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HVY Royalty Funding paves the way for Garnet PFS


Published 03-OCT-2023 10:12 A.M.


18 minute read

Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 3,750,000 HVY shares at the time of publishing this article. The Company has been engaged by HVY to share our commentary on the progress of our Investment in HVY over time.

Our garnet Investment, Heavy Minerals (ASX:HVY) has just announced the start of its pre-feasibility study to bring its garnet mine into production by 2026.

Garnet is a key industrial material used for fighting rust and corrosion on ships and infrastructure.

As we have done with our small cap bets that will lift with a surging uranium price, we have placed an early bet on the garnet market surging via our Investment in HVY.

Our bet is that there will be material shortages in garnet over the coming years due to:

  • A surge in demand from a recently announced $40B investment by the USA to repair ageing (rusting) steel bridges and infrastructure.
  • A reduction in supply from a continued ban on environmentally damaging, unlicensed Indian garnet mines.
  • Move to safer and cleaner solutions through a move away from traditional rust removal methods that are carcinogenic and environmentally damaging (copper slag and coal slag).

HVY is currently capped at just ~$6M, and its scoping study from September 2022 delivered some enticing numbers:

  • An after-tax project Net Present Value (NPV) of $253M
  • A payback period of 4.2 years,
  • An after tax Internal Rate of Return (IRR) of 33%
  • And a relatively modest project CAPEX of $110M
  • First production in 2026

We think the reason that HVY has been trading at such a low ~$6M market cap is because HVY was low on cash and the market had been expecting a cap raise.

Which, in a tough market kept a lid on the HVY share price.

HVY was light on cash to progress their Pre-Feasibility Study (PFS) and other work... until late last week.

On Friday HVY raised the first $500k from a non-dilutive, non-debt funding method called a “royalty agreement”.

This basically means HVY has sold off a tiny percentage (0.25%) of the future mine revenue in return for a precious cash injection ($500k) right now.

HVY can keep selling more of this royalty agreement as needed to fund the further work required in the medium term - which is non-dilutive to existing shareholders.

Most importantly, this first $500k that HVY has secured by selling future royalty sends an important message to the market:

  • Non-dilutive to existing shareholders (like us)
  • Allows progress on the HVY project to recommence
  • Some of the cash has already been deployed to start the PFS, which is expected to be complete in Q1 CY2024
  • Has signalled to the market there is belief that the project will be built (and royalties paid)
  • Has signalled to the market there is no dilutive equity raise coming (removes weight on share price)
  • Depending on how much more capital can be secured via the royalty agreement, it is possible that any potential investors waiting for a capital raise may now need to buy shares on market instead if they want exposure to HVY.

For these reasons, in our view, the securing of that first $500k of the royalty agreement was a materially important and significant news release for HVY.

With a funding solution now in place and HVY able to get moving on the project, today we will be launching our HVY Investment Memo (later in this note).

HVY’s PFS announced this morning will be done by IHC Mining, which is the same company that did HVY’s scoping study.

IHC has designed many garnet mines previously including two other garnet mines that we know of - being involved in the pilot plant works at Resource and Development Group’s Lucky Bay garnet mine and the metallurgical test work and DFS of Nordic Mining's Engebø Rutile and Garnet Project.

IHC Mining is a subsidiary of Royal IHC (IHC) - a large Dutch shipbuilding company with 2021 annual revenue of €532M ($868M).

(Cleaning rust from ship hulls is a key use of garnet.)

Now in terms of HVY securing the funding to build their actual mine (~$110M), we noted in our initiation note on HVY, IHC have sought project build investment finance support from the Dutch government:

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We see this as an important endorsement of HVY’s project.

This project finance support was made explicit in June 2023, when a Letter of Support was received from Atradius Dutch State Business (Atradius), which manages the government credit guarantee scheme on behalf of the Government of Netherlands official Export Credit Agency (ECA).

So with PFS (and soon after BFS) commenced, we are watching with interest to see what other avenues of funding HVY management can drum up to fund the mine build.

While we are waiting for the HVY’s studies and mine financing agreements to be completed, HVY also has some blue sky exploration to keep things interesting:

  • More drilling to the north/south of its existing JORC resource at Port Gregory
  • A second project 37km to the south, Red Hill, where HVY has released an exploration target of 90 to 150 Mt of material at 5.4% to 4.1% THM.
  • Mozambique - the Inhambane Project which has a JORC Inferred Mineral Resource of 90 Mt @ 3% THM and adjacent to Rio Tinto's mineral sands projects
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The more garnet they find in this drilling, the better, as it means a globally significant garnet resource could get even bigger.

