• A Major Knock Takes a Knock: The major negative responses to Great Western Mineral Group Ltd.'s (GWG) Steenkampskraal REO mine are: (a) it is in South Africa; and (b) that the resource there is small.  We can't move the mine, so country risk remains as evaluated by individual investors.  But like most others who have visited the site, we were of the opinion that the size of the resource would grow with drilling.  We have now received confirmation that this is true.

    We maintain our STRONG BUY rating and $2.00 target price, based on a DCF analysis incorporating our published REO price deck, initial 5,000 tpa production scaling to 10,000 tpa over time, and an integrated mine-to-market model involving the use of Nd and Pr oxides produced at Steenkampskraal by the company's alloy manufacturing subsidiary, Less Common Metals.   
  • Bigger Resource: The company's first 43-101 document, dated May 18, 2012, outlined a total I&I mineral resource for Steenkampskraal of 131,500 tonnes at 18.0% in situ grade, or 23,700 tonnes of TREO (10,100 tonnes TREO indicated and 13,600 tonnes TREO inferred).  This new update increases the size of the resource to a total of 74,100 tonnes of TREO (32,000 tonnes TREO indicated and 42,100 tonnes TREO inferred).  The new resources is larger by 213%, across both indicated and inferred categories.  
    In the past, one of the major criticisms of the project was its small resource size.  We had always believed that the resource could be increased substantially through drilling, given its apparent origin and structure based on past underground and surface work.  However, these new results confirm that thesis.  If we assume comfort with both the indicated and inferred categories, then the mine life (at a presumed production level of 5,000 tpa TREO) has expanded from just under five years to more than 14 years.
    The company intends to continue drilling, to both expand and upgrade the resource.  We see no reason that additional major increases in size cannot be delivered.  Note that since Steenkampskraal is located in the desert in the Western Cape region of South Africa, there is no significant seasonality to drilling.  
Conclusion: GWG remains our rare earth junior Top Pick. With new and strengthening management, a growing resource at Steemkampskraal, and continuing success in developing processing assets at Less Common Metals, we see good support for our STRONG BUY rating and $2.00 target price (based on a DCF analysis incorporating our published REO price deck, mid-2014 production of separated and purified REOs, and downstream sale of high-quality sintered magnet alloy).
We do caution investors that there are likely some bumps in the road, the most obvious one being a likely apparent shortfall in available capital compared to contingency requirements outlined in the forthcoming PEA.  However, we also see significant opportunities available within the REO industry to mitigate capital needs and execution risk, such as partnering.  We maintain our STRONG BUY rating.