Steenkampskraal: An Update

by Gareth Hatch on March 4, 2011 · 27 comments

in Rare Earths, Site Visits, South Africa

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In the past couple of weeks or so we’ve seen a number of news releases from Great Western Minerals Group Ltd. (GWMG) (TSX.V:GWG, OTCBB:GWMGF), concerning efforts to move their Steenkampskraal rare-earth project forward. After announcing a new exploration program at the site, and the “advanced discussions” concerning the construction of a separation plant in South Africa, the company announced the completion of the purchase of Rare Earth Extraction Co Limited (Rareco), the operators of the Steenkampskraal project.

Last month, while in South Africa attending Mining Indaba 2011 in Cape Town, I was able to sit in on an extended update from GWMG and Rareco management on their recent activities, some of which has subsequently been published in the above press releases and reported elsewhere. I also had the chance to visit the Steenkampskraal property itself.

Trevor Blench, Chairman of Rareco

Trevor Blench, Chairman of Rareco

Trevor Blench, Chairman of Rareco, said that the company acquired its 20-year mining license for Steenkampskraal in June 2010, and that a condition of its issuance was that the project had to commence within one year of issuance. He noted that the Rareco environmental management and social & labor programs had been approved and that arrangements to fully implement the Black Economic Empowerment (BEE) initiative were well underway. The BEE program was created by the government of South Africa after the end of the apartheid era, as a means of trying to give so-called Historically Disadvantaged South Africans (HDSAs) economic opportunities not previously available to them.

Mr. Blench noted that the previous operators of the mine site at Steenkampskraal, which was originally established to produce thorium in the 1950s and 1960s, left it in an appalling state. In return for the company agreeing to conduct appropriate remediation and rehabilitation work on the site over the life of the future mining campaign, associated mineral royalties normally payable to the state, have been waived, until the cost of the work has been met. My subsequent discussions with GWMG management indicate that without this arrangement in place, a royalty of up to 5% of gross revenues on refined mineral products, and up to 7% of gross revenues on unrefined mineral products, would normally have been due. GWMG and Rareco will not be obliged to spend money on rehabilitation at the same rate that royalties would have been due; the company has already placed R0.5MM in a rehabilitation fund and the fund will be reviewed annually.

Mr. Blench went on to note that a nuclear license is required for the Steenkampskraal project, in order to deal with the radioactive materials resent, and that this was previously approved by the authorities. The Steenkampskraal mine is an approved site for the storage of thorium as a result, a fact which Mr. Blench deemed to be a critical success factor for the project. It should be noted that under the existing nuclear license from the National Nuclear Regulator (NNR), GWMG / Rareco has to submit for approval, a detailed work program for each activity planned on the Steenkampskraal site, so that the NNR can provide the appropriate guidelines required while conducting such programs. The company also has a Draft Scoping Study out for public comment at present, prepared in support of the Environmental Impact Assessment Report, which is required in order to obtain a Waste Management License for production.

He also noted that the historical rare-earth ore reserve numbers for Steenkampskraal were established using a 5% cut-off grade, and given today’s pricing, the potential reserve would increase significantly if a lower grade was used (this is actually a similar cut-off grade to the one used by Molycorp for the Mountain Pass mine, which would probably also benefit from a lower cut-off grade value).

Gerrit Horne, Independent Trustee of the BEE Trust Fund

Gerrit Horne, Independent Trustee of the BEE Trust Fund

We also heard from Mr. Gerrit Horne, a labor lawyer and an independent trustee of the BEE trust fund to which Rareco donated 26% of its shares in Steenkampskraal Monazite Mines Corp (SMM). SMM is the specific legal entity that owns and controls the Steenkampskraal property, with Rareco retaining 74% ownership of SMM following the transaction. The fund will have a total of three trustees; one independent (Mr. Horne), one from SMM (Mr. Blench) and a third trustee who will be elected by the future HDSA employees of the mine, once it is operating. In addition, this third trustee will also serve on the board of SMM. The BEE trust fund will receive 26% of the revenues generated from the production of monazite concentrate at Steenkampskraal, without being required to put up capital in return. Mr. Horne commented that Rareco’s approach to the BEE initiative is viewed by the South African authorities as a good model for such initiatives within the mining industry.

