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Check out our Investor Webinar from 8 December 2022 when we looked at Ionic Rare Earths, Neurizer and interest rates
December 21, 2022
Ionic Rare Earths, IXR, NeuRizer, NRZ
In our investor webinar from 8 December 2022 we looked at:
- Rare Earths play Ionic Rare Earths (ASX:IXR).
- How far can interest rates go…and what does that mean for stocks right now?
- NeuRizer (ASX:NRZ) … a domestic Urea play.
See full transcription below.
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Marc: Good morning. It’s Thursday the 8th of December. Good morning, Stuart.
Stuart: Good morning.
Marc: For everyone who’s got a subscription to Concierge, check your inbox today and your text messages because we just published a new Concierge stock pick, one that we think is a winner. We met the company couple of times and, yeah, we think this one is headed for the big times really. So, check your email, check your SMS. And also one of our other existing Concierge stocks had a great announcement today, so it’s a good time, Stuart, for our Concierge stocks at the moment.
Stuart: And we’re in the black, which is great.
Marc: Absolutely, in a bear market. So, we’re pretty happy with that. So, by all means, if you don’t have a trial subscription yet, just sign on for that. You’ll get a call from Pete who will talk you through the whole thing, and to get you familiar with Concierge. All right, Stu, we’ve got a lot to talk about today other than Concierge stocks. One of them is rare earths. And it’s a special request from one of our subscribers, Ionic. Can you talk us through that story?
Stuart: Yeah. Ionic Rare Earths, ASX:IXR. I’m a big fan of rare earths. We’ll talk about what rare earths are in a moment, but the big picture is this, China has something like 95% of the world’s rare earth’s output, or at least it did until recently. Deng Xiaoping famously said in the 1990s, “Saudi Arabia may have oil, but we have rare earths.” And there’s all sorts of things that rare earths are important to and a lot of reasons why the control of the rare earths trade needs to be rested away from China.
Ionic Rare Earths is one of the heroes of that story. They’ve got a rare earths project in Uganda called Makuutu. Big resource there, 532 million tons of the good stuff. And importantly, it’s an Ionic absorption clay rare earth project. Long story as to the chemistry of this one, but basically they’re like the Chinese deposits in terms of being easy to work, and getting the right kind of rare earths out of them. So, if you were to go looking for the right kind of rare earths project to develop from scratch, you’d look closely at Ionic Rare Earths for that one.
Tim Harrison’s running this thing since 2020, and we’re expecting a mining lease application from the Ugandans to be issued next year. Market cap is tiny compared to the potential of this company, but there’s a few things that need to happen between now and potentially when it can go live in 2024.
So, what are rare earths? There’s the periodic table right there. You break out the third column from the left if you remember your high school chemistry. And there’s a string of relatively obscure elements like neodymium and praseodymium. Now, they never taught us much about those metals at school because they weren’t important back in the ’80s, Marc, when you and I were going to school. I certainly wasn’t paying attention to chemistry class, and, Marc, I suspect neither were you.
Marc: We were both chasing girls, right? Not paying attention to chemistry for sure.
Stuart: Right. Right, yeah. But we’ve since caught up. And it turns out in the meantime, industry has found a lot of uses for rare earths. Very important in the electric vehicles that we’re using. The magnets that run inside wind turbines, for example, also have rare earths inside them. So, it’s very much a suite of 21st-century metals. And, I mean, the thing I always tell people, the F-35 fighters that America uses to police the rest of the world, they can’t fly without rare earths that are coming from China, which is a somewhat embarrassing situation for Uncle Sam to find himself in. So, he’s looking for alternative source of rare earths. Ionic Rare Earths is one of those companies that can ultimately solve that problem.
Now, rare earths have been going in and out of favor. You’ve seen the chart there. It’s been coming down through the course of 2022 to the point where you can get this one for only 150 million. So, rare earths come in and out of favor. We’re starting to see a bit of price transparency, and the prices jump around a little bit. But that’s far and away left in the dust by the big picture that any new deposit, developed in the next 10 years, is gonna attract strong interest, so long as it’s outside of China.
So, what’s coming for this company? Very soon they’ll be able to publish their first scoping study on what Makuutu is potentially worth. They’re still drilling out the resource and potentially that could double in the next little while based on the drilling programs they’ve got. They’re working on a proof-of-concept demonstration plant. That should be…I typed in “plan.” They’ve got a plan to build a proof-of-concept demonstration plant.
