Texas Rare Earth Resources (OTCQX:TRER) just announced that it has entered into a binding offtake agreement with AREVA SA (OTCPK:ARVCF). As per terms of the agreement, AREVA will buy up to 300,000 pounds of TRER's uranium production from Round Top annually for five years - from 2018 through 2022. Pricing will be determined by a formula based on market prices.
As an investor in TRER, I am quite pleased with the arrangement, and I think there are several reasons that it is favorable. However, at the same time, I don't think investors should become overly enthusiastic in response to this news. Note that there is some frothiness in this name after Monday's 25% jump in the share price and after the recent run-up from ~$0.20/share to over $0.32/share. I still believe that shares are significantly undervalued, but any prudent trading strategy would suggest that now is probably not the best time to get long and that swing-traders should consider taking profits.
The Positive Takeaways
Despite my cautious tone, there is a lot to like about this deal. First and foremost, it is a positive sign that a large multinational, multi-billion dollar company is taking TRER - a company with an OTC listing and a $13.4 million valuation - seriously. AREVA's business isn't dependent upon TRER delivering this uranium, but the fact that AREVA is paying attention and sees an opportunity is significant for TRER shareholders.
Second, this is a validation of TRER's claims that its Round Top Project has noteworthy by-product value. The December 2013 PEA doesn't include uranium or the company's other by-products (e.g. lithium, beryllium, potassium). However, management has become more vocal about these opportunities (see my February article, also see the company's recent presentation). Round Top can produce 300,000 pounds of uranium oxide per year, and this currently has a market value of ~$12 million. Note that this is based on current metallurgy and we have not yet seen any recovery optimization efforts.
Third, not only is AREVA confident that the uranium is there, but we can also deduce that AREVA is confident in TRER's separation technology - continuous ion exchange/continuous ion chromatography (CIX/CIC). This is a technology which has already been used to separate out uranium at the commercial level.
These points should indicate to investors that TRER has a quality deposit and a feasible separation technology and that it is ultimately moving in the right direction.
Let's Not Get Too Enthusiastic
However, I don't think that this announcement changes the investment thesis meaningfully. I think this is a quality offtake agreement in a world where more often than not such agreements have little-to-no value. But at the same time, there are some shortcomings that I think need to be addressed.
First, note that AREVA may have confidence in TRER and its Round Top Project, but keep in mind that (1) AREVA doesn't need this uranium as it has multiple sources, and (2) AREVA isn't agreeing to advance any money towards TRER. AREVA doesn't really have much to lose even if it is positioned to benefit should Round Top go into production.
Second, TRER does not reveal the pricing formula in the press release. The price will be a function of the "spot" uranium price, but we don't know if TRER gave up some value in order to make this deal happen. On the other hand, it doesn't make sense to assume that TRER would agree to sell its uranium at a significant discount to the spot price. Furthermore, note that the pricing formula was set in advance. With this last point in mind, we can ascertain that even if TRER gave up some value or upside potential to make the deal happen that it has slightly de-risked the Round Top Project in the process.
Finally, while the institutional endorsement is encouraging, we have not yet seen continuous ion exchange/continuous ion chromatography used to separate rare earth elements at the commercial level. I have written elsewhere about why this technology makes sense and its shortcomings at this early stage. As I suggested, this could be a good alternative to solvent extraction - a high cost, environmentally unsound process that is ubiquitous in REE separation. At the same time, REE separation has been a notoriously difficult process to control. Regarding CIX/CIC, there continues to be timeline risk and the risk of failure, and investors shouldn't assume that this risk has dissipated, or even mitigated, with AREVA's implicit endorsement.
What Should Investors Do?
The AREVA deal hardly de-risks the Round Top Project. But even without the uranium offtake, there is substantial value in shares of TRER at the current price. The Round Top Project is the largest heavy REE project in the US. Furthermore, TRER has put together a board of directors with unparalleled experience in the REE space.
Yet, TRER has one of the lowest market capitalizations of any REE company, period, for a variety of reasons. Monday's price action narrows the valuation gap between TRER and its peers although I think shares remain undervalued.
With that being said, the stock has risen over 50% for the year. Long term, there's more upside but short term, I think investors would be wise to wait for a better entry point. Swing-traders may consider taking some profits with the hope of buying the shares back cheaper. Note, however, that this is a name that's just popping up on traders' radars, and that it is a tightly held stock. Both attributes mean that we could see a little bit of money push this stock a great deal higher.
Disclosure: The author is long TRER.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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