Mohamed Mahdi, President of Rareco

Mohamed Mahdi, President of Rareco

Finally, we heard from Mr. Mohamed Mahdi, the newly appointed President of Rareco. He said that the South African government is keen to exploit its natural resources intelligently, through the extraction and subsequent beneficiation of minerals inside South Africa – leading to the creation of new jobs and bringing further competencies and enhanced competitiveness to South Africa. He built on Mr. Horne’s comments concerning the efforts built-in to the Rareco plan, to uplift communities local to the Steenkampskraal project, through the BEE program. Mr. Mahdi’s comments were actually quite striking, really bringing home the South-African perspective, and just how much the authorities want projects of this type to succeed. Those of us staring at rare-earth material-grade spreadsheets all day, can sometimes forget the human dimension inherent to projects located in historically disadvantaged areas such as South Africa or the First Nations territories of Canada.

Per GWMG management, Mr. Blench will continue on as the Chairman of the Rareco Board of Directors. GWMG has now acquired 92.6% of Rareco’s shares. A 75% ownership stake would have meant that there was no longer a requirement for the company to solicit votes from minority shareholders on important issues; going past the 90% mark means that the remaining minority shareholders are obliged to tender their shares to GWMG.

On the last day of the Mining Indaba event, I had the opportunity to accompany the GWMG and Rareco management team and directors, analysts and others on a visit out to see the Steenkampskraal project first-hand. Following a short 40-minute flight from Cape Town to Vredendal, the group took a 90-minute drive out to the mine, where the Rareco team gave us a tour of the site. Photos from the tour can be seen by clicking on the thumbnails below. The site is reached via a hard-dirt track across the back country.

The thorium at Steenkampskraal was discovered in 1949. Anglo-American mined from the top of an original outcrop down 100-120 meters, with stopes going along strike. Mr. Blench said that a monazite concentrate was produced on-site, and that mineral-bearing rocks were manually hand sorted during processing. Anglo-America was only interested in materials with 2% or greater Th, which contained 15% total-rare-earth oxides (TREOs) or more – anything else was simply tossed into the rock waste dump. The existing dump contains an average 7% TREOs. Also present are slime dams, containing very fine materials that are hard to recover.

Mr. Blench indicated that the plan is to blend surface materials and underground broken ore ahead of processing. There is apparently 2-3 years-worth of broken ore already present in the mine, available for immediate processing, with the ore below ground averaging around 17% TREO content.

Mr. Blench commented that in the early days of Anglo-American’s original mining campaign, the ore body was high-graded, in some cases resulting in materials containing 80% monazite, and up to 50% TREOs! Little peripheral drilling was undertaken outside of the main ore body, at that time, which was simply followed into the ground. GWMG’s recent press release indicates that exploratory drilling will be undertaken in the vicinity of the original ore body and beyond, to ascertain potential resources elsewhere on-site. The company has also acquired significant data sets from the previous mine operators. Mr. Blench noted out that there are potentially recoverable quantities of copper (with grades up to 1%), silver (Ag) (up to 18 g Ag / t) and gold (Au) (up to 1 g Au / t).

I asked the management team how the original connection between GWMG and Rareco came about, and why Rareco did not decide to simply develop the mine itself. I was told that in fact Rareco did want to develop the mine itself, and that the company received a mining license for the project in 1997, was financed and all ready to go – only for rare-earth prices to drop. The company tried to make a go of things a second time around, when prices started to recover in the middle-to-latter part of the last decade, but the recession hit, making it difficult to finance such mining projects, so Rareco decided to look for a partner. This was around the same time that GWMG acquired Less Common Metals (LCM), and according to GWMG, they were looking for a project that could be fast-tracked into production (in contrast to the other projects in their portfolio such as Douglas River, Hoidas Lake or Benjamin River). GWMG were introduced to Trevor Blench and GWMG made its first visit to South Africa to evaluate the Steenkampskraal project, in September 2008.

