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 Show printable version of 'Kaiser Research Summary for Week of July 10-16, 2011' in a New WindowEmail 'Kaiser Research Summary for Week of July 10-16, 2011' to a friendSun Jul 17, 2011
Kaiser Research Summary for Week of July 10-16, 2011
    Publisher: Kaiser Research Online
    Author: Copyright 2011 John A Kaiser

 

Kaiser Research Summary for Week of July 10-16, 2011

In the Grip of Ideological Terrorism

The second week of July was dominated by growing unease that the fuss about the American debt ceiling was perhaps a little more serious than a poker game between ideological opponents. The general view around the world and within the United States has been that the politicians will milk this for all its worth, but in the eleventh hour common sense will prevail, the debt ceiling will be raised, and the Republicans will find themselves a different lever with which to lobby for the interests of their core constituency, namely taxpayers who make more than $150,000 annually, that does not risk disproportionately inflicting a decline on the net worth of this group that represents 8% of American households. But last week it began to dawn on the rest of the world that it was witnessing the death throes of an empire that had become so self-absorbed with ideological battles that it was willing to abdicate its currency's status as the world's reserve currency. Both gold and silver rallied, and appear destined to head substantially higher, against all currencies, because there is at this time no credible replacement for the US dollar as a reserve currency. What worries me is that most people laugh off this ideological terrorism as much ado about nothing; I hope they are right. But the complacency reminds me a lot of early September 2001 just before a different type of terrorist inserted itself into the American psyche, except this time around the terror attack will do the opposite of unifying Americans.

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 July 10, 2011 to July 16, 2011
Company Date
Price Recommendation Action Net
Cash
Net
Stock
Gain New Status
No Recommendations

New Comments
Company
Volume High Low Close Chg Status
Atac Resources Ltd (ATC-V)
969,100 $9.590 $8.450 $9.080 $0.380 Good Relative Spec Value Buy
Frontier Rare Earths Ltd (FRO-T) 488,500 $2.500 $1.830 $2.300 $0.450
Molycorp Inc (MCP-N) 16,076,000 $55.560 $51.260 $52.260 ($4.290)
Peregrine Metals Ltd (PGM-T) 40,049,400 $2.940 $2.400 $2.450 $1.640
Rare Earth Metals Inc (RA-V) 873,200 $0.265 $0.225 $0.260 $0.020 New BF MP Buy $0.30-$0.49

Bottom-Fish Action Report for July 10-16, 2011
Peregrine Metals Ltd (PGM-T: $2.60)

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Index Member Comment - July 11, 2011: Stillwater pays stunning premium for Altar copper-gold project of Peregrine Metals

Peregrine Metals Ltd jumped 221% to $2.60 on July 11, 2011 after announcing a plan of arrangement with Stillwater Mining Company whereby Stillwater will issue 0.08136 shares and pay US $1.35 cash for each share of Peregrine Metals. These terms represented a price of $3.16 based on Friday's Stillwater price of US $23.72, though at the end of Monday with Stillwater closing at US $18.46 (down $5.19) the offer was worth only US $2.85 or CAD $2.77 at a 0.973 exchange rate. Stillwater's sharp drop partly reflected the market's dismay over the premium Stillwater was willing to pay Eric Friedland's Peregrine Metals for a copper-gold project in Argentina still at the PEA stage, and partly the broad market sell-off in response to evidence that the Republican party would rather push the United States off a cliff than work out a compromise that lifts the debt ceiling and avoids a default. While the left likes to lambast the Tea Party as foot soldiers for the establishment, it is starting to dawn on the latter that the Tea Party is not as dumb as their insistence on no more taxes, not even for the rich, might seem. The vast majority of Tea Party members make less than $150,000 per year and are not so gullible as to believe that one day they too might collect huge salaries for stealing money from pensioners and taxpayers; what they are is loaded with resentment, and while it might seem they wish nothing but harm for their fellow citizens, what they do know is that as long as capitalism seeks out the lowest cost jurisdiction, which the United States is not yet, there is little hope for prosperity growth that lifts all boats. In turning minimal taxation of the elite into a sacred cow the Tea Party has in fact turned itself into a trojan horse that will cost the elite dearly when confidence in the viability of the American economy collapses, bringing down the value of the equities and bonds whose ownership is concentrated in the hands of a tiny minority Republican politicians have been tricked into defending against any tax increases. But in fact the Tea Party is setting up a really bad trade in the form of incremental tax savings for massive wealth destruction suffered mainly by those with significant net household worth. Some of the elite such as Warren Buffett have already figured out the nature of this sucide mission, but others such as the Koch brothers continue to bang a doomsday drum oblivious for whom it ultimately resounds.

