We were on the Molycorp (MCP) conference call and came away very comfortable with the progress on Project Phoenix (the renovation of Mountain Pass).
Management expects that Molycorp only needs to raise approximately an additional $120 million to fund Phase II of the Mountain Pass renovation for the expansion from 20,000 to 40,000 metric tons capacity by the end of 2013. The interesting information tidbit on that capital raise is that management's exclusivity period with BNP Paribas (OTCQX:BNPQY) expired on the setting up of a $150 million debt facility. The CEO said that there were more attractive financing options available at a lower cost of capital.
The major takeaway from the conference call was most impactful on the junior rare earth mining companies and the chatter that Molycorp would be taking one over mentioned in a Bloomberg article. Then there was Cramer's call for Molycorp to use its market capitalization (i.e. acquisition).
That hypothetical takeover is not happening anytime soon.
Many of these junior miners are hyping themselves as heavy rare earth element companies via their HREE/TREO (Heavy Rare Earth Elements)/(Total Rare Earth Oxide) percentages. The CEO of Molycorp pointed out that when Mountain Pass has a far higher denominator than any of the juniors, that ratio does not take into consideration total amount of Rare Earth Elements in a deposit.
A classic example of this is Ucore Rare Metals (OTCQX:UURAF) which this week released its first N43-101 document for its flagship Bokan-Dotson Ridge deposit in Alaska this week. The filing gave the Bokan-Dotson Ridge deposit a 39% HREE/TREO ratio on a TREO percentage of 0.746% with a TREO cut-off of 0.5%.
While that 39% HREE figure looks really impressive, when we put it into the context of the TREO % and the size of the total ore body (3.669 million tonnes) we get the following figures for the total inferred rare earth resource in the ore body covered by the N43-101 document:
- 27,370.74 total tonnes of TREO
10,565.11 total tonnes of HREO
To put those numbers into better context, Molycorp is going to have annual production capacity of 40,000 tonnes by the end of 2013 when Phase II of the Mountain Pass renovation is expected to be completed.
To put that Heavy Rare Earth Oxide into context, the Avalon Rare Metals (NYSEMKT:AVL) corporate presentation states on slide 44 that Molycorp's Mountain Pass mine has 18,400 tonnes of HREO.
But Molycorp's Mountain Pass mine has a HREE/TREO of only 1%, which looks abysmal versus the ratio for Bokan-Dotson Ridge. We need to start taking into consideration HREO in the context of the ore body size when evaluating junior rare earth companies.
So let's take a look at two junior rare earth companies we have previously highlighted on Seeking Alpha and in The Strategist Newsletter, as two that we like: Avalon Rare Metals (AVL) and Quest Rare Minerals (OTC:QSURD).
According to the Avalon Rare Metals February corporate presentation which cites the Nechalacho deposit N43-101 filing last updated January 27, 2011, we have the following statistics for its Nechalacho deposit:
- 226.88 million tonnes at 0.19% HREO outright, or 1.3% TREO & 14.33% HREE/TREO.
On that HREO outright number: Nechalacho has an inferred resource of 431,072 tonnes of HREO.
According to the Quest Rare Minerals February corporate presentation on slide 23, its Strange Lake deposit in Quebec has the following characteristics (also N43-101 compliant):
303,000 tonnes of TREO production over the total mine life
130,200 tonnes of HREO production
*We would advise readers that in addition to officially applying for an AMEX listing in the past week, Quest's January press release included drill results. The company advised that an updated N43-101 is expected on Strange Lake by end of first quarter 2011.
Bottom line, when looking at junior rare earth companies that say they have a high concentration of heavy rare earth elements, be sure to check the concentration against the size of the deposit and not just the rare earth concentration within the deposit itself.
Molycorp continues to progress forward, and we reiterate our view that it will become the dominant major rare earth company, so when evaluating junior rare earth companies remember who they are looking to as a potential partner or acquirer. Check the HREE/TREO ratio of a junior rare earth companies deposit against the TREO % of the deposit itself.
Disclosure: I am long MCP, OTC:QSURD, AVL.
Additional disclosure: Long MCP call spread, Short MCP PutsThe facts in this newsletter are believed by the Strategist to be accurate, but the Strategist cannot guarantee that they are. Nothing in this newsletter should be taken as a solicitation to purchase or sell securities. These are Mr. Evensen’s opinions and he may be wrong. Principals, Editors, Writers, and Associates of The Strategist may have positions in securities mentioned in this newsletter. You should take this into consideration before acting on any advice given in this newsletter. Investing includes certain risks including loss of principal. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision.