SGQ: 87.7m high grade rare earths drill hit - 150m step out from existing JORC resource. Gina Rinehart invests $22.5M.

Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 18,962,845 SGQ Shares and 12,500,000 SGQ Options. The Company has been engaged by SGQ to share our commentary on the progress of our Investment in SGQ over time. This information is general in nature about a speculative investment and does not constitute personal advice. It does not consider your objectives, financial situation, or needs.

St George Mining (ASX:SGQ) already has the largest and highest-grade carbonatite-hosted rare earths resource in South America - in Brazil.

It’s the second-highest grade rare earths resource in the Western world.

(it also has a big niobium resource, which we think the market is not pricing in while rare earths take all the attention)

SGQ’s project already has:

• 40.6Mt of Rare Earths at grades of 4.13% TREO (total rare earths oxide)
• 41.2Mt of Niobium at grades of 0.63%

In terms of grade, SGQ is comparable to ~$18BN Lynas’ project.

In terms of size, SGQ is comparable to ~$21BN MP Materials’ project.

(which may be why Gina Rinehart - shareholder in both MP and Lynas - cornered SGQ’s recent $72.5M capital raise by investing $22.5M...more on this in a second)

This morning SGQ announced an 87m long drill intercept of high grade rare earths (AND niobium...) in a “step out” drill hole 150m away from their JORC resource. (source)

( a “step out drill hole” basically means a company “rolls the dice” and tries drilling far away from where they have already proven a mineral resource, and the assumption is that if a step out drill is successful, then the resource could grow all the way to where the step out drill hit mineralisation)

Just last week SGQ hit another big step out intercept 230m to the west of the resource. (source)

And before that ~5 weeks ago, hit rare earths stepping out ~1km to the east, (source)

So based on these strong “step out” drill results, it looks to us like SGQ’s rare earths resource could get even bigger?

(The next task for SGQ is to do some drilling in between the successful step out holes and the existing resource to confirm if the mineralisation is continuous - this is called “infill” drilling... get it, “filling in” the area between known resource the step out holes)

We will find out soon... SGQ has 3 diamond rigs and one RC rig drilling the project 24/7, working toward an upgrade of the resource before the end of the year...

(Source)

Now we wait to see all of the drilling in the area’s between the current resource and the step out hits...

Here is how SGQ’s asset compares to the assets held by MP and Lynas right now:

(Source)

We think those comparisons to MP and Lynas (as well as how big the resource could get) is what drew interest from billionaire Gina Rinehart into SGQ.

SGQ just raised $72.5M (after the AFR had said that SGQ had gone out looking to raise $40M) (Source)

$50M of that was “led by European and North American funds”, and

$22.5M was taken in one line by Gina Rinehart’s Hancock Prospecting.

(Source)

Hancock Prospecting (and Gina) know the rare earths industry really well...

Hancock is already Invested in two of the biggest Western producers of rare earths in the world - $21BN MP Materials and $20BN Lynas Rare Earths.

Now she is coming in as a major shareholder of SGQ, which has the only comparable asset sitting on similar geology in the western world...

And the timing of her investment was pretty interesting too... just after China intervened in the rare earth markets with “dramatically expanded its rare earths export controls”.

(Source)

Is SGQ a potential target for US capital flowing into rare earths?

China controls over 90% of the global rare earths refining market which is why Trump may have felt the need to respond so quickly to China with Tariff threats.

(Source)

The Center for Strategic & International Studies (CSIS) - a top global national security think tank put out the following article saying China’s curbs are a threat to the U.S defence supply chains:

(Source)

Our view is that the reason why rare earths are being used as bargaining chips by China and the US is because of the military exposure they have.

Rare earth elements are critical for modern technologies, including electronics, medicine and military applications like F35 fighter jets, Tomahawk missiles and the advanced magnets needed for motion in AI robots...

And the US can’t really afford to go without critical raw materials that go into any of those.

Especially not letting the Chinese military get the jump on them in what we can only assume will be future wars fought with AI robots and drone swarms instead of soldiers.