I also asked what sort of cost savings, from LCM’s point of view, that LCM would see on an annual basis, by procuring material via the mine at Steenkampskraal, as opposed to buying it from China. I was told that by flowing through the margin through to LCM, the margin jumps from 10-15% EBITDA / revenues to around 70% at today’s pricing.

There has been a fair amount of discussion on the projected start date for Steenkampskraal, and how that depends on whether or not a Bankable Feasibility Study (BFS) is completed. GWMG management indicated that the lion’s share of the timeline is still the construction phase, with production slated to begin by mid-2013. Should the company decide to complete a full-blown report, it would be finished by the end of this year. The decision to complete a BFS, depends on whether or not GWMG decides to try to use debt financing to raise the money to cover capital costs. Not going with the full BFS would bring production forward a few months, but would likely require GWMG to fund the costs via alternate means.

Finally, I asked about the processing of materials, once they are mined from Steenkampskraal. GWMG issued a news release a couple of weeks after the site visit, indicating that they are in “advanced discussions” with a number of companies, with the goal of constructing a rare-earth separation plant in South Africa. Each alternative being considered will involve the acquisition of separation expertise. GWMG management indicated that a rare-earth chloride would be produced at the Steenkampskraal site, with the subsequent separation done at a site in South Africa with appropriate supplies of water, power and available reagents and chemicals. Per GWMG management, a decision on the final partner for the separation project would be made within the next 2-3 months.

My thanks go to GWMG for facilitating my visit to the Steenkampskraal mine site.

Disclosure: at the time of writing, Gareth Hatch is neither a shareholder of, nor a consultant to, Great Western Minerals Group (GWMG), or any of its subsidiaries, or any other publicly traded junior-mining company. He did not receive compensation from GWMG or from anyone else, in return for writing this article.

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1 Ruediger Haberland March 4, 2011 at 3:40 am

Great information – as usual.
One question: how will the thorium be deposited,
if dry and dusty it is a big health risk,
but if and when the next generation nuclear reactors are ready maybe a big revenue generator.
RHABE

2 Gareth Hatch March 4, 2011 at 3:47 am

Ruediger: my understanding is that the thorium will be mixed into concrete and stored as blocks, to reduce the problems to which you allude. The concrete would be treated at a future date to get the thorium back out.

3 Jim Bond March 4, 2011 at 7:54 am

Hi Gareth:

Great info as usual. GWG certainly appears to me to be one of the likely survivors of the current REE frenzy among the Juniors.

Jim

4 REE1 March 4, 2011 at 8:43 am

Gareth,

Thank you very much for the report.

I have held GWG shares from 5.5 cents back in 2008 and I firmly believe the company will ultimately succeed in its “mine to market” strategy, if indeed the company is not scooped up by an industrial mining giant first.

I’m not a mine engineer, and I don’t play one on TV either, so please bear with this question. You mentioned that there is about 2-3 years worth of “broken ore” at the site. Does that mean the ore is stockfpile on surface and is ready to go into the mill and processing facility? They just need to scoop it up and load it? (As opposed to having to incur the expense, risk and time of underground hard-rock mining?) If so, this would seem to me to be a huge cost advantage for GWMG compared to some of its peers.

Could you possibly elaborate on the status of the Steen. deposit? Will an official 43-101-compliant resource definition be included as part of the Scoping Study nearing completion?

Thank you sir, and best to Jack. Keep up the great work, guys!

REE1

5 Robert Gill March 4, 2011 at 11:20 am

Well, there wasn’t too much excitement in the report, Gareth. Looking at the pictures included, all I can say is, “Nice plane”.

Robert

6 wwwater March 4, 2011 at 11:21 am

According to the latest News Release by GWMG on the exploratory work to be done will be included in the documentation in the BFS if the results are received in time for inclusion. By that comment I interpret that a 43-101 report will form part of the BFS.