The premium Stillwater is paying for Peregrine's Altar deposit reflects a rejection by Stillwater management of the embedded pessimism that sees only an economic downturn for the future. Today, after House leader John Boehner capitulated to the Tea Party demand that the American economy, and possibly the world economy, be brought to its knees, was not a good day to assert an optimistic outlook. However, if you believe that the establishment usually figures out where its best interests lie, and that August 2 is the deadline for doing so, Stillwater's timing does not matter. FOX News, the primary proganda conduit for Tea Party populism, has been crippled by the exposure of Rupert Murdoch as a shameless and manipulative cynic from whose heart the interests of average Americans are starting to look very remote. It will not take long before the establishment rises to put an end to the Washington gridlock, and soon the market will realize that the embedded pessimism that has depressed the valuations of resource juniors with ounces and pounds in the ground is dead wrong. The KRO Intermediate Copper Index above shows that the prices of copper juniors with more than 2 billion net copper pounds in the ground have tracked the uptick of copper prices during the past couple weeks. The alternative view is that companies such as Barrick and Stillwater that are buying copper assets are wrong and will regret their actions, just as turned out to be the case for those who bought out juniors in 2008 ahead of the meltdown which began at the start of summer.

As the table below indicates, the Altar deposit had a measured+indicated+inferred resource of 1,267,000,000 tonnes of 0.42% copper and 0.06 g/t gold representing 11.7 billion lbs of copper and 2.4 million ounces gold with a gross metal value $52.3 billion at spot copper and gold, of which the copper GMV is 93%. Based on 152,807,135 shares fully diluted and Friday's closing price of $0.81 Peregrine had a market cap of $124 million which is the implied value of the 100% owned Altar project. In terms of market capitalization per in situ pound of copper the valuation was $0.008 per lb using 117.8 million issued shares as the base. At the net equity value of the Stillwater plan based on Friday's Stillwater price, US $451.4 million (after subtracting $34.4 million for the exercise of warrants and options), the valuation jumps nearly 400% to $0.039 per lb. This pushes the valuation into the $0.03-$0.05/lb range at which a number of takeover bids involving both large and medium sized copper deposits have taken place since 2003. Our Dominant Copper Deposits ranked by $/lb Table compares market valuations among existing resource juniors with copper deposits and those taken over. (The figures are based on issued stock and copper lbs net to the company.) For other copper rankings or other metals we suggest KRO members visit our KRO Resource Estimate Index for which you can also find a link in the menu that drops down from the "research tools" tab at the top of each web page.

I looked at Peregrine Metals as a possible bottom-fish earlier this year, but because of the lowish copper grade and skepticism that the Chinese entities which had been snooping around would make a move during a year when the Chinese economy is retrenching I felt I had time. That a North American company such as Stillwater would come out of the woodwork with an aggressive offer has caught me by surprise. It is certainly annoying that the other Peregrine which is a Kaiser Core Pick for 2011 has languished this year, and dropped lower everytime I reminded Spec Value Hunters to own it. The Peregrine Metals plan of arrangement requires a special meeting, with a circular expected to be filed in August. The transaction will probably not close until September, by which time Peregrine Diamonds Ltd should be moving on news from the 2011 season. There is overlap in the shareholder bases of the two Peregrines, so we should start to see some migration of capital into the diamond junior as shareholders exit the copper junior. Of greater significance is that Eric Friedland has turned Peregrine Metals and its Altar copper project into a success without any help from his brother Robert in whose shadow the market perceives Eric to stand, so the Peregrine Metals plan of arrangement with Stillwater serves as a big empowerment event for Eric Friedland which will reap benefits for Peregrine Diamonds Ltd this fall when he is able to bestow his full attention on the basket in which he has the most eggs and which is focused on a sector in which his brother has had no measurable success.

Project Resource Estimate - Altar
Oct 4, 2010NI 43-101Ron Simpson, GeoSim ServicesCutoff: 0.3% Cu eq.
Resource CategoryTonnageTotal
Rock Value
MetalGradeRecoveryContained Metal% of GMV
Measured Resource491,000,000$42/tCopper0.430%100.0%4,654,541,446 lb93%
Gold0.06 g/t100.0%962,962 oz7%
Indicated Resources311,000,000$39/tCopper0.400%100.0%2,742,504,409 lb93%
Gold0.06 g/t100.0%569,945 oz7%
Inferred Mineral Resources465,000,000$41/tCopper0.420%100.0%4,305,555,556 lb93%
Gold0.06 g/t100.0%867,119 oz7%
All Categories Spot1,267,000,000$41/tCopper0.419%
11,702,601,411 lb93%
Gold0.06 g/t
2,400,026 oz7%
All Categories LTA1,267,000,000$30/tCopper0.419%
11,702,601,411 lb93%
Gold0.06 g/t
2,400,026 oz7%
Spot Gross Metal ValueMarket Cap as % of Net GMVSpot Prices Used
$52,253,435,3760.2%Copper $4.15/lb, Gold $1,536.50/oz
LTA Gross Metal ValueMarket Cap as % of Net GMVLTA Prices Used
$38,277,762,0050.3%3 Year Average: Copper $3.05/lb, Gold $1,077.00/oz

