Southern Alliance Mining (SAM) QNS , with its main revenue from iron ore production, plans to expand into rare earth mining, as it eyes the growth potential of another market for metals. On April 17, the Malaysia-based, Singapore-listed company signed two memorandums of understanding (MOUs) to potentially acquire stakes in two entities in rare earth mining.
The first acquisition is a 40% stake in MCRE Resources, which is already in production via a 2,161-hectare site in Perak. The other MOU is to acquire 100% of Paramount Synergy, which already has the necessary paperwork to carry out exploration activities within a 1,863-hectare site in Johor. SAM is now producing iron ore from its mine in Chaah, within the same Malaysian state.
Exact details of the deals have yet to be finalised and a dollar value could not be indicated, as a valuer has yet to be engaged and due diligence has not been completed. Nonetheless, Lim Wei Hung, executive director and COO of SAM, tells The Edge Singapore in an interview that the acquisitions will be “substantial” and will be paid using new SAM shares.
“This is a significant step towards accomplishing our diversification goals and not only establishing SAM as a leader in the mining industry but also positioning Malaysia as a key contributor to rare earth mining in the global context,” he says.
The potential acquisitions, if completed, will be deemed as interested party transactions. Pek Kok Sam, SAM’s co-founder and managing director, controls around 62% of the company. He has interests in both MCRE and Paramount as well. Pek holds 12% of MCRE, whose largest shareholder, with a stake of 36%, is an entity called Qingdao Joyful Investment Co. Teh Teck Tee, SAM’s non-executive chairman is an interested party too, with his 12% stake in MCRE.
Paramount, meanwhile, is 79% held by Pek. Other shareholders include Lim’s wife Lai Choy Leng, who holds 3%. “Fundamentally, SAM is listed and serves as a platform to grow,” explains Lim, when asked why SAM is used as the vehicle by them to operate this business. Given how the value of the acquisitions will exceed the 5% net tangible asset value threshold, shareholders will get to vote at an EGM to be called.
See also: Southern Alliance Mining signs MOUs to acquire two rare earth mines in Malaysia
Shifting geopolitical sands
SAM’s move to rare earth mining rides on shifting geopolitical trends: a growing tussle for resources. Rare earth metals, contrary to the term, is a misnomer, as this group of 17 metal elements exist in abundance. The difficulty, however, is in the extraction and separation of these metals into useful material used to make everyday items such as handphones, as well as weapons such as the guidance system of missiles. Rare earth metals are also critical minerals for a greener future; they are essential for producing electric vehicles and batteries, and harnessing solar power and wind energy.
After the US halted production on environmental concerns in the 1980s, China has emerged as the dominant supplier of rare earth metals, estimated by Roskill, a metal commodities information services firm, at about 85% of the global output. With persistent bilateral tensions, US is reportedly trying to revive rare earth production but for now, China not only houses most of the world’s rare earth mines, but has also developed plenty of expertise and experience to process all 17 elements found within the rare earth carbonate.
According to research firm Fortune Business Insights, the global rare earth market is projected to grow at a CAGR of 10% from 2021’s US$2.8 billion ($3.78 billion) to US$5.5 billion in 2028.
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China may be the strong leader for now but with market prospects like this, other countries with rare earth deposits are eager to carve out their share of this pie. Resource-rich Malaysia, for one, has put itself on the map with the discovery of a significant number of rare earth deposits, joining the likes of Australia, India and Vietnam. SAM, citing a study by the Malaysia’s Mineral and Geoscience Department, notes that the non-radioactive rare earth resources in Malaysia amounted to 15.188 million metric tonnes, with an estimated value of some RM741 billion, or around $224 billion.
According to SAM, MCRE’s, with a current estimate of 33,000 tonnes of rare earth oxide, is the first ion adsorption clay rare earth mine in Malaysia. This means that the rare earth carbonate that is extracted from this mine is not radioactive in nature, as compared to mineral bearing ores, which are found in most rare earth mines in Malaysia. An environmental impact assessment report of MCRE revealed that the estimated rare earth oxide of MCRE’s explored mine area of 2,161 hectares is around 33,000 tonnes.