(Rare earths are used in AI robots to create powerful magnets, sensors, and precision actuators that enable movement, vision, and efficient energy conversion within their motors and control systems)

Companies inside the US have already started reaching out to SGQ as a potential source of feedstock for their downstream business’.

A few months ago SGQ signed an MoU with US based magnet materials and magnet producer REAlloys. (Source)

REAlloys produces high-performance magnets for “US Protected Markets” including the:

• US National Defense Stockpile (NDS),
• US Defense Industrial Base (DIB),
• US Nuclear Industrial Base (NIB),
• Robotics, Electric Aviation and Critical Infrastructure Industries and
• for US Partner Countries with Defense Treaties, Alliances & Agreements.

(Source)

Under the terms of the MoU, REAlloys will take SGQ’s rare earth product and test different processing techniques to see if it is suitable for magnet making...

(as well as industry recognition - SGQ also got backing from the Brazilian government to build a pilot plant to do testing of its own a few weeks ago)

(Source)

So SGQ’s project is already going through early stage product qualification processes for supply inside the US.

Using a plant supported by the Brazilian government...

IF SGQ were able to show that its rare earths are suitable feedstock for high performance magnets being produced in the US for the US...

Then SGQ’s project would become:

1. The largest and highest-grade carbonatite-hosted rare earth deposit in South America, which is not really that far away from the USA...
2. The second highest grade REE deposit globally in the Western world - where the old adage of “grade is king” comes into play.
3. The perfect target for someone looking to secure rare earth feedstock that is suitable for producing high performance, military spec magents...

Which is exactly what any company with processing capacity will be looking for all over the world...

Either like an MP Materials - the USA’s only vertically integrated producer of rare earth magnets OR someone who is producing downstream and wants some upstream mine exposure to secure their feedstock...

(or maybe even an end user trying to secure offtake - remember when the big automakers like Tesla were signing offtake deals).

Based on the events of the last 10 days it seems like there is still a lot to play out in the broader US critical metals story...

We think that once SGQ has finished its current round of drilling and has put out a resource upgrade, SGQ’s project could start to get a lot more interest from within the rare earths industry.

Ultimately, we want to see SGQ move ahead with its project (which we think is the best way to create a sense of urgency amongst any interested parties) that are taking a look at SGQ’s project. This is central to our SGQ Big Bet which is as follows:

Our Big Bet for SGQ

“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 no guarantee that our Big Bet will ever come true. There is a lot of work to be done, many risks involved, including development risk, country risk and commodity price risk - just some of which we list in our SGQ Investment Memo.

Success will require a significant amount of luck. Past performance is not an indicator of future performance.

Western rare earth majors are flush with cash - is the next natural move to do some M&A?

So far the single biggest critical mineral the US government has put capital behind has been rare earths.

Across US and Australia we have seen:

• The US$400M direct investment from the Pentagon into MP Materials. (source)
• The US$500M offtake deal between Apple and MP Materials. (source)
• The US$1BN loan commitment from JP Morgan & Goldman Sachs for MP Materials. (source)
• A$1.65BN in loans from the Australian government to Iluka Resources. (source)
• The $750M capital raise from Investors into Lynas Rare Earths. (source)
• Up to US$400M from the US/AUS governments for Arafura Resources. (source)

Now all of a sudden these companies' projects are funded and/or the corporations have a treasury to put to work (maybe by doing deals...).

The biggest benefactor so far has been MP Materials.

Most of MP Materials new cash is earmarked for “10xing its magnet facility” - they are literally calling it “the 10x Facility”.

Aside from sounding cool, and delivering much-needed US onshore processing capacity, it will also create a big hungry plant which is (as the Wall Street Journal reported) going to need feedstock which MP’s current mine just isn't able to provide:

(Source)

Where will the feedstock for a 10x facility come from?

Then there is the ASX listed Lynas Resources - who just raised $750M and said it was considering doing deals downstream with the cash raised...

(Source)

In May, the Lynas CEO flagged an interest in development assets in Brazil, and “plans to work with early-stage developers to help bring their mines online”...

