The Rare Earth Space, ‘A Culling of the Herd, and the Survivors’ (Part 1: North America)
While I was not in attendance at PDAC in Toronto this week, due to prior commitments in Malaysia, I understand from those who did attend and that I talked to that it was a somber affair for those junior REE ventures seeking additional and/or new funding. I am discussing below only companies with deposits in North America. I will discuss Europe and Africa next week and Asia the week after that.
Mining juniors, in general, and rare earth juniors, in particular, are contending with a lack of investment capital, and the writing is on the wall for many, as their projects remain too ‘early stage’, and much too ill defined with regard to end products and their markets, to attract capital (which is bearish and risk averse toward the resource sector at present).
Rare earth exploration juniors are at the edge of the cliff, and the culling of the herd is imminent for many of the blue sky/early stage projects that failed to deliver even an NI 43-101 compliant resource, much less an advance stage development document. I’ve been talking about this thinning of the ranks for some time and the abattoir is primed to start grinding out fresh kill.
Such is the Darwinian nature of the markets, and there’s something to be said for the channeling of capital to the strongest individuals that remain standing in times of drought and famine.
Two such survivors are Ucore (QTCQX: UURAF) and RER (ASE: REE), which are smallish, right size projects. In the case of Ucore their recent PEA delivered some metrics that set its Bokan property apart from the crowd…not the least of which is an almost absurdly low projection of the CAPEX required to get into production ($221M) and a product mix and form stated to be valuable enough to generate close to $100M per year in pre-tax profit (with a 43% IRR). That’s a bullish return on limited input capital. Ucore plans to be in production in 3 years or so, which places them at the forefront of the international race (along with, in my opinion, RER), to generate HREE’s outside of China.
Ucore estimates that they’ll be producing some 95 TPA of Dy; close to ½ of current US OEM automotive requirements and more than 10X the requirement of US Department of Defense (with which Ucore signed a strategic agreement in Q4 of 2012 for the purpose of advancing their HREE project). DOD is interested in Dy at least partially as an input component in unmanned drones in theaters of war (a topic that has garnered much media attention of late as a bulwark of the Obama administration’s offense strategy in the Middle East). Beyond this, UCU’s Dy output will be readily received by the American automotive industry, as prospective production of EVs and HEV’s continues to grow.
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Ucore has yet another ace on the hole with the State of Alaska in their corner. The State has a long history of assisting in the financing of CAPEX to worthy mining projects, with very patient long term, below market interest loans over life of mine. Alaska has a $39B permanent fund, largely the outcome of a robust long term petroleum sector which is now falling into abeyance. So, they’re the rare sovereignty in the western world that has not only significant capital but also the wherewithal to invest in its own future. In Ucore’s case, the stated CAPEX is so low, that the State could singlehandedly guarantee Bokan’s rise to production (witness Alaska’s underwriting of $225M just for the port and road infrastructure at the Red Dog Mine in Central Alaska; an amount which ironically totals more than Bokan’s entire CAPEX requirement). As I mentioned some time ago, the Goldilocks Principle will gain new credibility in the REE space, as it’s the right size project with the right products, Critical Rare Earths that will ultimately prevail. Ucore’s Bokan is such a project.
I have also been following Rare Element Resources, and I am convinced that their new model emphasizing the extraction and production of Critical Rare Earths is a winner. I have been hoping that RER would adopt the business development model that they, in fact, announced at the beginning of 2013, and they did exactly that. I was pleasantly surprised by the increase in extraction efficiency that RER just announced, especially considering the size of their resources. I note with an “I told you so” kind of satisfaction that both Ucore and RER have a business model that de-emphasizes the light rare earths other than the critical rare earth, neodymium. This is the only workable model in a non-Chinese world in which today a Lynas (LYC.AU) and perhaps a Molycorp (NYSE.MCP) are producing, or capable of producing, as much light rare earths as anybody wants (if the price is right, of course).
I am now ready to state a predcition: the Domestic American Survivors of the 2013 Rare Earth Mining Junior Cull will be Ucore and RER, because they are the right size and have the right products.
Unless there is the construction and operation of an efficient rare earth toll (contract) refiner to which North American rare earth miners have open access there can be little hope of survival for those rare earth mining juniors which have just discovered the need for access to a competitive cost separation plant. There are such toll refiners being planned in North America, but they will have limited capacity, so that they will only be able to serve the first that come to them.
For those who ask why I didn’t mention their favorite picks, whichever those picks may be, I repeat that based on my criterion I can only pick Ucore and RER as survivors in this side of the hemisphere. I’m going to a meeting in Europe tomorrow, Saturday, March 9, 2013. When I return next week I’ll reveal my picks as the European and African survivors.
Disclaimer: Jack Lifton is a consultant to Rare Element Resources Ltd. and Ucore Rare Metals Inc.
Jack Lifton is the CEO for Jack Lifton, LLC and is a consultant, author, and lecturer on the market fundamentals of technology metals. Technology metals ... <Read more about Jack Lifton>