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Bottom-Fish Action
 Tue Dec 28, 2010
Bottom-Fish Action Report for December 5-25, 2010
    Publisher: Kaiser Research Online
    Author: Copyright 2010 John A Kaiser

 

Bottom-Fish Action Report for Week of December 5-25, 2010

Rare Earths steal the Show

Volume and value traded diminished among TSXV listings during the December weeks leading up to Christmas, but prices generally remained steady as a mood developed that what had been a phenomenal year was just a warmup for what is to come in 2011. I have spent the past month searching for new bottom-fish to introduce at the end of the year and have indeed found a couple dozen interesting candidates. But as I suspected the bottom-fishing window that opened up at the end of 2008 has almost closed and the pickings are rather slim unless one has an appetite for shells being groomed for future pump and dump promotions. I had planned to close out the 2009 Bottom-Fish Edition and convert the keepers into spec value hunter recommendations, and launch a 2011 Bottom-Fish Edition populated by the sluggards from 2009 for which I still had hope plus a new batch. However, most of the 2009 bottom-fish have lifted out of their bottoms and do not qualify as fresh bottom-fish picks. In fact, I have come to the conclusion that 2011 will be a year where speculative profits are made through more expensive juniors whose stories are blossoming. So I am keeping the 2009 Bottom-Fish Edition open for another year, and will be adding new bottom-fish picks to the 2010 Bottom-Fish Edition which has only half the members of the 2009 Edition. Because a "self-fulfilling" prophecy dynamic has emerged I will be introducing new bottom-fish in small batches so that they do not jump up right away just because I put a spotlight on them.

For those of you who shudder at the thought of buying a successful pick such as Amazon or Atac at a price 10-20 times higher than what you could have paid 1-2 years ago, and doubt my contention that these particular cases could deliver 5-10 time further gains during 2011 from current levels, I hope to unveil a surprise during Q1 of 2011 on which I have been working for 18 months. This surprise will be a powerful search engine which will make it easy to find bottom-fish simply by crafting a clever query. It will also make it easy to research all manner of other resource juniors, which is why I am changing our name from Kaiser Bottom-Fish Online to Kaiser Research Online.

Although I will probably be stuck forever with the "bottom-fisher" moniker, the term "bottom-fishing" does not really apply to spec value hunting where we are looking for projects that would benefit from higher commodity prices, whose exploration potential may not be fully understood by the market, or where complex dynamics such as "security of supply" are at work. During 2011 I expect the price of gold to remain strong, trending toward $2,000 in real price terms that have a leveraged impact on discounted cash flow model based valuations of gold projects. The same applies to silver and base metals such as copper, nickel and even zinc. Mergers and acquisitions activity involving ounces or pounds in the ground projects will rise as the industry responds to large inflows of capital into the resource sector seeking liquidity and critical mass. The disappearance of smaller companies with advanced projects will stimulate interest in exploration plays which I think will bring back the speculative dynamic of the nineties when the market was not so much concerned about what the price of the metal would be next year but more concerned with how big and what grade a new discovery would deliver. Peregrine, Atac and now Eagle Plains are examples of discovery plays that will capture the imagination of devoted audiences.

I do believe "security of supply" involving critical metals will be a prominent theme during 2011, with rare earths leading the charge. As the Rare Earth Index chart above shows, a select group of advanced rare earth juniors has dramatically outperformed gold and the overall junior market during the past two years. The rare earth sector peaked in late October and has been consolidating since then as a number of major financing were done, the last of which was Rare Element's $57 million financing that closed on December 22. Over the Christmas weekend China released the new export quotas for the first half of 2011 which generated huge trading volume among the handful of rare earth juniors with a listing on AMEX or the NYSE while Canadian markets were closed for statutory holidays representing Christmas and Boxing Day. There will likely be a slingshot effect on the upside when Canadian markets open for trading on Wednesday December 29.

The export quota for the first half of 2011 will be 14,446 tonnes, which Metal-Pages describes as being down 11.4% from the 16,305 tonnes announced for the first half of 2010. Where that 16,305 tonne figure came from is a bit of a mystery because Metal-Pages had reported earlier in the year that the first half quota for 2010 was 22,282 tonnes while the second half was 7,976 tonnes for a total 30,258 tonnes for all of 2010, a figure Dudley Kingsnorth used in the recent Roskill Rare Earth Conference in Hong Kong. If those older figures are correct then the 2011 first half quota is down 35%. What we do not know is what the quota will be for the second half of 2011. If it is the same as the first half, or 28,892 tonnes, it would be down 4.5% from the 30,258 tonne 2010 quota. The situation worsens if the quota for the second half is lower. The Chinese are keeping us guessing, and needless to say, this has the champions of globalization by American decree hopping mad in Washington, particularly now that China has reframed its rationale for cutting exports from trying to force technology and job transfer to China to trying to cut back on environmental pollution which has been the key to cheap rare earth prices. It is going to be really tough to make a case that China must continue to sacrifice its workers and environment so that the NIMBY crowd in America can continue to pay a cheap price for rare earths. The solution to this security of supply problem lies not in forcing China to be a low cost producer of rare earths, but in supporting the development of multiple supply sources in diverse locations, or at least ones such as Canada whose population is a fraction of that of America but whose people have an equally fat consumption footprint, and consequently no need to hoard the supply for its own agenda. I expect the rare earth sector to get so much attention during 2011 that it will probably disappear, though we will have a couple hundred juniors exploring for new rare earth deposits for a few years longer.

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 December 5, 2010 to December 25, 2010
Company Date
Price Recommendation Action Net
Cash
Net
Stock
Gain New Status
NMC Resource Corp 12/15/2010 $1.00 Rollback 5:1 adjustment
$0 800 -20% BF MP Buy $1.01-$1.25
Antares Minerals Inc 12/20/2010 $8.40 Closeout Absolute Spec Value Buy Cycle Sell 326 @ $8.40 $2,738 0 174% Closeout Hold 0%
Antares Minerals Inc 12/20/2010 $8.40 BF Spec Cycle Sell 100% Hold 0% Sell 1,333 @ $8.40 $11,972 0 1,097% Closeout Hold 100%
Matamec Explorations Inc 12/24/2010 $0.50 Confirm Good Relative Spec Value Buy
$0 2,500 25% Good Relative Spec Value Buy max $0.50

New Comments
Company
Volume High Low Close Chg Status
Amazon Mining Holding Plc (AMZ-V)
2,546,900 $5.780 $4.510 $5.600 $1.040 Good Absolute Spec Value Buy
Avalon Rare Metals Inc (AVL-T)
11,482,600 $4.990 $3.750 $4.560 $0.530 Good Absolute Spec Value Buy
First Point Minerals Corp (FPX-V)
4,460,700 $0.970 $0.810 $0.910 ($0.030) Good Relative Spec Value Buy
Matamec Explorations Inc (MAT-V)
5,125,100 $0.580 $0.440 $0.495 ($0.065) Good Relative Spec Value Buy
Peregrine Diamonds Ltd (PGD-T)
6,108,500 $3.150 $2.410 $2.610 ($0.160) Good Absolute Spec Value Buy
Quest Rare Minerals Ltd (QRM-V)
2,815,200 $5.230 $4.440 $4.800 ($0.260) Good Relative Spec Value Buy
Rare Element Resources Ltd (RES-V)
7,249,100 $11.800 $9.200 $10.370 $0.520 Good Relative Spec Value Buy
Ucore Rare Metals Inc 7,515,900 $0.630 $0.460 $0.600 $0.020 New BF LP Buy $0.30-$0.49

Bottom-Fish Action Report for December 5, 2010 to December 25, 2010
Peregrine Diamonds Ltd (PGD-T: $2.72)
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Spec Value Hunter Comment - December 6, 2010: Peregrine reports CH6 results

