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Bottom-Fish Action
 Fri Dec 10, 2010
Bottom-Fish Action Report for Nov 28 to Dec 4, 2010
    Publisher: Kaiser Research Online
    Author: Copyright 2010 John A Kaiser

 

Bottom-Fish Action Report for Week of November 28, 2010 to December 4, 2010

The Rare Earth Supply Squeeze

The resource juniors continued to do well during the first week of December, helped along by gold's breakout above $1,400 though gold has since retreated below this milestone as concerns emerged that the United States might not be as aggressive about quantitative easing as anticipated, with the result that longer duration T-bill rates have been rising. This week my comment focuses on the rare earth sector which has adopted a holding pattern as the market awaits China's export quota policy for 2011. FOB spot prices have been generally flat during the past couple weeks, in part because there is little rare earth oxide available now that the export quotas have been exhausted.

An important hurdle heading into 2011 will be the structure China comes up with for its 2011 rare earth policy. The first half 2011 quota will likely be higher than the second half 2010 quota and the light rare earth FOB spot prices will retreat from their lofty heights as new export supply starts flowing again in January. This may cause some weakness in the rare earth juniors whether their deposits are loaded up with light rare earths or have a high percentage of heavy rare earths (yttrium, which dominates the heavy percentage, also has a skyhigh FOB price, as does the lower volume gadolinium), but the retreat will be short-lived and may not happen at all because there is no significant new supply coming on stream from anywhere during the next two years, and end-users not based in China will be eager to snap up and stockpile rare earth oxides before their competitors beat them to it.

Juniors with advanced heavy rare earth deposits might get a boost if China delivers on a rumoured new export policy that allots individual rare earth based quotas to the quota holders. This will reduce the availability of the more valuable heavy rare earths (yttrium excluded) for the export markets, enabling China to stockpile any domestic surplus, while the FOB spot prices for the heavies undergo 50% plus gains from current levels. The spotlight will then swing back to heavy rare earth deposits such as Strange Lake, Nechalacho, Norra Karr and Kipawa as well as their less advanced sisters in Alaska and Kyrgystan as the Japanese end users shift their attention from the lights to the heavies. In either case, it is unlikely that FOB spot prices will approach the average of the past three years unless there is something very wrong with the guidance one major Chinese authority has given industry and the market.

Dr Chen Zhanheng, head of the Chinese Society of Rare Earths which serves as a think tank for the authorities that develop rare earth industry policy, proved very prophetic when he published his Outline on the Development and Policies of China Rare Earth Industry on April 7, 2010. In his "unofficial" policy paper he outlined the need for China to crack down on inefficient, polluting and illegal rare earth production and processing operations in China. The crackdown appears to have begun in earnest after China slashed its export quotas for the second half of 2010 and instituted a tough customs inspection regime widely interpreted as an unofficial embargo against Japan in retaliation for the fishing trawler incident. Dr Chen gave a presentation at the Roskill Rare Earth Conference in Hong Kong during November which confirmed that China is serious about reducing smuggling and enforcing compliance with China's rare earth industry emission standards. The abstract for his presentation, "China Rare Earth Industry: Resources, Domestic Market and Environment", makes the startling claim that "almost no rare earth enterprises could match the industrial pollutants emission standards for rare earth industry". He also repeats an earlier suggestion that smuggled output may range 20,000-40,000 tonnes. This smuggled output is likely derived from the worst polluting mining and processing operations which in turn are most likely the smaller ion adsorption clay mining operations in southern China which are the primary source of China's heavy rare earth output. Shutting down this illegal production by enforcing emission standards is the path to achieving China's "mandatory plan of total production quantity control". According to Dr Chen the total production quotas were 120,000 tonnes for 2007, 134,600 tonnes for 2008, 127,300 tonnes for 2009 and 89,200 tonnes for 2010.

In their excellent presentation at the Hong Kong conference, "Rare Earths: Facing the Uncertainties of Supply", Judith Chegwidden and Dudley Kingsnorth provided a table presenting the official quotas and estimated output that includes an estimate for "illegal" mining. What is interesting about their data is that the estimated output for years 2007-2009 closely matches the production quotas, but their figures for 2010 show a 20,800 tonne gap between the 2010 quota and the estimated mine output. Since Dr Chen's smuggling estimates refer to rare earths exported above and beyond material exported through export quota channels which collect export duties, one can assume that prior to 2010 there was virtually no "illegal mining". One can thus infer that China's reduction from 127,300 tonnes in 2009 to 90,200 tonnes in 2010 reflects 37,100 tonnes of production that has been flagged to be shut down under the emission standards compliance program. In effect this supply has been deemed "illegal" and will disappear as China consolidates the rare earth mining and processing operations under the umbrella of a small group of larger entities whose emission and production quota compliance can be more easily monitored by central command authorities.

Dr Chen also states that China's domestic consumption of rare earths during 2009 was 74,000 tonnes. Assuming this 2009 figure is correct and that 2010 numbers are likely to be better given that the worst of the global recession is behind us, this would leave at most 15,200 tonnes available for 2011 export quotas. This contrasts with the 30,258 tonne total quota for 2010, but is in line with the 7,976 tonnes announced for the second half of 2010 (15,952 tonnes on an annualized basis) in conjunction with the sector consolidation campaign. Assuming the crackdown is carried out rigorously, the problem facing the rest of the world is that its entire quota for 2011 may amount to only 15,000-20,000 tonnes without the supplement of 20,000-40,000 tonnes of smuggled material. Such an amount would be 30%-50% lower than the total 30,258 tonne export quota for 2010 without any smuggled supply. Such an outcome would be so devastating for end-users that I question it is even conceivable given how much grief the Chinese have already had to endure. Furthermore, if Dr Chen is correct in a statement he makes in a Clint Cox Interview conducted on November 23, China has no plans to allow new exploitation during the next five years. The only hope for additional Chinese supply will come from possible expansion of throughput by existing operations unless the Chinese numbers understate reality, its emission standards enforcement actions prove to be a farce, or the country decides that it really does not want to attract more China based production of downstream applications that require rare earths.

The topic of China's grab to secure intellectual property is turning into a real hot button, as John Gapper of the Financial Times describes in his December 9, 2010 article "China's crafty play on trading places". Dr Chen laments that although China emerged as the dominant producer of rare earths, the development of downstream applications involving rare earths was done largely outside of China. The goal now is to do some catchup and the key is to restrict the supply of rare earths in the name of environmental responsibility without hurting domestic manufacturers who require rare earth inputs. Dr Chen expresses eagerness to see rare earth supply developed from sources outside of China, arguing that China does not need the grief that comes with being perceived as a monopoly producer. Of course he knows very well that significant new production outside of Mt Weld and Mountain Pass will not develop until 2015 and beyond. Japanese companies have done deals to develop modest short term supply in India through a JV with Orissa on processing mineral sands for monazite, with Ulba in Kazahkstan, the Vietnamese government on the Dong Pao deposit, and with Neo Material on the Pitinga deposit in Brazil, but these sources will only help plug the current supply-demand imbalance, and not do much to help with projected long term demand growth which Yasushi Watunabe of the Institute for Geo-Resources and Environment shows climbing to 400,000 tonnes by 2040. For many western manufacturers a simpler option is to just move their manufacturing operations to China and absorb the risk that intellectual property will end up in the hands of Chinese competitors through "co-option" and "re-innovation". But if commercialization and innovation will drive long run demand as envisioned by Watunabe, there remains plenty of reason for end-users to look at significant long term supply solutions being advanced by certain rare earth juniors. In any case, China will have be very careful in how it structures and presents its 2011 export quota policy if it is not to unleash a new round panic and anger in the west.

Above Bottom-Fish Range Within Bottom-Fish Range Below Bottom-Fish Range Recently Closed Out
Updated this Week New 2 Year High New 2 Year Low New Bottom-Fish High New Bottom-Fish Low

Bottom-Fish Recommendations made from November 28, 2010 to December 4, 2010
Company Date
Price Recommendation Action Net
Cash
Net
Stock
Gain New Status
Spanish Mountain Gold Ltd 11/29/2010 $0.60 Good Relative Spec Value Buy Buy 1,667 @ $0.60 $0 1,667 0% Good Relative Spec Value Buy max $0.75
Tasman Metals Ltd 11/30/2010 $3.13 Fair Relative Spec Value Hold
$0 787 146% Fair Relative Spec Value Hold at $3.13
Commerce Resources Corp 12/1/2010 $0.80 Confirm BF Spec Cycle Hold 100%
$0 5,263 321% BF Spec Cycle Hold 100%

New Comments
Company
Volume High Low Close Chg Status
Commerce Resources Corp (CCE-V) 3,319,400 $0.850 $0.760 $0.820 ($0.030) New BF Spec Cycle Hold 100%
Frontier Rare Earths Ltd (FRO-T) 581,900 $3.190 $3.100 $3.140 ($0.060)
Neo Material Technologies Inc (NEM-T) 5,806,600 $7.470 $6.760 $7.200 $0.410
Peregrine Diamonds Ltd (PGD-T)
2,858,800 $3.280 $2.610 $2.770 ($0.490) Good Absolute Spec Value Buy
Tasman Metals Ltd (TSM-V)
2,512,400 $3.700 $2.900 $3.120 ($0.470) Fair Relative Spec Value Hold

