Our New Investment is St George Mining Ltd (ASX: SGQ)

Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 24,900,000 SGQ shares at the time of publishing this article. The Company has been engaged by SGQ to share our commentary on the progress of our Investment in SGQ over time. Some shares are subject to shareholder approval.

Near the top of every “critical minerals list” sits one metal...

Niobium.

Market money is still flowing into niobium stocks and rewarding niobium discoveries.

We think this is because the supply of niobium is dominated by one single mine in Brazil that produces 80% of global niobium supply.

Yes, 80% of global supply in one company.

And it is privately owned.

St George Mining Ltd (ASX:SGQ) just announced the acquisition of a niobium and rare earths project right next door to this niobium mine that supplies 80% of the global niobium market.

SGQ’s new project has an existing niobium discovery, and post acquisition SGQ will be capped at $55M (based on 2.5c transaction share price). At that time SGQ will hold ~ $7.5M in cash.

On the ASX, we have recently witnessed large inflows of capital towards quality new niobium discoveries in Western Australia:

• WA1 Resources grew from a $9M microcap explorer to over $1BN in the space of two years, on the back of a new niobium discovery in WA.
• Encounter Resources went up 300% off the back of announcing a niobium discovery in WA, it is now capped at ~$248M.

The past performance is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.

SGQ’s project already has a proven discovery, and it is right next door to the world’s biggest niobium mine.

To date, there have been over 500 drill holes on SGQ’s project that have hit significant intercepts of over 1% niobium oxide, with some hits as high as 8%.

The mineralisation is from surface, widespread, and open in all directions.

Looking next door, the carbonatite that hosts the niobium is confirmed to depths of 800m, but SGQ’s project has not seen much drilling any deeper than 50m.

So while this is not a pure exploration story, there is exploration upside, especially given less than 10% of SGQ’s project area has been drilled (and that drilling was close-spaced).

Unlike ~$842M WA1 Resources and $248M Encounter Resources which have their valuable niobium sitting far away in the West Australian desert - the $55M capped SGQ’s Brazilian niobium project is near a skilled workforce and important infrastructure like sealed roads, grid power, water, telecommunications, and accommodation.

(this is because of the niobium mine next door to SGQ, plus a number of other mines within a few kilometres)

Having access to all that infrastructure and workforce on your doorstep means it is much faster and cheaper to bring a mine into production.

We Invested in SGQ to advance the existing niobium discovery and progress through the development stages toward building a mine.

As SGQ progresses through each stage, we hope to see the market steadily re-rate the stock.

We have looked at many early stage resource stocks in the last few months, and SGQ’s new project is the one we think will deliver us returns in the current market conditions over a long term hold.

It is early days, and success is no guarantee, but we think SGQ is acquiring a niobium asset which has a clear pathway to becoming an operating mine - and there are only three in the world right now.

SGQ’s project also contains rare earths in the same deposit.

Just like the high grade niobium found from surface, SGQ’s project has also recorded thick intercepts of high grade rare earths elements (REE) from surface.

As well as niobium, later stage rare earth projects (specifically those located in Brazil) have also been attracting capital in the markets:

• Brazilian Rare Earths - IPO'd in December last year at $1.47/share raising $50M. The company hit a high point of $3.70 and now trades at a market cap of ~$550M.
• Meteoric Resources - Traded at $0.012 before acquiring the Brazilian REE project. The company hit a high point of $0.30 and now trades at a ~$210M market cap.

Both of these companies have significantly shown sustainable re-rates off the back of acquiring and developing REE projects in Brazil:

The past performance is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.

Remember - post acquisition SGQ will be capped at $55M - significantly less than Meteoric and Brazilian Rare Earths.

Today, we are going to explain why we think SGQ has the best chance to actually get a mine up and running BEFORE WA1 Resources, Encounter Resources, Meteoric Resources and Brazilian Rare Earths.

So how did SGQ pick up such an advanced niobium and rare earth project?

Right next door to the largest niobium producer in the world and in a top mining jurisdiction?

Well it turns out SGQ’s project was owned by a fertiliser (phosphate) company called Itafos and the niobium and rare earth hits sat alongside phosphate mineralisation.

(yes, SGQ also has phosphate mineralisation on its project too - which could be interesting if fertiliser prices start moving aggressively higher)

Itafos is a listed company in Canada (TSX-V: IFOS) and has a producing phosphate mine.

