With an anticipated capex of more than $2 billion and the high degree of uncertainty and risk that financial markets associate with producing rare-earth elements outside of China, Peter Cashin knew that unless a prefeasibility study on the Strange Lake B-zone rare-earth project in northern Quebec yielded a 20% after-tax internal rate of return (IRR), it probably wouldn’t make the cut. And now a new prefeasibility study clears that hurdle, with an after-tax 22% IRR.
“We knew that it would come in at a range of 20–25%, so we did it,” Cashin, president and chief executive of Quest Rare Minerals (TSX: QRM; NYSE-MKT: QRM), says in an interview. “Now we have the opportunity to push the number higher by optimization.”
A hydrometallurgical plant built in southern Quebec would process four products: a mixed heavy rare earth element (HREE) + yttrium oxide concentrate; high-purity zirconium basic sulphate; high-purity niobium oxide; and a mixed light rare earth element (LREE) double-sulphate concentrate.
Revenues would average $1.1 billion a year, of which 55.8% would come from selling HREE + Y concentrate, 17.3% from zirconium product, 12.9% from niobium product and 13.9% from LREE concentrate.
Based on a minimum 30-year mine life, Strange Lake’s initial capital expenditure would tally $2.6 billion, and could be paid back in three and a half years. At a 10% discount rate, Strange Lake’s after-tax net present value clocks in at $1.8 billion, and rises to $2.5 billion at an 8% discount rate. Cash-operating costs average $432 million per year, or $300 per tonne milled.
The standard truck-and-shovel operation would target the highest REE grades possible for the first 10 years of production, followed by lower-grade mineralization in the following years. The mine is designed to ship 1.44 million tonnes of ore annually to the plant at an average waste rock-to-ore stripping ratio of zero to 34.
The new prefeasibility study envisions that the ore mined from an open-pit operation at Strange Lake would be crushed at the mine site and trucked to Labrador, where it would be shipped along the St. Lawrence River to Quest’s hydrometallurgical plant in southern Quebec.
Cashin says that if Strange Lake succeeds, it will create a new industry in the country. “What we’re proposing is not a mining project: it’s a fully integrated industrial complex,” he explains. “We’re proposing that it will provide a catalyst that will set up a brand-new industry that will put Canada and Quebec on the map as a HREE supplier to the world — and possibly even to China. The Chinese authorities have said that they have a finite resource within China, and there is a strong possibility that they will become HREE importers themselves.”
The CEO notes that the majority of the capital required is for the hydrometallurgical and separation process, and so far the feedback on the chemical portion of the industrial complex has been favourable. “We’ve been told by our partners that undertook peer reviews of the flow sheet that, in terms of the level of development of the hydrometallurgical process, we’re well ahead of our peers in terms of having ironed out many of the technical grey areas that are inherent in developing a flow sheet . . . we’ve come up with an efficient process flow sheet that will let us maximize the value proposition of the materials contained in the rock.”
He continues that “published recoveries we’ve seen in advance reports by our peers are in the order of between 50% and the high 60% of rare earths in general, and we’ve [since] published recoveries of between 81% and 85%.”
He says that Quest can have a higher margin on the products they produce, which puts the company in a competitive pricing position.
“Since it is going to be the first plant producing HREE products, we’re making a major investment in new processing systems that are going to be tested at a larger pilot-plant level.” Quest is developing the pilot plant, which will begin processing material in the early part of 2014.
Cashin says that improving the process flow sheet; restructuring the business model into multiple, integrated operating entities; on-site ore beneficiation to reduce shipping volumes and costs; and developing an Aboriginal-owned operating company to assume control of all ground and marine logistics could lead to improved operating efficiency.
Potential process improvements that were not incorporated into the prefeasibility study might include the production of an HREE + Y chloride concentrate instead of an oxide concentrate, which would cut operating costs for producing HREE + Y, while producing a concentrate that would be an improved feedstock when compared to individual separation processes. The production flow sheet could also be altered to make a niobium concentrate instead of a high-purity niobium pentoxide. In the latter case, there is potential to improve the quality of the initial niobium concentrate and make it suitable as feedstock for ferroniobium production, eliminating the need to refine the concentrate in a separate solvent-extraction circuit.
“What we particularly like about it is that we’ve identified lots of optimization opportunities that will let us lower operating expenses going forward,” Cashin says. “Even though there will be engineering changes, I think we can improve on what we’ve presented.”
In terms of financing, Cashin says it could come from a combination of things, including investment by strategic partners, off-take partners, sovereign wealth funds and the provincial government of Quebec.
Quest signed a non-binding letter of intent in July to sell 100% of its zirconium production to TAM Ceramics in the Niagara Falls area of New York state, and Cashin says his management team is also working with a group in the European Union that already has separation technology for individual HREEs from concentrates, as part of their business model and a distribution network. Quest has “a number of discussions occurring” with entities in North America, Europe and Asia “that have expressed interest in what we are doing.”
While Cashin declined to name which companies have expressed interest in taking product from Strange Lake, he said that potential clients might include magnet makers selling to manufacturers in the defence, automotive and wind-energy industries.
Under a timeline outlined in the PFS, Quest will begin a feasibility study on Strange Lake in next year’s second quarter. Then it could conceivably build facilities in 2016, complete construction and commissioning in 2017, and deliver its first product in 2018.
Strange Lake is 1,100 km northwest of Quebec City and accessible by air from Schefferville, Que., and from Nain and Goose Bay in Labrador. Vale’s (NYSE: VALE) nickel-copper mine at Voisey’s Bay lies 125 km east.
The Strange Lake B-zone deposit contains indicated resources of 278.13 million tonnes at 0.93% total rare earth oxides (TREO); 1.92% zirconium oxide and 0.18% niobium pentoxide. Inferred resources stand at 214.35 million tonnes of 0.85% TREO, 1.71% zirconium oxide and 0.14% niobium pentoxide.
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