Bottom-Fish Action Report for November 28, 2010 to December 4, 2010
Tasman Metals Ltd (TSM-V: $3.08)
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Spec Value Hunter Comment - November 30, 2010: Tasman confirms Norra Karr as potential solution to European REO supply problem

Tasman Metals Ltd published an initial 43-101 resource estimate for its Norrra Karr rare earth project in Sweden on November 30, 2010. The inferred resource was estimated at 5 cutoff grades ranging from 0.2% to 0.6% with the base case chosen as 0.4% TREO: 60,500,000 tonnes of 0.54% TREO and 1.72% zirconium oxide. The heavy rare earths represent 52.7% of the total rare earth oxide grade. The in situ resource consists of 326,700 tonnes of rare earth oxides, confirming that Norra Karr is a world class project well located to serve European rare earth needs. The primary rare earth bearing mineral as established by mineralogist Dr. Tony Mariano is eudialyte which until recently has represented a technical processing problem. On October 18, 2010 Matamec Explorations Inc announced that SGS Lakefield in collaboration with metallurgist Les Heymann and Tony Mariano had achieved a processing breakthrough for the eudialyte which is a key rare earth bearing mineral at its 100% owned Kipawa deposit in southern Quebec. This breakthrough prompted me to issue a Good Relative Spec Value Buy at $0.40 for Matamec with a $0.50 buy limit and a $1.00 six month target in Tracker 2010-12 published on October 26, 2010. The Matamec recommendation is premised on an updated resource estimate expected in late January 2011 boosting the current 7,245,000 tonnes of 0.65% TREO, a 10 tpd pilot plant study confirming the 89% recovery indicated by bench scale studies, and a positive PEA in late March 2011. My thinking is that Kipawa's small scale and location close to infrastructure would attract a takeover bid from an end-user such as Neo Material Technologies Inc which is seeking a non-Chinese source of heavy rare earths, terbium and dysprosium in particular, or by a (soon to be) producer with a mine to market strategy such as Molycorp Inc which had investigated Kipawa during the eighties as a source of heavy rare earths to supplement its light rare earth dominated Mountain Pass production. Tasman now offers a European solution to the global problem of developing heavy rare earth supply outside of China which itself is concerned about the sustainability of supply from its ion adsorption clay deposits in southern China.

Tasman was recommended a Good Relative Spec Value Buy at $1.27 on March 11, 2010 with a short term $2.50 target (now achieved) after the junior published initial drill results for the Norra Karr deposit which confirmed a large tonnage footprint, a high percentage of heavy rare earths, and a grade comparable to Kipawa. The initial resource estimate confirms this assessment and the project is now proceeding to infill drilling and metallurgical studies. In mid November Tasman retained SGS Lakefield and Les Heymann to undertake bench scale studies on a 100 kg sample, in effect bringing their know-how with regard to eudialyte processing to bear on the particular form of eudialyte present at Norra Karr. Based on 3 year average FOB rare earth oxide prices as of November 30, 2010 the inferred resource at Norra Karr has an in situ value of $13.7 billion and a rock value of $226 per tonne of which 71% ($151/t) is attributable to rare earth oxides and 29% to zirconium oxide priced at $3.76/kg. It is worth noting that at domestic Chinese spot prices the rock value is slightly higher at $152/t reflecting the reality that rare earth oxide prices are rising even in China. At FOB spot prices the TREO rock value jumps to $454/t, boosting the in situ value of Norra Karr to $31 billion. Of note is that the Norra Karr system has an unusually low grade of 14 ppm uranium and 7 ppm thorium which will help with the establishment of a processing facility in Europe if development proves feasible. Tasman has completed a private placement financing of 5 million units at $1.50 which brings its fully diluted capitalization to 61,721,292 shares which at a $3.13 stock price implies a value of $193 million for 100% owned Norra Karr which is not encumbered by any royalties. The financing boosts Tasman's working capital to about $12 million, leaving the junior adequately funded to carry out an infill drilling program scheduled to start in December, complete its metallurgical studies by the end of Q1 of 2011, and deliver a PEA by the end of Q2 of 2011. The bench scale metallurgical study will be a critical milestone because at this point we do not know if the eudialyte at Norra Karr lends itself to a cost-effective cracking process. Since we have achieved our price target for the initial spec value hunter recommendation, and recovery, mine throughput and cost numbers which allow us to generate discounted cash flow based valuations for the different rare earth oxide price scenarios will not be available for another six months, I am changing the recommendation to a Fair Relative Spec Value Hold while we wait for the metallurgical study and PEA milestones. Success on these fronts should enable Tasman's valuation to double to get in line with the valuations of other advanced rare earth projects. Shorter term upside would arise if Tasman attracts a strategic investor, which, given the significance of Norra Karr as a long term solution to the rare earth needs of European end-users, is plausible. There is also the possibility that Tasman itself could adopt a strategic role within the rare earth sector that goes beyond pushing Norra Karr through the development cycle. Thanks to its earlybird recognition of the rare earth story Tasman has acquired a number of other previously explored rare earth prospects in Sweden and Finland that put it in a position to develop rare earth supply from multiple sources. Tasman has also attracted a strong endorsement from Jim Dines which would certainly help the junior if it chooses a bigger role for itself.

Project Resource Estimate - Norra Karr
Nov 30, 2010NI 43-101Geoffrey Reed, Miarco-Minecosult (Australia), and Pincock Allen & HoltCutoff: 0.4% TREO
Note: TREO price used is $13.55/lb ($29.86/kg) 3 year FOB average as of Nov 30/10 (FOB spot is $83.63/kg, China domestic 3 yr $20.49/kg, dom spot $12.71/kg), Zr2O3 $1.71/lb, HfO2 $369/lb.
Resource CategoryTonnageTotal
Rock Value
MetalGradeRecoveryContained Metal% of GMV
Inferred Mineral Resources60,500,000$226/tRare-Earth-Metals0.540%100.0%720,238,095 lb71%
Zirconium1.720%100.0%2,294,091,711 lb29%
All Categories Spot60,500,000$226/tRare-Earth-Metals0.540%
720,238,095 lb71%
Zirconium1.720%
2,294,091,711 lb29%
Spot Gross Metal ValueMarket Cap as % of Net GMVSpot Prices Used
$13,682,123,0161.4%Rare-Earth-Metals $13.55/lb, Zirconium $1.71/lb

Rare Earth Oxide Prices US $/kg
Rare Earth OxideFOB 3 Year
Average
FOB SpotDomestic 3
Year Average
Domestic
Spot
Avalon
PFS 2014
JP MorganQuest Wardrop
PEA 2007
Quest Wardrop
PEA 2010
Lanthanum Oxide$10.60$58.00$3.95$4.49$4.06$25.41$4.26$10.68
Cerium Oxide$8.37$61.00$2.39$4.72$2.08$24.72$2.77$9.41
Praseodymium Oxide$27.67$86.50$19.77$33.33$43.87$53.25$23.24$33.83
Neodymium Oxide$28.35$87.00$20.55$36.93$46.06$55.77$24.52$35.10
Samarium Oxide$7.66$34.50$2.25$2.70$5.58$20.75$3.59$20.73
Europium Oxide$488.32$630.00$379.23$449.41$1,086.10$580.54$335.74$501.04
Gadolinium Oxide$11.88$44.50$5.95$10.34$13.70
$10.29$11.08
Terbium Oxide$514.89$605.00$394.09$419.45$1,166.09
$573.46$687.64
Dysprosium Oxide$143.20$295.00$109.88$199.99$254.59
$88.55$178.85
Holmium Oxide$25.50


$66.35
$25.50$27.46
Erbium Oxide$46.32


$48.92
$55.00$25.15
Thulium Oxide$90.00




$90.00$96.93
Ytterbium Oxide$25.00




$25.00$26.93
Lutetium Oxide$345.00


$522.83
$500.00$538.50
Yttrium Oxide$16.53$73.50$7.51$7.27$23.22
$8.74$38.24
Zirconium Oxide



$3.77
$3.77$3.77
Recoveries 100% for TREO and ZrO2
Tasman
Value $/kg TREO
$29.86$83.63$20.49$28.03$47.35$45.01$22.73$42.02
Tasman REO
Rock Value $/t ore
at 0.54% TREO
$162$454$111$152$257$244$123$228
Tasman ZrO2
Rock Value $/t ore
at 1.72% ZrO2
100% recovery




$65
$65$65
Tasman All
Rock Value $/t ore
at 0.54% TREO 1.72% ZrO2
$227$519$176$217$322$309$188$293

1) FOB and Domestic average and spot prices as of Nov 30, 2010 - Metal-Pages
2) Avalon 2014 prices used in June 2010 PFS based on 20% annual escalation of 2009 FOB prices, except cerium and lanthanum
3) JP Morgan prices used in Sept 29, 2010 research report as basis for DCF valuation that set A $1.71 price target for Lynas, where no REO given, 4 year FOB averages were used
4) Wardrop used a 3 year trailing average as of 2007 in the Quest PEA DCF which was 45% lower than the 3 year trailing average as of 2010 on a TREO/kg basis - the 2010 average Sm2O3 price is likely a mistake - too high
5) In assessing the recovered rock value and REO $/kg where no prices are listed we used the 4 year average FOB prices.

Peregrine Diamonds Ltd (PGD-T: $2.96)
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Spec Value Hunter Comment - December 1, 2010: BHP makes the strategically correct decision at Chidliak

Peregrine Diamonds Ltd announced on December 1, 2010 that BHP Billiton has elected not to boost its stake in Chidliak to 58% by funding all costs needed to deliver a bankable feasibility study. This allows Peregrine to maintain a 49% working interest and receive 49% of any future diamond production in kind at the start of production rather than three years after. Given the enormous scale of Chidliak, the fact that an economically quantifiable resource does not yet exist, that it could cost several hundred million dollars to deliver a bankable feasibility study for an Ekati/Diavik scale diamond mining camp, and that Peregrine's financially unconstrained ability to possibly develop significant diamond resources at the nearby 100% owned Cumberland and Qilaq project could boost its overall value well beyond BHP's buyout reach, at least with regard to diamond projects, staying at 51% was the sensible choice. Apparently this decision was not made mechanically, which suggests a very high degree of optimism within BHP about Chidliak's potential. And one has to wonder if the statement from BHP, "BHP Billiton has chosen to maintain its interest in Chidliak at 51 percent at this time" (my emphasis) was perhaps intended to convey more than the trivially true fact that the decision was made at this time, for from here onwards BHP has no contractual rights to increase its stake in Chidliak. If BHP wants a bigger stake it will have to buy out Peregrine, which it will not be in a position to justify until 2012 after what promises to be a very exciting year of additional discovery exploration and existing pipe mini bulk sampling. For bottom-fishers and spec value hunters this is very good news because it means that Peregrine will remain fully engaged in the advancement of Chidliak, and, because it needs to fund its 49% share of costs, will be entitled to provide full disclosure to its shareholders. This was not the case with Dia Met, which was carried for the first $500 million investment by BHP and thus had no financing driven need for detailed disclosure. BHP eventually bought out Dia Met at a 100% project basis valuation of $2.1 billion while Aber, which had to fund its 40% share of Diavik and secured considerably more detailed disclosure from operating partner Rio Tinto, eventually enjoyed a peak valuation of $4.5 billion. Chidliak is shaping up to be the most exciting new diamond play since Ekati, and a 49% working interest with full diamond marketing rights opens up Peregrine to a buyout down the road by one of the other big diamond producers.

Commerce Resources Corp (CCE-V: $0.80)
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Bottom-Fish Comment - December 1, 2010: Commerce added to Rare Earth Index

Commerce Resources Corp was added to the KBFO Rare Earth Index on November 30, 2010 following the release of additional drill results on November 24 which confirm that the Eldor carbonatite in northern Quebec is a major new large tonnage light rare earth discovery and which establish the potential for a heavy rare earth enriched zone that could serve as a sweet spot for initial mine development. The discovery hole was announced on August 19 which I described in a Bottom-Fish Comment published on August 20, 2010 as the most important new grassroots rare earth discovery since market interest in rare earths took off in 2009. What caught my attention was the consistency of the rare earth mineralization within long intervals, which was what had also enabled me to realize that the brownfields BZone discovery Quest Rare Minerals Ltd announced in September 2009 had world class implications. The 1.5%-2.0% TREO grade range of the initial widely spaced Eldor drill holes implied a tonnage footprint in the order of several hundred million tonnes. However, heavy rare earths were running only at about 5% of TREO which was consistent with Eldor's status as a carbonatite intrusive compared to the heavy rare earth enriched peralkaline intrusives at Nechalacho and Strange Lake. Since there is no shortage of light rare earth carbonatite deposits in China and the rest of the world, and because Eldor's location is very far from any transportation infrastructure, I initially felt that Eldor might be a candidate for development in 2020 and beyond if more advanced projects fail or demand growth outstrips their new supply. However, the latest results add a new dimension to Eldor which justifies fast-tracking its exploration and viewing it as a contender in the race to production, and for this reason I have added Commerce to the Rare Earth Index.

Holes #46 and #47 are located at the northwestern end of the 800 m by 1,000 m magnetic low anomaly associated with the Ashram Zone. Drilled about 100 m apart as vertical holes, #46 yielded 364.32 m of 1.95% TREO and #47 yielded 355.92 m of 1.86% TREO of which 4.49% are heavy rare earths. The assay intervals within hole #46 are generally 1.5%-2.0% with occasional higher grade spikes until at a depth of 214.7 m where the grade tends to be above 2%, averaging 2.24% TREO over 143.83 m. Although the heavies represent only 3.27% of the TREO grade in this deeper interval due in part to a boost in lanthanum and cerium grades, the rock value is $355/t using 3 year FOB averages as of November 30, 2010 and $1,576/t using FOB spot prices. Hole #47 averages 1.86% TREO over 355.92 m of which 6% are heavy rare earths, which represents a rock value of $339/t at 3 year average FOB and $1,326/t at spot FOB. But hole #47 is very interesting in that a 61 m interval starting at a depth of only 6 metres averages 1.41% TREO of which 14.6% is represented by heavies. Within this overall interval individual assay intervals spike as high as 25.6% heavy rare earths. The rock value is $364/t at 3 year FOB and $1,133/t at spot FOB. None of the other holes had this degree of HREO percentage and it suggests that a different rare earth mineral is present within this part of the Ashram Zone. This is supported by a somewhat higher thorium grade than elsewhere in the system (no uranium values were encountered) where it is quite low or absent. The nearest other holes, #44 and #45, located about 100 m to the east, are still pending. Because the mineralization is fine grained Commerce at this stage does not know the identity of the rare earth bearing minerals within this carbonatite, but it has submitted samples to a mineralogist and hopes to have a report by late December. At this stage the density of the drilling is insufficient to establish the internal zonation of the Ashram zone, but it is highly encouraging to see a possible HREO enriched sweet spot emerge within the Eldor complex at surface. In this regard, although a different style of instrusive, the Eldor complex may bear some similarity to the Nechalacho system which divides into a light rare earth denominated "Upper Zone" and an HREO enriched "Basal Zone" which runs about 20%-22% heavy rare earths carried mainly by fergusonite. The possibility has now emerged that the Ashram zone may host open-pittable HREO enriched mineralization, which makes fast-track exploration a greater priority than if it were just another light rare earth system. Of critical importance will be the mineralogy report which one hopes does not show that the Eldor mineralization is comparable to difficult minerals such as the fine grained, supergene enriched monazite at Mt Weld to which Frontier Rare Earths Inc, which raised a stunning $60 million for a deposit considerably lower grade than Mt Weld, rather unwisely compared its Zandkopsdrift deposit in South Africa.

The Eldor results have convinced Commerce management that Eldor deserves to be its top exploration priority and the junior plans to return to the property in March to mount a winter drilling program of vertical holes on 100 metre spacing over the lake covered portion of the magnetic low which is now interpreted to coincide with the rare earth mineralization. The lake is only 3-4 metres deep and unlikely to be a fish habitat in a region where such lakes freeze from top to bottom. Once the lake drilling is done the junior will likely turn to infill drilling in areas where HREO enrichment has been identified. With regard to the remote location Commerce has commissioned an infrastructure study which will look at some of the proposals being bandied around within Quebec government circles to open up northern Quebec with a rail lineto the port of Kuujjuaq. The Quebec government, which is already tuned into the development implications of the Kipawa and Strange Lake rare earth deposits, is also tuned into the Eldor discovery which represents one more reason to extend transportation infrastructure into northern Quebec. Commerce is an open bottom-fish recommended as a medium priority buy in the $0.10-$0.19 range on December 24, 2008 and converted to a Spec Cycle Hold 100% recommendation at $0.40 on August 20, 2010. I recommend bottom-fishers continue to hold Commerce for higher prices based on expectations that a significant HREO enriched zone will emerge within a large LREO dominated envelope, that the minerals present at Eldor lend themselves to cost-effective cracking, and that full delineation of the Ashram Zone identifies higher grade sweet spots.

Neo Material Technologies Inc (NEM-T: $7.20)

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Index Member Comment - December 3, 2010: Is Neo really a champion of China capitulation or just trying to talk down valuations?

Neo Material Technologies Inc has been a strong market performer as investor understanding about the importance of rare earths and their supply security broadens, but, rather perversely, Neo has emerged as a major friend of the rare earth sector shorts and is frequently sought out by media commentators to provide some negative "balance" to articles about the "rare earth bubble". Neo's CEO Constantine Karayannopolous has been very vocal in media interviews with his idea that rare earths and rare earth juniors are in a bubble whose eventual popping will cause many tears to flow. Not only is he worried about excessive valuations, but he is also skeptical about the viability of any rare earth projects outside of China. In one article by Julie Gordon within a broader Reuters Report:Fight for Rare Earth he is quoted as saying "it's very, very dangerous for people to be committing hundreds of millions of dollars to projects that will take another five years or more to see the light of day". He goes on to say "with today's prices, a lot of stuff makes sense...but I also think prices at this level are unsustainable". (See Dot-com deja vu muddies the rush for rare earths - Nov 9/10 for another example of negative media spin with ridiculous comments about the rare earth sector such as "investors have poured billions of dollars into their projects".) Along with his competitor, the French company Rhodia, which also has rare earth processing operations in China, he is quick to dismiss western hand-wringing about rare earth "security of supply" as a myopic refusal to get on with the program of moving downstream processing to China where he says the long term demand growth for rare earth based end-products ultimately resides. He frequently repeats the misleading statement that rare earths are not rare at all, while simultaneously complaining that nobody seems to understand how difficult it actually is to produce separated rare earth oxides. His efforts to get those tears flowing as soon as possible, however, appear to be motivated by the precarious position into which the current Chinese rare earth policy has put his company. Neo Material's business model consists of ensuring access to Chinese produced mixed rare earth oxide concentrates by serving as a gateway of technology transfer from the west to the east, which promotes the migration of jobs from America, Europe and Japan to China. Neo Material is in effect a champion of the great "free market" capitulation to China, which puts the company at odds with the growing western concern over the shift of economic and geopolitical power from West to East. Jim Dines, who initially had recommended Neo Material as part of his rare earth portfolio but then dropped the company for reasons initially vague but now abundantly clear, blew the whistle on Neo Material in his November 19, 2010 issue of The Dines Letter without actually mentioning the company by name. "Did China steal America's Rare Earth Monopoly" voices startling allegations that high level Chinese machinations lay behind the shift of Neo magnet technology from the United States to China where it is now helping to empower China's emergence as a leader of rare earth based technologies. This article, which includes "Five Misinformations in the Rare Earths Media", is a masterpiece within the newsletter genre. Neo's problem is that its niche within the rare earth supply chain is threatened by a future explosion of rare earth supply from outside of China. If Neo Material does not end up controlling some of this future non-Chinese supply, and succeeds in shifting its manufacturing base and technological expertise back out of China, it will find itself submerged by China's consolidation of the rare earth production and processing sector into a handful of giant partly state-owned entities.

Neo Material established itself in China during the nineties as a processor of rare earth concentrates from a variety of Chinese mines, effectively bypassing the near supply monopoly Molycorp had outside of China through its Mountain Pass operation. Neo Material operated separation facilities which converted mixed oxide concentrates, sourced from Inner Mongolia for the light rare earths and from ion adsorption clay deposits in Jiangxi for the heavy rare earths, into individual rare earth oxides which it could in turn refine into metals or fabricate into other engineered materials. China allowed this foreign company to establish a processing base in China, and in doing so acquire REO separation know-how, because it sought a gateway to western technology for converting rare earth oxides into value-added downstream products. In 2004 Neo Material "acquired" Magnequench Inc, an American based producer of rare earth based "super" magnets whose technology was developed by General Motors in 1995. It did not take long before Neo had shut down its American operations and established in China the production of Neo powder, a combination of neodymium, iron, boron and other metals created through the patented Magnequench process which lends itself to the production of very powerful permanent "bonded" magnets which, unlike the even more powerful "sintered" magnet which lack a binder, can be shaped into complex forms. These magnets primarily show up in electronic storage devices such as computer hard disks and communication gadgets where miniaturization is the driving force, and increasingly in the automotive sector where hybrid cars convert the lightness and power of Neo powder based magnets into fuel efficiency gains.

Neo's problem, which it states clearly in the risk factor sections of its regulatory disclosures but either fails to mention in media interviews or conveniently has such disclaimers overlooked, is that the key patents which prevent western companies who respect American patent law from importing downstream products that violate Neo's Magnequench patents expire in 2014. By transferring the Magnequench technology to China Neo has in effect "shared" it with competitors who one suspects already supply "Neo powders" to countries who generally do not respect intellectual property laws, and who will be in a position after 2014 to supply the entire world with Neo powder. The elephant in the Chinese room these days are the western companies which not only invested their capital to establish manufacturing facilities in China, but in doing so also shifted valuable intellectual property within reach of industrial spies, initially enabling rogue Chinese corporations to clone the technology and its production for markets outside the patent protection umbrella, and setting the stage for the inevitable day when America pushes too hard, and China pushes back way too hard in what escalates into a massive geopolitical game-change, which leaves western companies up a creek without a paddle and China in possession of all sorts of proprietary western technology. For now the export of value-added rare earths based "engineered materials" has no restrictions, but the competitive advantage Neo and Rhodia seem to have secured as suppliers of these materials by virtue of establishing downstream processing capacity in China will last only so long as rare earth supplies outside of China do not develop. The devil's bargain Neo and Rhodia have struck with China is that they will not face the risk of marginalization through selective enforcement or outright invention of special rules because they are foreign entities, if they play along by singing the siren song of "come to China, move your component manufacturing to China where input costs are cheap and in the case of certain raw materials guaranteed".

In the case of Rhodia, a giant French chemicals conglomerate, singing the "Come to China" song is inconsequential because the company is diversified enough to absorb any under-belly punches from China. But Neo is in a much more vulnerable position because it is a comparatively small company, is very much dependent on its Chinese operations, and has a significant Russian shareholder who currently has no say in the company's affairs but who seems to understand Neo's structural problems. The rock and a hard place between which Neo Material is wedged consists on the one hand of the possibility that after 2014 when the patents expire other Chinese entities will get preferential access to the rare earth oxide supply needed to produce the Neo powder which any western company can buy without worrying about patent enforcement, and on the other hand, if all these deposits outside of China get developed there will be all sorts of competitors converting neodymium and dysprosium oxides into Neo powders and selling it to western manufacturers. Although Neo Material has done an excellent job developing Neo powder product grade complexity within its Magnequench division, and diversity in its Performance Materials division where the company produces all sorts of rare metal based materials, the company is dead in the water if during the next four years China decides to cut off its supplies of raw materials sourced in China such as rare earths, zirconium,. gallium, and indium. Neo has tried to balance this risk by acquiring and enhancing "urban mining" businesses which recycle rare metal bearing scrap in North America and Europe, but this is not a long term solution to Neo's dependency on Chinese supply.

In a Special Interest Comment published on July 29, 2009 I published an overview of Neo's situation and suggested that the prudent path for Neo would be to secure ownership of one or more full spectrum rare earth deposits outside of China and use its expertise to develop them into an in-house supply of rare earths. At the time Neo had initiated an investigation into the possibility of producing heavy rare earths from a tin mining operation in Brazil called Pitinga. Neo has not had much to say about its investigation of the Pitinga project in Brazil where it hopes to recover dysprosium and terbium from xenotime which occurs within the cassiterite system that is mined for tin. Neo initially looked at both the bedrock and tailings potential, but now seems to be focused on the tailings alone. It has completed about 3,000 m of a 7,000 m drilling program designed to delineate the tailings deposit. The plan to recover the xenotime as a by-product of tin mining was apparently abandoned because the distribution of the xenotime mineralization is too erratic to provide a reliable mill-feed. Such an approach would also be dependent on the long term viability of tin mining which, given the price of tin these days, is perhaps no longer such a worry. The tailings deposit, however, already exists and if its development is feasible, could emerge as a secure long term supply of the dysprosium and terbium Neo needs for its magnet powder. While there is potentially no lack of supply from light rare earth deposits down the road, China's reliance on its ion adsorption clay deposits as a source of heavy rare earths is bumping up against the possibility of depletion within 15-20 years at current production rates and methods. This has prompted a consolidation of the generally small scale south China clay mining operations which involves shutting down many of the inefficient and polluting operations whose unregulated status has facilitated smuggling of heavy rare earths into export markets. Although Neo sources its heavy rare earths within China, the prices of the heavy rare earths are likely to rise even in domestic terms. If Neo is successful in developing Pitinga it will likely ship the 80% not allocated to Mitsubishi to its operations in China. Although Neo management expresses great optimism about Pitinga, it doth protest a little too much about all those other rare earth juniors and their projects which have received substantial funding compared to the pittance Mitsubishi made available for Pitinga.

When you dig deep into the affairs of Neo Material Technologies Inc you cannot help but be impressed by the depth and breadth of its operations and internal know-how. Molycorp principals long ago headed off the obvious by insisting to me that Molycorp had no interest in taking out Neo Material, though the two companies did agree in June 2010 before the Chinese export quota cuts were announced to engage in negotiations for knowledge transfer and off-take agreements. A brute force acquisition by Molycorp is unlikely because most of Neo's value resides in the heads of its personnel who just might scatter to the four corners of the earth in the event of a successful hostile bid. Neo's predicament is that if it makes an overt move to acquire a rare earth junior, which to be affordable to Neo is unlikely to be in production before Neo's patents expire in 2014, it will likely suffer consequences in China. The big problem for everybody is the gap between 2011 and 2014 during which China will still be consolidating its own rare earth industry and only a handful of non-Chinese rare earth projects are candidates to come on stream. While it is likely that abundant new supply will come on stream in 2015 and beyond, what happens in the mean time to rare earth prices?

The interim Chinese policy of slashing export quotas and imposing export duties and unrefunded VAT taxes has created a two tier pricing system which is likely to become very chaotic if China carries out a plan to assign quotas for the individual rare earth oxides rather than the prevailing system which allows quota holders to select the specific rare earth oxides allocated to fulfill their exports. Needless to say, in a business where margins are tight, any smart businessman will fill a weight based quota with higher value rare earth oxides. As a result, the FOB spot prices for the more expensive rare earths such as dysprosium, terbium and europium known as "heavy rare earths" have barely increased during the second half of 2010 while those of the cheaper and more abundant light rare earths have soared. But if China figures out a way to ration the individual rare earths, the heavy rare earth prices will likely outperform the lights during 2011. China is not overly eager to see new light rare earth supply to evolve outside of China, but it is eager to see heavy rare earth supply evolve because it has its own long term supply shortage problem. One has to imagine that China would not frown on one of its technology transfer honeypots securing a non-Chinese supply of heavy rare earths that it might eventually import into China. For example, if Neo Material made a bid for Matamec Exploration Inc and its Kipawa project in southern Quebec, it would not only secure a long term supply of dysprosium and terbium, but it would also get a by-product supply of zirconium, a key metal in its Performance Materials division for whose supply it currently relies on Chinese zircon sources which are expensive because of the high cost of converting the zircon silicate into zirconium metal. Or Neo might think bigger by looking at Tasman Metals Ltd whose Norra Karr deposit in Sweden is a similar grade and style of deposit as Kipawa but substantially bigger. Les Heymann, Neo's former production VP in charge of the Chinese separation facilities, happens to be a consultant to both Matamec and Tasman. The problem for Neo is that it is an operating company while these companies are development companies, and consequently Neo would prefer to acquire one or the other as cheaply as possible. Constantine Karayannopoulos is likely less worried about the tears investors in rare earth juniors might eventually develop than he is about the pain that paying up to secure Neo's long term future will cause him and his company. It makes sense for Neo Material to talk down the valuations the market is assigning to juniors with rare earth projects, but in singing the "Come to China" song Neo Material discourages the market from assigning a strategic premium to the company and encourages it to value the company on the basis of trailing and next year earnings numbers. This strategy could backfire on Neo Material because one day it may wake up to a bid from one of those "over-priced" juniors to whom Neo's key shareholders will tender. And if the knowledge trust embedded within Neo does not instantly disperse, the west will steal from the east the secrets of rare earth oxide separation technology.

Frontier Rare Earths Ltd (FRO-T: $3.14)

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Index Member Comment - December 3, 2010: Frontier added to KBFO Rare Earth Index

Frontier Rare Earths Ltd was added to the KBFO Rare Earth Index on November 17, 2010, the day it commenced trading on the TSX after completing a $60 million IPO consisting of 17,650,000 units at $3.40. About $8 million of the proceeds has been earmarked for phase 1 work scheduled over the next 12 months for the Zandkopsdrift rare earth deposit in South Africa. The key focus for 2011 will be the completion of bench scale metallurgical studies, delineation of the mineral geometry within the main deposit, and exploration for additional high grade supergene enriched mineralization within satellite plugs surrounding the main intrusion. Frontier believes it will be able to deliver a prefeasibility study for Zandkopsdrift by the start of 2012 and complete a bankable feasibility study by the end of 2012. The Frontier IPO is a remarkable achievement for the Kenny family which in less than a year has converted a rare earth prospect acquired by staking in 2007 into a $230 million windfall for the family trust which owns 67,690,000 free trading shares spread among four nominee accounts. The trustee, James Flannan Kenny, is a co-founder of AIM-listed Firestone Diamonds plc, the emerging African diamond producer whose largest shareholder happens to be Lynas and Molycorp backer JP Morgan. He is in the process of handing the reins to his sons James and Philip who are the CEOs of Frontier and Firestone respectively. Since "staking" Zandkopsdrift in 2007 Frontier has raised $2.4 million which it has invested in reviewing historical data, reassaying past drill hole pulps, and drilling 13 RC confirmation holes which have allowed completion of an indicated plus inferred 43-101 resource estimate that scales from 43,730,000 tonnes of 2.16% TREO at a 1% cutoff to 4,770,000 tonnes of 4.62% TREO at a 3.5% cutoff. The target mineralization within this carbonatite intrusion consists mainly of supergene enriched monazite and some crandallite, two secondary phosphate minerals created through a lateritic weathering process similar to that which created the high grade Mt Weld deposit. The entire carbonatite is rare earth bearing, with unweathered material generally grading below 1%, though there are areas within the weathered portion which also grade below 1%. What is not known at this stage is how much tonnage will end up in a mining plan constrained only by mineralogy and the optimal recovery process SGS Lakefield has been retained to develop. The consultant behind the SGS work will be metallurgist Srdjan Bulatovic who will tackle the flotation needed to produce a concentrate prior to cracking. According to SGS past work by Anglo American indicates that 90% plus recoveries can be achieved from the supergene monazite through sulphuric acid leaching, so there is no technical issue to overcome. The economics will be defined by the recovery achieved through flotation, and by the cost of acid consumption to achieve an optimal recovery from the resulting concentrate. The company's goal is become a producer of 20,000 tonnes of TREO annually which for a ten year mine life would require a resource of 20 million tonnes at the 1% cutoff for a ten year mine life. A big unanswered question is to what extent the larger resource estimate at lower cutoff grades involves the blending of different rare earth bearing minerals which may have different optimal processing requirements that do not lend themselves to a scaled up generic flow-sheet. But even if the mineable resource ends up at the small end of the scale, it may eventually prove of interest to Lynas, which has just done a deal whereby Sojitz will help Lynas raise $250 million needed to expand the throughput capacity of the LAMP facility. Alternatively, if South African authorities balk at allowing rare earth concentrates to be shipped offshore for downstream processing, Frontier may eventually end up marrying Great Western Minerals Group Ltd if the latter is successful in redeveloping Steenkampskraal and building a separation facility in South Africa that has a meaningful scale. Furthermore, given its substantially bigger market capitalization, Frontier may discover that one way to be in a position to talk about the heavy rare earths that are only modestly present at Zandkopsdrift is to take a run at the Bokan Mountain heavy rare earth deposit of Ucore Rare Metals Inc. Management, however, for now thinks that its expansion goals are better served by focusing on the potential of Namaqualand for additional rare earth deposits, including ones enriched with heavy rare earths. The company has filed a number of permit applications based on a historical heavy mineral sampling database made available by Hugh Jenner-Clarke, a key player behind Firestone who was critical in securing access to Anglo American data on Zandkopsdrift which Philip Kenny estimates would cost $20 million to generate from scratch today. Kenny estimates that Frontier may need only $20 million to deliver a BFS for Zandkopsdrift and that the surplus capital raised could prove very helpful in aggressively pursing new exploration targets.

With 107,451,788 shares fully diluted and a 74% net interest in Zandkopsdrift, Frontier has an implied project value of $456 million which well exceeds that of other rare earth juniors at a similar stage where mineralogy is not yet fully understood and contemporary bench scale metallurgical studies have yet to be undertaken. Whatever reservations one may have about the fundamental merits of Zandkopsdrift, it is clear that there is much more going on than an unwitting charity scheme by befuddled investment bankers to enrich the Kenny clan, which is why I recommend that spec value hunters keep a close eye on Frontier. It is possible that Frontier is indeed nothing more than a misguided bet on Zandkopsdrift that will end poorly in 2012 when the next meaningful milestone is achieved, which will be sad for the purchasers of the IPO but inconsequential for the rest of the rare earth sector. But when I consider that the Kenny trust, and I assume that the lineal descendants as declared by the prospectus are alone the absolute beneficiaries of the trust, was left with a "free" 76% equity stake in a junior whose coffers were loaded with $60 million, I tend to believe that James Flannan Kenny and his sons have a plan that does not entirely depend on Zandkopsdrift being a world class solution to the world's rare earth supply problem. In any case, it is nice to see the equity markets assign such a high valuation to what is still a fairly early stage rare earth project.

With regard to the 74% net interest, Frontier management will argue that it actually owns a 95% economic interest, but I disagree and will treat Frontier as having only a 74% economic interest but a 100% funding obligation until a production decision is made, and even then the BEE rules pretty much force Frontier to come up with all the money needed to turn Zandkopsdrift into a mine. Under South Africa's Black Economic Empowerment (BEE) rules which are supposed to rectify the "historically disadvantaged" status of black people created by the white apartheid era, every major business must eventually have a 26% equity ownership by black people. This applies especially to mineral resources. Some countries such as Botswana and Eritrea take a direct stake in a mining project on either carried terms or on some sort of repayment of fair value from future cash flow basis, and if such a project is ever profitable "all" the people indirectly benefit through the government interest (in some African cases this is untrue because they are run by thugs who divert into their own pockets any cash collected by the government from mines). South Africa's BEE program is designed to empower and enrich black individuals who tend not to be somebody walking down the street or in general need of empowerment. The BEE program has incurred the wrath of young blacks such as Julius Malema, president of the ANC Youth League, who has called for the nationalization of South Africa's mining industry. Malema, who has run around singing the anti-apartheid song "Kill the Boers" so that there is no confusion over what he thinks about South Africa's former masters, is also not particularly keen about how BEE has been used to enrich an older black elite, and he is a major headache for South Africa's president Jacob Zuma, the man of many wives who has danced his way past rape charges. Frontier has dealt with the BEE rules by giving a 5% interest in the subsidiary which owns Zandkopsdrift to Martin Van Zyl and 21% to the Namaqualand Empowerment Trust. Philip Kenny points out that the trust is different from the earlier BEE trusts which did indeed enrich a handful of well-positioned black South Africans. The Namaqualand Empowerment Trust is apparently made up of community stakeholders, and in this regard might serve well as a social license that ensures local opposition does not derail the development of Zandkopsdrift. Neither Van Zyl nor the trust need provide any capital until a bankable feasibility study has been completed. Once such a study has been completed the trust will be required to pay to Frontier 21% of the value of Zandkopsdrift based on "standard international valuation practice". In other words, if the NPV of Zandkopsdrift is $2 billion, the trust will have to pay Frontier $421 million, which Frontier may facilitate through "vendor financing". However, I am not sure what counts as a "bankable" feasibility study in a situation as unusual as rare earths where we now have a two tier pricing system involving domestic China and FOB export prices, with both now above their three year trailing averages, and FOB spot prices in some cases 500% higher than domestic prices. Add to that the wild dynamic of future rare earth demand growth and the uncertainty about supply growth, and I cannot imagine what prices "standard international valuation practice" would require to be plugged into the cash flow model. Most likely it will be a low, deeply conservative number which means the trust will not have to pay anything near the valuation the market might assign to Frontier's ownership of Zandkopsdrift. Furthermore, the value that an end user might assign to ownership of Zandkopsdrift msy be calculated entirely in strategic terms such as the opportunity cost suffered by not being able to commercialize and market a high margin product because the end-user does not have security of supply for a critical but financially minor rare earth input. This type of thinking, which is a key plank in my security of supply narrative, falls outside of "international valuation practice" because the premises upon which opportunity cost is calculated are private largely because they involve internally generated innovation and proprietary strategy. In fact the economic value might be zero, which means the BEE may need to pay nothing for an interest that is intrinsically worthless, even though Frontier may disappear through an expensive buyout. In my view it is thus appropriate to assume that Frontier has only a 74% net interest. Even if the trust ends up with minimal financial benefit from the 21% stake, its members will likely benefit indirectly through the local economy generated by the development of a flotation and cracking facility at the mine site.

The Zandkopsdrift rare earth distribution includes 7.9% heavy rare earths which is to be expected for a carbonatite whose primary rare earth minerals are the phosphates monazite and crandallite. The table below presents the rock value at different rare earth price sets.

Rare Earth Oxide Prices US $/kg
Rare Earth OxideFOB 3 Year
Average
FOB SpotDomestic 3
Year Average
Domestic
Spot
Avalon
PFS 2014
JP MorganQuest Wardrop
PEA 2007
Quest Wardrop
PEA 2010
Lanthanum Oxide$10.60$58.00$3.95$4.49$4.06$25.41$4.26$10.68
Cerium Oxide$8.37$61.00$2.39$4.72$2.08$24.72$2.77$9.41
Praseodymium Oxide$27.67$86.50$19.77$33.33$43.87$53.25$23.24$33.83
Neodymium Oxide$28.35$87.00$20.55$36.93$46.06$55.77$24.52$35.10
Samarium Oxide$7.66$34.50$2.25$2.70$5.58$20.75$3.59$20.73
Europium Oxide$488.32$630.00$379.23$449.41$1,086.10$580.54$335.74$501.04
Gadolinium Oxide$11.88$44.50$5.95$10.34$13.70
$10.29$11.08
Terbium Oxide$514.89$605.00$394.09$419.45$1,166.09
$573.46$687.64
Dysprosium Oxide$143.20$295.00$109.88$199.99$254.59
$88.55$178.85
Holmium Oxide$25.50


$66.35
$25.50$27.46
Erbium Oxide$46.32


$48.92
$55.00$25.15
Thulium Oxide$90.00




$90.00$96.93
Ytterbium Oxide$25.00




$25.00$26.93
Lutetium Oxide$345.00


$522.83
$500.00$538.50
Yttrium Oxide$16.53$73.50$7.51$7.27$23.22
$8.74$38.24
Zandkopsdrift Recoveries 100% for TREO at 1% cutoff
Frontier
Value $/kg TREO
$18.37$71.12$10.77$16.35$29.96$36.70$11.90$22.03
Frontier REO
Rock Value $/t ore
at 2.16% TREO
$426$1,650$250$379$695$851$276$511
Zandkopsdrift Recoveries 100% for TREO at 3.5% cutoff
Frontier
Value $/kg TREO
$18.42$71.15$10.81$16.39$36.73$30.01$11.96$22.09
Frontier REO
Rock Value $/t ore
at 4.73% TREO
$870$3,362$511$774$1,418$1,736$565$1,044

1) FOB and Domestic average and spot prices as of Nov 30, 2010 - Metal-Pages
2) Avalon 2014 prices used in June 2010 PFS based on 20% annual escalation of 2009 FOB prices, except cerium and lanthanum
3) JP Morgan prices used in Sept 29, 2010 research report as basis for DCF valuation that set A $1.71 price target for Lynas, where no REO given, 4 year FOB averages were used
4) Wardrop used a 3 year trailing average as of 2007 in the Quest PEA DCF which was 45% lower than the 3 year trailing average as of 2010 on a TREO/kg basis - the 2010 average Sm2O3 price is likely a mistake - too high
5) In assessing the recovered rock value and REO $/kg where no prices are listed we used the 4 year average FOB prices.

The Zandkopsdrift carbonatite was first explored for its manganese potential during the fifties but did not get serious attention until the seventies when Anglo American investigated the phosphate and niobium potential, conducting metallurgical studies on concentration methods which led to the conclusion that the material was not amenable to beneficiation. Anglo then checked out the potential for uranium and thorium but concluded that the grade range of 60-70 ppm and 215-235 ppm respectively was too low and dropped the project in 1975. Phelps Dodge looked at the phosphate potential in 1977, tried to option the project to Union Carbide, and let the claims lapse in 1978. Anglo American picked up Zandkopsdrift again in 1985 and spent the next three years delineating the deposit for its rare earth potential and conducting some metallurgical studies before stopping work in 1989. No work appears to have been done until 2007 when Frontier acquired prospecting rights as part of a regional focus on Namaqualand. Frontier acquired the historical Anglo data and completed a review in 2008. In February 2009 JOGMEC collected samples from outcrop and old core holes and delivered a rare earth and mineralogy analysis in August 2009 which concluded that the Zandskopdrift lithology was typical for a deeply weathered carbonatite and that the key rare earth mineralization was associated with the "iron-manganese wad" and crandallite rich zones. Frontier undertook a program to validate the Anglo drill data by re-assaying pulps and drilling confirmation holes (13 RC holes 1,005 m), which effort was successful and led to the completion of a 43-101 resource estimate based on cutoff grade determined pit shells.

Project Resource Estimate - Zandkopsdrift - Global
Oct 29, 2010NI 43-101Mike Venter, Mike Hall, Pete Siegfried of MSA Group (Pty) Ltd & James Brown of SGS Mineral ServicesCutoff: 1.0% TREO
Note: Price used is 4 year FOB average as of Nov 16/10: $7.39/lb or $16.28/kg TREO based on global REO distribution. FOB Spot would be $27.36/lb or $60.32/kg. Based on 2,246 m RC by Anglo and 1,005 m RC by FRO.
Resource CategoryTonnageTotal
Rock Value
MetalGradeRecoveryContained Metal% of GMV
Indicated Resources22,920,000$378/tRare-Earth-Metals2.320%100.0%1,172,275,132 lb100%
Inferred Mineral Resources20,810,000$324/tRare-Earth-Metals1.990%100.0%912,960,758 lb100%
All Categories Spot43,730,000$352/tRare-Earth-Metals2.163%
2,085,235,891 lb100%
Spot Gross Metal ValueMarket Cap as % of Net GMVSpot Prices Used
$15,409,893,2322.9%Rare-Earth-Metals $7.39/lb

Frontier has generated block models at cutoff grades ranging from 1.0% TREO to 3.5% TREO. At 1% cutoff Zandkopsdrift has an impressive open pittable indicated and inferred resource of 43,730,000 tonnes at 2.16% TREO which at three year FOB average prices works out to a rock value of $397/t on a 100% recovery basis, $1,538/t using spot FOB prices as of November 30, 2010. On a global basis this works out to $17.3 billion in situ at 3 year FOB and $67.3 billion at spot FOB. At the higher grade cutoff of 3.5% the indicated and inferred resource shrinks dramatically to 4,770,000 tonnes at 4.62% TREO (Zone C) which has a rock value of $850/t at 3 year FOB and $3,287/t at spot FOB for overall in situ values of $4.1 billion and $15.7 billion respectively. Frontier also has estimates at cutoff grades 1.5% (Zone A) and 2.5% (Zone B). One could infer from this information alone that production from Zandkopsdrift could be scaled to whatever level future demand expectations justify, but unfortunately Zandkopsdrift contains a high degree of lithological complexity that may limit future mining plans to the smaller tonnage defined by the 3.5% cutoff grade.

Project Resource Estimate - Zandkopsdrift - C Zone
Oct 29, 2010NI 43-101Mike Venter, Mike Hall, Pete Siegfried of MSA Group (Pty) Ltd & James Brown of SGS Mineral ServicesCutoff: 3.5% TREO
Note: C Zone is supergene enriched monazite and crandallite, $8.35/lb 3 yr FOB as of Nov 30/10 ($18.42), $71.15/kg at spot FOB, $16.39/kg spot China, $11.96/kg 3 yr China
Resource CategoryTonnageTotal
Rock Value
MetalGradeRecoveryContained Metal% of GMV
Indicated Resources3,230,000$841/tRare-Earth-Metals4.570%100.0%325,421,076 lb100%
Inferred Mineral Resources1,540,000$869/tRare-Earth-Metals4.720%100.0%160,246,914 lb100%
All Categories Spot4,770,000$850/tRare-Earth-Metals4.618%
485,667,989 lb100%
Spot Gross Metal ValueMarket Cap as % of Net GMVSpot Prices Used
$4,055,327,71211.1%Rare-Earth-Metals $8.35/lb

The technical report and prospectus warn that the resource estimates have been generated on the basis of cutoff grade driven pit shells alone and that additional drilling is needed to establish mineralogical controls. Zandkopsdrift is a large Tertiary aged carbonatite possibly 5 km wide which has undergone deep lateritic weathering which has resulted in supergene enrichment of rare earth grades within two fine grained minerals with intergrown textures: a secondary monazite within what Frontier calls the "iron-manganese wad", and another phosphate called crandallite. The weathering profile is irregular and in places as deep as 80 metres. The higher grade rare earth mineralization appears to be directly related to supergene enrichment which in turn is locally affected by later stage structures and faults. In addition there are "columns" of low grade carbonatite breccia. Drill sections provided by Frontier indicate that grade and mineral host vary laterally and vertically. Delineation drilling during 2011 coupled with bench scale metallurgical studies on representative 25 kg samples will be key to supporting management's contention that mineralogy will not be a recovery relevant variable at varying grades within the weathered portion of Zandkopsdrift. In plain English this means that when it comes time to mining the deposit at different scales, only grade control and mineralogical control will be relevant. This was a key insight that emerged from metallurgical studies at Strange Lake where grade varies within the mineralized pegmatite-granite layer-cake but the recovery process is not affected by granite versus pegmatite.

Unlike we learn otherwise from the SGS studies, a major challenge at Zandkospdrift will be to develop a block model constrained by both grade and the minerals for which a recovery process has been optimized. An analogy would be high sulphidation gold systems such as Greystar's Angostura deposit in Colombia where an irregular weathering profile poses an ore control challenge for large scale mining operations which must keep sulphide, mixed and oxide mineralization separated. A significant limitation to the exploitation of Zandkopsdrift may be the need to selectively mine small high grade monazite and crandallite zones within the broader mineralized envelope. The larger tonnage estimated at the 1% cutoff may shrink drastically if the 1% cutoff is applied only to mineralization that lends itself to cost-effective processing. It is telling that Frontier has budgeted $2.6 million to infill drilling aimed at overcoming the "current limited understanding of the geometry and nature of the carbonatite intrusion" and another $2.1 million to exploration of satellite plug targets. One suspects that the interest in the satellite plugs relates to the possibility that these may have undergone supergene enrichment and could constitute additional millfeed of the right type of mineralization, but management indicates that it may also be able to find HREO enriched zones in these satellite plugs.

The current understanding about Zandkopsdrift's metallurgy is based on work Anglo American did during the seventies and eighties when it investigated the deposit first in terms of its phosphate potential and then its rare earth potential. Anglo checked out gravity separation, magnetic separation and flotation as concentration methods and concluded that only flotation was viable. Frontier retained SGS Lakefield to review the past work; the SGS metallurgical review is appended to the MSA Technical Report available on the company's web site (the SEDAR version does not download properly). SGS indicates that although Anglo conducted acid leach tests on samples from Zandkopsdrift which achieved recoveries in excess of 91%, the exact methodology is not documented. Anglo did establish that sulphuric acid consumption for unaltered material was ten times higher than the altered material, though SGS does point out that whole rock samples rather than a concentrate was used in the Anglo tests and that improvements are likely if pre-concentration can be demonstrated. Nevertheless, ore control based on mineralogy will be critical to keep processing costs under control. As an aside, the reason only the southwestern portion of the carbonatite was drilled is that Anglo had used a wagon drill to drill short 2 metre holes across the entire intrusion and assayed for lanthanum and cerium. Apparently the "blank" portion of the carbonatite yielded low TREO grades and was assumed to not be enriched, so was never underwent deep drilling.

Frontier likens the target mineralization to the high grade supergene enriched mineralization at Mt Weld in Australia which Lynas is putting into production. Locally the supergene mineralization has graded as high as 18.9% TREO which does tempt comparisons to Mt Weld. But this may not be a wise comparison because there remains skepticism that the Lynas recovery process will achieve production expectations, and if Lynas does not clear this milestone by the end of 2011 when production is supposed to start, it will generate negative fallout for any project that claims to be similar. On the other hand, if Lynas is successful, and Zandkopsdrift yields a concentrate similar to what Lynas will ship from Australia to Malaysia, Lynas will be an obvious bidder to take out Frontier and ship Zandkopsdrift concentrate to its processing facility in Malaysia. This would obviate the need to develop a processing and separation facility in South Africa, provided South Africa's sometimes sticky beneficiation rules do not get in the way. A gross royalty capped at 5% and driven by a profitability formula is applicable to rare earth production; a future controversy will be the appropriate price basis for taxation purposes. Alternatively there may eventually be a marriage between Frontier and Great Western Minerals Group Ltd which has now made a bid for the remainder of Rareco whose success would give it full control of the Steenkampskrall deposit whose mine shaft is apparently licensed as a thorium dump and which has similar high grade monazite mineralization. But before we get carried away speculating about possible synergies we must remember that every rare earth deposit has a unique assemblage of rare earth bearing minerals and in this regard Frontier has budgeted $1.5 million for bench scale metallurgical studies to be conducted by SGS Lakefield over the next 12 months. As SGS points out, there have been many improvements in processing technology since Anglo American did its studies, and within a year the cautious language used by SGS in its review will be replaced by definitive statements about recovery rates and reagent consumption. Unless Frontier uses its high market capitalization and strong surplus working capital position to embark on a mergers and acquisition campaign, it is difficult to imagine a significantly higher stock price until we have clarity on the recovery process and how much ore maps to the optimized recovery rate, or rare earth mania heats up substantially from current levels.

New Bottom-Fish Highs
Company
Volume High Low Close Chg Status
Antares Minerals Inc (ANM-V)
1,899,700 $7.850 $6.850 $7.680 $0.580 Good Absolute Spec Value Buy
B2Gold Corp (BTO-T) 8,549,700 $2.790 $2.400 $2.710 $0.240 BF TP Buy $0.30-$0.49
Champion Minerals Inc (CHM-T) 5,206,000 $1.920 $1.550 $1.890 $0.270 BF MP Buy $0.30-$0.49
Pacific Coast Nickel Corp (NKL-V) 711,000 $0.095 $0.075 $0.075 $0.000 New BF XP Buy below $0.10
Realm Energy Intl Corp (RLM-V) 1,873,400 $0.900 $0.770 $0.890 $0.070 BF MP Buy $0.30-$0.49
Silver Bear Resources Inc (SBR-T) 1,114,200 $0.495 $0.340 $0.460 $0.110 BF TP Buy $0.20-$0.29

Top 10 Bottom-Fish Volume Traders
Company
Volume High Low Close Chg Status
Eagle Plains Resources Ltd (EPL-V) 14,619,400 $0.750 $0.225 $0.740 $0.500 BF XP Buy below $0.10
Geologix Explorations Inc (GIX-T)
9,948,500 $0.960 $0.640 $0.920 $0.260 Good Absolute Spec Value Buy
B2Gold Corp (BTO-T) 8,549,700 $2.790 $2.400 $2.710 $0.240 BF TP Buy $0.30-$0.49
Torex Gold Resources Inc (TXG-T) 6,449,000 $1.750 $1.280 $1.460 $0.110 BF Spec Cycle Hold 100%
Creston Moly Corp (CMS-V) 5,711,700 $0.470 $0.395 $0.425 ($0.010) BF TP Buy $0.10-$0.19
Champion Minerals Inc (CHM-T) 5,206,000 $1.920 $1.550 $1.890 $0.270 BF MP Buy $0.30-$0.49
EMC Metals Corp (EMC-T) 4,802,900 $0.340 $0.225 $0.340 $0.105 New BF TP Buy $0.10-$0.19
Ucore Rare Metals Inc 4,614,400 $0.590 $0.475 $0.580 $0.040 New BF LP Buy $0.30-$0.49
South American Silver Corp (SAC-T) 4,298,200 $2.620 $1.710 $2.350 $0.560 BF TP Buy $0.10-$0.19
Calibre Mining Corp (CXB-V) 4,297,800 $0.130 $0.115 $0.120 ($0.005) BF XP Buy below $0.10

Top 10 Bottom-Fish Value Traders
Company
Value High Low Close Chg Status
B2Gold Corp (BTO-T) $22,673,529 $2.790 $2.400 $2.710 $0.240 BF TP Buy $0.30-$0.49
Sabina Gold & Silver Corp (SBB-T) $19,733,745 $5.680 $4.840 $5.500 $0.560 BF TP Buy $0.30-$0.49
Nevsun Resources Ltd (NSU-T) $16,805,166 $6.530 $5.720 $6.510 $0.760 BF Spec Cycle Hold 100%
Antares Minerals Inc (ANM-V)
$14,025,411 $7.850 $6.850 $7.680 $0.580 Good Absolute Spec Value Buy
Avalon Rare Metals Inc (AVL-T)
$11,316,580 $4.200 $3.540 $4.030 $0.340 Good Absolute Spec Value Buy
Volta Resources Inc (VTR-T) $9,641,005 $2.650 $2.250 $2.450 $0.140 BF MP Buy $0.10-$0.19
Torex Gold Resources Inc (TXG-T) $9,514,224 $1.750 $1.280 $1.460 $0.110 BF Spec Cycle Hold 100%
Ur-Energy Inc (URE-T) $9,458,201 $2.490 $1.970 $2.240 $0.270 BF MP Buy $0.50-$0.75
South American Silver Corp (SAC-T) $9,394,442 $2.620 $1.710 $2.350 $0.560 BF TP Buy $0.10-$0.19
Champion Minerals Inc (CHM-T) $8,959,601 $1.920 $1.550 $1.890 $0.270 BF MP Buy $0.30-$0.49

Top 10 Bottom-Fish Price Gainers
Company
Volume High Low Close Chg Status
Nevsun Resources Ltd (NSU-T) 2,761,400 $6.530 $5.720 $6.510 $0.760 BF Spec Cycle Hold 100%
Amazon Mining Holding Plc (AMZ-V)
968,500 $4.790 $3.940 $4.560 $0.650 Good Absolute Spec Value Buy
Antares Minerals Inc (ANM-V)
1,899,700 $7.850 $6.850 $7.680 $0.580 Good Absolute Spec Value Buy
Almaden Minerals Ltd (AMM-T) 1,637,300 $4.880 $3.600 $4.460 $0.560 New BF Spec Cycle Hold 100%
South American Silver Corp (SAC-T) 4,298,200 $2.620 $1.710 $2.350 $0.560 BF TP Buy $0.10-$0.19
Sabina Gold & Silver Corp (SBB-T) 3,701,700 $5.680 $4.840 $5.500 $0.560 BF TP Buy $0.30-$0.49
Eagle Plains Resources Ltd (EPL-V) 14,619,400 $0.750 $0.225 $0.740 $0.500 BF XP Buy below $0.10
Rugby Mining Ltd (RUG-V) 542,500 $1.980 $1.410 $1.870 $0.470 New BF MP Buy $0.30-$0.49
Impact Silver Corp (IPT-V) 3,054,300 $1.880 $1.220 $1.680 $0.410 BF MP Buy $0.30-$0.49
Marathon PGM Corp (MAR-T) 154,200 $5.250 $4.280 $4.850 $0.350 BF MP Buy $0.30-$0.49

Top 10 Bottom-Fish Price Percentage Gainers
Company
Volume High Low Close Chg Status
Eagle Plains Resources Ltd (EPL-V) 14,619,400 $0.750 $0.225 $0.740 208% BF XP Buy below $0.10
Reva Resources Corp (RVA-V) 384,600 $0.295 $0.185 $0.295 59% New BF LP Buy $0.20-$0.29
Lithic Resources Ltd (LTH-V) 366,500 $0.145 $0.100 $0.140 47% New BF XP Buy below $0.10
EMC Metals Corp (EMC-T) 4,802,900 $0.340 $0.225 $0.340 45% New BF TP Buy $0.10-$0.19
Escape Gold Inc (EGT-V) 100,000 $0.220 $0.140 $0.195 44% New BF LP Buy $0.10-$0.19
Geologix Explorations Inc (GIX-T)
9,948,500 $0.960 $0.640 $0.920 39% Good Absolute Spec Value Buy
Uravan Minerals Inc (UVN-V) 268,400 $0.430 $0.280 $0.430 39% BF MP Buy $0.10-$0.19
Treasury Metals Inc (TML-T) 1,280,700 $0.760 $0.530 $0.720 36% New BF MP Buy $0.30-$0.49
Rugby Mining Ltd (RUG-V) 542,500 $1.980 $1.410 $1.870 34% New BF MP Buy $0.30-$0.49
Impact Silver Corp (IPT-V) 3,054,300 $1.880 $1.220 $1.680 32% BF MP Buy $0.30-$0.49

Top 10 Bottom-Fish Price Losers
Company
Volume High Low Close Chg Status
Rare Element Resources Ltd (RES-V)
518,800 $11.100 $9.710 $9.850 ($0.950) Good Relative Spec Value Buy
Peregrine Diamonds Ltd (PGD-T)
2,858,800 $3.280 $2.610 $2.770 ($0.490) Good Absolute Spec Value Buy
Uranerz Energy Corp (URZ-T) 1,294,000 $4.180 $3.260 $3.440 ($0.460) BF MP Buy $0.50-$0.75
Strategic Metals Ltd (SMD-V) 4,279,400 $2.290 $1.620 $1.920 ($0.240) BF MP Buy $0.10-$0.19
Mountain Province Diamonds Inc (MPV-T)
198,300 $5.210 $4.930 $4.960 ($0.190) Good Absolute Spec Value Buy
Quest Rare Minerals Ltd (QRM-V)
1,586,500 $5.300 $4.820 $5.060 ($0.180) Good Relative Spec Value Buy
Helio Resource Corp (HRC-V) 1,534,100 $0.650 $0.420 $0.480 ($0.170) BF MP Buy $0.20-$0.29
Anfield Nickel Corp (ANF-V) 30,600 $4.600 $4.350 $4.450 ($0.150) BF Spec Cycle Hold 100%
Medallion Resources Ltd (MDL-V) 1,525,500 $0.550 $0.400 $0.440 ($0.130) New BF LP Buy $0.10-$0.19
Corona Gold Corp (CRG-T) 318,500 $1.220 $1.100 $1.100 ($0.120) BF TP Buy $0.30-$0.49

Top 10 Bottom-Fish Price Percentage Losers
Company
Volume High Low Close Chg Status
Helio Resource Corp (HRC-V) 1,534,100 $0.650 $0.420 $0.480 -26% BF MP Buy $0.20-$0.29
Medallion Resources Ltd (MDL-V) 1,525,500 $0.550 $0.400 $0.440 -23% New BF LP Buy $0.10-$0.19
White Tiger Mining Corp (WTC-V) 933,100 $0.320 $0.275 $0.295 -16% New BF MP Buy $0.20-$0.29
Peregrine Diamonds Ltd (PGD-T)
2,858,800 $3.280 $2.610 $2.770 -15% Good Absolute Spec Value Buy
Amanta Resources Ltd (AMH-V) 827,900 $0.140 $0.105 $0.115 -15% BF XP Buy below $0.10
Uranerz Energy Corp (URZ-T) 1,294,000 $4.180 $3.260 $3.440 -12% BF MP Buy $0.50-$0.75
Pacific Iron Ore Corp (POC-V) 60,300 $0.320 $0.300 $0.300 -12% New BF LP Buy $0.30-$0.49
Strategic Metals Ltd (SMD-V) 4,279,400 $2.290 $1.620 $1.920 -11% BF MP Buy $0.10-$0.19
Wolverine Minerals Corp (WLV-V) 619,300 $0.670 $0.530 $0.600 -10% New BF LP Buy $0.10-$0.19
X-Terra Resources Corp (XT-V) 97,600 $0.520 $0.445 $0.450 -10% New BF LP Buy $0.30-$0.49

New Bottom-Fish Lows
Company
Volume High Low Close Chg Status
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