Lifton on Texas Rare Earth’s uranium deal with Areva
Texas Rare Earths Resources (OTCQX: TRER) has reached a milestone in its business model of creating shareholder value from not only rare earths but also from other valuable metals and materials to be co-produced from its mineral deposits, and it has, in doing so, achieved a first among rare earth juniors. The company has signed an off-take agreement with the global French owned vertically integrated nuclear engineering group, Areva, which entitles Areva to up to 300,000 lbs of uranium oxide (“yellowcake” in the industry parlance) per year as a by-product of rare earth mining and processing from the company’s Round Top Mountain deposit in West Texas.
It cannot be overemphasized that this off-take agreement is a conditional contract, not an MOU. This means that if Texas Rare Earth Resources produces uranium oxide between 2018 and 2022 then Areva is obligated to take up to 300,000 lbs per year during that period at a market in-dexed price. The contract can be renewed for an additional term by mutual agreement during the first 5-year term.
Another point that needs to be emphasized is that Global1000 manufacturing corporations almost never contract for “production” with junior mining ventures due to the distance between their respective places in the natural resources supply and value chains for the resources in question. Producing mining companies (let’s call them “senior” miners) often purchase deposits from junior miners, which are by definition “exploration” companies. This is for the common sense reason that it is costly to maintain staffs of geologists and pay exploration expenses when for most of the time the senior miner is interested only in bringing proven deposits into production. It is difficult to manage individual exploration geologists (the “prospectors”) or groups of them. Prospectors do not like to sit around in offices waiting for assignments. It has traditionally been much easier for seniors to allow juniors to follow trending interests in particular resources and wait for them to approach the senior with an offer of a claim.
In the rare cases when a junior plans to actually transform itself into a senior, such as TRER is doing, and the even rarer case when that plan is taken seriously by the market it is up to the junior to prove it has the ability to do the job. This need to prove its ability is a very high bar to the entry of a new senior of a any size.
In my opinion this is the first time that a major senior miner (AREVA) has had enough confidence in a rare earth junior’s probability of success in developing a producing mine to agree to contract for a future delivery. This is not a first right of refusal this is an agreement that in consideration of AREVA agreeing to a price formula ahead of time and to taking a minimum amount un-der that formula then TRER offers to produce such material as a by-product of its extraction of and refining of rare earths from the minerals at Round Top and to deliver it to Areva.
It finally cannot be overemphasized that this is not a “memorandum of understanding,” a commonly touted document that signifies no more than that the parties agree that they are talking about the issues in the MOU. The AREVA/TRER agreement is a completed and valid contract between the parties. TRER has made an offer that AREVA has accepted and consideration has been given by both parties.
In my opinion this off-take contract is a good indication that AREVA’s view on the long-term pricing and availability of U308 is such that it wants in early with people its procurement officers think can deliver.
At today’s spot prices this contract has value of as much as $11.9 million a year at today’s U308 current spot price of $39.50 per pound. I do not know of any other junior rare earth miner that has done this. It is not a giant step but it is a solid step towards TRER becoming an operating mining/refining (going, i.e., profitable) concern.
This move places TRER well along its development of a business model that plans for the commercial production of separated individual heavy rare earths with co-production of uranium, lithium, potassium and beryllium. Those who ignore the company or sideline it as “too low grade” or “without a viable extraction and separation technology” do not seem to have been very convincing to AREVA’s procurement operations.
I congratulate the executive management of TRER on a job very well done.
Jack Lifton is the CEO of Jack Lifton, LLC and is a consultant, author, and lecturer on the market fundamentals of technology metals. “Technology metals” ... <Read more about Jack Lifton>