Atac Resources Ltd (ATC-V: $9.12)
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Spec Value Hunter Comment - July 13, 2011: Speculation over Atac's Carlin-style play building

Atac Resources Ltd, which is in the midst of a 40,000 metre drill program on it 185 km long Rackla Gold Belt project in the Yukon, hit a new high of $9.15 on July 13, 2011 in the wake of last week's Conrad drill results. Hole #10 drilled 100 m east of the 2010 discovery hole #8 yielded 114.93 m of 3.15 g/t gold. The mineralization is fairly continuous, with 32 of 45 intervals averaging more than 1 g/t gold and only 4 intervals less than 0.25 g/t gold. Atac has 7 drills on the Nadaleen Trend just south of the Nadaleen Fault where it is targeting more than 200 holes largely at the limestone horizons of the folded stratigraphy. The Conrad drill is currently marching eastwards toward a high grade outcrop that yielded 40.3 g/t gold. While I have reproduced some key images below, Spec Value Hunters should check out the latest Atac Presentation to get a sense of the enormous information flow this project is capable of generating during the next few months. Several drills are working on the Osiris target which yielded strong intersections last year in an area with a much more intense gold in soil anomaly that the Conrad and Eaton areas. The geological context of the Osiris area is similar to that of the Carlin Trend and the speculative goal for 2011 is to see that Atac has indeed latched onto a world class gold district. As is required for every yet-to-be proven world class play, Osiris has its share of naysayers who fret about the remote location, the refractory nature of the mineralization, the region's lack of power infrastructure, and concerns that in terms of a gold kitchen the Yukon is little more than a greasy spoon. Until proven otherwise the latter is always a possibility, and with regard to the former concerns, well, we shall worry about them after we have discovered the extent and grade of gold mineralization. In terms of trying to follow how drill intersections line up, don't bother. As the drill hole location map reveals, Atac is swiss-cheesing a virgin property that is likely to yield many gold bearing intersections whose structural relationships management will spend all winter sorting out. What would send the stock into orbit is a monster intersection along the lines of 200 m of 15 g/t gold signaling a sweetspot that quashes concerns about refractory ore and remote location; there is no guarantee that this will happen, but the scale of work is such that if this potential resides at Osiris, the probability is high that Atac's drill crew will unveil it this work season. Atac's Osiris project has an implied value of $900 million without any 43-101 or even historic gold ounces to its credit, but this play has the scale and scope to qualify as the Bre-X Redemption if it delivers on its promise. Spec Value Hunters who are still holding since our initial buy recommendation at $0.63 on July 7, 2009 on the basis of the Tiger Zone which has now become a footnote, and those who bought on our Kaiser Core Picks for 2011 recommendation at $5.70 on January 13, 2011 should both hold for at least the next hundred holes because if this is indeed a Carlin-style system, assays and not visuals will tell the gold story.

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Frontier Rare Earths Ltd (FRO-T: $2.20)

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Index Member Comment - July 13, 2011: Frontier secures non-binding relationship with Korea Resources Corp

Frontier Rare Earths Ltd announced on July 13, 2011 that it had signed a heads of agreement with the South Korean government agency called Korean Resources Corp which will not be turned into a binding agreement until after the junior publishes a preliminary economic assessment (PEA) for its 74% owned Zandkopsdrift rare earth project in South Africa. Although still very much of a "due diligence" type deal, it is one more sign that end-users and government agencies who support them are biting the bullet and embracing the rare earth juniors as solutions to their rare earth supply problems. On July 11 Frontier announced that it expects to have its PEA done during Q4 of 2011, which certainly sounds more doable than its initial promise to deliver a prefeasibility study (PFS) by the end of 2011. The company expects to have an 18,000 m drill program initiated in January finished by the end of September (two-thirds done as of early July). The results will be used for an updated resource estimate which will form part of the PEA; given slow assay turnaround and the need to map the mineralogical dimension of Zandkopsdrift, the PEA will likely be ready in December 2011. In mid May SGS Minerals started bench scale metallurgical studies on 5,500 kg of core from Zandkopsdrift, with initial results expected shortly. The company claims that it will have a definitive feasibility study done by the end of 2012, which may be possible if Frontier opts to focus on a small, high grade near surface resource with reasonable mineralogical uniformity, but unlikely if a larger scale mining plan is adopted which will require a flow-sheet designed to handle the complexity that emerges at the depth where the weathering profile becomes irregular. The main milestone for Zandkopsdrift will be a plausible processing flow-sheet. At this point the KORES deal does not mean much because it is non-binding, and with the signing of a binding agreement to happen after the PEA is published, it looks like KORES can simply walk away if it is unhappy with the PEA. But this knife cuts both ways, and Frontier has indicated it is exploring other strategic partnerships. In this regard the deal appears to be not much better than the non-binding memoranda of understanding Avalon Rare Metals Inc announced on July 11, except that the identities of "three Asian industrial companies" are secret.

Nevertheless, it is important that KORES has allowed its name and fairly aggressive terms to be used by a rare earth junior. While no actual deal may ever be signed, KORES is sending a signal that it is prepared to back a junior through production. Another Korean company, steelmaker POSCO, struck a definitive deal today with Fortune Minerals Ltd to acquire a 20% direct interest in the Mount Klappan metallurgical coal project by putting up $174 million representing 20% of projected capital costs and paying Fortune $27 million in stages. POSCO will have an offtake arrangement whereby it will acquire 20% of production at cost. The KORES "deal" with Frontier has much better terms, though at this stage is not binding. The KORES strategic partnership envisions KORES purchasing a direct 10% interest in Zandkopsdrift on "market-related" terms. Frontier nets 74% under the current ownership structure, so this stage would leave KORES with 10% and Frontier with 64%; if "market-related" means the value of Zandkopsdrift implied by Frontier's market capitalization, KORES will have to pay 13.5% of Frontier's market cap when it inks the deal. At today's closing price of $2.20 and 89,563,000 shares issued KORES would pay about $27 million for a direct 10% interest. If the BEE group had the right to "pay" for its 26% share on the same terms, it would pay 35% of Frontier's market cap or $69 million, whose payment of course would be through future cash flow. After Frontier completes a definitive feasibility study KORES will have the right to purchase another 10% direct interest based on the valuation established by the feasibility study. KORES will have to pay cash, while the BEE, whose "purchase price" will also be defined by the study, will not pay cash unless a third party lends them the money against future cash flow. At that time KORES will have the right to purchase a 10% equity stake in Frontier at prevailing market prices. KORES will have the right to purchase rare earth output at prevailing international market prices proportionate to its direct interest, and if it has gone to 20%, it will have offtake rights to an additional 20%, bringing its overall offtake right to 40% of Zandkopsdrift's production. Unlike the POSCO deal with Fortune where most of POSCO's investment goes into the ground and little into Fortune's pocket , KORES will have to contribute its share of development and capital costs on top of what it pays for the project and equity stakes. The news release also says KORES "will take responsibility for arranging debt finance from Korean and other international lenders", though this wording is not as strong as "being responsible". If KORES makes these terms binding, this deal will be very good for Frontier. Although KORES bears some similarity to JOGMEC in that it is a government entity mandated to secure raw material supply for domestic end-users, the KORES mandate includes having a direct mining interest whereas JOGMEC is required to flip its direct project interests to non-government entities.

Molycorp Inc (MCP-N: $51.85)

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Index Member Comment - July 14, 2011: Rare Earth Juniors down despite tightened H2 2011 export quotas

Molycorp Inc and other rare earth juniors sold off on July 14, 2011 after the Chinese Ministry of Commerce released export quotas for the second half of 2011 which imply a modest drop from the overall export quota for 2010. The combined quota consisting of 14,446 tonnes for the first half and 15,738 tonnes for the second half totals 30,184 tonnes, which is 74 tonnes less than the 30,258 tonne total for 2010 or down 0.2%. Some of the mainstream North American media (see Bloomberg: China almost doubles Rare Earth Export Quota) chose to focus on the fact that the H2 2011 quota was 8.9% higher than the H1 2011 quota, and 98% higher than the quota for H2 2010, suggesting that China was relaxing its export quota policy. This caught the attention of the rare earth bears who saw it as a negative market inflection point for the rare earth juniors. What they are ignoring is that the quota for H1 2010 was 22,282 tonnes compared to 7,976 tonnes for H2 2010, with the sharp drop in early July 2010 reflecting a Chinese policy shift to consolidate a polluting and inefficient rare earth industry. A good part of the H1 2010 export quota was unused by mid-year of 2010, and, because first half quotas can be carried over to the second half of a calendar year, but no unused quotas can be carried over into the new calendar year, the sharp reduction for H2 2010 was viewed by the Chinese as a balancing of quotas with demand. Since then the Chinese have guided through various organs such as Dr Chen Zhanheng of the Chinese Society of Rare Earths (CRSE) and Wang Caifeng of the China Association of Rare Earths (CARE) that their export quota target is about 30,000 tonnes annually for the next five years. The H2 2011 export quotas are thus consistent with China's goals and do not at all lessen the urgency of the supply situation for end-users outside of China. It is not out of line to interpret the slight reduction for the total 2011 quota as a raspberry blown at the WTO ruling which contends that China must sell its output to the highest international bidder.