If all goes well, we could get to this time next year with a final investment decision on Makuutu, in which case, you know, we’ve seen with other rare earths companies that have emerged from ASX, beginning with Lynas, these things can end up having market cap in the billions. Now, Marc, you’ll never guess what that flag is on the right side of the screen.
Marc: I’ve got a good idea of what that flag is.
Stuart: Yeah. That’s Uganda. I thought you’d never ask. Uganda, a big country in East Africa just in…
Marc: What’s that bird in the middle there?
Stuart: I didn’t have time to look into that, but I knew you’d ask that question. So, yeah, embarrassing [inaudible 00:05:19].
Marc: Because you pointed that…exactly, yeah. So, Stu, on Ionic, and looking at the other rare earths plays on ASX, where would you rank this one? Why would you like it or why would you prefer another stock to this one?
Stuart: Look, basically, yeah, the big picture for rare earths is you need to look seriously at Lynas as being a core part of your portfolio. It’s got some great growth options that’s working on it. You know, it’s an established company, you know, basically a top 200 stock. There are other companies that have made a lot of progress. I think of Vital, VML, for example, with their rare earths project in Canada.
Where does Ionic sit? People need to pay strong attention to this one because the scoping study shows that it’s valuable, and Uganda proves that it’s a good destination to build a mine. It will get its first decent look of investor attention. So, I’m very glad that our subscriber brought this one to our attention because it’s very much gone on my radar screen now as a potentially very successful project. The key here is being ionic absorption clay. If the metallurgy works, the cost of production for this one is very low.
Marc: Right. So, what’s the million-dollar question? Right. What can go wrong with this one? What’s the risk? Because we’ve seen over the years that we’ve been looking at these sorts of stocks, a lot can go wrong with these explorers/developers.
Stuart: What can go wrong is rare earths tends to be the pretty girl at the party. Everyone gets excited, then she leaves, and people move on to another commodity. So, I was in Perth recently at a mining investor event over there, and a whole bunch of companies were beginning to work on rare earths projects. So, what you could get caught in is the temporary depopularization of rare earths just because investors have moved on to something else. So, you need to be careful about that. And, yeah, come back to these things when everyone hates rare earths because that’s when the snapback is coming.
Marc: Right. And as always, the…always a company-specific risk, right, associated with developers? That something goes wrong in the process, or in permitting, that sort of stuff.
Stuart: Look, I mean, we’ve seen enough of these things to know. Every time you do a flow sheet, the flow sheet looks great on paper, then the metallurgists have to reduce it to practice, and something somewhere will go wrong. You know, smart guys like us sort of practiced chemistry, and that way we could go and now step in and make these things work without a hassle. But, you know, we’re busy in the investment game instead, right?
Marc: Yeah. Look, I’m not that smart as you. I don’t know anything about chemistry. So, anyway, from chemistry to something, what I would call more tangible, actually. It might not be for most people, but interest rates. So, we’ve seen a lot of developments, of course, this year, interest rates going up on the back of higher inflation. But where can it stop? I mean, we’ve seen a, what we think is sort of a bottom in the NASDAQ anyway, in some of the bigger U.S. markets. We’ve bounced up, but it’s coming back now slightly. The question is, what will inflation expectations do? And on the back of that, what will interest rates do? So, what we’ve seen with the RBA this week, they hiked by 25 basis points to 3.1% now, but it’s like a…
Stuart: That’s what a bip is, right?
Marc: A bip, yeah. Twenty-five bips, 25 basis points.
Stuart: Basis points.
Marc: But if you look at what’s happening with inflation, look, you can’t say it’s coming down yet, but we might see the first signs of leveling off, at a fairly high level, obviously. But we think the quick rise of inflation, that’s might be behind us if we look at these charts, at the top chart there. And if that’s, in fact, the case, then we might actually see some sort of plateau or some sort of peak in interest rates from the RBA next year in 2023.
