We recently put out a brief piece on Ucore Rare Metals (OTCQX:UURAF), which is involved in a joint venture with IBC Advanced Technologies (aka "IBC") to research and scale up the latter company's molecular recognition technology (aka "MRT") for the commercial separation of rare earth elements (aka "REEs").
In this article we pointed out that some of the comments released by management regarding MRT are suspect, and one is outright incorrect. We pointed out things we like and dislike about the process, but can't get beyond the point that this technology has only been scaled up in a few instances, and never for REE separation, which is notoriously complex. This in itself, coupled with the company's suspect statements leads us to the conclusion that Ucore is not a wise investment.
This is all, of course, circumstantial with respect to our assessment of Ucore as an investment It could be the case that MRT will be wildly successful, and that the misstatements made by CEO Jim McKenzie are honest mistakes that don't reflect the company's true capabilities.
But we see several other problems with the company that investors need to consider. We cite six here:
- Uncertainties regarding MRT and Ucore's vetting of its JV partner IBC.
- There are unknown costs that make MRT's economics impossible to assess at this point in time or at any time in the near future.
- The company's valuation is multitudes--even magnitudes--higher than its peers.
- Timeline/scale-up risk: New technologies take time to scale up and there could be delays even at the pilot plant level (remember the company first said it would have its pilot plant up in 2015). This erodes the current value of future cash-flow.
- We aren't sure what Ucore's business model is. MRT is the tool, or the proposed advantage, but we aren't sure how Ucore will use it to generate cash-flow until it announces a source of material and a customer base.
- MRT has not yet produced commercially acceptable samples of several REEs, and the company still needs to show the market that it can purify REEs to the thresholds determined by industry.
It is clear to us at least that the risk/reward is relatively unfavorable, although this is a far cry from stating that Ucore shares can't perform well or that they should be shorted.
1: Who Vetted MRT/IBC? Ucore has recently stacked its advisory board with chemical engineers, chemists, and experts on MRT, but before the company announced that it was pursuing MRT there were no chemists or experts on chemistry or chemical engineering, with the closest expert being Ken Collison, who is a mining engineer. Richard Hammen was there as well but he was on the board because he's the CEO of Ucore's previous separation partner--Intellimet, which is arguably a competitor to IBC. Would he advise them to work with a competitor? We should also note that any decision they make today will be biased considering that all of their chemists come from IBC or are involved in MRT--there's no counterbalance and this is dangerous regarding the company's ability to critically assess itself.
One response to this was the Nobel Laureate committee vetted MRT since scientists who made developments in the technology were awarded the Nobel Prize. Of course we have to differentiate between scientific advancements and their commercial applications. The latter always lag the former, and it is difficult to predict the latter's development based on the former. Those who like the Nobel Prize aspect of MRT might look at the myriad of graphite companies clinging to the fact that related-product graphene's discovery won the Nobel Prize as well. Graphene may have a lot of potential, but it has hardly reached the point of commercialization.
While MRT has been commercialized this has been in just a handful of applications, not including REEs. More importantly it is often not the key separation mechanism, and when it is the product being separated out is of high value (e.g. PGMs). For instance this 2002 paper--co-authored by IBC's Steve Izatt--shows how MRT can be used to remove impurities from a zinc-rich PLS in which the zinc content dramatically outweighs the cobalt, nickel...etc. content. The zinc content dramatically outweighs the impurity-content.
We might extrapolate that MRT could be used to remove impurities from an REE-rich solution. It could, for instance, be used to remove the HREEs from a REE concentrate derived from monazite or bastnaesite, which are both rich in LREEs (for practical purposes the HREEs would be considered "impurities"). However, it is a far stretch from this potentiality to claim that MRT is an economical solution to the REE separation puzzle.
We also note that in 2002 IBC was accused of charging the Federal Government for work carried out for the company's commercial customers (as opposed to the government). The company settled with the DoJ. We don't think that this speaks one way or another as to the efficacy of MRT or to the competency of IBC and its employees. We don't even think they're bad guys. But the U.S Government needs REEs and has been financing research projects into the space, including into REE-separation, and we think that when deciding which companies to work with IBC's rocky history with the DoJ could put it at a disadvantage. We don't know whether Ucore knew of this when vetting IBC, but if it was it certainly wasn't forthcoming in the matter, and that is further reason for concern.
2: Unknown Costs: "Unknowns" are red flags in investing, especially when you're dealing with a sector as complicated as REEs. Unfortunately with MRT we simply don't know what several costs are going to be. The one we've been pointing out is custom-made resins. The fact that they are custom means we simply cannot know their cost until Ucore makes its first commercial order, not its pilot plant order. Pilot plants are more useful for project optimization than for project verification. Given the $1,000/liter cost for resins cited by Solvay for PGM separation MRT resins we're concerned about resin costs, especially since PGM prices are in the tens of thousands of dollars per kilogram while REE prices are maybe $12-$25/kg. depending on the distribution of various elements. Note that these resins have to be replaced annually (according to Steve Izatt, whom we spoke with last year), meaning that the cost of these resins will impact the project's all-in sustaining costs. Thus even if opex is low it would have to be sufficiently low to account for this added recurring cost.