Itafos is trying to reduce its debt burden, so has agreed to sell the project to SGQ for US$21M in staged payments.

Investors like simplicity and to Itafos this was a non-core asset - they just don't have the bandwidth to bring another mine into production.

At the same time as part of this deal, Itafos is taking a ~10% stake in SGQ - so they obviously don't want to give up the upside of the asset entirely.

This deal reminds us of when Meteoric paid for a later stage rare earths project in Brazil, and its share price went from 1.2c to ~30c. More on this in a second.

A key reason we have Invested in SGQ is that we think the ASX will rerate SGQ’s new later stage niobium and rare earths asset inline with the values placed on other ASX listed niobium and rare earth players like WA1 Resources, Encounter Resources, Meteoric Resources and Brazilian Rare Earths.

Over the coming 12-18 months we want to see SGQ:

• Complete the transaction and vendor payments
• Run an extensive amount of drilling
• Deliver a JORC compliant resource
• Run met test work
• Complete a Pre Feasibility Study

Introducing our latest Portfolio addition: St George Mining Ltd (ASX:SGQ)

Today, SGQ announced the acquisition of its Brazilian niobium/REE project.

Post completion of the deal, SGQ will have a market cap of $55M and approximately $7.5M in cash (at 2.5c/share).

Niobium is a metal that has traditionally been used to make steel stronger and lighter - this use case is 88% of niobium demand.

However, niobium is also used in a range of speciality applications including aerospace, defence, semiconductors, optical lenses, and MRI equipment - about 12% of demand.

And it turns out niobium can also be used in battery technologies to improve battery performance and life - this is a high growth emerging market for niobium.

Because the niobium market is so concentrated by one private company, governments around the world are looking to secure their supply chains. Niobium is right up the top of US and EU critical mineral lists and is of key strategic interest.

(and money has been flowing into niobium discoveries like WA1 Resources and Encounter Resources)

The company that owns the mine that produces 80% of the world's niobium is called CBMM and it is located in Minas Gerais, Brazil.

Minas Gerais is a Tier 1, stable mining jurisdiction, with thousands of mines focused on a range of metals. It's the same place we recently visited, and heard the government pitching its state to foreign capital - it's clearly open for business.

It is the same state where Latin Resources made a giant lithium discovery - and went from 3c to 43c - one of our best ever Investments - so we like the region.

Our newest investment SGQ is located in the same state as both Latin Resources and CBMM.

Today SGQ acquired an advanced stage development asset that has over 500 intercepts with niobium grades above 1%... and still has 90% left of the project to drill out.

The deal is still conditional on certain conditions being satisfied and is expected to close in late September/early October of this year.

Compared to other niobium projects, we think that this one has a very fast path to actually becoming a mine.

SGQ is also following the playbook set by Meteoric Resources for acquiring a late stage asset in Brazil.

A few years ago, Meteoric Resource acquired an advanced rare earths asset in Brazil, instead of rushing to secure exploration ground like most other juniors on the ASX.

Meteoric became the number one ASX rare earths exposure in Brazil and saw its share price go from 1.2c to a high of above 30c...

Because the asset was an existing discovery BEFORE the spotlight on critical minerals (particularly, REE projects), the company got a headstart on other exploration companies.

We are Invested in SGQ because we think it can become the number one Brazilian niobium exposure on the ASX.

SGQ plans to have a maiden JORC resource complete and a Pre Feasibility Study started on the project in the next 12 months.

Post transaction SGQ will have a market cap of $55M, which is in line with valuations we have seen some early stage explorers trade at...

The big differentiator is that SGQ’s advanced asset sits on the same geological structure where the world’s biggest niobium mine is currently operating.

When it comes to turning discoveries into mines, the quickest development stories are of projects that sit near existing production infrastructure.

That’s another reason why we are Invested in SGQ.

Another differentiator is that SGQ’s project isn't just a niobium story.

As we noted above, SGQ’s project also has drilled rare earth grades of >10% TREO at its carbonatite - this is comparable to grades seen from Lynas’s Mount Weld (106.6mt at 4.12% TREO) - albeit at a smaller scale.

We are Invested in SGQ to see it take its project from where it is now into development studies over the coming months.

