We were early to the rare earth story and have written extensively about both the industry itself and some of the participants that we find most interesting. Being early brought us outsized gains in, among others, Quest Rare Minerals (QRM) and Stans Energy Corp. (HREEF.PK). Recently the REE stocks have entered into an inevitable price consolidation. We view the price pullback in the stocks as a healthy (and needed) consolidation that will remove the froth from the market.
Importantly, the fundamental news on the rare earth industry just keeps getting better, thus creating a divergence between the fundamentals and the price action of the REE stocks that we believe will be resolved later this summer (to the upside). We see several factors at work causing the downward consolidation. First, the general market has been down six weeks in a row, which has caused enough pain that a “negative feedback loop” is taking hold. Secondly, many commodities (other than REEs and corn) have reached interim tops and then sold off. Third, the economic data here in the United States has been soft of late, and combined with the end of QE2 has given rise to worries of a double dip. Finally, with the tea party element of the Republican Party making noise about a “mini default” on US sovereign debt there is a general unease in the market place. Also, and more specific to rare earths, with yet another Molycorp (MCP) secondary, some are wondering if those insiders know something that the market does not.
We expect our bullish thesis in rare earths to continue to play out unabated. A possible spur may be a Chinese announcement due at the end of June concerning REE export quotas for the balance of the year.
The summer exploration season is now upon us and that has turned our attention to several “cashed up” juniors that are sitting upon projects that we like. These companies are Stans Energy Corp, Quest Rare Minerals, and Hudson Resources, Ltd. (HUDRF.PK).
Stans Energy is an underfollowed company that may well be closer to production than some of the better known names such as Arafura Resources, NL (ARAFF.PK), Great Western Minerals (GWMGF.PK), Avalon Rare Metals and too many others to name. We suspect it might be the first heavy rare earth mine to actually go into production and deliver the rarest of the rare earths to desperate consumers with pent up demand.
For those not familiar with Stans, it owns the Kutessay II project in Kyrgystan, which is the only past producing heavy rare earth element mine of significance in the world outside of China. Just in the last four months, Stans has announced a JORC resource report on Kutessay II, released test results of new milling technologies to improve Kutessay II REE concentrates, raised $28,000,000 in a private placement led by Stifel Nicolaus and Clarus Securities and closed on the acquisition of the Kyrgyz Chemical Metallurgical Plant Rare Earth Processing Complex (KCMP RE) and related private rail terminal. In addition to the aforesaid processing plant, proceeds of the offering will be used for the feasibility study on Kutessay II, refurbishment and upgrading of the KCMP RE processing complex, as well as the potential acquisition of another REE property, which we suspect will be one of the monster heavy REE deposits located in Russia. Most impressive, we have found Robert Mackay (President and CEO of Stans) to be a “straight shooter” that under promises and over delivers.
Quest Rare Minerals Ltd. and its Strange Lake project have been profiled by us before ( see here and here ). Recently quest has filed a revised NI 43-101 resource estimate for the B-Zone, which showed important improvements to both grade and tonnage. Also, the board of directors has approved funding for a pre-feasibility study of the Strange Lake B-Zone Deposit that should be completed prior to the end of the year. Additionally, Quest obtained a US listing and the common stock commenced trading May 23, 2011, on the NYSE AMEX. We believe the US listing will gain the company much needed exposure as it will join Molycorp, Avalon Rare Metals (AVL) and Rare Element Resources (REE) as the only rare earth mining companies with US listings. The upcoming summer exploration program will include 35,000 meters of exploration and geotechnical drilling. Quest is well financed with a $51,750,000 secondary placed October 21, 2010, through a syndicate led by Dundee Securities Corporation, CIBC World Markets and Stonecap Securities, Inc.
Hudson Resources, Inc. announced the initial NI 43-101 compliant resource estimate for their Sarfartoq Rare Earth Project in Greenland on January 4, 2011. Since then it has commenced metallurgical test work and on April 5, 2011, Hudson closed on a $17,260,000 secondary offering led by Dahlman Rose & Company, LLC and GMP Securities LP with Stonecap Securities, Inc. and Euro Pacific Canada, Inc. acting as co-managers. Hudson has recently commenced its 10,000 meter summer drilling program, which will seek to both expand and upgrade the ST1 Zone. Finally, just this month Hudson engaged Wardrop to commence the Sarfartoq Rare Earth Project preliminary economic assessment study with completion expected later this fall.
Thus our take is irrespective of the general market climate. These three REE companies have the benefit of recently obtaining financing, which will allow them to aggressively pursue development of each of their respective REE projects while generating positive news flow through the balance of this year.