7 REE1 March 4, 2011 at 11:33 am

The lack of a 43-101*-compliant resource estimate seems to be the stumbling block preventing John Kaiser and Jimmie Dines from recommending the stock. IMHO getting their endorsement would do wonders for the stock price.

8 Gareth Hatch March 4, 2011 at 11:50 am

REE1: I meant that there is broken ore on the floor of the mine, left there before mining operations ceased. Initially no new drilling or blasting or drilling would be required to bring this material up to the surface. This is in addition to the rock piles on the surface that could and would be processed.

There are some strongly held views out there on Great Western Minerals Group (GWMG) and the Steenkampskraal project, both positive and negative. Candidly, I’m not so sure that a 43-101-compliant resource estimate or its absence, would do a whole lot to change the minds of those with such strong views. For my part, my interest in this and other rare-earth projects has always been from the strategic point of view. I was familiar with Less Common Metals (LCM) years before I’d ever heard of GWMG. I’ve always viewed the Steenkampskraal story from the perspective of it being the potential means of securing one part of the supply chain for LCM as an alloy producer. Others see it simply as a component of a stock play (either good or bad), and I understand that too.

9 Marvin Leonardo March 4, 2011 at 12:29 pm

I appreciate your work Gareth. This information is a highly valuable tool. See you at the top and thanks again.

10 Tek March 4, 2011 at 1:12 pm

Gareth,
Thanks for a fine informative update. I think GWMG has demonstrated an excellent attention to following its Mine to Market strategy. And if they do eventually acquire a suitable buyout offer, it will certainly reflect all their hard work in assembling a complete, vertically integrated, company. Either way, I think this company has, and will continue to be, a lucrative investment opportunity.
I agree that they should simply pursue the exploration and process refining developments and not worry about trying to change the minds of a few analysts.
“There comes a time in every project where you simply have to shoot the engineers (analysts) and get on with the work.”

11 Kris March 4, 2011 at 1:35 pm

Thanks very mych Gareth. Much appreciated!

Any serious investor should follow the end users, not the analysts… Analysts are not going to buy the stuff, are they?

12 Gordon Clarke March 4, 2011 at 2:43 pm

Well Robert Gill and Fran;

My cup is now 3/4 full and not 1/4 empty.

13 RA March 4, 2011 at 3:27 pm

Still not sure how MCP has 10x+ the market cap of GWG when GWG has a similar setup and strategy. One would think a GWG listing in the US might help with valued definition of the company and enable it to raise potential equity to finance CapEx.

14 Bob M March 4, 2011 at 3:39 pm

Great report, Gareth. Just wonder: is that a law abiding area of SA? I get the feeling it is, but it would be helpful to have it affirmed.

15 Andy March 5, 2011 at 4:49 am

I was recently at a presentation regarding strategy for mining at this site,it seems the Thorium aspect is well covered,large existing underground storage areas and wet working will make operations much easier than other sites with similar deposits

many thanks Gareth,keep on with great info

16 u4eah March 6, 2011 at 3:12 pm

Hello Gareth
Thankyou for the Steenkampskraal photo shoot and timely update.
I’ve noted some posters appear disappoointed to see only piles of rock in your photos and no buildings of worthiness etc , however I see only the future in those beautifully colored gemstones. (Perhaps they should go mining down on Bay St. in Toronto!)
I’m curious Gareth, whether you were permitted to enter the former mine, or have any photos of what’s down there; or is it as Mickey Fulp proclaims “merely a crazed radio-active bat cave” LOL!
Also, does GWG plan to construct a more significant updated mine entrance c/w modern efficient ore extraction equipment? If so is permitting and design plans in place?
Your insights Gareth as always, credible and worth the read.

17 Steven Schultz March 6, 2011 at 4:41 pm

Hello Gereth!

My question is: It will be until 2013 before they can process even the loose material in the mines and surface? Thanks for a thorough review.