The 9 Reasons why we Invested in SGQ

1. Niobium is a critical mineral. Governments want it, SGQ has it.

80% of the global niobium supply is controlled by one company CBMM. Niobium sits as the second highest risk metal on the critical materials list for both the EU and the US for supply concentration.

2. SGQ is capped at $55M post acquisition, much smaller than listed peers.

Post acquisition SGQ will be capped at A$55M (at 2.5c/share). Peers that have made niobium discoveries include WA1 Resources ($842M) and Encounter Resources ($249M). SGQ can also be compared to peers that have defined Rare Earth Element projects including Brazilian Rare Earths ($550M) and Meteoric Resources ($210M).

3. Existing discovery with 500 intercepts above 1% niobium.

Compared to other companies that are in the exploration stage, SGQ already has a niobium discovery. This provides a strong foundation for SGQ to quickly progress towards a JORC resource through more drilling of its own.

4. Money flowing into companies developing niobium projects.

Because of the importance of niobium, and its concentrated supply chain, large swathes of capital is pouring into other companies that are developing niobium projects. WA1 and Encounter Resources are two of the most successful stories on the ASX, both discovering niobium in WA.

5. Project sits next door to the largest niobium producer in the world.

SGQ is next door to CBMM, which supplies 80% of the global niobium market. SGQ’s project sits on the same geology as CBMM.

6. Only 10% of the project has been drilled (exploration upside).

To date, only 10% of SGQ’s project has been drilled with most of the drilling only down to ~50m depths. The high-grade mineralisation commences at surface and is open in all directions, leaving open the possibility for this discovery to grow even bigger.

7. Rare earths, with high grade TREO.

SGQ’s project also contains ultra high grade rare earths with TREO grades >10% in 10-60m intercepts. SGQ’s project sits on the same type of geology (carbonatites) as Lynas’ giant Mount Weld rare earths mine.

8. Project located in the same state in Brazil as Latin Resources.

The project is located in the Minas Gerais state of Brazil, a state that we have visited and home to one of our best ever Investments, Latin Resources. Latin Resources grew from $0.03 to over $0.40 off the back of a giant lithium discovery. The region is very mining friendly with good access to infrastructure and power.

9. Project acquired from a forced seller.

The vendor of the asset (Itafos) is a TSX listed phosphate producer and is currently going through a de-leveraging process trying to reduce debt. SGQ is picking up an asset that Itafos likely sees as non-core because of the business’ phosphate focus and a lack of bandwidth to bring another mine into production.

SGQ - the most advanced Brazilian Niobium/REE exposure?

One of the key reasons we liked the SGQ acquisition is because of the parallels it has to the Meteoric acquisition from back in 2022...

For those that are unfamiliar with the Meteoric story:

Back in 2022, Meteoric acquired an advanced rare earths asset in Brazil for what the market at the time thought was expensive (~US$20M cash headline number).

For the perennial cynics, it was a high price to pay for an asset in a hot macro thematic...

From the company (Meteoric’s) perspective it was actually a very different approach to what every other ASX junior was doing at the time...

Every other junior explorer at the time was trying to pay as little as possible for early-stage, ‘roll of the dice’ exploration assets.

While the juniors spent capital trying to make a REE discovery, Meteoric was busy defining a monster deposit.

The asset was picked up in October 2022 and in less ~12 months time Meteoric was the number one Brazilian rare earths exposure on the ASX.

In less than 12 months Meteorics share price was up by over 33 times - at its peak Meteoric’s market cap was ~$610M.

The past performance is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.

We think SGQ is doing the same, defining an existing discovery, but for niobium as well as REE.

And where SGQ differs from Meteoric is that Meteoric has an ionic clay deposit - SGQ’s deposit is in carbonatites - like WA1 Resources.

SGQ is acquiring what we think is the most advanced Brazilian niobium exposure on the ASX.

SGQ’s project right next door to niobium heavyweight CBMM - they control ~80% of the world’s niobium supply:

The project SGQ is acquiring already has over 500 significant intercepts with niobium grades >1% - including some smaller intervals where grades are up to 8.3%.

There are also 10-60m intercepts where rare earth grades are >10%.

All of those intercepts start near surface and are mostly limited to depths of ~50m.

So there is plenty of scope to increase the mineralisation at depth and in all directions.