So, for now, the market is priced in a peak rate of 3.7% by the middle of next year. And if you look at that chart at the bottom there, we’re currently at 3.1%. You can see it’s a very sharp increase. And we’re saying the rate of those increases, the sharpness of that…the angle of that chart, we’re saying probably the worst of that is behind us. And actually, some people are saying that this has been the last hike for now by the RBA because it just wants to pause and see what’s actually happening in the economy, in the real economy, and especially with inflation, obviously. So, we’ll know more in February. That’s when the next RBA meeting is.
If we look at the U.S., and I think this is actually more leading, obviously, because the U.S. is the leading economy in the world still. If you look at inflation expectations, which is different from actual inflation numbers, but this is what the market is expecting going forward. We can see that that, in fact, has actually reached a plateau, and it’s sort of, you know, consolidating around the current levels.
So, just a month ago, there was some talk of a Fed pivot where they would sort of, you know, ease off on the interest rate hikes, and then part of the market is still thinking that. What we will see next week, when the Fed meets again for the last time this year, is a rate hike between 50 and 75 basis points, or bips. And the current range is 3.75% to 4%, so that will go up. But then looking at what the market participants are expecting, 5.25% to 5.5%. So, again, we’re nearly there basically. And that means basically the strength of the interest rate hikes is behind us. And I think that’s really what you need to focus on.
And based on, you know, the mood of the market, we see these shifts in sentiment every day, right, almost every day. So, if you look at the chart there, those two spikes at the bottom in the circle there, the red circle, red oval, I should say, we think that might very well have been the bottom. Technically, we’re still in the downtrend for…
Stuart: What market are we looking at here, Marc?
Marc: What’s that?
Stuart: What market are we looking at here?
Marc: This is Nasdaq Composite.
Stuart: The Nasdaq Composite. Right. Okay, yeah. So, if sentiment is turning, we’ll see the market holding up above those two orange lines on the chart?
Marc: That’s the idea, yeah. So, we’ve seen that bottom there, for now, the short-term bottom. But, yeah, like I said, technically we’re still in a downtrend. And the reason we’re coming down in the last week or so is because, all of a sudden, there was some strong numbers for services PMI, and that came in higher than expected in November.
So, again, the markets thought, “Oh, crap, Fed’s gonna hike more again.” So, you know, stocks came down on the back of that. So, we’re not out of the woods yet, but we think we may have seen the bottom recently. Of course, time will tell what is going to happen. But the likelihood of moving through this, or having seen the bottom is increasing as far as we’re concerned.
So, what does that mean for stocks? I think you should selectively start buying again. Not your entire budget for stocks at the moment, but just, you know, get back into the market, look at stocks that you’ve got your eye on for a while. In our case, that is, for instance, Domino’s, or Xero, or Judo Bank, Flight Centre. Now, those sorts of stocks have come down quite substantially, but inherently they’re very good companies. Right. So, don’t buy your full position there yet. But make sure you’ve got some in reserve. But get into the market. At least you’re moving…if the market goes up, at least you’re participating. If it comes down, you still have some budget left to put into those stocks at lower prices.
Stuart: Yeah. It’s like with Domino’s, buy some cheese bread. Don’t buy the whole pizza.
Marc: Exactly. Yeah. Buy some slices and, yeah, expand to a full pizza at some point. But that would be the strategy because, yeah, after all, it’s still…there is uncertainty in the market, obviously. And the most negative people will say, “Yeah, we’re going into very deep recessions,” and the most optimistic people are saying, “Well, it’s gonna be a very soft landing, and it’s up and away from there.”
So, this is our take on it. We don’t know the future. We don’t have a crystal ball, unfortunately, but we can advise a certain strategy to get into the market at an evaluation that is still…well, for the NASDAQ anyway, still 35% below where we were last year. Right. And it doesn’t mean that all these companies, all of a sudden, are crappy companies. It means evaluation’s come off, and, sure, maybe growth will be lower in the next year or two than what people were thinking earlier. But inherently, these are still pretty good companies. So, just our two cents on interest rates in the market in general.
Stuart: It’s actually more than two cents, Marc. It’s 2.2 cents because the inflation rate’s a bit higher.
Marc: Yeah, sure. But, yeah, inflation’s so high, it increases every minute, right, the pricing. All right, Stu, one other stock that we can talk about today before our time is up, it’s NeuRizer, urea play.
