.

Based on its latest scoping study, El Fleur/Sauz has an estimated operating cost of $2,525/tonne LCE, while La Ventana comes in at $1,958/tonne LCE.

This compares with costs of around $2,000/tonne LCE at the Chilean salar operations run by Sociedad Quimica y Minera (SQM), the world’s largest and lowest-cost producer of lithium. Mining costs for hard-rock, spodumene-based lithium producers, such as Australia’s Galaxy Resources Ltd, sit above the $4,000/tonne LCE mark, although these producers have the option of leveraging higher grades (around 3% Li2O) than clay deposits.

This emphasis on obtaining the highest net present value (NPV) for El Fleur/Sauz (which comes in at $2.02bn, at an 8% discount rate) had the effect of increasing the mining cost estimates, Morzaria explained, because achieving the highest possible revenue stream meant factoring in a larger strip ratio, which presently stands at 4:1. 

"That doesn’t necessarily give you the lowest cost per tonne and hence we ended up with [an estimate of] around $2,500/tonne for El Fleur/Sauz, as opposed to La Ventana, which came out at around $1,900/tonne but with lower production," he said. La Ventana has an NPV of $848m, at an 8% discount rate.

Morzaria noted that Bacanora has plenty of scope to customise Sonora’s production to market demand – whatever that market may be by the time the project enters production.

As for processing Sonora’s ore, the company is already running a pilot batch treatment processing plant at the site, which is based on a roast with gypsum and salt after which the ore goes into solution prior to evaporation using heat, rather than ponds. The most expensive part of this process will be the energy costs of the roast, which involve heating the lithium ore at 850-1,000°C for anywhere between 30 minutes to an hour, according to Morzaria.

The lithium market

It goes without saying that REM’s stance on the lithium sector is a bullish one.

"It’s a very interesting market and ripe for a new entrant at a low cost – which is what the Sonora lithium project is," Morzaria told IM.

He notes that cathode producers who egg lithium juniors on with projections of supply gaps in the battery lithium market have the motive of encouraging more supply in order to lower their own sourcing costs.

Nevertheless, he pointed to estimates that the lithium market will require a 10% increase in supply if electric vehicles take off before the end of the decade and that, even without this inflexion, there could be room for as much as 5-6% additional lithium supply.

"You’ve got to ask where this is going to come from. FMC doesn’t look like it’s going to increase its production and SQM faces problems in increasing production, because any of the salars do," Morzaria said.

He added that Bacanora, with REM’s help, is now looking at bringing in partners and talking to possible offtakers for its projects. "Specifically on the lithium, because you need to bring them in earlier," Morzaria explained. "It’s about developing those relationships and seeing where we go from there."

*Conversions made March 2015