Cobra Resources — Exploring a potential game changer

Cobra Resources (LSE: COBR)

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Research: Metals & Mining

Cobra Resources — Exploring a potential game changer

Cobra Resources is an exploration company focused on developing a rare earths deposit in South Australia, with a potentially low-cost method of production through in situ recovery (ISR). ISR is a proven, low-cost method of extraction in the uranium industry and dominates the bottom third of the uranium cost curve. Its scope for lower capital and operating costs is potentially a game changer for rare earth extraction, where Western producers are struggling with cost inflation and volatile commodity prices. Upcoming catalysts include progressions in circuit design and advancement towards a maiden resource at its Boland deposit.

Written by

Andrew Keen

MD - Head of Content, Energy & Resources, Industrials

Metals & Mining

Cobra Resources

Exploring a potential game changer

Metals and mining

Spotlight - Update

1 May 2024

Price

1.18p

Market cap

£8m

Share price graph

Share details

Code

COBR

Listing

LSE

Shares in issue, including recent placement, post equity raise

727m

Net cash (£m) at 31 December 2023
Additional £0.2m raised in January and £0.6m raised in April

0.6

Business description

Cobra Resources is an LSE-listed minerals explorer with gold and rare earth deposits in the Gawler Craton in South Australia. It is developing flowsheet options for its Boland deposit, which appears to have the potential for in situ recovery, generally associated with lower capital and operating costs.

Bull

Potential breakthrough approach to rare earth extraction.

Potential low capex rare earth extraction method, with significantly lower funding needs and shorter time to market.

Early in the development process, with steady news flow possible from processing and drilling results.

Bear

No guarantee of success in moving to a maiden resource for in situ recovery.

Potential long development pipeline; in need of additional capital.

Rare earth commodity price volatility.

Analysts

Andrew Keen

+44 (0)20 3077 5700

Harry Kilby

+44 (0)20 3077 5724

Cobra Resources is a research client of Edison Investment Research Limited

Cobra Resources is an exploration company focused on developing a rare earths deposit in South Australia, with a potentially low-cost method of production through in situ recovery (ISR). ISR is a proven, low-cost method of extraction in the uranium industry and dominates the bottom third of the uranium cost curve. Its scope for lower capital and operating costs is potentially a game changer for rare earth extraction, where Western producers are struggling with cost inflation and volatile commodity prices. Upcoming catalysts include progressions in circuit design and advancement towards a maiden resource at its Boland deposit.

Why rare earths?

Four of the 17 rare earth elements (REEs) are critical for strong permanent magnets (Nd, Pr, Dy, Te). These magnets boost the efficiency of electrical generators (in applications like offshore wind turbines) and electric motors (in applications like electric vehicles). They play a critical role in power generation and power use, so are vital for the global energy transition to low carbon solutions. All the REEs listed above are rightly seen as critical minerals by many governments worldwide, and there is a need to shift the dependence away from China (which accounts for 80-90% of global processed oxide output).

How Cobra is different

Cobra has identified rare earth mineralisation at its Boland project in the Gawler Craton in South Australia, which is concentrated in narrow zones. One zone (zone 3) has high permeability and transmissibility, indicating its potential for ISR. Boland has been confirmed as an ionic clay resource with tests so far indicating easy leachability. Rare earth production is dominated globally by hard rock producers and China. Non-Chinese projects have been largely hard rock, but there is a growing list of ionic clay projects in Australia and South America (we look at six in this note). However, Boland is unique in its potential to combine an ionic clay resource with ISR. This opens the possibility for a significant drop in capital and operating costs (which is critical in a volatile commodity environment and is causing real difficulties for other new REE producers), as well as providing a source of heavy rare earth elements (HREEs) in a tier one mining jurisdiction.

