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Hexagon Energy Materials Limited (ASX: HXG)

Recent years have seen the development of what could be termed the “New Age in Energy”,
largely driven by increasing demand for batteries, high field strength magnets and related
items, for use in electric vehicles, wind turbine generation and consumer electronics amongst
others.
This has seen increased demand for raw materials, with graphite, lithium and rare earth
elements (“REEs”) being the headline grabbers over recent years. There is also the need
for downstream processing of the raw materials, with this providing the best opportunity to
capture value, and avoiding being a ‘price taker”, as raw material producers are (and has been
seen with recent oversupply in lithium and graphite causing issues for the miners). What we
have also seen is China take control of the downstream supply chain, and in some cases, the
upstream as well, with China controlling close to 100% of the markets in some cases.
Therefore, there is the need for diversification of downstream supply in what are considered
strategic industries, with, in addition to civilian use, several commodities being critical in military
applications. In particular, the US is taking a pro-active approach in supporting development of
alternative sources of supply, and there is also a strong drive for increasing domestic content
in manufacturing with the “Made-in-USA” push.
Hexagon Energy Materials Limited (“Hexagon” or “the Company”) has identified and acted
upon this opportunity and is now focused on advancing REE downstream processing, looking
to commercialise new technology with the potential to disrupt the Chinese domination of the
global REE processing market and increasing diversity into the supply chain. Hexagon intends
to fast track to cashflow and considers the downstream market segments and North America
as the means to achieve this goal. The most recent advance has to become a 49% partner in
a new incorporated joint venture with Canadian-based Innovation Metals Corp Inc (“IMC”)
through funding the construction of a commercial demonstration plant (“CDP”) using IMC’s
proprietary RapidSXTM technology for the separation of mixed REE concentrates into various
rare earth products. IMC has successfully completed pilot scale test work of RapidSXTM, with
the financial support of the US Department of Defense (“USDOD”).
The pilot scale test work demonstrated the capability to separate REE concentrates into
commercial quality rare earth oxides (“REOs”) at a substantially lower operating cost, and
significantly lower capital cost than current operations, whilst using proven solvent extraction
(“SX”) technology. Subject to the successful operation of the CDP, this presents an opportunity
to commercialise the RapidSXTM process through licencing and potentially construction of a
plant to treat 3rd party feedstocks.
Our view is that Hexagon represents an excellent ‘ground-floor’ opportunity for investors to gain
exposure to REE through a lower-risk, more commercially advanced business strategy than
a typical upstream REE exploration/development play. The initial commercialisation strategy,
targeting licencing the technology, will require relatively limited capital (and thus result in less
dilution for shareholders), and will be located in North America - a business friendly jurisdiction
with deep markets.
Given the Company’s focus on the REE strategy, we consider this to be the core value driver for
Hexagon in the near term with strong news flow expected. However the Company also holds
other important assets such as IP in regard to downstream graphite processing, upstream
graphite exploration projects (including Mineral Resources) as well as the highly prospective
Halls Creek gold-base metals project in Western Australia – we have included descriptions of
these in our report for completeness.
KEY POINTS
Successful pilot scale work and possible short time to commercialisation: Downstream
RapidSXTM work to date on REE has successfully produced commercial grade/quality products
with expected relatively short times to commercialisation should the CDP be successful.
Disruptive technology: The RapidSXTM REE processing has the potential to be a major
disruptive technology, delivering substantially lower operating and capital costs than the
current alternative REE separation processes used in China. The process is also ‘feed agnostic’
in being able to treat a wide variety of REE mineral and concentrate types, and thus it should
be able to add value to a wide range of projects.
Strong US push for diversified and domestic production of critical and strategic materials:
Given China’s control of the supply chain in a number of critical and strategic materials, there
is a strong push, particularly from the Trump administration, to disrupt and diversify the supply
chain for strategic energy materials, particularly given the current trade tensions between the
world’s two largest economies.
Pricing control in downstream processing: Downstream processing allows participants
to have a significant amount of control in product pricing, unlike the upstream raw material
producers that are generally price takers and at the whims of the markets.
Growth in demand: Hexagon is in an ideal position to take advantage of the forecast significant
growth in demand for the battery and magnet materials over coming years.
Experienced and committed personnel: The management group is focused, well regarded
and has the skills and experience required to execute the Company’s strategy. Management
also hold shares in Hexagon, thus aligning their interests with those of other shareholders.
Steady News Flow: Ongoing work on a number of fronts should provide steady news flow
through 2020, leading to commissioning of the CDP by late Q3, 2020. We would expect value
appreciation on material positive advances in the Company’s projects.