The market loves a bit of near term, blue sky exploration drilling.

Exploration forms Objective #3 of our HVY Investment Memo, which we will share today.

Today, we’ll also outline the terms of HVY’s royalty agreement and what we can expect from the PFS.

Terms of the royalty agreement

We think a royalty agreement is the perfect option for HVY right now at a time when companies are having to offer steep discounts and free attaching options to get equity raises over the line.

And the subscribers to royalty agreement who have already chipped in $500K are effectively providing a major endorsement to the market of HVY’s ability to get its garnet mine up and running (and earning revenue)

Participants who subscribe to the royalty agreement will be granted a 0.25% royalty over future production at Port Gregory - HVY’s main project.

Importantly, HVY retains the right to buy-back 60% of the royalty held by the subscribers within 24 months at a 125% premium to the amount paid.

In addition to the grant of the royalty, subscribers will be issued one attaching unquoted option for every dollar paid to the Company under the royalty agreement, with an exercise price of $0.25 and expiring 2 years from the date of their issue.

We think the terms of this royalty agreement are designed to strike a balance between securing funding now without giving away too much in terms of future revenue streams from the Port Gregory mine.

Mine royalty agreements are common in overseas markets and can be beneficial in a tough funding environment (like the current market for small caps) as it secures funding for the company without dilution - a win for existing shareholders.

Here’s why...

  1. The subscribers get a forward revenue stream, which works well particularly if they have faith in the project’s ability to go into production.
  2. The company gets funds to develop a project right now, without diluting shareholders. The funding takes it closer to a Final Investment Decision on mine construction and getting into production.

Like any investment, royalty agreements are not without risk for either party and much depends on the final terms - for example the royalty could cap the future upside of the project’s revenue.

But we see the royalty agreement as a win-win in this scenario - it doesn’t give away too much of the future revenue streams of the project and it also doesn’t dilute existing holders.

We hope that this royalty agreement funding provides HVY’s share price a clear run without the weight of a capital raise through to the end of the PFS - so that any upside news will be rewarded by the market.

The HVY royalty agreement remains open (to certified 708 investors only) and any interested parties should contact the company directly.

More on HVY’s Pre Feasibility Study (PFS)

Today, HVY announced that it had awarded its PFS contract to IHC Mining, with the PFS to commence in the first week of October.

We think this PFS will build on an already strong Scoping Study, which the company released in September of last year.

As before, that scoping study outlined:

  • An after-tax project Net Present Value (NPV) of $253M
  • A payback period of 4.2 years,
  • An after tax Internal Rate of Return (IRR) of 33%
  • And a relatively modest project CAPEX of $110M

We think there is upside to be found in this PFS, especially if garnet prices go the way we think they will.

Companies in the “feasibility” stage of development will progressively move through studies like Scoping Studies, PFS and BFS.

These studies provide project financiers and investors a level of confidence about the economic viability of the project.

Without feasibility studies, investors are ‘flying blind’, and big mining and construction projects are very unlikely to get funded.

HVY’s study in particular will look at engineering of the project, in particular the site layout for the processing plant and equipment needed, as well as a more accurate costing of the CAPEX and OPEX for the project.

As we mentioned before, the PFS will be done by IHC Mining, which is the same company that did HVY’s scoping study.

IHC Mining is a subsidiary of Royal IHC (IHC) - a large Dutch shipbuilding company with 2021 annual revenue of €532M ($868M).

As we noted in our initiation note on HVY, IHC have sought project build investment finance support from the Dutch government.

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We see this as an important endorsement of HVY’s project.

This project finance support was made explicit in June 2023, when a Letter of Support was received from Atradius Dutch State Business (Atradius), which manages the government credit guarantee scheme on behalf of the Government of Netherlands official Export Credit Agency (ECA).

We take this as a leading indicator of IHC Mining being able to help HVY secure funding for the project and a signal that potential end users of HVY’s product (such as Royal IHC) are interested in securing supply from HVY’s project.

In short - we think IHC Mining is the right partner for HVY’s PFS, and they could help queue up the necessary funding down the track for HVY’s project.

🎓To learn more about feasibility studies read: Feasibility Studies Explained: Evaluating Project Viability

It’s also important to note that this PFS is working with a particularly simple flowsheet:

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What has HVY done since we Invested?

Below you can find our past coverage on HVY.

Our HVY Initiation note

We think the garnet demand is going to be strong over the next decade, which is why we added HVY to our portfolio.

Click the link above to get the full 13 reasons we Invested in HVY.

