Rare Element Resources Ltd. (RES.V)
March 24 2008
Preliminary Report
You gotta follow the smart money!
Although I was already aware of this company, it moved in from the periphery of my radar screen with a couple of ‘Hi, how are you’ meetings at the recent PDAC in Toronto.
I chatted first with Don Ranta, Company President, at the booth on the exhibitors’ floor. In a nutshell, this project is two pronged. It’s a gold prospect and it’s a rare-earth element (REE) prospect. At present, the market credits it as a gold prospect, since that’s what the market understands. The REE aspect is intriguing to me, but more on that in a moment. Let’s stick to the gold for now.
RES has a joint venture with Newmont for the gold exploration of its Bear Lodge property in northeastern Wyoming. This excludes any interest in uranium and rare-earth elements. Newmont has the right to earn a 65% share of the project by performing US$5 million in exploration on the property, with a later option to raise its share to 80% by completing a positive project feasibility study. I’ve heard that Newmont doesn’t get down and dirty for projects with potential for less than 5 million ounces of gold. If this project comes to fruition, I would expect Newmont to take it out before it gets to the stage of a feasibility study.
If it’s true that Newmont sees the potential for a minimum of 5 million ounces of gold at Bear Lodge, let’s calculate the ‘what if’ value to RES shareholders at 35% of the project, or 1.75 million ounces. Use my cubing tool, forcing the 1.75 million ounces figure to yield final values per share.
Share price has ranged between $0.80 and $1.60 since last May (with a momentary spike above $1.70). Recently, along with the generally soft market for juniors, some downward price pressure can be linked to recent financings coming due. Volume is thin, and the Company is tightly held, though, so the price is subject to some volatility. Current price is $0.90. With just over 24 million shares, fully diluted, and gold at $920, the market is currently attributing value at 1.4% of the Company’s share of the suggested 5 million ounces in situ (with no value assigned to the rare-earth side). With the involvement of a major already in hand, this valuation seems not overdone by any stretch. Any movement forward on the news front as to positive results in exploration bears the potential to push this much higher. A market cap at 10% of in situ (not an unreasonable takeout threshold, assuming the 5 million ounces) would see the share price at C$6.53. That’s more than seven times the current price. Of course, we don’t yet know how much gold is present, just that Newmont is present.
Newmont is busy working on permitting necessary before an aggressive drilling program can begin. To date, Newmont has been unable to drill into the most promising targets. They’re currently spending $1 million on an environmental impact study. That’s not something done lightly. The word is that this effort is progressing well and that the project is expected to see a major drilling program by the Fall of 2008, with the potential for up to 200 holes on a 200 acre area of disturbance.
Now to the rare-earth side of the equation. Rare-earth elements are actually not so rare. They make up 25% of all metals in the earth’s crust. They were thought rare when first discovered some 200 years ago. What is rare about them is their presence in economic quantities. Rare-earth elements include 15 from the lanthanide-series (lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium, and lutetium), along with yttrium, scandium, and thorium. Say that five times with crackers in your mouth.
Uses for these metals are largely high-tech, and include:
- Catalytic converters in cars (growth market)
- TVs, computers, cell phones, DVD players, cameras (growth market)
- Rechargeable batteries (growth market)
- Metal alloys (growth market)
- Nuclear reactors (It think it safe to term this as a growth market.)
- There are about 20 kg. of rare-earth elements in every hybrid car. If you believe in potential for that market, you must, in turn, believe in potential for the rare-earth element market.
Here’s the crux of the matter. China produces 97% of the world supply of rare-earth elements, with 77% of the entire world production coming from just one mine. China current supplies 75% of the $1 billion US market. There are currently no producing mines in North America for these metals. With China’s own growing economy, you can well expect a pullback in inventory available for export. By 2012, China is projected to be unable to supply the market for both its own needs and those around the world. You can guess which markets are going to be cut out of that picture. Prices for these metals, once refined, can range from US$15 per kg. for lanthanum metal to $30,000 per kg. for scandium metal. These are current prices, leaving room for much growth if and when the world supply becomes squeezed. The value per tonne mined, for a high grade deposit, is estimated at over $1,000. This compares quite favourably to a typical high grade gold deposit, with valuation in the range of $120 per tonne.
So what has all this got to do with RES.V? According to the USGS, Bear Lodge is, “The largest deposit of disseminated (definition) rare-earth elements in North America.” From the Company’s web site, “Virtually all of the significant REE mineralization is located on claims owned by Rare Element Resources.”
Currently, the Company is engaged in metallurgical tests on recent drilling samples to better understand the feasibility of various extraction methods. Success in these tests will likely be followed by aggressive drilling in an effort to define the resource base. According to the USGS, the metals are there at Bear Lodge. It’s now up to the Company to ensure an effective method for extracting and separating these metals.
Rare Element Resources has recently made significant changes in management, with Don Ranta coming on as the new president, and the creation of a high profile Advisory Board. With these new appointments, I expect activities for the Company to pick up speed very shortly.
In broad strokes, this Company is currently a gold play, with meaningful potential for much more. The Company hopes for the rare-earth element side to develop into a match for the gold side. The marketplace doesn’t yet understand rare-earth elements. Part of my task in the weeks ahead is to learn and share more about the related potential of these metals to contribute to this Company’s balance sheet. I hope to make a site visit in the Spring and will report my findings shortly thereafter.
Oh yes, my second chat was with the much esteemed Bob Bishop, whom I had met last September on a site visit for Southern Arc Minerals, in Indonesia. For those few of you who may not know, Bob retired last June after 24 years in the field as editor and publisher of the highly successful newsletter, Gold Mining Stock Report. We spoke for a few minutes at the Southern Arc workshop for shareholders, presented at the Royal York Hotel on the first night of the PDAC. Knowing that Bob had been associated with Rare Element Resources in the past, I took the opportunity to ask him about it, and whether he thought it would be a worthy trip for me to make for a site visit. For his response, picture Alfalfa, the 1930s “Our Gang” character, standing there, kicking his toe into the dirt as if to say, “Aw shucks”. Bob actually kicked his toe into the floor, then looked up at me and smiled and said, “Well, I think I’m one of the largest shareholders… so, what do you want me to say?”
With respect,
Kevin Graham
Rare Element Resources Ltd.
RES.V
Share Price: $0.90
Outstanding shares: 20,972,723
Fully diluted shares: 24,301,072
Insider holdings: 10%
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The sole intention of this report is to provide investment-related information and opinions. The writer does not hold a position in the featured security but may take a position without prior notice. All content presented in this report is obtained from sources deemed reliable, but its accuracy is not guaranteed. Use of this information is at the risk of the reader, without responsibility on the part of the writer. The writer is not a licensed investment advisor, nor a geologist and does not offer personalized investment advice. Please do your own due diligence.