3: Valuation: Investing is all about buying assets that are undervalued, and it is difficult to make a case for Ucore's valuation here as the highest valued REE company ex: Lynas (OTCPK:LYSDY), and as a producer Lynas' valuation cannot easily be compared with Ucore or its junior coevals. REE separation is currently a low-margin business given global excess capacity and low REE prices. Ucore only owns part of the joint venture with IBC, thereby eroding even more value--since Ucore is now almost exclusively devoted to MRT the JV's valuation is ~$100 million given Ucore's current market capitalization. Yet it paid a small fraction of this for the earn-in rights: $2.9 million. We wonder why the JV is currently valued at $100 million while Ucore paid the equivalent of <$5 million. Meanwhile the company's valuation is typically 3-20X higher than those of other REE companies.
4: Timeline/Scale-up Risk: No REE project is going to scale up on schedule or at anticipated efficiency levels--it takes a lot of time to work the kinks out of these complicated systems. If this is true for proven technologies imagine what a new technology can face! Even if you believe in MRT it is prudent from an investment standpoint to err on the side of caution, meaning this could take years or even a decade to bring into production...assuming it works. This means that future cash-flows need to be discounted well out into the future, and that development costs will have to be financed in ways that will likely dilute shareholders.
5: Business Model: In order to be a REE separation company Ucore needs something to separate. It is developing the Bokan deposit in Alaska but we think there are a couple of problems here. The first is that the economics of this project were calculated with REE prices considerably higher than today's prices. Ucore has even shied away from discussions on Bokan. A good example of this can be found if we go back to the Epstein interview, where there is just one question about Bokan that slithers its way back to the MRT discussion.
Please comment on Ucore's upgraded and increased resource estimate
Yes, thanks for the question. We recently upgraded and increased our resource estimate at Bokan-Ridge. Essentially, an additional million tonnes of Inferred mineralization grading 0.604% was added. More than 98% of previously established resource was upgraded to the Indicated category under NI 43-101 compliant standards. We're also pleased to report that the anomalous skew towards more valuable HREEs remains consistent across the entire deposit. The resource remains open at depth and along strike. Again, Bokan feed stock is but one of many sources that Ucore has on offer. REE suppliers around the globe are closely examining MRT.
While McKenzie says that Bokan ore is critical he tries to focus investors away from Bokan to other potential feed-stocks. This is good! Bokan isn't a good source of feedstock given current REE prices. But McKenzie needs to be more direct about the fact that REE prices are down so much that Bokan ore is no longer attractive.
This brings us to the second issue which is the source of Ucore's feedstock. The only "easy" place to get a feedstock is out of China. Maybe it can separate the HREEs produced but not separated by Lynas (the same can be said for the samarium-europium-gadolinium concentrate it produces), but this would only be a few hundred tonnes per year. Numerous other companies--usually in mining--have indicated that they wish to produce concentrates as their final products, yet none is close to achieving this while the weak REE market has slowed most companies' developments to a trickle, if not to a standstill.
Since we're investing in businesses and not in science projects Ucore has to be more direct on this front in order to garner our attention. There has been very little on this front--nothing direct-- and we consequently see holes in the company's business model that need to be filled.
6: Ucore hasn't produced commercial-level purities of certain REEs or high-purity REEs: Ucore claims that it has separated the individual REE oxides at commercial purities or at "high purity" but this isn't true. Different elements require different purity levels for industrial application. Yttrium, for example, needs to be 99.99% pure for many applications yet Ucore only purified yttrium to 99.4%. "High purity" REE usually means 4 or 5 9's--99.99% or 99.999%. In some conversations we've heard companies discuss 6-9's material. These products are critical for lasers, lenses, alloys, and other specialty applications where small amounts of impurities can impact performance. Ucore has not achieved any of this using MRT. We wouldn't be surprised if Ucore could do this given the above-cited paper, which shows how MRT can be used to remove small amounts of impurities from a PLS, thereby purifying a target element. When we asked about this early last year they said they could do it easily by just running the product through the MRT apparatus for a few more iterations. But if they can do it then why didn't they? If they can, they should, as it will help them sign sales contracts for separated oxides and higher valued high-purity products. Given their access to capital and eagerness to become North America's leading REE company we can't think of a reason for them not to demonstrate this capability to the market, unless, they can't.
The Bottom Line
With shares rising, Orca Holdings adding to its position, and with the announcement of the pilot plant's completion coming in the near future (PDAC?) it's no wonder that Ucore shareholders are optimistic regarding the company's future.
We don't share this optimism. Ucore has failed to sufficiently convince us that MRT is a viable alternative to solvent extraction, or that it is even a superior "new" technology with respect to its peers'. This technology has shown promise in some metal separation apparatuses, but given the low value, distribution of, and chemical similarity of the REEs we fail to see evidence that these past successes are predictive of success in this endeavor. Even if this evidence were to exist we fail to see any evidence that MRT is a superior technology from an economic standpoint to solvent extraction, and the fact that there are unknown costs makes it difficult to argue otherwise. Supposedly the pilot plant will provide insight into some of these concerns (although not all of them), and investors who buy now without knowing the precise economics of MRT are convinced that if they wait for the pilot plant results that they will miss the boat.
This strategy may work, but it is hardly a prudent investment strategy, which we consider to be to find companies with low valuations, easily understood technical processes (relatively speaking), and a straightforward management team that promotes its story in a level-headed manner. Ucore has a high valuation, a "black box" technology, and it has made unsubstantiated claims to the public that promote MRT at the expense of other REE separation technologies and proposed technologies. In short Ucore is anathema to what we are looking for in an investment, which is why we continue to avoid the shares.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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