(Source)

SGQ could certainly use some help from a multi-billion dollar partner like that.

Of course, no one knows exactly what Lynas and MP will do but we are hoping at least one of them has at the very least “watchlisted” SGQ and is paying attention.

It would definitely make sense for the two to be watching SGQ because SGQ’s project is hosted in the same type of geology as the two projects they mine (hard rock carbonatite-hosted rare earth deposit).

They know this type of rare earth deposit well and would be able to form a view on what can

be done with SGQ’s project pretty quickly (unlike other types like ISR or clay hosted deposits).

Surely Hancock (Gina) will have views on where SGQ fits in all of this as a shareholder in all three companies (SGQ, Lynas and MP Materials)...

What’s next for SGQ?

Drilling results 🔄

In the short term the main thing we want to see are drill results.

Ideally we see big extensions at depth and to the north/east/west of SGQ’s current JORC resource estimate.

And then slowly once the limits of the resource are define, drilling to fill in the gaps...

Beyond the drilling 🔄

Over the next 12-18 months, a lot of the catalysts for SGQ could come at hard-to-forecast times:

• Updates on downstream processing strategy - We want to see SGQ define its downstream rare earths strategy. We are especially looking forward to an update in relation to the US.
• Start working on development studies - SGQ has already commenced environmental, geotechnical and development studies with a view of getting to economic studies in Q4-2025.
• Pilot plant trials - SGQ has signed an agreement with CEFET to jointly collaborate on a new Pilot Plant trial that will build on the prior 9 month trial from 2012-13 which successfully produced rare earth product at over 99% purity and recoveries of 86% TREO.
• SGQ is also participating in the “MAGBRAS Initiative” - a program that has major automakers like Stellantis working toward building Brazil’s first permanent magnet-making facility.
• Metwork and sample production - SGQ should have results from this in the pipeline with the creation of the St George Technical Centre. The main catalyst we are looking forward to is the re-starting of SGQ’s pilot plant with development of this underway with the agreement signed with CEFET to host and jointly collaborate. This will allow for product samples to be produced for potential strategics/offtake partners.
• Permitting - SGQ is targeting completion for permitting by Q4-2026.
• Finalise the remaining vendor payments - (US$6M due before the end of the year and US$5M due next year). With the funds raised today, we now don’t need to worry about where SGQ will find the cash to pay for these.

(Source)

What are the risks?

In the short term, the key risk for SGQ is “exploration risk”.

With drilling underway we are conscious there is no guarantee that drilling will successfully grow SGQ’s resource estimate.

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).

Source: “What could go wrong?” - SGQ Investment Memo - 6 August 2024

Other risks?

There are several other significant risks worth keeping in mind.

First, there's supply chain concentration risk, with the global niobium market dominated by just three producers (CBMM controlling 80%), SGQ faces the challenge of breaking into an extremely concentrated market where existing players have significant market power and established customer relationships.

The rare earths market is also concentrated, but to a lesser extent than the niobium market.

There's also environmental and regulatory risk.

Brazil has a troubled history with tailings dam disasters, leading to stricter regulations and lengthy permitting processes.

SGQ’s project requires approvals from multiple government authorities with no certainty these will be granted on acceptable terms.

While SGQ’s project sits on well understood geology, there is no guarantee that SGQ can put together a flowsheet that is capable of processing its deposit.

Processing and scaling up production is something that even experienced operators have struggled with in the rare earths-niobium space.

Other risks include commodity price volatility.

Niobium prices can fluctuate up to 35% between quarters due to the opaque pricing mechanisms in this specialised market, potentially impacting project economics.

Rare earths markets are also small and volatile which can impact project economics.

As always, these risks are part of early-stage mining investments, particularly in critical minerals projects in emerging markets.

Our SGQ Investment Memo

You can read our SGQ Investment Memo in the link below.

We use this memo to track the progress of all our Investments over time.

Our SGQ Investment Memo covers:

• What does SGQ do?
• 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