18 Wanda Reglin March 6, 2011 at 8:32 pm

My question would be similar to the last post regarding the potential of loose material and the time frame for production of these? Road blocks?
Also I am interested in either your’s or Jack Lifton’s thoughts on the possibility of GWG securing a US Military contract given GWG’s early and exclusive integrated potential?
Thanks Gareth

19 fran March 7, 2011 at 12:42 pm

WANDA REGLIN–

see GWG press release 1/31/2011, GWG to supply USA vendor ELECTRON ENERGY CORP Re: your querry on military contract.

GWG not ready yet with more than ore for existing contractor.

20 Tekton March 7, 2011 at 6:28 pm

I note that the grading of the spoil piles has been revised to 7% (it was at 9%). As I recall the above ground “waste” piles total about 85 KMT, resulting in 6-7,000 MT of TREO. What the rock in the mine is rated at for quantity and quality, I don’t know. But it is apparent that nearly all of the materials could be readily loaded and exported to a refining facility, with no mining required. That should be enough for GWG to run their operations for two or three years before they’d have to commence new mining. That’s pretty good for a start.

The landscape looks amazingly like any western US high desert.

21 Wanda Reglin March 8, 2011 at 12:26 am

fran-
I indeed saw that press release back on the date of release.1/31/11, does not answer my question as it is not a direct military contract. No idea what the second part of your statement means.
But thanks anyhow…take care and good luck with your research.
Still interested in what Gareth and Jack Lifton may have to say.

22 fran March 8, 2011 at 9:44 am

WANDA REGLIN–

i doubt DOD will ever nake[allow to be made] statements identifying sources of REE suppliers. DOD is in fact an impediment to total free flow of REE info in the USA, for their obvious reasons.

23 Wanda Reglin March 8, 2011 at 4:26 pm

Excellent article just released …new info to me regarding no separation facilites outside of China. Interesting perspective in the level of US National Security

http://oilprice.com/Metals/Commodities/Rare-Earth-Prices-Soaring-Will-Miners-Play-Catch-Up.html

24 Gareth Hatch March 10, 2011 at 3:21 pm

@Tek: nice quote – will have to steal that from you :-)

@Bob M: the term “law-abiding” is obviously relative, but it seems to be a stable part of the country.

@u4eah: we didn’t go into the mine itself, no, as the railings, ladders etc. into the steep shaft down haven’t been refurbished yet. I’m not sure it was Mickey Fulp who said what you quoted above, but I’m not going to go there :-) Great Western will be refurbishing the mine entrance, of course, with new equipment, and all of the logistics for that are underway, and will no doubt be reviewed by the authorities before the project is executed.

@Steve Schultz: Yes, it will take a while to get the processing facilities built, in addition to refurbishing the existing mine itself.

@Wanda Reglin: each phase of the overall project at Steenkampskraal has to be approved by the local authorities, so there is always the potential for roadblocks. I am not aware of anything significant that would stand in the way of moving things along at the pace that Great Western has stated.

Great Western is already doing alloying research work for the US government in its Michigan facility.

@Tekton: yes, the material could be loaded and exported in that way, except for the fact that the thorium contained within has to be dealt with, and the current plans require that it be removed and stored on-site.

That part of Southern Africa is known as the Karoo region, with some interesting geographic features.

25 gatling March 17, 2011 at 7:55 pm

electron energy is a “proud supplier” to the dept of defense & it seems by glancing at their website that the DOD is a large proportion of their business. I also saw the news release in late january & thought it a little odd or perhaps abit early since great western is still a couple of years away from producing usable materials. Electron enregy does its own “refining” which would be expected from a DOD supplier. Looks like a good partner/contract for great western

26 Gareth Hatch March 17, 2011 at 10:37 pm

@gatling: Electron Energy Corporation produces its own alloys from constituent metals. Great Western Minerals Group owns the Less Common Metals facility in the UK, which also produces alloys from metals. Thus the potential synergies are significantly more near term, than the timeframe in which Steenkampskraal will get up and running.

27 Charles Kenny June 20, 2011 at 3:37 pm

Hi Gareth,

Please pass along my best wishes for success with the project to Mr. Blench. I believe Trump and I used to dig in the dirt together about 50+ years ago…

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