MCRE has also obtained all its operating and mining licences and commenced ion adsorption rare earth mining in 2022 and is the pioneer of the application of ground-breaking mining techniques to extract Non-Radioactive Rare Earth Elements (NR-REE) in Malaysia via in-situ leaching method.
MCRE has already begun export of these elements in February. The acquisition of this operational mine is expected to strategically position SAM as a key producer of rare earth elements in Malaysia and potentially in Asia, excluding China, in the future.
Lim claims that a large factor in acquiring MCRE is also the ability to mine in a greener way. “It doesn’t involve land clearing, so we don’t chop down the tree, and second thing, it doesn’t involve a big fleet of equipment for excavator trucks right, then naturally we have reduced the carbon footprint,” he says.
When not properly done, mining rare earth metals is notoriously harmful to the environment. The process involves digging vast open pits in the ground which can contaminate the environment and disrupt ecosystems.
In a previous high profile controversy in Malaysia, a rare earth mine owned by Lynas, the only other major producer outside China, faced a series of protests by environmentalists and blocks from regulators in wake of environmental concerns. Also, Lynas mines typically mine mineral bearing ore, which are radioactive in nature.
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MCRE, on the other hand, uses a process of injecting liquids into the earth to encourage the displacement of rare earth ion adsorption clay that flows into their collection site. Called in-situ leaching, Lim clarifies that this activity requires no excavation of the land, a method that China has granted the corporation exclusive rights to utilise.
In addition to MCRE, SAM will also leverage on its existing mining expertise in iron ore and gold as well as synergies derived from MCRE to expand and expedite the present exploration activities at Paramount, also in Johor.
Lim is confident that the proposed acquisition of shares in MCRE and Paramount, if and when completed, will position SAM as a world-leading rare earth company.
Now, if the prospect is so good, why didn’t SAM acquire these two entities earlier? According to Lim, there were several uncertainties during the exploration stage, where the Malaysian government had to come up with standard operating procedures upon the discovery of the first of such rare earth mines. With proper regulatory procedures charting the road to commercial production in place, the risk that SAM needs to bear when moving into this reduces.
Royals and gold
To be sure, SAM’s move into rare earths is not the only diversification from iron mining it has been making. Since early 2022, the company has been carrying out exploration work in the Tenggorah area for gold, which is subject to different market forces compared to iron. SAM is doing so via a joint venture company that it holds 85%, with the royal family of Johor holding the remaining 15%. “We are progressing into the second stage, which means that our primary stage showed viable data. This is good,” says Lim.
The first phase of exploration identifies the land area of the mine with the largest potential for mining through geological mapping. The company has already identified the area and now has already started its drilling programme in April. After which, it will test the samples obtained from the drilling to determine the potential of the ore.
A successful move into either gold, or rare earth mining can potentially help SAM reduce the volatility of its earnings, which is now pegged to global iron ore prices, which in turn, had seen one of the bigger bouts of volatility throughout the pandemic years.
Acting at different points in time, factors such as supply chain issues, pent up demand, investors’ fears, cooling demand in China and so on, caused global iron ore prices to fluctuate between just over US$70 per tonne at the start of the pandemic, to more than US$200 per tonne in the second half of 2021 – only to drop again to around US$120 currently.
SAM’s most recent financial results, meanwhile, had company specific issues too. In its latest 1HFY2023 ended Jan 31, SAM’s revenue dropped by 47% y-o-y to RM52.2 million ($15.7 million), as overburden removal activities had to be carried out at the iron mine, which resulted in lower volume of iron ore produced. In addition, in line with global pricing, SAM had to make do with lower average selling prices of down 16.8% for iron ore concentrate and down 7% for iron ore tailing. SAM ended 1HFY2023 with a loss of RM7 million, versus earnings of RM19.4 million in 1HFY2022.
Lim is upbeat that iron ore prices will see “positive development”. First, domestic demand now outweighs supply. Next, with China reopening and its economic engine revving up, there will be greater export demand too.
SAM currently does not have any analyst coverage. It listed in June 2020 at 25 cents and closed at 68 cents on April 19, giving the company a market capitalisation of $335.0 million.
