We first met with Medallion Resources’ (MDL.V) CEO Don Lay at a conference in April and that was the first time we heard about the company’s business plans. Medallion plans to produce Rare Earth Elements but won’t mine the minerals as it expects to extract the REE’s from a source called monazite. It took us a few months of reading up on the subject and we have asked the company’s management team numerous questions before we were convinced of the merits of this project. In fact, we’re now fully convinced that recovering REE’s from monazite might actually be one of the very few possibilities to produce REE’s in the current REE price environment. A lot of other ‘REE hopefuls’ won’t go anywhere as long as the REE prices remain this low, and as long they still encounter issues with the lithology.

As Medallion will process monazite to recover the REE’s, this company should not be subject to all sorts of risks associated with operating a mine, and the market should start to understand this company is a processor and not a mining company.

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What is monazite?

Monazite is a phosphate mineral discarded as waste material by the vast majority of large mineral sands (MS) producers (where most of the higher grade monazite gets concentrated). Even though this tailing is being interpreted as ‘waste’ by the MS producers, it’s actually ‘ore’ for companies like Medallion Resources, as monazite sand often contains 40-60% Rare Earth Elements.

And that’s where Medallion comes in. The mineral sands companies are solely focused on recovering the zirconium, ilmenite and rutile from their projects and generally couldn’t care less about the monazite. In fact it can be an annoyance as it contains the slightly radioactive element thorium. After all, companies like Iluka Resources (ASX:ILU) and Mineral Deposits (ASX:MDL) are industrial minerals miners and don’t want to burn their hands on attempting to recover Rare Earth Elements from their waste stream.

What is Medallion’s business plan? Is it feasible?

Medallion’s business plan is pretty simple and straightforward. Instead of finding and developing its own hard-rock REE project (and taking on all the exploration, development, financial and construction risks), it has developed (and is continuing to fine-tune) a flow sheet to recover Rare Earth Elements from monazite. This will be much easier and definitely more straightforward than the majority of the REE ‘hopefuls’. As we explained in the previous paragraph, the monazite has already been dug out of the ground and is sitting in huge quantities on waste piles.

And if you’d be a mineral sands producer sitting on tens of thousands of tonnes of monazite piles which you haven’t attributed any value to, wouldn’t you be interested in earning some money selling your ‘waste’ to a company which will be able to recover the rare earths from your waste? Of course you would. The rutile and ilmenite prices are historically quite low now, so if a mineral sands company would be able to sell its waste for a few hundred dollars per tonne, it would increase its revenue and cash flows, as for instance shipping 10,000 tonnes of monazite per year could result in an additional revenue of $10M per dollar it receives $1,000 / tonne for monazite.

So the main questions always is; these plans are very nice and it sounds pretty good, but are they also feasible? Well, processing monazite isn’t a new, and in for instance India, a state-owned company, India Rare Earth Limited (IREL) has been processing monazite from Indian beach sands to recover the REE’s for decades. Recently IREL went live with a new plant in partnership with Toyota. So there’s absolutely no reason why Medallion’s idea wouldn’t work. In fact monazite is the original mineral resource for rare-earths and has been processed for a 100 years.

Does this mean Medallion will become a direct competitor of for instance India Rare Earths? Not really. Companies like Iluka or Sierra Rutile will want to make sure the monazite they sell will be processed by a reputable operator, and that will be Medallion’s competitive edge. The Mineral Sands producers will want to make sure everything happens to modern first-world standards to avoid any potential backfire (as that would be horribly bad PR for the mineral sands producers).

The main operating risk we see right now is the ‘copycat’ risk, whereby other companies would also start looking to process monazite. As said, the process is not rocket science technically, but there are significant execution challenges (transportation, health and safety, jurisdiction selection, customer and supplier relationships) and fortunately Medallion Resources has a 2-3 year advantage, being ‘the first mover’.

What are the next steps?

Medallion will use a part of the proceeds of the most recent private placement to conduct additional metallurgical test work on the monazite samples. It could be very interesting for Medallion Resources to invest in a flow sheet that would take care of (read: get rid of) the cerium. Right now (using the current REE prices), most separators of REE concentrates are actually penalizing companies delivering a concentrate containing cerium. As it costs more to separate the cerium from the concentrate than the mineral would earn the separator in revenue, the negative impact of cerium-containing concentrate is being passed on to the seller of the concentrate.

Would it be possible to remove the Cerium from Medallion’s end-product? Yes, and it actually shouldn’t be too difficult to do so. The Cerium could be removed from the concentrate by oxidation followed by precipitation and this should be cheaper to do than through the solvent extraction used by the separators. And this would be a huge step in the right direction. Even though the opex will increase slightly due to adding the cerium-removal step, the impact on the revenue per kilo of REE concentrate will be higher and based on the current basket prices, the revenue per kilo could jump by in excess of 50% thanks to the higher weighting of the valuable Praseodymium and Neodymium) which would more than offset the removal costs. Again, this is just a theory but will very likely be tested (and hopefully confirmed) in the next round of metallurgical test work.

Once the pilot plant has confirmed the technical viability of the production process and once the flow sheet has been completed, it will be in Medallion’s best interest to immediately secure an offtake agreement for the monazite it will need for its operations.

Will that be difficult? Not really. There are quite a few mineral sands mining companies on this world, and we have the impression Medallion has already developed good relationships with some companies that potentially might be able to sell the monazite to Medallion. The last time we were in the Medallion office, we have seen the sample sent by a large mineral sands provider to perform some test work on, so we would expect this provider to be in the pole position to become Medallion’s first supplier.

The management team

Don M. Lay – President/CEO & Director

15+ years of international experience in public and private venture- capital and project funding.

William H. Bird, Phd, PGeo – Chief Technical Advisor & Director

40+ years in mineral exploration. He is a recognized rare-earth expert with a worldwide rare-earth technical network.

Tom Arnould, CA – CFO & Corporate Secretary

30+ years in mergers and acquisitions and senior finance roles.

Investment thesis

As the title of this report states, this is not a mining company. This purely is a ‘buy-process-sell’ business plan whereby the acquisition cost of the purchased monazite will fluctuate depending on the REE prices. This means the company’s operating margins will be more or less protected and the only REE pricing risk is during the processing cycle (from the moment it purchases the monazite until the moment it settles the sale of the REE concentrates).

And that’s exactly what makes Medallion Resources so interesting. Canada has experienced a real REE hype a few years ago, leaving a lot of investors and shareholders with a bad after-taste. However, Medallion is not one of the so many REE mining companies and that’s what makes this company stand out from the crowd. You could actually compare the business model with the model used by for instance Inca One Gold (IO.V). That company also doesn’t mine for gold, it purchases the ore, processes it and then sells the gold it has been able to recover.

In this report we wanted to introduce you to monazite and Medallion’s plans with it. In a next report we will discuss the potential scenario’s and also try to build an economical model to show you the current market capitalization is too low right now.

Once the pilot plant confirms Medallion’s plans are feasible, we are expecting a huge re-rating in the market as Mr. Market starts to realize this is more a technology company than a mining company. Medallion is carrying the weight of a semi-failed REE sector in Canada, undeservedly so. We have initiated a long-position and expect to continue to participate in upcoming private placements.

Disclosure: Medallion Resources is a sponsoring company, we hold a long position.

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