Stuart: Right, if you look at our sister company, Pitt Street Research, we published some issue with sponsored research on NeuRizer a few months ago. Great story in a field that’s got a lot of growth to it. Currently very impressed with this company. What is NeuRizer? Adelaide-based company. They’re developing a urea project in South Australia. Go to the north of that state, there’s an old coal mine called Leigh Creek. Leigh Creek closed in 2015.
What coal seams have in abundance is what’s called syngas. Drill into the coal seams, up comes gas. And NeuRizer’s business plan is genius itself. You take that gas, turn it into ammonia, and then into urea, which, if you’ve been paying attention with a lot of fertilizer stories we’ve been telling here, that’s a half-decent input into the global fertilizer industry.
Now, NeuRizer have already done some numbers around that. They’re talking about 3.4 billion pre-tax value at a 9% discount rate for their urea project once it gets up and running. Needs a lot of capital, but there’s a reason why they can access the capital they need. You get the full story in some issue with sponsored research we published on the 15th of September, but a great, well-thought-out story in an area that’s expected to enjoy a lot of growth in the next few years. So, a company recently raised capital at 10 cents a share, stock’s stabilizing at around that level. We’ve got much higher valuations in our research. And, I mean, simply the very high prices of urea that are prevailing at the moment means that there’s considerable upside from where we are from here.
What is urea? I hear you asking. It’s an organic compound that farmers use because it’s a source of nitrogen. The way you get it is take methane gas, then convert that to ammonia, then throw in carbon dioxide, and you’ve got urea, is the chemical formula there next to the white powder on the right-hand side.
World needs a lot of urea. It consumes about 220 million tons of the stuff a year. And at the moment, the big producers are the Gulf States where they can produce gas very cheaply and then process that into urea. Australian farmers need a lot of it, and there’s virtually no domestic production. So, this could begin as an import replacement product for Australian farmers, but obviously, you could sell them to a global audience at the current high prices of urea.
And it’s low cost, because you use in-situ gasification to bring up the gas from the coal seams, and there’s a heck of a lot out there. This company’s engineers are estimating they can produce urea only 109 AUD a ton. And at the moment, the globally traded price is probably six or seven times that if you would convert the 555 USD a ton that I saw yesterday into Australian dollars. So basically, out of this old coal mine in South Australia, you’ve got a urea project, which isn’t just cost-effective, it’s in the lowest quartile in terms of cost.
Now, some of you might be concerned that when I mentioned the word “coal,” that there’s a lot of carbon coming out of this project. And this is the other part of the story that’s interesting. It’s virtually carbon-neutral, the reason is carbons a big input into urea. So, any carbon coming out of the coal goes straight back into the end product. And then if you use carbon capture and storage, and we looked at this in our research, carbon capture and storage is a viable way of being able to stop carbon from going into the atmosphere. It’s used, you know, in a big way in the oil and gas industry. Local companies here like Santos and Woodside are using it…intend to use it for new projects as well. You’ve got a carbon-neutral use for an old coal mine, which is great.
Now, the motorcycle on the right-hand side of the screen is interesting. When South Korea’s economy started to take off in the 1970s, the first domestically produced motorcycles were built by a Korean chaebol called Daelim. Daelim are a NeuRizer’s partner in this project. If you’re familiar with the chaebol system in Korea, basically you’ve got a grouping of companies with multiple capabilities. Daelim’s engineering company is doing the engineering work on this project. And the bank associated with the chaebol has also sent out a letter of comfort on the financing.
Now, that’s subject, obviously, to a bankable feasibility study showing that the numbers are good, and that’s in the works at the moment. But that, I think, takes away a lot of the funding risk for this company, and allows us to look forward to some considerable upside on Australia’s next urea project.
Marc: All right, there you have it, NeuRizer. So, get into that one. First of all, read the research on Pitt Street Research. It’s pittstreetresearch.com. When did we publish that, Stu? September?
Stuart: That was back in September.
Stuart: And, yeah, basically it’s a great learning exercise for me in terms of the opportunity in urea, and how a company is cleverly going about assembling the elements to a great project.
Marc: All right. With that, we’ll wrap it up. If you don’t have a subscription to Concierge, get a trial, see what’s happening today in that existing stock that we have in there, and check out the new one. And have a chat with Peter Kilby, our customer services rep.
Marc: And with that, we’ll wrap it up, and see you next week.
Stuart: …stay bullish.