The situation has in fact worsened, because on May 20, 2011 the Ministry of Commerce and the General Administration of Customs ruled that after July 1 the rare earths contained in rare earth ferro alloy exports would be subject to export quota regulations. These ferro alloys were supposed to be a downstream product but were in fact a shipping container that enabled rare earths to bypass the export quota system. Once the rare earth alloys arrived in Japan or other western destinations the alloy was melted down and the rare earths extracted. It is not clear what volume was exported in this manner, but apparently it was used to export expensive rare earths such as dysprosium and terbium. These are heavy rare earths that come mainly from the southern China ion adsorption clay operations which have been the main focus for China's crackdown on illegal and polluting mines. Some estimates suggest that China has only 10-15 years of supply left before these clay deposits are depleted, which is why officials such as Dr Chen have signaled that China will become an importer of heavy rare earths. It is not just foreign end-users who are feeling the pain of sharply higher heavy rare earth prices; domestic prices for europium, terbium and dysprosium are only modestly lower than FOB prices. Other more abundant rare earths such as cerium, lanthanum and yttrium continue to have substantial FOB premiums over domestic prices because their availability for the export market is restricted by the export quotas.

The slightly reduced quota for 2011 exports hardly qualifies as good news for non-Chinese manufacturers seeking cheap and ample supply and it certainly is not bad news for juniors seeking to develop non-Chinese rare earth supply. During June CARE and CRSE revealed that Chinese REO production during 2010 was 118,900 tonnes, down from 129,400 tonnes in 2009. The Chinese have a quaint concept that translates as "total control plan" which represents the country's overall production target. The target for 2010 was 89,200 tonnes, which is 29,700 tonnes less than what was reportedly produced. These targets have been 30,000-40,000 tonnes below actual production, with the difference politely described as "unofficial" production. Perennial Chinese threats to shrink "unoffocial" production were a running joke because the production targets are generated in Beijing but the mines are in jurisdictions presided over by local officials who until recently have been rather immune to Beijing's dictates. The 2011 shock that translated into soaring domestic prices is the realization that this time appears to be different, this time Beijing is getting control of the rare earth industry, consolidating smaller operations into large state owned mining entites or shutting them down altogether. When the CRSE's Dr Chen projects 2011 production will be 93,800 tonnes and increasing annually by 5% for the next decade, nobody is laughing anymore.

The Chinese, however, seem to have a problem with arithmetic, because, according to CRSE and CARE, Chinese consumption reached 87,000 tonnes of REO in 2010, up 19% from 73,000 tonnes of consumption in 2009, which was up 8% from 67,680 tonnes in 2008. Some of this domestic demand growth is internal as China invests heavily in wind technology, but some of it is also arising from capitulation by non-Chinese end-users who are moving their component production to China in order to secure access to critical inputs. European end-users are the most resistant about moving their intellectual property into China, which is why European media squawked today about the H2 2011 export quotas while the spin from American media served the goals of the rare earth bears who are still heavily short the rare earth supply contenders and contend that everything is just a bubble. With no major non-Chinese production coming on stream until 2013 (2012 will at best be a transitional year for Lynas), we can expect Chinese demand to continue to grow. But if China does curtail domestic production to 93,800 tonnes, and consumption stays at the 2010 level of 87,000 tonnes, there will be only 6,800 tonnes available for export markets, which is a lot less than the 30,184 tonnes export quota for 2011. The Chinese numbers simply do not add up if China is sincere about making at least 30,000 tonnes available for export markets each year.

China has boxed itself into a corner. Unless it somehow mobilizes new supply, domestic demand will eclipse China's production. If China were to eliminate export quotas, the premiums of FOB prices over domestic prices would disappear, with domestic prices rising toward higher FOB prices, which would hurt all end-users. New rare earth supply cannot be quickly mobilized, so in the case of a severe supply-demand imbalance where rationing is not an option, the price will soar to a level where demand self-destructs. The WTO argues that a member cannot use quotas and export duties to ration a raw material such as rare earths at preferential prices to domestic consumers. If China complies, it faces a double whammy in that its end-users will enjoy no supply and price advantage over foreign end-users, and because industry in general will seek substitutes that turn into long term structural rare earth demand destruction, the strategic value of China's near monopoly on rare earth production will diminish over time. China will likely buy time by appealing the WTO ruling on unrelated raw materials such as silicon carbide and coke, and praying that Lynas and Molycorp bring their Mt Weld and Mountain Pass supply on stream as projected so that the political tension is relieved. Politicians and foreign end-users will huff and puff during the next two years while the WTO case meanders through the courts, Chinese end-users will benefit from supply availability at reasonable prices, and China will benefit from technology transfer as end-users decide that intellectual property theft risk is a lesser evil than going out of business for lack of physical supply. Preservation of the recent status quo is thus very good news for the rare earth juniors who are supply contenders, because end-users are starting to realize that applying the WTO ruling to rare earths will not help anybody if China sticks to its production target of 93,800 tonnes with 5% annual supply growth. That is why there has been a spate of recent news releases about offtake agreements, memoranda of understanding, and other signs that end-users and government agencies are conducting due diligence on the more advanced supply contenders.

My supply evolution chart indicates that although there will be a severe supply shortage until 2013, more than enough supply will arrive by 2016 to solve the problem. This new supply will not result in a return to REO prices that prevailed before H2 of 2010, because its cost structure is equal or higher than the price of rare earth oxides at a time when China was willing to allow inefficient, polluting, hazardous and illegal production to be the norm in its rare earth industry. What is not known is what the margin will be between international rare earth prices and and each producer's cost of production. If the rest of world supply materializes as I envision, Chinese export duties and quotas will disappear; there should emerge an international market that discovers the price of rare earth oxides. China will milk its supply advantage during the interim, and there is nothing anybody can do about it. But there is a problem with this scenario, because the financing of future non-Chinese rare earth supply is being done with only vague linkage to "market prices". The Korean and Japanese consortium that is investing $1.8 billion in the Brazilian niobium producer CBMM is rumored to have done a cost plus offtake agreement on the niobium and rare earth production potential of the world class Araxa deposit. End-users which directly or through an intermediary buy out a junior rare earth supply contender may have no intention of supplying rare earths to the market or treating their value as anything but their local cost of production. The possibility that down the road the end-user could have bought the rare earths cheaper in the open market will be ignored because the end-users will apply "opportunity cost" accounting in deciding whether or not to acquire and develop a rare earth deposit. China has ambitions to create a central rare earth warehouse in which a state entity will stockpile rare earth oxides and "sell" them on the basis of a "unified pricing system" somewhat akin to the supply management system De Beers once used for the diamond market which has complexity similar to the rare earth market. De Beers' "central selling organization" had a captive market in the form of a club called "sight holders", each of which had specialized rough diamond needs for their downstream markets. China plans to run something similar for the benefit of both its rare earth producers and downstream users. I expect similar but smaller "offline" supply management clubs to emerge outside of China that are run by private sector groups as well as sovereign entities such as implied by the tentative deal Frontier Rare Earths struck with KORES. Speculators worred about the prices of rare earth juniors should shift their attention to the question of who or what consortium will end up controlling which rare earth supply "clusters".

The next big question will be, if a consortium risks its capital to develop a rare earth mine to secure its members' long term supply needs, and allocates production to its members via a cost plus formula, and stockpiles the rest as private warehouse inventory for exclusive drawdown by its members, will regulators accuse the consortium of operating a cartel and force it to make its rare earth production available to the highest bidder whether or not it is a member of the consortium that took the risk associated with bringing the rare earth mine into production? If you believe that such an anti-trust action would be unfair, then substitute "China Inc" for "consortium" and ask yourself on what basis one might object to China Inc allocating its entire rare earth supply to domestic end-users? This concept of closed rare earth supply systems is not as outlandish as it might sound; China views its rare earth sector as a somewhat closed system and the government is investing huge capital in R&D aimed at identifying new applications and technologies that tap into the special properties of rare earths. Why should private companies not be allowed to do the same? The complexity of rare earths is such that they cannot be viewed in the traditional free market terms that other raw materials are viewed, and unless this is understood and accepted by all players, the long term rare earth supply problem will not be solved. The KRO Rare Earth Index looks like it is being pressured toward a technical breakdown, which is possible if the Republicans allow their Tea Party masters to force a technical default by preventing a rise in the US debt ceiling. I suspect the downward pressure has more to do with anxiety about a general market meltdown during which the rare earth sector, which symbolizes an optimistic rather than apocalyptic outlook for the global future, would be among the first to tumble, than fundamental skepticism about the sector. If we make it into August with a US default deferred reasonably far into the future, the current downtrend will form a double bottom that will precede a major breakout during the latter part of 2011 as end-users and sovereign entities take major steps to secure their long term rare earth security of supply.

Rare Earth Metals Inc (RA-V: $0.26)
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Bottom-Fish Comment - July 15, 2011: Rare Earth Metals drilling Lavergne light rare earth prospect

Rare Earth Metals Inc has been a disappointment since I recommended it as a medium priority bottom-fish buy in the $0.30-$0.49 range on December 31, 2009 as part of the 2010 Bottom-Fish Edition, and it certainly has not delivered much justification for being included in the KRO Rare Earth Stock Index on which it has largely been a drag during the past couple years. The Clay-Howells deposit that had Mick Stares excited in 2009 has faded into a possible magnetite mining scenario after a scout drilling program in April 2011 failed to turn peripheral targets into significant new rare earth zones. In Labrador Rare Earth Metals is now conducting a 2,500 m drill program on the Two Tom and Dory Pond prospects within the Red Wine Complex where the goal is to establish heavy rare earth enriched grades within eudialyte mineralization. Eudialyte is a zirconium silicate which is often associated with heavy rare earth enrichment such as is the case at Matamec's Kipawa project in southern Quebec and Tasman's Norra Karr project in southern Sweden, but the grade is typically less than 1%. Eudialtye has historically posed a processing problem in that the mineral dissolves readily in acid, but the silica turns into a gel that stymies selective extraction of the rare earth elements. The metallurgical engineer Les Heymann, who recently passed away, achieved a breakthrough on behalf of Matamec in late 2010 by developing a flow-sheet that brought the eudialyte at Kipawa into solution without creating the gel state. Heymann also consulted to Tasman which has also reported bringing Norra Karr mineralization into solution without the gel problem. Drilling by Rare Earth Metals last year at Two Tom established a decent sized zone grading in excess of 1% TREO, but the HREO content was less than 10%. Although Rare Earth Metals will likely establish a modest resource for Two Tom as a result of this season's drilling, this resource is unlikely to be a development candidate. The junior achieved higher sampling grades at the Dory Pond zone which was considerably more HREO enriched than Two Tom; if Rare Earth Metals is to deliver any good news from the Red Wine Complex it is most likely to come from the Dory Pond drilling. Rare Earth Metals has started to look like one of those several hundred rare earth juniors its advisory board member Jack Lifton frequently worries about in the media as being too many, but which in reality pose as much of a threat to flooding the rare earth sector as do the thousand gold exploration juniors to the gold market. However, Mick Stares thinks that he has latched onto a play which will enable Rare Earth Metals to catch up with the supply contenders and justify its membership in the KRO Rare Earth Stock Index.

In early June 2011 Rare Earth Metals negotiated a deal with several groups to acquire 100% of a cluster of claims covering 839 hectares initially called the Springer project but now called the Lavergne project. The vendors, which include Dave Hodge's Zimtu Capital Corp, will get $567,000 and 2 million shares over 3 years, and retain a 2% NSR (half can be bought for $1 million for each of the three claims). The Lavergne property was last explored in 1969 when a company drilled two holes into a zone that has been traced for at least 600 metres. The three reported intersections were 112.7 m of 0.98% for hole 69-01, and, 27.43 m of 1.36% and 19.8 m of 1.33% TREO within hole 69-3 (the northernmost hole). The other 2 holes were drilled to the east. Continuous assays are not available - apparently only intervals deemed to be potentially interesting were assayed and the core has disappeared. Assays for the heavy rare earth elements were not done, but assays by Rare Earth Metals for surface samples indicate less than 2% HREO. Roger Mitchell has established that the dominant REE bearing mineral is synchisite, a member of the bastnaesite family that is also a key REE contributor in Rare Element's Bear Lodge deposit, based on what management hopes are representative samples. Subsequent work by Tony Mariano using samples from the current drilling program apparently support the view that synchiste is the main rare earth mineral within this system consisting of a carbonatized, hematized and brecciated syenite within a gneiss envelope as shown in the geology map above. The main zone is partly surrounded by swamp and so nothing is known about the bedrock geology to the north and northwest.

What attracted Mick Stares to this prospect was the location 80 km east of Sudbury very close to infrastructure, a low thorium content in the 150-200 ppm range (less than 0.02%), and the fact that more than 90% of the rare earth content reports to a single mineral which does not pose serious cracking challenges. The junior initiated a 1,200 m drill program in late June which Stares indicates will likely be expanded to 2,000 m during the first round.

On July 6 Rare Earth Metals reported that the initial drill hole had encountered 250 m of carbonatite including "heavily carbonatized, hematized and brecciated granitoid rock with pyrite and fluorite mineralization". Since then the 45 degree angled hole has been completed to a depth of 400 m, and a second hole drilled at 60 degrees from the same setup has been completed to a depth of 500 m. These holes weres drilled near the 1969 hole that yielded 112.7 m of 0.98% TREO. A third hole is now underway about 400 m to the north undercutting hole 69-3 which yielded the two other intervals. The original results are interesting, but not very exicting for a light rare earth deposit. However, the new holes have caused management excitement to go up a significant notch, though at this stage the market is paying no attention. What seems to be driving management's excitement is the considerably longer intervals of apparent mineralization than previously encountered, and the wide range of readings the field crew has obtained running their NITOM XRF unit along the core. Because the core contains coarse grains of mineralization these readings are unreliable, so the company is waiting for assays to see how grade behaves along the entire core before banging the drum loudly.

Based on my assessment of the geological context and the new insight deeper and longer holes are generating, I think bottom-fishers should take a second look at Rare Earth Metals Inc at current prices that are below the original $0.30-$0.49 buy range. During the past year we have seen significant discoveries emerge from a couple known carbonatites, Commerce's Eldor complex in northern Quebec and Geomega's Montviel project in south-central Quebec, both of which have yielded very long rare earth intersections, 1.5%-2.0% in the case of Eldor, and 1.4%-1.6% in the case of Montviel.