Catalysts and next steps

There are a number of additional steps that need to be taken to shore up Boland as a REE ISR deposit and declare a maiden resource, which we believe is possible mid-year. In the immediate term, Cobra is re-assaying historical drill cores to test for REE mineralisation. Its ore is also undergoing a column leach trial to test recovery levels under potential ISR conditions (results are expected in June) and its pregnant liquor solutions from existing bench-scale test work are being tested by partners to help flowsheet design. Further leach tests and mineralogical studies to determine the distribution of REEs within the clay bands and better define the parameters for in situ leaching are also planned. In the longer term (and possibly post a maiden resource estimate) Cobra will also likely expand aircore (AC) drilling to extend the footprint of ionic REE mineralisation.

Rare earths in a tier one jurisdiction

Cobra has a total land package in the Gawler Craton in South Australia of 3,261km2, known as the Wudinna Project (100% owned since 22 April 2024, when Cobra purchased the remaining 25% from Andromeda Metals). Within this area there are a number of gold and rare earth deposits that total a 279koz JORC1 gold mineral resource (5.81Mt at 1.5g/t) and a JORC rare earths resource of 41.6Mt (at 699ppm total rare earth oxides (TREO)). The current JORC resources and location of the Wudinna Project are outlined in Appendix 1. The gold mineralisation is in a range of deposits (Barns, Clarke, White Tank and Baggy Green) with the existing JORC rare earth resource lying above the Baggy Green and Clarke prospects.

  Joint Ore Reserves Committee, the Australian standard for reporting mineral resources.

Boland deposit changes the strategy to ISR

In June 2023, Cobra announced a set of new REE drill results with the focus switching to the Boland deposit, which is not included in the current JORC resources at Wudinna. The Boland deposit has become the priority as it has been identified as ionic mineralisation (or an ionic adsorption clay), with the structure of the deposit potentially suitable for ISR mining. The focus of developing Boland has been on two key factors: understanding the metallurgy for potential recovery circuit design and understanding the structure of the deposit to see if the conditions for ISR are met.

A maiden resource is yet to be declared at Boland. For a deposit to be classified as a mineral resource there needs to be reasonable prospects for eventual economic extraction, so metallurgy and geological setting (amenability for ISR) are important steps, before extending the size and scope through additional drilling.

The initial intersections announced in June 2023 resulted from drilling 1.5km of a prospective 30km zone of paleochannel (prehistoric river systems). Signature intersections quoted by Cobra (detailed in Appendix 1) indicated grades ranging from 619ppm to 2,189ppm TREO. In March 2024, drilling results were announced that identified three zones of mineralisation (detailed in Appendix 1). Zone 3 includes 0.6m at 1,538ppm TREO. While this is relatively narrow mineralisation, which can be problematic in conventional mining, it can be advantageous in ISR processes in the right geological setting.

Zone 3 of the mineralisation is of particular interest not just because its grades are higher, but also because it sits within a zone where permeability of the deposit is high, helped by advantageous grain-size distribution and good transmissibility. Particle size distribution analyses conducted to date indicates that 67.6% of zone 3 has a particle size greater than 1mm (equivalent to fine sand) and its calculated transmissivity is high (135–275m/day). Both results indicate a high probability of success for ISR recovery, according to Cobra. Finding these zones of high permeability within paleo systems is the key to potentially developing an ISR method of extraction.

The modelled mineralisation at Boland is potentially very large, with zone 3 mineralisation mapped across 139km2.

Exhibit 1: Modelling of zones at Boland exploration target

Source: Cobra Resources

Mineral classification and leachability is key

In September 2023, Cobra announced that metallurgical testing by the Australian Nuclear Science and Technology Organisation (ANSTO) on samples from the Boland deposit had confirmed the mineralisation to be ionic adsorption rare earth clays. The classification as an adsorption clay means the REEs are present on the surface of the clay mineralisation at the micro level within the mineralisation (rather than absorbed) and are therefore amenable to leaching (ie dissolvable with solutions passing through the mineralisation).