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Garnet guru appointed to HVY’s Board

HVY announced the appointment of experienced garnet expert Aaron Williams to the board.

Aaron previously held the COO role at the world’s largest garnet producer GMA Garnet Group - which co-incidentally has a producing garnet project right next to HVY.

This is in addition to decades of experience in other executive roles at garnet related companies, including co-founding an abrasive blasting equipment company in Malaysia.

Aaron brings some pretty unique experience to HVY, given he has mined garnet, and been on the downstream side of the market.

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Our HVY Investment Memo

Today we will be announcing our HVY Investment memo. The key trigger for this memo was to lock away the funding for the company’s PFS.

With an initial $500K now secured under the royalty agreement, and potentially more money to come (as the company keeps this agreement open) - we are ready to launch our Investment Memo for HVY.

In this memo you will find:

  • Key objectives we want to see HVY achieve
  • Why we are Invested in HVY
  • What the key risks to our Investment thesis
  • Our Investment plan

Investment Memo: Heavy Minerals (ASX:HVY)

Memo Opened: 3 Oct 2023

Shares Held: 3,750,000

What does HVY do?

Heavy Minerals (ASX:HVY) is a “mineral sands” developer with three projects. The most advanced project is a garnet-rich deposit located in WA, very close proximity to two other garnet producers.

What is the macro theme behind HVY?

Garnet is an important industrial material, specifically used in abrasive sand-blasting to treat and prevent rust on ship hulls, bridges and other large metal structures.

It is also used in “abrasive water-jet cutting” of metals, glass and other materials in the automotive, aerospace and electronics industries.

Major shipbuilding companies and infrastructure maintenance companies use garnet to safely reduce corrosion and extend the life of surfaces that are prone to rust.

The world has a major rust problem - ageing ship fleets and big infrastructure projects like bridges are falling apart. Particularly in the US, which we see as an important target market for HVY’s garnet products.

The most recent study on corrosion in 2013, placed the costs of corrosion at roughly 3-4% of global GDP.

Garnet is eco-friendly compared to alternative industrial abrasives like dirty coal slag or carcinogenic copper slag.

As the world focuses on becoming environmentally friendly we expect the shift towards industrial garnet to further accelerate.

Our “Big Bet” for HVY

“We want to see 20x return as HVY moves into production by 2026 and become a profitable garnet mine”

NOTE: our “Big Bet” is what we HOPE the ultimate success scenario looks like for this particular Investment over the long term (3+ years). There is a lot of work to be done and many risks involved - some of which we list below. Success will require a significant amount of luck. There is no guarantee that our Big Bet will ever come true.

Why did we Invest in HVY?

As published on 14th July 2023.

  1. Tiny market cap after lots of progress: When we initially Invested in HVY it was capped at just $6M with a scoping study already completed for its project.
  2. Tight structure low shares on issue (SOI): When we initially Invested HVY had ~55 million shares and ~18 million options on issue. Prior to our Investment, the top 5 shareholders held ~75% of these shares.
  3. Management skin in game: Before our Investment, HVY directors held ~11.6% of the company, with chairman Adam Schofield holding 7.7% himself.
  4. Garnet is an important niche material: Garnet is leveraged to big industries like the maritime and aerospace industries to allow for rust removal, industrial cutting and anti-corrosive paint to be applied to surfaces. It cannot be easily replaced.
  5. Favourable long-term pricing environment for garnet: Supply side is decreasing with Indian garnet production being banned. On the demand side bans are being considered for garnet alternatives (copper slag/silica) due to ESG concerns. We expect to see demand outstrip supply in the coming years leading to higher prices.
  6. US is spending ~US$40BN on upgrading old rusty bridges: The US has budgeted US$40BN of new funding for bridge repair, replacement, and rehabilitation. We expect this to increase demand for garnet as a sandblasting product.
  7. Quick, viable pathway to becoming key garnet supplier: HVY’s project has an established JORC resource, a completed scoping study and is just about to start a pre-feasibility study. HVY is targeting first production in 2026.
  8. Close proximity to two producing garnet projects: HVY’s projects sits next door to the GMA mine which supplies ~35% of the world’s almandine Garnet and Resource and Development Group’s newly constructed mine.
  9. Neighbour RDG trading at a ~$220M enterprise value: Resource and Development Group next door is capped at ~$150M and has an enterprise value close to ~$220M. RDG is also ~65% owned by $13BN Mineral Resources.
  10. Project economics stack up, plenty of room for upside: HVY’s scoping study shows an after-tax project Net Present Value (NPV) of $253M, a payback period of 4.2 years, and an after tax Internal Rate of Return (IRR) of 33%. The project CAPEX is also relatively modest at $110M.
  11. Upside to increase garnet resource: HVY could double its existing JORC resource with more drilling to the north/south of its existing JORC resource and at its Red Hill project where it has a 90-150Mt (4.1 to 5.4% THM) exploration target.
  12. Project financing support from Dutch Export Credit Agency: HVY recently received a “Letter of Support” for project funding from Atradius - the Dutch Export Credit Agency.
  13. ESG focus and Australian project attractive to European/US garnet buyers: Western companies are seeking sustainably produced materials, which will increase interest in sustainable produced garnet, especially given the cloud surrounding garnet that was previously produced in India