That’s where we expect SGQ to focus next - drilling out the project working toward a maiden JORC resource.

Over the next ~12-18 months we want to see SGQ deliver:

1. Drilling for extensions to its deposit.

Hopefully we see thicker more high grade intercepts at depth and in all directions.

1. Maiden JORC resource by H1 2025.

We know from the previous technical study on the project that there is enough drilling to put out a resource, we want to see SGQ deliver a number that tops what was in that 2013 report.

1. Metallurgical testing.

We want to see SGQ confirm its deposit can be processed using the same/similar processing routes as CBMM’s Araxa deposit. If SGQ can show this then we think the project becomes more attractive from a corporate perspective.

1. Scoping Study/PFS.

All of the work above are precursors to SGQ taking the asset into the “economic studies” stage. We already know the asset demonstrated an NPV of US$967M back in 2013... so it will be interesting to see what SGQ can deliver almost 11 years later...

A look at what SGQ is looking for, Niobium and Rare Earth Elements

Niobium

For decades, niobium has been used in alloys to make steel stronger and lighter.

However, recently niobium oxide has been used in batteries to create ultra-fast charging batteries.

Recently, Toshiba demonstrated this ultra fast charging niobium oxide, lithium-ion battery:

While 88% of the niobium market is used for steel, niobium oxide is increasingly being used in a number of specialty markets including aerospace and superconductors.

Niobium has been rising up the critical minerals list for a few years now.

And is considered the second most critical mineral by both the US and Europe:

This is for one key reason, there are very few niobium producers and 90% of the world’s niobium comes from one country... Brazil.

That said, the niobium market is tiny... for now.

Production was dominated by one company CBMM (located in Brazil) and it accounts for roughly 80% of the 100kt of niobium produced in 2022.

The niobium markets remind us of the lithium markets of the early days.

Because of the tiny size of the market, the end commodity is susceptible to big price swings.

There are strong price incentives to explore for and develop niobium assets... and we expect this to grow as niobium oxide’s importance in a number of specialty markets becomes apparent.

Markets for these niche elements, where there are only a handful of players, casts a big geopolitical spotlight on the commodity.

Particularly when it is looking increasingly likely that it will be used in future facing technologies.

Rare Earth Elements (REE)

Unlike niobium, rare earth elements are out of favour with investors at the moment due to cyclical low commodity prices.

REEs are used in everything from glass, lights, magnets, batteries, alloys and catalytic converters.

They are also critical components for the defence industry...

Rare earths are also considered critical minerals by governments all around the world.

Because China controls ~60% of the world’s rare earth mining and ~85% of the world’s rare earth processing capacity.

The big rare earth run was back in 2022 and since then some of the share price for explorers/developers have come off the boil responding to low spot prices.

BUT that hasn't stopped governments and corporates from throwing cash at the sector - which to us is a clear signal of just how critical they are from a strategic perspective.

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We think the rare earths aspect of SGQ’s acquisition could become a big part of the company’s story if or when rare earths prices rebound and the macro thematic turns around.

Whereas most of the market will see SGQ’s asset as a niobium exposure initially, we think the rare earths aspect of the story is just as important in terms of future project economics.

So that we can follow the company’s progress over time and track our Investment, today we are also publishing our SGQ Investment Memo, where we share:

• What SGQ does
• The macro theme for SGQ
• Our SGQ Big Bet
• What we want to see SGQ achieve
• Why we are Invested in SGQ
• The key risks to our Investment Thesis
• Our Investment Plan

SGQ Investment Memo 1

Shares Held: 24,900,000
Memo Opened: Tuesday, 6th August 2024

What does SGQ do?

St George Mining (ASX:SGQ) is a Brazilian niobium & rare earths developer in the state of Minas Gerais.

What is the macro theme?

80% of the global supply for niobium is controlled by one company and one mine in Brazil.

This commodity is considered the second highest commodity for both the US and the EU in terms of supply chain risk.

Although the market for niobium is still relatively niche, it may grow as metal of the future in things like ultrafast charging batteries.

Rare earths are also considered critical minerals with production and processing capacity concentrated in China.

Our SGQ Big Bet:

“SGQ defines a niobium/rare earths deposit large enough to take into development or attract corporate interest via a takeover at a market cap of >$500M”

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, many risks involved - just some of which we list in our SGQ Investment Memo. 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 SGQ?

