Industrial Alliance Securities analyst Kiril Mugerman initiated coverage Monday on rare earth elements (NYSEMKT:REE) explorerTasman Metals (CVE:TSM) with a speculative buy rating and a 12-month price target of $1.75, citing the company's Norra Karr deposit in Sweden as being the most "economically robust" under low REE prices.
The brokerage firm's REE price deck is based on the 2008-2010 prices, in essence eliminating the 2011 price spike. The Industrial analyst notes his firm's price deck is 8 percent below January 2013 prices, and 65 percent below the peak prices seen in 2011.
The analyst writes that only low prices can boost demand for REE: "We believe that such a price environment is more sustainable to the end users and supports growth within global technological development."
As such, projects in the space need to be economical at the most conservative of REE prices.
"We isolate five advanced projects that are enriched in Heavy REE and the so called Critical REE, and compare each one using both a macro scale and in detail using the latest published economic assessments, adjusted to our price deck," says Mugerman in the morning research report.
His analysis continually recognizes Tasman's Norra Karr as being the strongest on an economic basis, due to "favorable geology, metallurgy, infrastructure and jurisdiction". Industrial Alliance does not consider the heavy REE sector capable of handling more than one new project at a time, and therefore isolates Tasman as the top pick among these projects based on its comparisons, valuations, and the stress test seen in the research report.
"We identify that the comparable companies Ucore, Avalon and Matamec offer minimal or no potential upside at all in a low REE price environment. Quest is the only runner up that should be re-evaluated based on its upcoming PFS," he adds.
The main investment risks at play for Tasman, he highlights, are short- and long-term financing, as the company is at risk of running out of cash at the end of the year, or stalling its pre-feasibility study in order to preserve working capital - which is now at $8 million.
Mugerman states that the REE explorer and developer needs to raise $10 million in 2013 to be in a position to further de-risk the project, in terms of metallurgy and permitting, and to complete the final studies in time for the 2017 production timeline.
The analyst's final valuation accounts for project scalability and evental pick up in REE demand and market support, he says, as well as current poor market sentiment toward the REE sector and the increased financing risk.
No value was attributed to other properties, royalties or any potential intellectual property from REE processing.
Tasman operates the only two REE projects with NI 43-101 compliant resource estimates in mainland Europe: the flagship Norra Kärr deposit and the other one being Olserum. Both projects are enriched in the more valuable heavy REE and located in well-developed regions of Sweden, accessible to infrastructure, including power, road, rail, port, water and local skilled labour.
The Norra Kärr deposit is a zirconium and REE-enriched intrusion with a footprint of 350 x 1200 metres in area. The company released a preliminary economic assessment (PEA) for the deposit in 2012 and is currently working on a pilot plant metallurgical study to be incorporated in the preliminary feasibility atudy (NYSE:PFS) expected in the first quarter of next year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.