What do we expect the company to deliver?

Objective #1: Secure project financing

We’d like to see HVY secure project financing - the HVY scoping study outlined a CAPEX of $110M. HVY has received a “Letter of Support” for project funding from Atradius - the Dutch Export Credit Agency (ECA). We would be looking for HVY to further this relationship, and engage with the Australian Export Credit Agency, Export Finance Australia.


🔲 Secure Dutch ECA cover for Port Gregory

🔲 Engage with Australian ECA

🔲 Institutional investor

🔲 Debt or equity financing agreement

Objective #2: Progress feasibility studies

We want to see HVY complete a pre feasibility study for its main garnet project (Port Gregory). After completing the PFS, we want to see HVY move quickly to start its bankable feasibility study (BFS) for its main garnet project (Port Gregory)


✅ Comence PFS

🔲 Complete PFS

🔲 Start BFS

🔲 Bonus: Complete BFS


Objective #3: Blue sky exploration potential

HVY could double its existing JORC resource with more drilling to the north/south of its existing JORC resource and at its Red Hill project where it has a 90-150Mt (4.1 to 5.4% THM) exploration target.


🔲 Drilling

🔲 Increase total JORC resource across Port Gregory and Red Hill projects

What could go wrong?

Funding risk

The small cap funding environment is particularly difficult, and it is possible that HVY cannot secure the funding it needs through royalty agreements or otherwise to continue its operations.

Small caps need money to grow, and capital raises are often needed, which can cause dilution to shareholders and these raises can be conducted at a discount to market prices.

Commodity pricing risk

There’s a risk that garnet prices decrease, hurting the economics of HVY’s project.

Development delay risk

Development studies such as pre feasibility studies and bankable feasibility studies can take longer than expected and any delay here could hurt the pace of HVY’s newsflow and sentiment around the company.

Sales/offtake risk

It is possible that sales and marketing activities do not progress as planned and agreements for future supply (offtakes) take a long time to be signed or do not happen.

Competition risk

There is a risk that other garnet companies come into production, making HVY’s product less viable in the market.

Market risk

There is a general market collapse/financial crisis. In this scenario, HVY’s share price could be impacted by broader market forces.

Financing risk

Due to a combination of any or all of the above risks, financing for the project is hard to come by or unavailable, and the project does not become operational.

What is our investment plan?

We are Invested here for garnet dividends.

Our Investment Plan for HVY is to hold on to the majority of our position to see the company execute on its business strategy over the next five to seven years and move into production.

If the company’s share price materially re-rates in the medium term due to the results of the PFS, a macro triggering event or any other unknown reason, we may look to sell up to ~20% of our holding to “Top Slice” our Investment, as is our standard Investment strategy.



General Information Only

S3 Consortium Pty Ltd (S3, ‘we’, ‘us’, ‘our’) (CAR No. 433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information and is for informational purposes only. Any advice is general advice only. Any advice contained in this article does not constitute personal advice and S3 has not taken into consideration your personal objectives, financial situation or needs. Please seek your own independent professional advice before making any financial investment decision. Those persons acting upon information contained in this article do so entirely at their own risk.

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S3 and its associated entities may hold investments in companies featured in its articles, including through being paid in the securities of the companies we provide commentary on. We disclose the securities held in relation to a particular company that we provide commentary on. Refer to our Disclosure Policy for information on our self-imposed trading blackouts, hold conditions and de-risking (sell conditions) which seek to mitigate against any potential conflicts of interest.

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The information contained in this article is current as at the publication date. At the time of publishing, the information contained in this article is based on sources which are available in the public domain that we consider to be reliable, and our own analysis of those sources. The views of the author may not reflect the views of the AFSL holder. Any decision by you to purchase securities in the companies featured in this article should be done so after you have sought your own independent professional advice regarding this information and made your own inquiries as to the validity of any information in this article.

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