Namibia Rare Earths (OTCPK:NMREF) recently provided an update on their program to complete a resource at Area 4 of its 200 square kilometer Lofdal Carbonatite Complex in Namibia. The current program at Area 4 is focusing on mineralization extending over a 650 meter strike length. Namibia Rare Earths anticipates completion of the resource in the third quarter of 2012. To date, progress at Lofdal includes the following:
- 20 holes completed (2,061 meters) of 6,000 meter drill program
- Nine of 13 planned trenches completed
- Down-hole geophysical surveys completed on 16 drill holes
Initial results from portions of drill assays and samples from trenching should be received from labs in the next couple weeks. As drilling and sampling is expected to continue through the end of April, it is likely that drill results will provide ongoing news flow through the end of May. Drilling is intersecting the targeted mineralization based on visual characteristics observed by geologists. The downhole geophysical surveys are providing detailed information on rock densities which will be required to generate reliable tonnage estimates of the resource.
Namibia Rare Earths has selected Area 4 as its priority area of interest based on results from an earlier initial 7,500 meter drill reconnaissance program. The current drill program is intended to lead to establishing an initial resource to a depth of about 75 meters. Additional drilling will step back in order to drill below the identified mineralization to a depth of 100 or 150 vertical meters. In addition, they may also test the ends of the targeted resource for horizontal expansion along strike.
Looking beyond a potential resource in Area 4, mineralization appears traceable by geophysical surveys which detect structures which may have been the conduit for fluids. Namibia Rare Earths has recently completed 100 line kilometers of induced polarization geophysical surveys extending several kilometers along strike to the east of Area 4. They have also completed a pole-dipole array survey to locate additional drill targets between drill fences in the area adjacent along strike from Area 4. This should provide additional drill targets following completion of the resource drilling at Area 4 with the potential of extending the 650 meter area of interest an additional kilometer to the east. While this is ongoing, Namibia Rare Earths will be targeting sampling and mapping programs within the larger area covered by the 100 line kilometers of induced polarization geophysical surveying to the east, for further drilling with the potential for further identification of mineralization, and understanding how mineralization may have occurred.
Investors interested in Namibia Rare Earths should look for consistency of heavy rare earth enrichment, further mineralization encountered at depth and along strike, and information relating to possible extensions of mineralization regionally to the east. It is important that Namibia Rare Earths complete a resource at Lofdal currently scheduled by the third quarter of 2012, that the resource has a competitive mix of heavy rare earths, and that reconnaissance exploration to the east (along with drilling at depth and along strike at Area 4) suggests the opportunity for expansion of a potential resource to add scale.
We anticipate that the establishment of a resource will be a key event in forwarding Area 4 at Lofdal into a competitive position among a limited number of rare earth projects with a NI 43-101 compliant resource. At that point investors will be looking at the content level of heavy rare earths and tonnage that may support positive economics necessary for development. In addition to expanding a potential resource, Namibia Rare Earths will continue with ongoing metallurgical work to support a potential Preliminary Economic Assessment. Given the early stage of work at Lofdal, we anticipate that Namibia Rare Earths will be on the radar for investors interested in rare earths, and compare favorably for its distribution of heavy rare earths with the potential for resource expansion.
Comments on the Molycorp Earnings Release of Rare Earth Prices
We listened in on the Molycorp, Inc.'s (MCP) fourth quarter earnings conference call. While we were impressed with the progress Molycorp has made, we were somewhat surprised with the subsequent negative response by analysts and the decline in the company's stock price. The concerns appear to be concentrated around management comments about increasing costs and general concerns from potential over supply and falling prices of certain light rare earths, namely lanthanum and cerium. While concerns over costs may have been a surprise, the importance of these two light rare earths should come as no surprise with the potential near term impact by successful completion of Molycorp's Phase I at its Mountain Pass project in California. According to the U.S. Department of Energy Critical Minerals Strategy December 2011, potential additional supply of lanthanum or cerium might impact prices. As the addition of new supply from Molycorp's Mountain Pass Phase I is expected to exceed demand in the near term, some reduction in these prices should come as no surprise.
While the direction of costs and certain light rare earth prices drive analyst sentiment, there appears to be a disconnect in recognizing Molycorp's unique position in the rare earth market as the sole producer of rare earth elements outside of China. In addition, Molycorp reported net income of $117.5 million or $1.27 per diluted share in 2011. Also, Molycorp reported that completion of its Phase I at Mountain Pass is expected to commence production in the third quarter, about three months ahead of schedule. They produced a total of nearly 7,000 metric tons of rare earth oxide products and metals in 2011. They expect to increase production to 8,000 to 10,000 metric tons in 2012, and at a run rate of 19,050 metric tons by the end of the third quarter. As of the conference call, Molycorp reported contracting the sale of 78% of production from Phase I.
Twenty percent of total production is included within the 78% contracted to be used internally for its proprietary XSORBX drinking water purification product. Most interesting to us is that Molycorp's sold about 55 metric tons XSORBX in 2011, with target sales of 1,000 metric tons in 2012, nearly a twenty factor increase. While it is not clear to us how much cerium is required for this product, apparently 20% of total production of rare earth elements at Mountain Pass would support this target. Earlier comments by Molycorp suggest that if introduction of XSORBX is successful, Molycorp may use all the cerium it can produce. This would imply that there would be no cerium available for global demand from Mountain Pass. This vertical integration should provide grist for potential revenues and margin expansion in addition to other initiatives to diversify sources of revenues.
There appears to be a wide range of opinion on Molycorp. It would appear to us that they have established a significant platform to generate profits. In addition, it would appear that the same challenges faced by Molycorp are common with its competitors who may be years away from production. Considering the impact of declining light rare earth prices, the potential risk that many of these projects may never go into production bodes well for stabilization of rare earth prices. From our perspective, Molycorp looks to have good potential of establishing a near monopoly being one of the few rare earth producers outside of China. Overall, with Molycorp's Phase I coming on-line we suspect that lower light rare earth prices may create additional challenges for the bankability of light rare earth dependent projects. This in our opinion may sustain uncertainty for the rare earth industry, with exception to heavy rare earths, which will become increasingly of interest. As we believe Namibia Rare Earths to have the potential of establishing one of the most significant new heavy rare earth resources in 2012, we find both Namibia Rare Earths and Molycorp attractive at current valuations.
Disclosure: I am long MCP.