The recent announcement by Molycorp (MCP) that it had “found” heavy rare earths (HREEs) near its Mountain Pass Mine and could potentially mine this area and produce HREEs from the same facility as its LREEs (Light Rare Earth Elements) pushed the stock higher. If MCP could do this, yes, it would be a game changer; the real story is whether it can do this, which seems a long shot, at least in the timeframe it has laid out. If investors are finally starting to recognize the real value of the HREEs, then we believe that they should probably look elsewhere for the most ‘bang for their buck’.
Quest Rare Minerals (QRM)
QRM is probably one of the most misunderstood stocks in the rare earth arena by Americans. The company has traded at a significant discount to Avalon Rare Metals (AVL) despite having a project not nearly as remote and open pittable. QRM also has not used the most inflated REE prices when formulating the economics of its project, something AVL has been accused of doing. We believe that this is part of the reason QRM traded at such a steep discount to AVL, with the rest attributable to AVL having begun trading in the US prior to QRM and in the midst of the ‘Rare Earth Craze’ at the end of 2010.
The company still has a solid capital structure with only 60.4 million shares outstanding, and 69.9 million outstanding on a fully diluted basis. This tight structure in the past has enabled shares to really fly on big news, and this should continue to be the story in the near-term. With the deposit at Strange Lake open in all directions and to depth, we should expect further announcements of the company’s exploration drilling at the project to be successful.
QRM, in its latest investor presentation, also maintains that it expects to be in production at the B-Zone in 2016, which indicates to us that it has not run into any issues with lab work to this point. The Preliminary Economic Assessment (PEA) released in September 2010 indicated that the project was economical at very cheap prices from years before. When it publishes its latest report (Pre-feasibility expected before year end, followed by a Feasibility Study in early 2012), we imagine that it will only appear better due to the addition of resources (from infill drilling and increasing the boundaries of the deposit) and the realization of the higher prices of recent years being factored into the historical prices.
Avalon Rare Metals (AVL)
We recognize AVL’s merits as a HREE deposit and its large size. We also acknowledge the fact that the project is in a very remote area of Canada, will be almost twice as expensive as QRM’s Strange Lake to develop, and will be an underground mine and thus cost more to operate and face serious operational hazards. Investors need to look no further than Cameco (CCJ) and its experiences with underground mine floods in Canada. Of all the REE companies pushing projects forward, AVL is the only large one focused on an underground mine.
The company has been issuing shares to fund its exploration and development activities. The current share structure consists of 102,796,736 shares outstanding and 109,301,986 shares fully diluted. Capital costs for the mine are projected to be C$901.9 million.
Although Avalon, we believe, has a project that is second to Quest’s when compared to each other, we recognize that if HREEs are finally given their due among investors, then AVL shares will rise alongside the other HREE focused entities and outpace most.
Stans Energy Corp. (HREEF.PK)
Stans has a past producing mine in Kyrgyzstan which used to supply the former Soviet Union with all of its REE needs. The composition of the deposit is roughly 50/50 HREE/LREE and the deposit was previously mined via open pit methods. The Kutessay II deposit represents an interesting play on the REEs for investors as Stans seeks to increase the production capacity of the mine and deliver a Prefeasibility study by Q4 of 2011.
The surrounding area which Stans controls around the Kutessay II deposit should prove to hold further REE reserves as the Soviets never needed to further test and develop these areas because of the 80 year supply of REEs they had from the operating mine. We do know at this time that there is a Beryllium deposit next to the past producing REE mine, and that Stans will publish a JORC soon. Based off of what the Soviets found years ago, we would not be surprised if Stans were to find base metals and/or gold and silver associated with any new REE discoveries.
Investors should also watch to see if Stans adds one of the monster HREE deposits in Russia to its portfolio via its joint venture with its Russian partners, which could provide a boost to shares.
Ucore Rare Metals (UURAF.PK)
Ucore claims in its latest investor presentation that it is the only US deposit which is capable of being developed in the next five years, which mirrors what many in the financial and political communities have stated. Ucore has a deposit, Bokan Mountain, which is heavily skewed to the HREEs and located in a mining friendly area of Alaska. Unlike many of the other deposits, Ucore’s is a vein-like deposit which lacks the depth many projects possess, but it has its mineralization spread out over a large area.
Ucore has been rumored as an add-on for MCP in order to diversify into the HREE space and be able to fully integrate into their mine-to-magnets strategy.
Ucore has excellent infrastructure and uranium onsite which could also be mined. It will be interesting to see how the company moves forward with this project.
Tasman Metals (TASXF.PK)
Tasman Metals has the only HREE deposit on continental Europe. Located in southern Sweden, its flagship Norra Karr project has HREO exceeding 50% of the TREO. The mineralization starts at the surface and the drill intercepts have exceeded 100m at various spots throughout the deposit. The company has a tight share structure with insiders owning 16% of the shares and only 58,000,000 shares outstanding with 64,027,343 shares fully diluted.
Should Tasman’s plans play out, the company would be producing REEs in late 2015 or early 2016. Based off of 2015 estimates, in full production Tasman would produce 15% of the world’s yttrium AND dysprosium needs. According to its latest corporate presentation, investors can expect Tasman to release a PEA and complete its AMEX listing by the end of 2011, both of which should help prop up the shares.
Great Western Minerals (GWMGF.PK)
A company that MCP was a breath away from buying, Great Western essentially is the magnets part of MCP’s ‘mines to magnets’ strategy. GWG is, however, bringing on a HREE mine in South Africa and has indicated that it believes it will be first to market, although one has to imagine most of that initial production will go to its own needs for production and stockpiling efforts.
Although some have praised the projects the company has in the pipeline in Canada, it is our opinion that those are too far down in the pipeline to get to market fast, and the fact that they are located in Canada indicates to us that getting fast tracked is likely an outside possibility.
Although Molycorp’s announcement of the HREEs and its “plan” to get into production in maybe a year sound great, these above listed companies are much further along in the process of having their projects actually produce REEs of any kind, let alone the HREEs. Investors buying into MCP’s thinking are forgetting that although a processing plant is quite important, you cannot simply put through any kind of ore and expect significant or even economical production. All REE deposits are different and require adjustments in your processing of the ore; it is even possible to have to adjust the processing technique for the same deposit while in various parts of the ore.
To play the HREE space, stick to these HREE focused companies with some of the best HREE deposits in the world. They are years ahead of anything that is discovered today, let alone anything that is simply grab samples at this time. MCP may steal the headlines these days, but as investors realize the importance of the HREEs and the economics behind these projects, the crème should rise to the top.