1. Niobium is a critical mineral. Governments want it, SGQ has it
2. SGQ is capped at $55M post acquisition, much smaller than listed peers
3. Existing discovery with 500 intercepts above 1% niobium
4. Money flowing into companies developing niobium projects
5. Project sits next door to the largest niobium producer in the world
6. Only 10% of the project has been drilled (exploration upside)
7. Rare earths, with high grade TREO
8. Project located in the same state in Brazil as Latin Resources
9. Project acquired from a forced seller

What do we expect SGQ to deliver?

Objective #1: Acquisition completion

We want to see SGQ satisfy the conditions for the acquisition and complete the deal.

Milestones

🔲 Shareholder approvals

🔲 Upfront cash payment completed

🔲 Deferred consideration #1 Paid

🔲 Deferred consideration #2 Paid

Objective #2: Drilling to increase size of discovery

We want to see SGQ drill out its existing discovery at depth and in all directions to increase the footprint of the deposit.

Milestones

🔲 Drilling permits granted

🔲 Land access agreements

🔲 Drilling commenced

🔲 Drilling results

Objective #3: Maiden JORC resource estimate & met testwork

We want to see SGQ define a maiden JORC resource for its project. As part of the resource estimate we also want to see SGQ run some metallurgical testwork and confirm its project sits on similar geology to CBMM’s project next door AND that it can be processed using similar processing techniques.

Milestones

🔲 Metwork updates

🔲 Maiden JORC resource estimate

Objective #4: Enter feasibility studies

We want to see SGQ take its project into economic studies either via a scoping study, Preliminary Economic Assessment (PEA) or a Pre Feasibility Study (PFS).

Milestones

🔲 Scoping study/preliminary economic assessment commenced

🔲 Scoping study/preliminary economic assessment completed

What could go wrong?

Exploration risk

A big part of our Investment is in seeing SGQ extend mineralisation at its project at depth and along strike.

There is no guarantee that drilling will return anything of significant commercial value for SGQ (either through weak grades or thin intercepts).

There is also some risk associated with metwork for later stage projects like SGQ’s - SGQ will be focusing on understanding the metwork over the coming months in parallel to drilling.

Commodity price risk

The niobium market is very small, which means that there can be big swings in commodity prices based on supply out of CBMM (who controls 80% of the market).

There are also a number of substitute commodities to niobium such as tantalum and vanadium.

If the price of niobium accelerates, then buyers may look for substitutes, pushing the price of the commodity down.

Deal Risk

The acquisition by SGQ is still subject to a certain number of conditions being met.

SGQ will need to get shareholder approvals for the deal - and there is a chance the vendor will need to get approvals for the transaction also.

SGQ expects the conditions of the deal to be satisfied by late September/early October 2024 but there is always a risk that these do not happen. If the deal falls through then our Investment Thesis wouldnt be applicable anymore.

Deferred payments risk

To pay for the acquisition SGQ will need to make three separate payments totaling US$21M. The first US$10M instalment is due on closing of the deal with the remainder due over the next 18 months.

IF SGQ is unable to raise funds to pay for the deferred milestone payments then it risks losing the asset. It is possible that SGQ fails to make these payments in which case we would expect the company’s share price to be re-rated significantly lower.

Market risk

Broader market sentiment could deteriorate, and shares as an investment class trade lower, taking SGQ’s share price with it. Alternatively, there could be further sector specific pain ahead where junior explorers suffer a lot more than the broader market.

Development/delay risk

Should any or all of the above risks materialise, SGQ could wind up stuck in “development purgatory” where newsflow dries up and the project remains stagnant for a prolonged period of time, hurting the share price. Additionally, if delays occur in terms of material newsflow, the market could turn on SGQ.

Investment Plan

We are Invested in SGQ to see it progress its project into development.

Our plan is to hold the majority of our position in SGQ for 3 to 5 years which we hope is enough time to see SGQ to move towards development (see “our long term bet” above).

After 12 months we will apply our standard de-risking strategy.

We may also look to sell up to 20% of our holding if the company delivers on one or more of our Investment Memo objectives and/or the share price materially re-rates.

Any sell downs will be in accordance with our trading and hold policy disclosure.

You can see all our current holdings here.