Bench-testing on the ore samples by ANSTO has also indicated relatively high recovery rates, with these results being achieved at ambient temperatures and weak acidity (pH4). Acid consumption rates were relatively low (6–30kg/t). The best results achieved to date were at pH3 and a six-hour duration leach, with recoveries of 68% for magnet rare earth oxides (MREOs) and 65% for heavy rare earth oxides (HREOs). The leachability is important as Cobra is likely to use weak sulfuric acid for ISR, and South Australia has multiple industrial producers of sulfuric acid.

Why ISR?

ISR extraction is fundamentally different to mining a deposit. The ore is left in the ground and the method includes pumping a solution into a permeable zone of the orebody, often bounded by impermeable mineralisation, and extracting a pregnant solution that contains the targeted minerals. The leach solution travels through the permeable zone from injection wells to extraction wells, and it is then pumped to the surface. As the solution is processed, it results in an intermediate product. ISR is an established process for South Australia’s uranium producers (for example, the Four Mile uranium mine operated by Heathgate Resources and the Honeymoon restart project owned by Boss Energy).

In September 2023, Cobra signed a memorandum of understanding (MOU) with Watercycle Technologies, a UK based technology company associated with the University of Manchester. The partnership aims to examine alternative approaches to REE extraction and ISR mineral extraction design. The intent is to design a flowsheet that will take the pregnant liquor post the leaching phase through to a mixed rare earth carbonate (MREC) product, which is a tradable product suitable for further processing and separation. Cobra’s senior management (Rupert Verco, CEO, and Robert Blythman, exploration manager) have operational experience in the uranium industry, so are well placed to develop an integrated approach to ISR at Boland.

Exhibit 2: ISR schematic

Source: Cobra Resource presentation September 2023

ISR in uranium shows why grade is not king

The uranium industry provides the best illustration as to why extraction methods can be far more important than resource grades when determining relative competitiveness. The world’s two largest miners are Kazatomprom, based in Kazakhstan, with approximately 23% of global mine production, and Cameco Corporation, based in North America, with approximately 12% of global production. Kazatomprom mines uranium at 14 operating properties that contain 27 deposits. Its aggregated mineral ore reserves are 929Mt at 0.061% uranium with mineral resources of 1,136.6Mt at 0.064% uranium. In contrast, Cameco mines significant quantities of uranium using traditional underground mining techniques. Its production is approximately split evenly between the McArthur River Mine (with a reserve grade of 6.72% U3O8) and the Cigar Lake Mine (with a reserve grade of 17.03% uranium). These grades are in the order of 200x the reserve grade of Kazatomprom’s reserves.

Despite this 200x differential in grades, Kazatomprom dominates the bottom third of the global uranium cost curve. The key difference is that ISR does not require expensive material movement (extracting ore from the ground), material processing (transport/crushing/grinding) or remediation (movement of processed ore back to mined areas and rehabilitation).

Exhibit 3: ISR mining dominates the bottom end of the Uranium cost curve

Source: Kazatomprom presentation

Next steps

There are additional steps that need to be taken to shore up Boland as an REE ISR deposit. These include:

In situ leach tests and mineralogical studies. These will determine the distribution of REEs within the clay bands and better define the parameters for in situ leaching.

Monitoring of existing exploration wells.

Further drilling. Cobra will expand AC drilling to extend the footprint of ionic REE mineralisation.

Further re-assaying of historical drill cores to test for REE mineralisation.

ANSTO is preparing a column leach trial on core recovered at Boland to test recovery levels under potential ISR conditions. Results are expected in June.

The bench-scale test work by ANSTO produces pregnant liquor solutions. These will be sent to Watercycle Technologies to determine a potential flowsheet, with the aim of producing a carbonate concentrate. It is likely that such a potential flowsheet would be optimised for high recoveries of higher-value HREEs.

Peers

We do not include a valuation in this short note. Cobra is an exploration company with a market capitalisation of c £8m and its stock is likely to be relatively volatile and subject to progress announcements regarding its Wudinna Project. It is yet to declare a maiden JORC resource at its Boland deposit, which is likely to form the core of its strategy, so comparing it to peers on a resource basis is premature.