Peregrine Diamonds Ltd reported mini bulk sample results for the CH6 project on December 6, 2010 which confirm that CH6 is a high grade kimberlite with gem quality diamonds, but the news did not contain any jaw-dropping information that would have sent the stock soaring. The 14.11 tonne sample recovered through core drilling sampled 4 distinct units which yielded through DMS processing an overall parcel of 40.04 carats at an average grade of 284 cpht, slightly lower than the 300 cpht grade we were looking for. Our expectations for higher grades based on micro diamond curves were achieved by a 1,030 kg sample from Unit A, a weathered volcaniclastic horizon at the top of the pipe which yiedled 7.03 carats that translate into an indicated grade of 681 cpht. This sample included the largest stone, a 1.29 ct off-white transparent macle, which would be similar to the 1.75 ct macle Aber recovered in the initial somewhat smaller 750 kg sample from A154 South. Unit B, a volcaniclastic kimberlite that extends to a depth of 100 metres and includes lots of carbonate boulders from the cover rock through which the magma erupted, yielded 9.53 carats from 3,380 kg for an indicated grade of 282 cpht. Unit C, which is a mix of massive and volcaniclastic kimberlite, yielded 7.44 carats from 2,130 kg for an indicated grade of 349 cpht between depths of 100-150 metres. Unit D, which has been intersected as deep as 325 m, consists of massive kimberlite that has also been diluted with carbonate fragments but to a lesser degree than units A-C. It yielded 15.32 carats from 7,560 kg for an indicated grade of 203 cpht. This grade is somewhat disappointing because this unit volumetrically represents more than half the tonnage, which suggests that the global grade will average between 200-300 cpht which puts CH6 in Diavik's league but does not surpass A154 South. Peregrine processed a representative 465.3 kg control sample through caustic fusion which yielded 2.2 carats of stones 0.85 mm or larger for an indicated grade of 481 cpht. This control sample parcel included a very nice 0.99 carat white-colorless, transparent octahedron. This boosts the overall parcel to 42.28 carats for an indicated grade of 290 cpht. The overall sample yielded 9 diamonds above 0.5 carats with the largest weighing 1.29 carats. While this may seem disappointing in comparison to the 6.53 carat stone delivered by a similar size parcel recovered from CH7, none of the big stones in the CH6 parcel stand out as sample outliers. If anything, perhaps Unit B got unlucky.

In any case, CH6 deserves to undergo bulk sampling in 2011 and detailed delineation drilling. While the diamonds look good, a larger parcel is needed for valuation purposes. Still coming up are micro diamond results for one of the nearby "String of Pearls" bodies intersected this year which may shed positive light on the potential for similar nearby high grade tonnage. Otherwise there are still more than a dozen kimberlites for which micro diamond results are pending, including the core holes into the volcaniclastic kimberlite adjacent to the CH7 magmatic kimberlite whose mini bulk sample yielded excellent results whose celebration was dampened by our realization that at this stage we cannot yet map the macro grade to the bigger tonnage of the overall CH7 pipe. Visually in terms of mantle xenolith and indicator mineral abudance the intersections through the volcaniclastic phases in CH7 look similar to the magmatic phase at the edge that was mini bulk sampled. At the moment the market has discounted CH7, but if we get micro diamond results which allow correlation of the mini bulk samples results with the main CH7 body, a stock price boost may ensue. With regard to the potential for stocking stuffer surprises in December, there have been questions as to whether or not Peregrine pushed "better looking" samples into the front of the micro diamond processing queue and that consequently we are slated to receive a bunch of dud results. The order seems to have been determined more by when samples arrived from the field and underwent petrographic logging, which does not appear to have been dictated by order received or appearances, though in some cases was dictated by the strategic implications of their locations. In the case of the RC holes whose chips are not so easy to log, maybe we will still get a surprise like CH41. If there are no further positive surprises by the end of the year (we've exhausted the potential for negative surprises that could hurt the stock), I would expect Peregrine to settle into a trading range below $3 with a breakout developing in January as Peregrine gears up for winter drilling on the CH17 twins in the northern part of the property during March. This uptrend may develop sooner because there is a legacy cult from the good old diamond days which says that diamond juniors with Arctic plays must be bought in December, and the CH6 results are good enough to rekindle fond memories among analysts and investors who remember the discovery years of Ekati/Diavik.

At the moment the 2011 plans call for a $15 million budget which at this stage seems to be determined by the camp permits that are in place and what amount of work these permits can support. Peregrine and BHP Billiton have been very mindful of permitting processes and associated political sensitivities. While the proposed program seems tame in contrast to how pregnant Chidliak is, we may see the scale accelerate if the permitting bodies in Iqaluit concur. Some observers may worry that Peregrine will be in trouble if BHP ramps up the spending, now that Peregrine must fund its 49% share. BHP has just managed to dodge a marketing bullet in that the CH6 results failed to be so off the scale stupendous that the market would have laughed at BHP's timidity in adhering to rational decision-making principles in sticking with 51%. CH6 is helpful, but it is not the stairway to heaven some would like it to be, and BHP would be reluctant to push for a bigger program if it looked like it had made a mistake that it had not actually made. But now that this danger is out of the way, do not be surprised if a much bigger program is proposed if Iqaluit adopts a "let's do it!" attitude. An expansion of the 2011 program would require Peregrine to raise additional capital, but the market would likely push the stock higher in response to an expanded program, reducing dilution for additional financing which would not be needed until the second half of 2011. Bottom-fishers should continue to hold Peregrine 100% and spec value hunters should use a possible lull between now and March to accumulate a position below $3 in anticipation of a breakout beyond $5 in Q2 of 2011 and vindication of Chidliak as an Ekati rival during H2 of 2011.

Quest Rare Minerals Ltd (QRM-V: $4.85)
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Spec Value Hunter Comment - December 9, 2010: Quest expands limits of BZone

Quest Rare Minerals Ltd released a new batch of 27 additional drill holes for the BZone at Strange Lake on December 9, 2010 which have marched the BZone eastwards about 40-50 million tonnes (holes 56-64), provided further evidence of a thick north trending pegmatite unit within the overall BZone which likely extends underneath Brisson Lake, and opened up an area to the west (holes 69-70) where grades above 2% TREO have been encountered. Dundee, which led the $51.75 million financing Quest closed on October 21, showed the street why it should be every junior's underwriter of choice by selling 73,700 shares of the 305,621 shares that traded and buying zero. On that stomach churning day November 16 when Quest dropped to $3.55 on 1,143,700 shares before recovering at $4.16 Dundee "supported" the stock by finishing the day net sold 85,400 shares. Of the 18,136,541 shares that have traded since October 21 Dundee is net sold 720,900 shares in second place behind another Quest underwriter, CIBC which is net sold 2,365,764 shares. The Quest market must also contend with Canada's flow-through charity craze, Quest having sold 2,300,000 flow-thru shares at $5 to raise $11.5 million it didn't neet at this stage. Under Canada's flow-through rules an investor is able to deduct the full flow-through investment against ordinary income which results in a tax saving at the taxpayer's marginal rate which in Canada is not low. The hitch is that the cost base is set to zero so that whatever the investor gets when the stock is sold counts as a capital gain. Because only 50% of capital gains is taxable at the taxpayer's marginal rate, the taxpayer still ends up ahead if he sells for the price he paid. But if the stock is donated to a charity, there is no capital gain, but the full value the charity gets from liquidating the stock is the investor's writeoff against income. This also exists in the United States, which is why donating stocks in which one has a huge gain is the preferred way to donate to one's favorite charities. But in the United States you have to own the stock for at least one year; in Canada there is no distinction between long and short term capital gains. The beauty of the flow-through charity maneuvre is that top tax bracket Canadian taxpayers get a double-dip tax saving where literally they can make a charitable donation of $10,000 and be out of pocket only roughly $1,000 if the charity can dump the stock at roughly the same price as the flow-through purchase price. With flow-through financings such as Quest's where there is no hold period and reasonable liquidity in the after-market, there is huge demand from investors to take on this flow-through paper so that they can puff themselves up with apparent generosity.

On top of having to eat the paper from the CIBC and Dundee warrant clippers and the flow-through charity donors, the market has had to find a home for 3.6 million Quest shares Cliffs started selling in October. The remaining 1.5 million share block was sold on November 22, leaving Cliffs with about 600,000 escrow shares which the market will have to eat in February when they are released from escrow. With "friends" like Dundee, CIBC and Cliffs, who needs enemies? Can anybody blame Quest shareholders for demanding that the company seek an AMEX listing so that the company need no longer rely on Canadian brokerage firms for market support? In any case, Quest is now more than adequately financed to complete a major pilot plant study and prefeasibility study by the end of 2011. The next major milestone will be an updated resource estimate in Q2 of 2011 where we hope to see the grade for the resource used in the PEA get bumped from 1.161% TREO to 1.4% or better as the 50-100 metre drill density of the 2010 program gives shape to the near surface higher grade pegmatite unit. In terms of a shorter term milestone that might give the stock a boost, concrete evidence that Quest is indeed seeking an AMEX listing might do the trick. In terms of the bigger picture, most of the structural selling pressure is behind us, and Quest will very likely succeed in building a base above $5 as we head into the new year.

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), but the retreat will be short-lived and may not happen at all because there is no significant new supply coming onstream 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. The above chart modifies the Quest PEA parameters in several important ways: 1) zirconium and niobium credits are given zero recovery, 2) a 25% "gross royalty" has been substracted from the recoverable revenue to reflect that absence of any provision for operating and capital costs related to separation of mixed rare earth oxides, and, 3) the resource grade has been bumped up from 1.161% TREO to 1.4% TREO to reflect the 2010 drilling program results. The chart shows that Quest has tenfold upside potential from current levels to above $60 if the PEA parameter assumptions are upheld by the planned 2011 prefeasibility study and FOB spot prices prevailing at the end of 2010 become the new long term reality. My recommendation to bottom-fishers and spec value hunters is to hold Quest Rare Minerals Ltd in anticipation of a significant move up during Q1 of 2011.

Ucore Rare Metals Inc (UCU-V: $0.49)
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Bottom-Fish Comment - December 14, 2010: Ucore closes $10 million financing

Ucore Rare Metals Inc has closed a $10 million private placement of 25 million units at $0.40 through Byron Securities and Pope & Company. This puts Ucore in good shape to carry out metallurgical studies on samples extracted from the Dotson Zone at the 100% owned Bokan Mountain project in southeastern Alaska and conduct infill drilling during 2011. The Dotson Zone consists of 25 narrow and steeply dipping dykes within a 50 metre wide corridor that has been traced over a strike length of 2,140 metres. The system is inferred to have a vertical extent of at least 450 metres. On October 20 Ucore reported results for the first 8 holes of an 18 hole program totalling 3,770 metres which wrapped up in September. The company has yet to report assays for the remaining holes, but on November 29 did report some trench results. Whereas the angled holes yielded widths between 1-2 metres of mineralization with a couple exceptions, none of which represent true width, the selected 7 trenches reported ranged 2-7 metres, though the highest grade was 0.507% TREO over 2.04 metres. These results were not particularly encouraging for Ucore's vision of "open-trench" mining the Dotson Zone. The company's disclosures continue to be a joke and it's image management strategy dubious: what is supposed to be the point of the girl holding the glowing butterfly on the home page, remind us of Bokan's uranium mining legacy? Apart from posting a very fat 7 MB drill plan which does not include the trench locations, Ucore has added no information to its web site reflecting its 2010 accomplishments other than its news releases. Even the corporate presentation is a stale one from April 2010. I suppose in some cases the less one knows the better off one is, especially if one partook of the recent private placement which has boosted issued shares to 134,326,641 and fully diluted to 174,648,072 shares. The drill plan does show the traces of the various dykes, but it would be nice to see where those trenches managed to find 2-7 m wide dykes. I suspect they occur here and there within the Dotson Zone and do not line up across the "50 m wide" Dotson Zone. And what about the unreported trenches?

In describing the Dotson Zone as 50 metres wide, which is intended to help people believe that "open-pit" mining will not involve a horrific waste to ore stripping ratio, Ucore is being rather misleading. If it were serious it would cut a 50 metre trench across the Dotson zone and give the average grade of a channel sample along the entire trench. But we are unlikely to see such data because the average grade of these skinny dykes including the waste rock between them would require a magnifying glass to read. Ucore believes it has now achieved sufficient drill density to allow a 43-101 resource estimate to be calculated. Ucore has boosted its conceptual estimate to a range of 3.5-6.5 million tonnes at 0.76% to 1.42% TREO to a depth of 200 metres. It will be very interesting to see what a QP comes up with that is 43-101 compliant. The company has also shipped a representative "bulk" sample of unspecified size to Hazen Research for bench scale metallurgical studies. Mineralogical work by Tony Mariano has identified bastnaesite, a mineral associated with light rare earths, and iimoriite, a mineral associated with yttrium and other heavy rare earths, as the primary rare earth carriers in the Dotson zone. The method for cracking these minerals is stated to be well established, but, given that Molycorp seems to accomplish no better than a 59% recovery for its 8%-9% TREO bastnaesite at Mountain Pass, one has to wonder to what extent fine grained bastnaesite with less than 0.5% TREO (remember, as Ucore declares at every chance, about half the TREO grade at Dotson consists of heavy rare earths, which do not report to bastnaesite) will deliver even 50% recoveries. Ucore hopes to get a metallurgical report from Hazen during Q1 of 2011.

In an effort to signal how hard the company is working to get Bokan into production and solve America's heavy rare earth supply problem, Ucore recently retained mine engineer Ken Collison to conduct a scoping study for the project. Collison is quoted as being very impressed that the mineralization is consistent along the strike of the dykes and that there is sharp visual demarcation between waste and mineralized rock which will allow selective mining of ore, which seems a little at odds with this other quote from him: "The vein stock works at Bokan are like the branches of an immense tree, with mineable widths and substantial HREE mineralization across the entire system". The latter might seem consistent with Ucore's claim that Dotson is a 50 metre wide zone, but when you do the grade math Bokan certainly does not look like a meaningful future open pit mine. Hole #78 intersected 4 mineralized intervals totalling 8.95 m within an overall 53.89 m interval from 153.53 m to 207.42 m whose grades ranged 0.59% to 1.07% TREO.

This may sound like good news, but when you do a weighted average across the entire interval you get only 0.12% TREO. That grade might work at an ion adsorption clay deposit such as those mined in southern China, but the heavy rare earth minerals at Bokan are silicates that have not been beaten up by mother nature through eons of weathering. On the other hand, capital costs for selectively mining the mineralized dykes should be modest compared to other rare earth projects which will require more heavy duty equipment than a donkey, wheelbarrow, pick, shovel and stick of dynamite. I remain of the view that unless Ucore discovers an exciting new dimension to the Bokan peralkaline system where rare earth mineralization is hosted by larger tonnage zones rather than later stage dykes, the best we can hope for from Bokan is that it becomes an emergency source of heavy rare earths for the US military that get extracted at whatever it costs as the Soviets did with the Kutessay II mine in Kyrgyzstan. The company would be wise to focus its efforts on doing the grunt work for establishing what it takes to establish a long term underground mining and processing operation at the Dotson zone in preparation of a strategic government subsidized buyout rather than pretend that Bokan has commercial potential. In a strategic buyout scenario perhaps the US government will pay $100 million to buy out Bokan rather than just expropriate it because Ucore is not demonstrating technical feasibility in a timely manner. Unfortunately, with 175 million shares fully diluted this optimistic outcome translates into an upside target of only $0.57. From a bottom-fishing perspective Ucore is shaping up to be dud, but the company has managed to attract newsletter writer Byron King as a champion and its story is consistent with Byron Securities analyst Jon Hykawy's belief that mainly heavy rare earths such as terbium and dysprosium deserve attention. And what about adressing the need to separate Bokan's potential mixed oxide output into individual oxides, a favorite theme of some vocal Ucore backers? Ucore certainly will not be able to ship the concentrates to Mountain Pass because we all know that Mountain Pass has "only light rare earths" and consequently its separation facility will not be designed to handle heavy rare earth dominated mixed oxides. Bokan just does not appear to have the scale to support a dedicated separation facility that operates on commercial terms. Great Western has a similar problem at Steenkampskraal whose monazite ore contains some heavy rare earths; perhaps the two will eventually merge so that a separation facility with commercial scale becomes justifiable. But don't give up on Ucore quite yet. In my view China's rare earth export policy for 2011 will boost FOB spot prices for the heavy rare earths, which gained only modestly since July compared to their light cousins, and because the heavy rare earths have obscure uses in advanced technologies of the sort used by the military, there will be renewed fuss during 2011 about the shortage for heavy rare earths, a shortage that also looms in the long run for China itself. Bottom-fishers should thus be patient and look for a rally during H1 of 2011 for an exit opportunity. Because at this stage Ucore's upside requires the "rare earth bubble" declaimed by its underwriter's chief analyst to grow considerably bigger, and because I do not see solid fundamentals emerging from the results so far reported, I am turning Ucore into a Spec Cycle Hold 100% recommendation at $0.49 with the goal of selling between here and $1 over the next six months.

First Point Minerals Corp (FPX-V: $0.81)
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Spec Value Hunter Comment - December 21, 2010: Cliffs validates First Point's nickel-iron alloy strategy through alliance with Altius

First Point Minerals Corp received an indirect endorsement of its nickel-iron alloy story on December 15, 2010 when its partner on the Decar project in British Columbia, Cliffs Natural Resources Inc, announced that it was forming a strategic alliance with Altius Minerals Corp, a very successful former bottom-fish backed by John Tognetti and Rick Rule with rhetorical support from Doug Casey and brother-in-law Paul Van Eeden, to explore for "ferro-alloy metals" in certain areas of Newfoundland and Labrador. Cliffs has been on a rampage forming strategic alliances with Rick Rule backed "prospect-generator" juniors (Riverside, Estrella, and now Altius), perhaps after listening to Rick's analysis of the rare earth sector as nothing more than an EBITDA midget not worthy of any serious investor's attention, and accordingly dumping for about $15 million most of the Quest Rare Minerals Ltd shares it inherited through its takeover of Freewest in early 2010. Cliffs may be returning a favor by acting as the funding partner for projects generated by the "apparently" much smarter exploration managers of companies backed by Rick Rule and his "prospect generator" entourage. Don't get me wrong, I think very highly of the prospect-generation-farmout model, but I do take issue with the religious manner in which certain newsletter writers pump the model as if any company which does otherwise is a stupid "POS" for using its own nickel to test its internally generated exploration ideas (Virginia, Atac, and Almaden come to mind as delinquents whose truancy rewarded their masters) or, even worse, is so incompetent it has no choice but to spend its shareholders' money on ideas generated by other companies whose management deemed the project too risky to merit their own shareholders' money. Raising capital and promoting a good story is not always a toiling geologist's strength, so it is a good thing that both types of companies exist within the Canadian publicly traded venture capital market.

To be fair, there is a method to this ideological rigidity, because it is only through the discipline of the prospect-generator-farmout model that the executives of such a junior will know when it is really the right time to disobey their handlers and send Rick Rule laughing to the bank as seems to be his destiny in the case of Atac and its 100% owned Rackla Gold Belt story in the Yukon. Cliffs' alliance with Altius, however, seems to fall into the category of a smart junior unloading risk onto a not-so-smart major. Under the alliance deal Cliffs will put up $1.8 million over the next two years for grassroots exploration whose initial focus will be "nickel-iron alloy minerals and chromite in ultramafic complexes on the island of Newfoundland". Towards this end Altius has staked 98,225 hectares which will be the focus of grassroots exploration. Anybody not familiar with the First Point story can be excused for shrugging off this news release as just one among a thousand that lead to nothing. But as somebody who jumped onto the First Point story the instant Cliffs validated it in November 2009 when it optioned the Decar project and acquired a 15% equity stake in First Point, I recognized this as a very significant development. To summarize, First Point has put forth the idea that certain ultramafic bodies which grade up to 0.25% nickel like just about every ultramafic body, have a majority of that low nickel grade represented by an unusual mineral called awaruite, in effect natural stainless steel occuring as a native nickel-iron alloy that does not "rust" due to weathering or otherwise oxidize due to hydrothermal processes. The magnetic susceptibility of this nickel-iron alloy, its high density, and the fact that the grains are not tied up in an olivine silicate lattice as is the case for the typical ultramafic body grading 0.25% nickel, theoretically lend it to low cost extraction from the host rock through magnetic and gravity separation methods.

Cliffs did the Decar deal with First Point in November 2009 after conducting bench scale tests on sample material which corroborated internal tests done earlier by First Point, neither of which can be the subject of public disclosures because a certified method of establishing the nickel grade attributable to nickel-iron alloy alone did not exist. In simple terms, only the grade of the nickel within nickel-iron alloy is meaningful; the rest has economically impossible recovery characteristics. The problem for explorationists is that fire assaying measures total nickel content and does not distinguish between "hopeless" olivine nickel and "potentially extractable" awaruite nickel. This situation changed in September 2010 when metallurgist Dr Barry Smee certified the geochemical method First Point had developed to establish what percentage of a nickel fire assay grade was attributable to the nickel-iron alloy. This certified method is proprietary to First Point, which means that Cliffs cannot use it without First Point's permission. And because First Point is not party to the Cliffs-Altius alliance covering Labrador and Newfoundland, the partners will have to use old-fashioned thin-section and speck-counting techniques to determine if any of the ultramafic complexes are loaded with natural stainless steel rather than the usual worthless olivine hosted nickel.

Cliffs and Altius are certainly barking up the right tree, because Newfoundland is a collided melange of land masses that includes "ophiolites", chunks of oceanic basalt that got "obducted" rather than "subducted", and consequently had a chance to undergo the metamorphic processes which squeeze nickel and iron out of their silicate prisons to form grains of the nickel-iron alloy mineral called awaruite. In contrast, Labrador is not as prospective, because its ultramafic bodies were formed through intrusions that underwent magmatic segregation which tends to form nickel sulphide based mineralization when it is not the unwelcome olivine form. Unfortunately for Cliffs and Altius, they will need an expensive fine-toothed comb to find anything worthwhile in Newfoundland.

First Point has been one of my top picks not because I think Cliffs will establish Decar as a world class nickel deposit that will be a pioneer in validating the "porphyry copper" model applied to low grade "nickel-iron alloy" deposits that lend themselves to low cost bulk tonnage mining methods, which the drilling evidence last summer seems to support as a likely outcome, but more so because First Point's possession of a cost effective "nickel-iron alloy" grade assaying method gives it the means to scour the planet for similar large, open-pittable ultramafic bodies in locations that lend themselves well to mine development. It is my expectation that by the end of 2011 First Point will have identified and scooped most of the readily accessible ultramafic bodies whose nickel grade is largely attributable to "natural stainless steel". Although First Point has had multiple crews scouring the planet during 2010, it has not announced any new acquisitions, and the word I get from Peter Bradshaw is that his crews have not found much worth acquiring, and not due to lack of effort. In a sense this is good news, because it shows that this type of nickel-iron alloy deposit is not very abundant and that competitors such as Cliffs and Altius will have to work hard to find those that do exist.

So, needless to say, I am of course puzzled why First Point's toiling geologists have got nothing to report so far even as their partner joins Altius to waltz across Labrador and Newfoundland in search of nickel-iron alloy projects. It turns out that a First Point crew spent three weeks last summer traversing Newfoundland and testing known ophiolites for nickel-iron alloy using the junior's proprietary assaying method. Unfortunately, First Point found nothing worth acquiring after using a coarse-toothed comb consisting mainly of government and assessment data as the basis for field visits. If there was anything big and obvious to be acquired in Newfoundland, First Point beat Cliffs and Altius to the punch. This does not mean Cliffs and Altius will not succeed, but it does mean that either an awful lot of grassroots work will be needed, or Altius will need to bring detailed geological knowledge into play, in effect a fine-toothed comb which will catch the fleas First Point would have missed. The problem Cliffs and Altius face is that they will not be able to use their eyes to spot the fleas in the comb, but will need to use their fingers to "see" the fleas. Whether or not Cliffs and Altius find any fleas in Newfoundland, the important news for First Point is that Cliffs is taking this story very seriously.

How serious is that? Well, Cliffs is required to spend $500,000 per year on Decar, and it spent about $1.4 million during 2010. Furthermore, it has already committed to spend at least $500,000 during 2011, even though further work hinges on a greenlight during Q2 of 2011 with regard to the metallurgical studies Cliffs is conducting internally and through SGS Lakefield using composite samples weighing several hundred kilograms of drill core from Decar, in particular the Baptiste zone which is much more accessible than the Sydney Zone which was also drilled during 2010. The key hurdle is to establish that the recovery characteristics of weathered rock, which was the nickel-iron alloy bearing rock previously tested, are the same for fresh, unweathered rock recoverd by drilling during 2010. When I ask what are the odds that Cliffs's metallurgical studies using unweathered samples will disappoint, Peter Bradshaw looks at the sky and wonders out loud, how is weathering likely to have affected the natural stainless steel that exists as discrete grains in the Decar ultramafics. In other words, the study Cliffs is conducting is largely mechanical, and it would require an unexpected complication to prevent Cliffs from authorizing a delineation drilling program worth several million dollars for 2011. Cliffs' willingness to form a JV with Altius to spend $1.8 million over 2 years to look for nickel-iron alloy deposits in Newfoundland is a pretty good sign that Cliffs already sees a green light and is getting on with the business of acquiring similar projects before First Point beats it to them. The Altius JV is thus a vote of support for First Point, and it shows that the concept is gaining acceptance in circles that are conservative and influential. Although I have said spec value hunters should not buy First Point above $0.75, in light of the gradual uptrend the stock has developed, within which it manifests a see-saw pattern of sharp rises and gradual retreats, each one bottoming successively higher than the prior retreat, I think spec value hunters should take advantage of the year-end weakness to acquire a strong position in a stock with a unique conceptual story that could revolutionize the nickel industry, and, if First Point succeeds in nailing down similar ultramafic deposits, could deliver $10 plus prices for First Point over the next two years.

Amazon Mining Holding Plc (AMZ-V: $4.81)
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Spec Value Hunter Comment - December 21, 2010: Amazon files a patent application for a process that could be a game changer

During the past six weeks Amazon Mining Holding plc has made a series of announcements which together put the "alternative potash" security of supply story into a much bigger league that could deliver tenfold gains from the current price during the next two years. Amazon was made a medium priority bottom-fish buy in the $0.10-$0.19 range on December 24, 2008, which was converted to a Spec Cycle Hold 100% recommendation at $0.80 on July 31, 2009. On December 18, 2009, after Amazon reported initial drill results which confirmed the existence of a large zone of homogenous, good K2O grade glauconite within the Cerrado Verde project, I issued a Good Absolute Spec Value Buy at $2.03 with a price target in the $3-$5 range for the second half of 2010 if a preliminary economic assessment (PEA) was favorable. On October 28, 2010 Amazon delivered a PEA which estimated an NPV of US $455.4 million for a 1.1 million tpy operation and $858.1 million for a 2.2 million tpy operation using a 10% discount rate and 40 year mine life. This translated into a stock price of $14.60 and $27.50 respectively using the then fully diluted capitalization of 31.2 million shares. The stock settled into the $4-$5 range where it appeared stuck as the market wondered when and how Amazon would raise the $20 million needed for a demonstration plant in 2011, whether the fertilizer blenders would accept the ThermoPotash prices assumed by the PEA, and if the commercial plant's reliance on coking petroleum and resulting cost sensitivity to oil prices would ultimately stymie raising the $200 million plus capital cost. With the bottom-fish recommendation up 2,400%, the spec value recommendation up 137% and at the upper end of the target range, and the story now at a highly technical engineering and product marketing stage which is beyond my technical expertise, I have been in a quandary over closing out the positions or investing additional time in the Amazon story at the expense of generating new cheap bottom-fish picks. Fortunately a series of very brief news releases during the past couple weeks have not only answered the demonstration plant financing question, but have also transformed the "security of supply" story into a "breakthrough" story that has profound implications for Amazon's upside potential and the possibility to mitigate future food shortage problems by making glauconite generally accessible as a source of traditional KCl fertilizer. Accordingly, I am maintaining the bottom-fish recommendation as a Spec Cycle 100% Hold, and issuing a new Good Absolute Spec Value Buy recommendation at $4.81, with a $20 plus price target by the end of 2011, and $50 plus during 2012 if Amazon does not disappear in a bidding war before then.

On December 15 and 16 Amazon issued several financing news releases which started off with a best efforts private placement offering of 960,000 shares at $4.17 by UK based Ocean Equities, whose analyst Natasha Liddell published an excellent research report on November 16. Ocean is placing 60% of its tranche with a private investor who is a stakeholder in the South American agribusiness giant Bunge, an investment that was apparently initiated on the basis of independent due diligence. The other 40% is being placed with UK institutions. Amazon issued a separate news release the same day where it announced that the Canadian brokerage firms GMP and Wellington West would conduct a private placement of 960,000 shares at $4.17 on a bought deal basis, with an over-allotment option for 480,000 shares. The next day Amazon announced that Salman Partners was now also part of the financing syndicate which would place an additional 960,000 shares on a best efforts basis. Some of the paper being placed by the Canadian brokers is going to strategic investors from the agribusiness sector. In total, if the over-allotment is exercised and the best efforts portion fully completed, Amazon will issue 3,360,000 shares to raise $14 million, and bring its fully diluted capitalization to 34,511,204 shares. Coupled with the existing $4 million working capital position, this financing, which is expected to close by January 11, 2011, would boost Amazon's working capital to about $17 million, enough to cover the $3 million cost of an extensive drilling campaign designed to quantify the glauconite resource within the entire 100 km verdete slate belt covered by Amazon's 165,069 hectare concession, and the $8.5 million cost of running a 60,000-100,000 tpy demonstration plant for 12 months which will form part of a feasibility study for the project.

When Amazon's CEO Cristiano Veloso told me in late November that the company planned to spend $3 million drilling shallow holes on 400 metre spacing along the entire Verdete Slate belt for which a conceptual estimate of 15 billion tonnes of glauconite was made by Coffey Mining last year, I questioned the need for this work in light of the operating scale proposed by the PEA. The PEA was based on an inferred resource of 105 million tonnes of 10.3% K2O within the Funchal Norte zone at a 7.5% cutoff, which represented 100 years of mine life at the 1.1 million tpy scale and 50 years at the 2.2 million tpy scale. Earlier in the year I was told that Amazon planned to do this sort of exploratory drilling in an effort to systematically identify the highest grade zone with the best location with regard to energy and transportation infrastructure. This time around I was told that Amazon needed to conduct assessment work to be in a position to convert the exploration license into a development license covering the entire resource. I supposed this was necessary to prevent somebody else from horning into Amazon's niche market and applying the ThermoPotash process, which was invented during the eighties and has no proprietary protection, to glauconite zones Amazon would otherwise have let come open. A week later on December 2 Amazon published a news release about filing a patent application for a process that produces "conventional potash products, muriate of potash and sulphate of potash" from verdete slate. Assuming this was another one of those tedious "chemistry" press releases Amazon periodically makes, I put it aside to read when I had nothing better to do and a couple cups of coffee in me, like, never. But when I followed Cris Veloso's suggestion to read it carefully, I instantly had a "holy mackerel" experience and understood why wealthy investors from the agribusiness sector were participating in last week's financings.

When I first discussed Amazon's story in a March 18, 2009 Bottom-Fish Comment I focused on the potential for the junior's huge "glauconite" resource in southern Brazil known as the "verdete slate" to reduce Brazil's dependency on imported potash. Glauconite is a silicate containing 5.5%-14% K2O compared to 18%-22% K2O for the salt called sylvite from which the fertilizer potassium chloride (KCl) is derived. Amazon's goal was to melt the glauconite in a rotary kiln in conjunction with limestone followed by quenching to create a "shattered glass" product called ThermoPotash which could be added to fertilizer blends used by Brazilian farmers. ThermoPotash, because it is a "whole rock" product, could not really replace KCl because it contained only 5.5%-14% K2O compared to 60% K2O for KCl, which implied a substantially higher application cost. (On the plus side, ThermoPotash would not run afoul of organic certification requirements as does potassium chloride.) However, the lower solubility of ThermoPotash made it an ideal supplement for fertilizer blends whose KCl content has a tendency to wash out quickly in Brazil's setting of acidic soils and torrential rains. Glauconite deposits exist throughout the world, but the location of the Verdete Slate in the heart of Brazil's agricultural district at surface combined with the region's climate and resulting high fertilizer consumption represented a special situation. All Amazon had to do was demonstrate ThermoPotash's agronomic efficacy and a cost structure that was competitive with the landed cost of imported KCl potash from Canada or Russia. The upside for Amazon bottom-fishers and spec value hunters lay in the strategic premium a large fertilizer company might pay to control Amazon's Cerrado Verde project and thus enjoy some protection against another episode of skyrocketing potash prices as the world witnessed in 2008 before the financial meltdown, and is likely to experience again as climate change impacts growing regions and the emerging market populations expand food demand. Argonomic studies were initiated during mid 2010, with no negative news so far, and the PEA published in late October 2010 suggested that the project was feasible if FOB Vancouver KCl prices did not drop below $400/t and the blenders accepted Amazon's ThermoPotash's pricing model. The timeline below shows that 2011 will be a critical year leading to big decisions in early 2012 with regard to this business plan. So, maybe somebody would eventually pay $200-$400 million to privatize Amazon, which would translate into a stock price in the $6-$12 range, a very nice accomplishment for bottom-fishers who bought at $0.19 but certainly not something to boast about on a "holy mackerel" scale.

This patent, however, has "holy mackerel" implications. The patent application for a simple process that cost effectively converts glauconite into conventional forms of potash such as potassium chloride or potassium sulphate is a game changer at many levels if the process works and the patent is granted. BHP Billiton spent $350 million on its failed bid to buy Canada's Potash Corp for $39 billion. It should double that bet, and set the stage for some future payback, by making a snap $10 per share takeover bid for Amazon before its competitor Vale does (the stock will be $20 before this idea hits their radar). One has to admire the broad-ranging vision of Cris Veloso, who in 2008, after Amazon staked the Verdete Slate belt over the objection of some Canadian board members and before certain predators sought to "rescue" the treasury, immediately began to look for a scientist with the capacity to develop a process for converting glauconite (K(Fe3+,Al,Mg)2(Si,Al)4O10(OH)2) into potassium chloride (KCl). His search led him to Dr Derek Fray, professor and director of research at the University of Cambridge in the UK. Amazon sponsored Dr Fray to invent a solution to this problem, and two years later he came up with a way of "reacting verdete slate with a simple mixture of salts to form water-soluble potash". The reaction involves temperatures of 800-1000 degrees C and allows for regeneration of most of the reagents. The next step will involve pilot plant studies to confirm the process and better quantify the cost structure. More details will be published in January 2011 after Amazon has filed related patent applications. This angle is above and beyond everything that I have talked about with regard to Amazon!

If the process works and the associated cost is reasonable, Amazon could be in a position to convert the 10-15 billion tonne glauconite resource within the Verdete Slate belt that grades 5.5% to 14% K2O into potash products that would not only eliminate Brazil's need to import potash from Canada, Russia and a handful of others who dominate potash supply, but it could enable Brazil to become a net exporter of potash. Furthermore, Amazon would be in a position to license the process to operators in other countries with accessible glauconite deposits. If Amazon has the potential to become a $10-$20 stock just on the basis of providing ThermoPotash as a 1-2 million tonne per year supplement to Brazil's existing fertilizer blenders, what would the stock be worth if Amazon turns out to have a process for converting glauconite into conventional potash products at a cost competitive with South American brine operations and the deep sylvite deposits in Saskatchewan? On December 21 Amazon announced that the Secretary of Finance from Minas Gerais has approved special tax treatment for the Cerrado Verde project which will also apply to to any conventional potash products (SOP and KCl) that might be produced if the new process works. Specifically, an 18% type of VAT is suspended for all raw materials and equipment that need to be imported, which apparently applies to most of the capital cost of the ThermoPotash project, and several key agricultural states which would be markets for ThermoPotash and any other potash products have agreed to reduce their "VAT" to 4% from existing rates that range 4.9% to 12%. Amazon Mining Holding Plc is a Good Absolute Spec Value Buy with doubling to tripling potential on the basis of its primary ThermoPotash business plan, and substantially higher if it can demonstrate that Dr Fray's process is feasible.

Avalon Rare Metals Inc (AVL-T: $4.56)
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Spec Value Hunter Comment - December 24, 2010: Avalon secures AMEX listing

Avalon Rare Metals Inc obtained an AMEX listing (symbol AVL) on December 22, 2010 which for the first time directly exposes the American audience to a rare earth trading vehicle with a full spectrum world class rare earth project. The distinction between "full spectrum" and "light rare earth dominated" is important because currently the vast majority of heavy rare earth oxides come from the rapidly depleting ion adsorption clay deposits in southern China which are the focus of a consolidation drive by Chinese authorities to eliminate illegal and highly polluting mines which are a key source for rare earths smuggled out of China. FOB spot prices for heavy rare earth oxides increased only modestly during the second half of 2010 after China drastically cut export quotas to 7,976 tonnes from 22,282 tonnes during the first half of 2010. Because the the quotas are by weight and not rare earth element specific, quota holders are free to choose which rare earth oxides to export, which, because profit margins tend not to fluctuate significantly, would be the more expensive rare earths. As a result the cheaper rare earth oxides, namely the light rare earths and the heavies yttrium and gadolinium, were withheld from export while considerably more expensive heavy rare earths such as europium, dysprosium and terbium were favored for export. As a result of the export restrictions the prices for the cheaper rare earths skyrocketed, in cases more than 500% above their three year FOB averages. Although yttrium is classified as a "heavy", it is not the rare earth invoked by promoters and analysts who emphasize the urgent need for more "heavy" rare earth supply. As a consequence projects dominated by "light rare earths", led by Mt Weld and Mountain Pass, stole the show during the second half of 2010 as projects had ther DCF valuations recrunched with FOB spot prices. The NPV sensitivity chart shows what happens to Nechalacho's NPV per share when you plug in the FOB spot prices prevailing at the end of 2010. The after tax NPV comes out at $2.3 billion for an implied target price of $22.70 per share. Because Avalon had promoted itself as better than other deposits thanks to its elevated percentage of heavy rare earths, it found itself somewhat side-lined during the second half of 2010 as Wall Street chased the soaring FOB spot prices with relatively lower prices, but ones that were still well above 3 year FOB averages. If one were to treat JP Morgan's price set as a realistic prediction of future long term FOB REO prices, one could set $9.66 as a price target for Avalon, higher if Avalon were to double its proposed mining and processing rate for Nechalacho. With the achievement of an AMEX listing just in time for China's 2011 export quotas and the publication of the Department of Energy's "Critical Materials Strategy" in mid December, Avalon is set to achieve a much higher profile in 2011 as it works on delivering a feasibility study during H1 of 2012.

Avalon is the most advanced of the Canadian listed juniors after delivering a prefeasibility study during 2010 for the Nechalacho project in the Northwest Territories which proposed an underground mining scenario starting at 1,000 tpd and scaling up to 2,000 tpd over several years. The target is the HREO enriched Basal Zone which runs about 22% heavy rare earth oxides, 3-4 times the level seen in typical carbonatite deposits but only half the percentage encountered in other peralkaline intrusions such as Strange Lake, Kipawa and Norra Karr. Avalon shocked the market last June when its PFS dictated a high $744 million capital cost for a fairly small scale mining operation at Nechalacho which generated an internal rate of return of only 24% using the $39.78/kg base case REO prices Avalon projected for 2014 which was well above even today's 3 year FOB average of $25.68/kg. Since then Avalon has completed a scoping study for a 25,000 tonnes per year separation facility based in southern Ontario whose capital cost was estimated at $360 million. This plant's capacity is more than double the projected annual output of 10,000 tonnes for Nechalacho, which means that Avalon will either have to double its output at Nechalacho or source concentrate from other rare earth mines to keep the separation facility operating at full capacity. Interestingly, at the spot FOB price of $78.02/kg of Basal Zone ore the value attributable to the heavy rare earths is only 33% compared to the 50%-60% that applies to the other price sets. In essence the "heavies" at Nechalacho have become less important than the cerium, lanthanum and neodymium, all of them light rare earths. Although the demand for heavies is a fraction in terms of weight relative to the lights, the demand is real and deposits such as Mountain Pass, Mt Weld and even China's Bayan Obo simply do not have the volume of heavies needed to meet growing demand. Quite likely we will see some retreat in FOB spot prices for yttrium and the light rare earths during 2011 while prices for the heavies will strengthen during 2011 as the Chinese consolidation of its ion adsorption clay deposit broadens. From a security of supply perspective it is preferable to develop a "full spectrum" rare earth deposit such as Avalon's Nechalacho deposit rather than one whose heavy rare earths represent less than 5% of the total rare earth grade. As we head into 2011 I am recommending that bottom-fishers maintain their position with a Spec Cycle Hold 100%, and that spec value hunters who heeded my Good Absolute Spec Value Buy recommendations as high as $2.35 also maintain their positions in anticipation of a $10 price target during the first half of 2011.

Rare Element Resources Ltd (RES-V: $10.37)
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Bottom-Fish Comment - December 24, 2010: Rare Element closes $57 million financing for Bear Lodge

Rare Element Resources Ltd closed a $57.5 million short form prospectus financing on Decxember 22, 2010 consisting of 6,394,000 shares at $9 through Byron, GMP, Jacob , Global Hunter and Salman Partners. The financing was first announced on November 18 and was supposed to be done at $9.25, but in the spirit of any Canadian financing not done on a bought deal basis the brokers had a tough time filling the book until about a week ago when Rare Element let the financing price be chiseled down to $9.00 after which lo and behold the offering was instantly double over-subscribed. Meanwhile brokerage firms have been hunting around for Rare Element shareholders willing to lend their stock to short-sellers for as much as 24% on an annualized basis, continuing a trend that started in late summer after Rare Element secured its AMEX listing and became an alternative to Molycorp as a market proxy for rare earth mania. If there is a significant naked short position out there perhaps a good portion of it was covered through this financing which is immediately free trading. Because it did not include a warrant the stock has either been bought by longs in no hurry to sell or by shorts who have covered their existing shorts, which means the upside for the stock from here onwards will be a function of news flow and market sentiment about the rara earth sector. (On December 28 after China released its export policy for the first half of 2011, Rare Element traded 24.2 million shares on AMEX as high as $14.65 before closing at $12.95 on total trading valued at $335 million. Molycorp traded as high as $55.22 before settling down for the day at $46.18 on trading valued at $837 million. Avalon, which secured its AMEX lasting on December 22, traded as high as $7.18 before closing at $6.43 on trading valued at $57.4 million.)

With the financing out of the way Rare Element can put its $65 million working capital to work on the 100% owned rare earth Bear Lodge and gold Sundance projects in Wyoming. Final drill results for the gold project are expected in early January with an initial 43-101 resource estimate expected by early February. Low grade oxide gold mineralization has been encountered over broad intervals to a depth of 150 metres which has raised hopes for a 1.5-2.0 million ounce open-pittable, heap leachable gold resource. The company is still considering splitting the property into gold and rare earth portions and possibly splitting itself into two companies. But because the property is covered by a 200 acre disturbance permit which covers both the rare earth and gold zones Rare Element is unlikely to subdivide the property until both projects are well advanced. Rare Element will also be releasing in batches over the next month the remaining 36 holes of the 60 drilled on the rare earth zone, but it is unlikely the market will react to this data. A more important milestone expected in early April is an updated resource estimate for Bear Lodge. Here we hope to see a doubling of the resource used in the September 2010 PEA which proposed a 1,000 ton per day (907 metric tonnes per day) open pit mining operation for a resource of 5,600,000 tons of 4.45% TREO at a 2.0% cutoff. This would either extend the mine life to 30 years or allow a doubling of the mining rate to 2,000 tons per day. The updated sensitivity chart above presents what happens to the after-tax net present value of Bear Lodge under the 1,000 tpd PEA mining scenario using the new 45,873,713 fully diluted capitalization for Rare Element and a variety of rare earth price sets. It is important to note that the REO price sets reflect prices for separated rare earth oxides and that the PEA does not include the operating cost of separating mixed oxides or the capital cost of such a facility; the DCF analysis thus over-states the potential value of Bear Lodge. The primary value of the chart is to illustrate the relative impact the diffferent price sets have on the per share valuation. For example, at a base case defined as the three year trailing FOB average, which works out to $18.88 per kg for the relative rare earth distribution of the Bear Lodge FMR oxide zone, the after tax NPV works out to $510 million (using a 1:1 USD:CAD exchange rate) or $11.11 per share. Yet when you plug in the spot FOB prices prevailing at the end of 2010, $70/kg, the after tax NPV soars to $3.2 billion or $69.33 per share. Significantly higher targets emerge if you double the resource and mine it at double the PEA rate. The big question is where between the FOB 3 year average and the spot price will rare earth oxide prices settle out at in 2015 and beyond when new supply has come on stream and presumably new demand has emerged. Because we do not know which rare earth mines will make it into production with what degree of efficiency, or what the commercialization plans end-users have for products that require rare earths as critical inputs, it is impossible to predict at this stage which number is realistic. This uncertainty is reflected in JP Morgan's decision to use an REO price set somewhere in between for its Lynas and Molycorp recommendations, which works out to $26.66/kg TREO in the case of Bear Lodge and implies a price target of $20 per share. (Note that these $/kg TREO figures are independent of grade and reflect the percentage distribution of individual rare earth oxides within a deposit, a set of values that is independent of grade but which is tied to the rare earth bearing mineralogy of a deposit.)

If Rare Element can boost its resource and/or grade so that it can double its output from about 10,000 tonnes to 20,000 tonnes, and confirm that the 80% recovery demonstrated by bench scale metallurgical studies in 2010 are viable at the cost assumptions made by the PEA, it would be on a par with Molycorp's Mountain Pass operation at its current planned production rate. There is thus a major gap between the $600 million implied value of Bear Lodge at $13 Rare Element and the $4 billion plus implied value for Mountain Pass at $46 Molycorp which is not entirely attributable to the fact that Bear Lodge would come on stream 3-4 years after Mountain Pass. A higher stock price for Rare Element could also come about as the market begins to understand that Bear Lodge has extraordinary long term strategic implications for the United States in that substantial oxide resources in the 1%-2% TREO range are present at Bear Lodge. According to Don Ranta there are about 15 tonnes of this 1%-2% "waste" rock present for every tonne of 4% plus ore. While this grade might be considered sub-economic during the next 20 years, it will probably be ore in 2030 and beyond if demand growth follows the Japanese trajectory which projects 400,000 tonnes per year by 2040. There may be 100-200 million tonnes of 1%-2% TREO rock present at Bear Lodge. In fact, in 1950 the US Bureau of Mines drilled 10 holes in the Whitetail Ridge area and published a back of the napkin style estimate of 84 million tons of 1.5% TREO. During 2010 Rare Element got around to drilling only 2 holes in the Whitetail Ridge area which yielded grades in excess of 4% TREO. Once it becomes clear that the main Bull Hill resource at a 2% cutoff is just the start for Bear Lodge, Rare Element will start to attract a higher valuation that reflects its potential to be part of a very long term solution to America's rare earth security of supply problem. Rare Element remains a Spec Cycle Hold 100% recommendation for the original medium priority bottom-fish buy at $0.50-$0.75 made on December 24, 2008, and the Good Relative Spec Value Buy at $2.98 made on May 12, 2010 is converted to a Fair Relative Spec Value Hold with $20 as a target during the next 6 months as the market recognizes that Rare Element is a Molycorp peer.

Matamec Explorations Inc (MAT-V: $0.50)
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Spec Value Hunter Comment - December 24, 2010: Matamec raises $6.9 million for Kipawa

Matamec Explorations Inc has raised $6.9 million through private placements consisting of 14,350,000 units @ $0.40 (1 share + 1/2 warrant exercisable at $0.50 until June 23, 2012) and 2,320,000 flow-through shares at $0.50. Osisko's CEO Sean Roosen appears to have become a strong supporter of Matamec as a result of this financing round which puts Matamec in an excellent position to fund an updated 43-101 resource estimate for the Kipawa rare earth project, deliver a PEA by the end of Q1 of 2011, and initiate a 10 tph pilot plant study as part of a PFS expected to be done by H1 of 2012. Matamec undertook a $250,000 drill program in December whose 50 m spacing will support upgrading the Kipawa resource to indicated status and which will provide several composite batches of material for bench scale metallurgical studies. During October 2010 Matamec announced that its consultants metallurgist Les Heymann and mineralogist Tony Mariano achieved a breakthrough in developing a process design which avoids the silica gel problem that plagues the recovery of rare earths from eudialyte, the primary host mineral at Kipawa. Matamec has described the process as "proprietary", though Heymann has pubilcy stated that this should only be understood in the sense that conventional processes were customized to handle the particular coarse grained mineral at Kipawa. This news prompted me to issue a Good Relative Spec Value Buy at $0.40 on October 26, 2010 with a price target in the $1.00-$1.50 range over the next year as Matamec accelerates the development of Kipawa, and the smaller scale compared to other "full spectrum" giants such as Nechalacho and Strange Lake coupled with a good location attract end users looking for a shorter term solution to their "heavy rare earth" supply problem. There was also the possibility that Neo Material Technologies Ltd might snap up Matamec as its heavy rare earth supply problem should its efforts on the tailings at the Pitinga tin mine in Brazil not work out, or that Molycorp, under pressure to supplement its Mountain Pass light rare earth production with some heavy rare earth production, might revisit this project its predecessor Unocal investigated during the eighties as a potential source of zirconium and yttrium. Matamec may not yet have any strategic rare earth sector backer, but the arrival of Sean Roosen, lured aboard by spouse and Osisko IR specialist Sylvie Prud'homme who joined Matamec as a board member last July, is bound to give this former hamster wheel of a junior some serious traction during 2011. Following the recent financing Matamec has 137,782,450 shares fully diluted, which implies a value of $69 million for the 100% owned Kipawa project. An updated inferred resource estimate that incorporates the 2010 summer-fall drilling is imminent, and it is my expectation that it will boost tonnage defined by the "rare earth with zirconium as by-product" scenario into the 10-15 million tonne range without sacrificing grade. My Good Relative Spec Value Buy recommendation suggested buying Matamec to a $0.50 limit which everybody had plenty of opportunity to do during the past month as the junior completed its financings; spec value hunters are running out of time because Matamec has everything underway needed to keep Kipawa as a contender in the race to production, and with the financing hurdle out of the way, it is set to break out beyond $0.50 as we head into 2011.

New Bottom-Fish Highs
Company
Volume High Low Close Chg Status
Benton Resources Corp (BTC-V) 4,515,000 $1.000 $0.720 $1.000 $0.200 BF MP Buy $0.10-$0.19
Mountain Province Diamonds Inc (MPV-T)
1,114,800 $6.490 $4.800 $6.200 $1.240 Good Absolute Spec Value Buy
Red Crescent Resources Ltd (RCB-T) 617,900 $0.820 $0.550 $0.820 $0.200 BF TP Buy $0.20-$0.29
Treasury Metals Inc (TML-T) 2,337,100 $1.210 $0.700 $1.170 $0.450 New BF MP Buy $0.30-$0.49
Xtierra Inc (XAG-V) 3,028,300 $0.380 $0.250 $0.370 $0.130 New BF MP Buy $0.10-$0.19

Top 10 Bottom-Fish Volume Traders
Company
Volume High Low Close Chg Status
Eagle Plains Resources Ltd (EPL-V) 32,245,400 $1.280 $0.560 $0.700 ($0.040) BF XP Buy below $0.10
B2Gold Corp (BTO-T) 20,285,500 $2.850 $2.510 $2.620 ($0.090) BF TP Buy $0.30-$0.49
Torex Gold Resources Inc (TXG-T) 16,869,500 $1.620 $1.380 $1.540 $0.080 BF Spec Cycle Hold 100%
VMS Ventures Inc (VMS-V) 15,909,300 $0.550 $0.415 $0.490 $0.050 BF MP Buy $0.20-$0.29
Geologix Explorations Inc (GIX-T)
14,644,100 $1.000 $0.660 $0.680 ($0.240) Good Absolute Spec Value Buy
EMC Metals Corp (EMC-T) 14,554,100 $0.440 $0.330 $0.395 $0.055 New BF TP Buy $0.10-$0.19
Northern Superior Resources Inc (SUP-V) 13,696,500 $1.140 $0.400 $0.800 $0.190 BF XP Buy below $0.10
Orko Silver Corp (OK-V) 12,028,800 $2.990 $2.110 $2.680 ($0.010) BF TP Buy $0.30-$0.49
Champion Minerals Inc (CHM-T) 11,544,200 $2.480 $1.870 $2.350 $0.460 BF MP Buy $0.30-$0.49
Avalon Rare Metals Inc (AVL-T)
11,482,600 $4.990 $3.750 $4.560 $0.530 Good Absolute Spec Value Buy

Top 10 Bottom-Fish Value Traders
Company
Value High Low Close Chg Status
Rare Element Resources Ltd (RES-V)
$72,475,054 $11.800 $9.200 $10.370 $0.520 Good Relative Spec Value Buy
B2Gold Corp (BTO-T) $54,451,624 $2.850 $2.510 $2.620 ($0.090) BF TP Buy $0.30-$0.49
Nevsun Resources Ltd (NSU-T) $54,125,784 $7.420 $6.300 $7.070 $0.560 BF Spec Cycle Hold 100%
Avalon Rare Metals Inc (AVL-T)
$49,697,436 $4.990 $3.750 $4.560 $0.530 Good Absolute Spec Value Buy
Sabina Gold & Silver Corp (SBB-T) $32,534,620 $5.820 $4.750 $5.140 ($0.360) BF TP Buy $0.30-$0.49
Orko Silver Corp (OK-V) $30,619,056 $2.990 $2.110 $2.680 ($0.010) BF TP Buy $0.30-$0.49
Eagle Plains Resources Ltd (EPL-V) $28,801,021 $1.280 $0.560 $0.700 ($0.040) BF XP Buy below $0.10
Torex Gold Resources Inc (TXG-T) $24,800,750 $1.620 $1.380 $1.540 $0.080 BF Spec Cycle Hold 100%
Champion Minerals Inc (CHM-T) $24,561,409 $2.480 $1.870 $2.350 $0.460 BF MP Buy $0.30-$0.49
Ur-Energy Inc (URE-T) $17,282,900 $2.720 $2.120 $2.680 $0.440 BF MP Buy $0.50-$0.75

Top 10 Bottom-Fish Price Gainers
Company
Volume High Low Close Chg Status
Mountain Province Diamonds Inc (MPV-T)
1,114,800 $6.490 $4.800 $6.200 $1.240 Good Absolute Spec Value Buy
Amazon Mining Holding Plc (AMZ-V)
2,546,900 $5.780 $4.510 $5.600 $1.040 Good Absolute Spec Value Buy
NMC Resource Corp (NRC-V) 1,001,500 $1.110 $0.180 $1.050 $0.840 New BF MP Buy $1.01-$1.25
ReMac Zinc Corp (RMZ-V) 731,700 $0.880 $0.225 $0.800 $0.610 New BF LP Buy $0.10-$0.19
African Aura Mining Inc (AUR-V) 498,100 $3.000 $2.440 $3.000 $0.590 New BF MP Buy $1.01-$1.25
Nevsun Resources Ltd (NSU-T) 7,805,200 $7.420 $6.300 $7.070 $0.560 BF Spec Cycle Hold 100%
Avalon Rare Metals Inc (AVL-T)
11,482,600 $4.990 $3.750 $4.560 $0.530 Good Absolute Spec Value Buy
Rare Element Resources Ltd (RES-V)
7,249,100 $11.800 $9.200 $10.370 $0.520 Good Relative Spec Value Buy
Champion Minerals Inc (CHM-T) 11,544,200 $2.480 $1.870 $2.350 $0.460 BF MP Buy $0.30-$0.49
Treasury Metals Inc (TML-T) 2,337,100 $1.210 $0.700 $1.170 $0.450 New BF MP Buy $0.30-$0.49

Top 10 Bottom-Fish Price Percentage Gainers
Company
Volume High Low Close Chg Status
NMC Resource Corp (NRC-V) 1,001,500 $1.110 $0.180 $1.050 400% New BF MP Buy $1.01-$1.25
ReMac Zinc Corp (RMZ-V) 731,700 $0.880 $0.225 $0.800 321% New BF LP Buy $0.10-$0.19
Pacific Coast Nickel Corp (NKL-V) 3,020,800 $0.240 $0.085 $0.185 147% New BF XP Buy below $0.10
Pacific Wildcat Resources Corp (PAW-V) 2,578,400 $0.820 $0.345 $0.700 77% BF MP Buy $0.10-$0.19
Treasury Metals Inc (TML-T) 2,337,100 $1.210 $0.700 $1.170 63% New BF MP Buy $0.30-$0.49
ICN Resources Ltd (ICN-V) 3,036,400 $0.660 $0.375 $0.600 62% New BF MP Buy $0.20-$0.29
Zazu Metals Corp (ZAZ-T) 5,544,500 $0.400 $0.200 $0.350 59% BF XP Buy below $0.10
Xtierra Inc (XAG-V) 3,028,300 $0.380 $0.250 $0.370 54% New BF MP Buy $0.10-$0.19
James Bay Resources Ltd (JBR-V) 1,284,000 $0.690 $0.420 $0.650 51% BF LP Buy $0.10-$0.19
Argus Metals Corp (AML-V) 8,291,600 $0.290 $0.155 $0.275 49% New BF MP Buy $0.10-$0.19

Top 10 Bottom-Fish Price Losers
Company
Volume High Low Close Chg Status
Sabina Gold & Silver Corp (SBB-T) 6,289,000 $5.820 $4.750 $5.140 ($0.360) BF TP Buy $0.30-$0.49
Polar Star Mining Corp (PSR-T) 1,081,200 $2.100 $1.500 $1.760 ($0.340) BF MP Buy $0.20-$0.29
Rugby Mining Ltd (RUG-V) 244,000 $1.850 $1.440 $1.560 ($0.310) New BF MP Buy $0.30-$0.49
Quest Rare Minerals Ltd (QRM-V)
2,815,200 $5.230 $4.440 $4.800 ($0.260) Good Relative Spec Value Buy
Geovic Mining Corp (GMC-T) 2,642,200 $0.940 $0.650 $0.700 ($0.250) New BF LP Buy $0.50-$0.75
Geologix Explorations Inc (GIX-T)
14,644,100 $1.000 $0.660 $0.680 ($0.240) Good Absolute Spec Value Buy
Wesdome Gold Mines Ltd (WDO-T)
1,089,900 $2.850 $2.560 $2.600 ($0.210) Good Relative Spec Value Buy
Gunpoint Exploration Ltd (GUN-V) 212,200 $1.800 $1.400 $1.400 ($0.200) New BF TP Buy $0.76-$1.00
Salazar Resources Ltd (SRL-V) 1,140,900 $1.330 $1.060 $1.180 ($0.170) BF MP Buy $0.10-$0.19
Mawson Resources Ltd (MAW-T) 1,678,600 $2.190 $1.900 $2.010 ($0.160) BF MP Buy $0.10-$0.19

Top 10 Bottom-Fish Price Percentage Losers
Company
Volume High Low Close Chg Status
Graniz Mondal Inc (GRA.H-V) 20,000 $0.050 $0.050 $0.050 -33% BF XP Buy below $0.10
Geovic Mining Corp (GMC-T) 2,642,200 $0.940 $0.650 $0.700 -26% New BF LP Buy $0.50-$0.75
Geologix Explorations Inc (GIX-T)
14,644,100 $1.000 $0.660 $0.680 -26% Good Absolute Spec Value Buy
Escape Gold Inc (EGT-V) 275,000 $0.200 $0.150 $0.150 -23% New BF LP Buy $0.10-$0.19
Firestone Ventures Inc (FV-V) 654,900 $0.130 $0.095 $0.100 -23% New BF LP Buy $0.10-$0.19
Hard Creek Nickel Corp (HNC-T) 1,753,000 $0.480 $0.330 $0.370 -23% New BF LP Buy $0.20-$0.29
Galena Capital Corp (FYI-V) 2,373,200 $0.050 $0.040 $0.040 -20% BF XP Buy below $0.10
Rye Patch Gold Corp (RPM-V) 8,264,300 $0.310 $0.230 $0.245 -18% New BF LP Buy $0.30-$0.49
Rugby Mining Ltd (RUG-V) 244,000 $1.850 $1.440 $1.560 -17% New BF MP Buy $0.30-$0.49
Continental Precious Minerals Inc (CZQ-T) 943,900 $0.920 $0.700 $0.760 -16% BF MP Buy $0.30-$0.49

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