Below we list known Western ionic clay peers. As mentioned above, and as a general guide to grade differences in ionic clay resources, Cobra’s zone 3 mineralisation intercept has been 0.6m at 1,538ppm TREO, which is within the broad range of grades outlined below (625–2,626ppm), although all of the known Western producers below are pursuing conventional mining (ie the removal of ore and batch processing), which is energy intensive, and therefore grades are not comparable. Also, mineralogy and recoveries can vary significantly with mineralisation differences.

Meteoric Resources (ASX: MEI, market capitalisation A$418m). Owns the Caldeira Project in Brazil. Maiden JORC resources of 409MT at 2,626ppm TREO at 1,000ppm cut-off. Deposit is intended to be mined through traditional open-pit methods, with clays removed for ionic exchange then used to backfill depleted mine areas. Reported 47% recovery of Tb4O7 to MREC and 39% recovery of Dy2O3 to a MREC.

Aclara Resources (TSE: ARA, market capitalisation C$78m). Aclara has two ionic clay deposits, Penco Module in Chile (27.5Mt measured and indicated resource at 2,292ppm TREO) and Carina in Brazil (1681.Mt inferred resource, 1,510ppm TREO, preliminary economic assessment status US$1.2bn NPV8). Planned mining method is open pit with clays removed and rare earths extracted in ionic rechange before redepositing in mined open pits. The deposit is relatively weighted towards DyTb and Aclara intends to pursue processing in the US.

Ionic Rare Earths (ASX: IXR, market capitalisation A$72m). Ionic owns 60% of the Makuutu ionic adsorption clay project in Uganda (532Mt at 630ppm TREO, DFS status NPV8 US$406m). Mining approach will be conventional. Ionic also has interest in separation and refining capabilities that can be applied to recycling.

Australia Rare Earths (ASX: AR3, market capitalisation A$18m). Australian Rare Earths owns the Koppamurra deposit (186Mt at 712ppm TREO) south of Adeliade in South Australia. The current mining and processing flowsheet concept is for heap leaching, with leached material eventually being backfilled into open-pit operations.

Serra Verde (unlisted, owned by privately held Vision Blue, headed by Mick Davis, ex CEO of Xstrata, now owned by Glencore). Serra Vede’s Pela Ema, operating in central Brazil, is an integrated rare earth mining and processing operation now in production (commercial production commenced at the end of 2023) and is based on exploiting an ionic clay mineralisation. Vision Blue invested US$150m into the project in January 2023 to fund the project into production (other investors include Denham Capital). Serra Verde was targeting 5,000t pa of rare earth oxides. Serra Verde is mined via a conventional open pit and is an ionic adsorption clay. As a private company Serra Verde has not, to our knowledge, released a recent mineral resources statement publicly, but there was a (May 2012) 43-101 compliant technical report filed, with an inferred resource of 458Mt grading 0.098% (980ppm) total REE.

Cobra has several upcoming catalysts that could provide positive newsflow. It has already de-risked its discovery by identifying ionic REE mineralisation with good metallurgical recovery rates to date. It is continuing to prove up ISR as a recovery method and initial indications for scale are positive. Cobra’s market valuation is well below the peers mentioned above and, if it successfully achieves its goals this year (notably defining high recoveries in column leach tests, a maiden resource based on ionic mineralisation and a processing pathway with low reagent usage), this could lead to share price appreciation.


Appendix 1: Current mineral resource and recent specific drilling results

Exhibit 4: 2023 Wudinna Project gold JORC MRE

Deposit

Classification

Tonnes (Mt)

Grade (g/t Au)

Gold oz

Barns

Indicated

0.44

1.3

18,000

Inferred

2.19

1.6

116,000

White Tank

Inferred

0.33

1.5

16,000

Baggy Green

Inferred

2.12

1.4

96,000

Clarke

0.73

1.4

33,000

Total

5.81

1.5

279,000

Source: Cobra Resources

Exhibit 5: Wudinna Project 2023 rare earths JORC MRE

Prospect

Category

Tonnes Mt

TREO ppm

MREO ppm

LREO ppm

HREO ppm

Pr6O11

Nd2O3

Dy2O3

Tb4O7

Clarke

Inferred

26.5

725

175

571

154

35

122

16

3

Baggy Green

Inferred

15.1

652

142

512

140

29

97

14

2

Total

Inferred

41.6

699

163

549

149

33

113

15

3

Thompson

Exploration target

81–233

640–856

168–213

550–717

97–140

32–42

124–174

10–15

2–3

Source: Cobra Resources

Signature intersections quoted by Cobra in its June 2023 drilling results at Boland include:

CBAC0164: 3m at 942ppm TREO (22% MREO) from 15m, and 3m at 1,333ppm TREO (13% MREO) from 30m and 42m at 2,189ppm TREO (25% MREO) from 36m.

CBAC0163: 3m at 559ppm TREO (24% MREO) from 18m, and 3m at 618ppm TREO (22% MREO) from 21m and 12m at 1,191ppm TREO (27% MREO) from 36m.

CBAC0168: 12m at 948ppm TREO (19% MREO) from 42m.

CBAC0176: 3m at 429ppm TREO (23% MREO) from 27m, and 3m at 661ppm TREO (19% MREO) from 48m and 3m at 1,984ppm TREO (22% MREO) from 54m.

In March 2024, drilling results were announced that identify three zones of mineralisation:

Zone 1: 3.1m at 1,007ppm TREO, where Nd2O3 + Pr6O11 totals 212ppm and Dy2O3 + Tb2O3 totals 23.5ppm MREO 23.4%, HREO 17%) from 15.6m.

Zone 2: 1.9m at 1,043ppm TREO, where Nd2O3 + Pr6O11 totals 205ppm and Dy2O3 + Tb2O3 totals 22ppm (MREO 22%, HREO 18%) from ~20.5m.

Zone 3: 0.6m at 1,538ppm TREO where Nd2O3 + Pr6O11 totals 305ppm and Dy2O3 + Tb2O3 totals 52ppm (MREO 23%, HREO 28%) from ~26.6m.

Exhibit 6: Wudinna Project setting in South Australia

Source: Cobra Resources

Appendix 2: Rare earths

Below is an extract from a thematic report Edison published in March 2023, Critical minerals: The investment vacuum.

Rare earths

Rare earths elements (REEs) are elements that are typically found together in nature and mined as a group. They are famously ‘not rare’ but not often found in economic concentrations. They are found in a broad range of mixes and mining operations typically convert relatively small quantities into a concentrate at the mine site, which then requires painstaking separation into individual rare earth compounds, typically oxides. China has come to dominate both mining and processing over the past 20 years.

Exhibit 7: Rare earth elements

Source: Edison Investment Research

Role in energy transition

Each REE has very different physical characteristics and hence very different end uses and prices. The major two elements in demand for energy transition are neodymium and praseodymium (Nd/Pr), due to their use in high-strength NdFeB magnets. Dysprosium is a smaller market, but also relevant to magnet demand growth as it improves magnet performance at high temperatures. NdFeB magnets were largely commercialised during the 1980s, initially in uses such as computer hard disk drives, but then in applications such as small electric motors. Demand has since accelerated in uses where large magnets or induced magnetic fields had traditionally dominated, principally EV motors and in large wind turbines.

Total global demand for NdPr was approximately 50,000t in 2022, with wind turbine magnets accounting for approximately 18% and EV motors accounting for approximately 15%. The balance of demand is a wide range of small electric motors used in vehicles and automation more generally.

We estimate that an EV contains c 1kg of REO (a mix of Nd oxide and Pr oxide) in the magnet, which weighs c 2.8kg. The full electrification of 100m non-commercial vehicles would require annual demand of c 100,000t.

Wind energy will also strongly add to demand growth – offshore wind turbines consume approximately 213kg/MW (213t/GW) against 61kg/MW (61t/GW). Generally, there is a trend towards less complex, low speed direct drive as its operating cost improves, particularly for offshore wind farms.

According to IEA, in 2021 wind electricity generation increased by a record 17% to 2,73TWh, resulting in total capacity of 830GW. This growth was 55% higher than that achieved in 2020 and was the highest growth among all other renewable power generation technologies. This increase was made possible due to the wind capacity additions of 113GW in 2020. However, to accomplish the IEA’s Net Zero Emissions by 2050 Scenario would entail approximately 7,900TWh or 3,105.9GW of wind electricity capacity to be needed by 2030. This would need the necessary annual capacity additions for wind electricity generation to increase to almost 250GW pa, which is more than double 2020’s record growth.

Roughly 22% of total wind capacity growth in 2021 was delivered by offshore wind turbines, which is the highest in history and three times the average of the past five years. At a 20% offshore/80% onshore mix, and average intensity per GW (given the intensities described above) would be 91t/GW. This implies 22.7kt of NdPr annual demand to meet this wind goal, almost 50% of current global annual demand. To fulfil this climate goal in the wind electricity segment, annual investment in onshore wind will need to triple from US$67bn in 2018 to US$211bn globally in 2050 and offshore wind investments quintuple from US$19bn in 2018 to US$100bn by 2050 (source: IRENA).

Exhibit 8: Make up of a wind turbine

Source: Goudsmit UK

Are there alternatives?

There are alternatives, but at a cost. Both wind turbines and EVs can avoid the use of NdPr by using motors/generators that mechanically induce an electric field for their operation. However, powerful permanent magnets improve vehicle efficiency by approximately 3% for an EV, critical for adding to range and particularly useful in low-speed, high torque stop-start city driving. A typical EV might contain 2.5–3kg of rare earth magnets, which are made using c 1kg of NdPr, with the balance being iron and boron. This means that rare earths add perhaps $70 to the materials cost of a vehicle at long-run prices, which is small in comparison to the trade off in other materials usage for the additional motor efficiency.

Wind turbines can also use induction motors rather than rare earth motors, but again there are cost and efficiency issues at play. As wind power has progressively moved offshore, wind turbines have become far larger and need to be designed for minimal maintenance. This favours a direct-drive mechanism based on permanent magnets rather than highly geared, faster rotating induction motors.

How ‘at risk’ is supply?

Rare earths are very politically exposed. China has come to dominate rare earth mining and processing over the past two decades, partly due to lower prices forcing out western suppliers and partly because it is one industry where China has a natural resource endowment. China accounted for 70% of rare earth mined production in 2022; however, this was as high as 90% in recent years and the next largest producer (the United States, at 14%) has been sending its mined rare earth concentrates to China for processing. This is now ending, with the United States shifting to domestic rare earth separation and ultimately magnet making (its production is dominated by US-listed MP Materials, which has been striking backward integration partnerships with General Motors). Deglobalising rare earth supply chains is a long-term strategic priority in terms of supplying energy transition materials.

Exhibit 9: Global mine production – rare earths

Exhibit 10: Global reserve base – rare earths

Source: USGS and Edison Group analysis

Source: USGS and Edison Group analysis

Exhibit 9: Global mine production – rare earths

Source: USGS and Edison Group analysis

Exhibit 10: Global reserve base – rare earths

Source: USGS and Edison Group analysis

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This report has been commissioned by Cobra Resources and prepared and issued by Edison, in consideration of a fee payable by Cobra Resources. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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General disclaimer and copyright

This report has been commissioned by Cobra Resources and prepared and issued by Edison, in consideration of a fee payable by Cobra Resources. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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London, WC1R 4PS

United Kingdom

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Esker reported FY23 results in line with our expectations. Revenue grew 12% (14% constant currency) while inflationary effects and sales commissions on bookings outperformance in H223 resulted in operating profit declining 16% y-o-y. The high level of contracts signed towards the end of FY23 provide good support for revenue growth in FY24 and FY25 and measures taken by management to improve productivity should drive margin expansion over our forecast period back into the company’s target range of 12–15%.

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