Both of these zones have tonnage potential in hundred million multiples, and both appear to have potential for sub-zones with 10%-20% HREO enrichment (ie 10%-20% of the TREO are heavy rare earths). But Eldor is remote and Montviel is semi-remote with a grade that should be better. Lavergne is not likely to solve anybody's heavy rare earth supply problem, but the mineralization appears to be at surface, the tonnage footprint large, and the rare earth mineral the type that should lend itself to simple metallurgy. What we do not know is the grade, but we do know that grades in excess of 5% TREO have been observed at surface, and the word from the field is that the NITOM readings are all over the map. There is thus a good chance that the first batch of assays expected at the end of July will yield hundreds of metres grading in excess of 2%. This is not what anybody would expect looking at the historical results, which is why Lavergne is carrying an implied project value of only $28 million based on a $0.26 stock price, 97 million shares fully diluted and a 100% net interest. If we get assay confirmation that Lavergne is a major large tonnage light rare earth discovery with potential to deliver a starter pit grading in excess of 3% TREO, Rare Earth Metals will undergo a rapid three to fourfold price increase to achieve partial parity with other light rare earth projects. The junior has the ability to launch an expanded drill program that can carry on into the swampy area through winter, and with $8 million working capital as of the end of 2010, it will not need to conduct any dilutionary financings to fund the program. I am confirming Rare Earth Metals Inc as a medium priority bottom-fish buy below $0.49, with a contingent upgrade to top priority if initial drill results yield intersections in excess of 100 metres of 1.5% TREO.

New Bottom-Fish Highs
Company
Volume High Low Close Chg Status
Cariboo Rose Resources Ltd (CRB-V) 79,500 $0.400 $0.325 $0.400 $0.030 New BF LP Buy $0.10-$0.19
Strategic Metals Ltd (SMD-V) 747,200 $4.240 $3.460 $4.240 $0.640 BF MP Buy $0.10-$0.19

Top 10 Bottom-Fish Volume Traders
Company
Volume High Low Close Chg Status
B2Gold Corp (BTO-T) 14,214,200 $3.450 $3.040 $3.380 $0.070 BF TP Buy $0.30-$0.49
Realm Energy Intl Corp (RLM-V) 5,502,800 $1.070 $0.850 $1.020 $0.140 BF MP Buy $0.30-$0.49
Mega Precious Metals Inc (MGP-V) 5,247,000 $0.790 $0.610 $0.700 $0.080 BF LP Buy $0.10-$0.19
Prima Colombia Hardwood Inc (PCT-V) 5,213,900 $0.180 $0.090 $0.105 ($0.065) BF XP Buy below $0.10
Volta Resources Inc (VTR-T) 4,187,400 $2.130 $1.770 $1.900 $0.100 BF MP Buy $0.10-$0.19
Lydian International Ltd (LYD-T) 2,886,900 $2.950 $2.440 $2.740 $0.240 BF MP Buy $0.20-$0.29
IBC Advanced Alloys Corp (IB-V) 2,558,800 $0.185 $0.170 $0.180 $0.000 New BF LP Buy $0.10-$0.19
Malbex Resources Inc (MBG-V) 2,449,600 $0.470 $0.405 $0.455 $0.035 BF LP Buy $0.10-$0.19
Torex Gold Resources Inc (TXG-T) 2,308,800 $2.080 $1.740 $2.020 $0.180 BF Spec Cycle Hold 100%
Nevsun Resources Ltd (NSU-T) 2,268,500 $6.280 $5.920 $6.080 ($0.050) BF Spec Cycle Hold 100%

Top 10 Bottom-Fish Value Traders
Company
Value High Low Close Chg Status
B2Gold Corp (BTO-T) $46,636,169 $3.450 $3.040 $3.380 $0.070 BF TP Buy $0.30-$0.49
Nevsun Resources Ltd (NSU-T) $13,892,616 $6.280 $5.920 $6.080 ($0.050) BF Spec Cycle Hold 100%
Avalon Rare Metals Inc (AVL-T)
$12,007,719 $6.440 $5.980 $6.100 ($0.250) Good Absolute Spec Value Buy
Sabina Gold & Silver Corp (SBB-T) $9,385,051 $6.580 $5.990 $6.140 $0.110 BF TP Buy $0.30-$0.49
Volta Resources Inc (VTR-T) $8,000,873 $2.130 $1.770 $1.900 $0.100 BF MP Buy $0.10-$0.19
Lydian International Ltd (LYD-T) $7,773,301 $2.950 $2.440 $2.740 $0.240 BF MP Buy $0.20-$0.29
Quest Rare Minerals Ltd (QRM-V)
$6,928,505 $5.820 $5.100 $5.200 ($0.650) Good Relative Spec Value Buy
Realm Energy Intl Corp (RLM-V) $5,398,235 $1.070 $0.850 $1.020 $0.140 BF MP Buy $0.30-$0.49
Orvana Minerals Corp (ORV-T) $5,102,498 $2.760 $2.230 $2.310 ($0.390) BF TP Buy $0.50-$0.75
Orko Silver Corp (OK-V) $4,907,362 $3.220 $2.740 $3.180 $0.190 BF TP Buy $0.30-$0.49

Top 10 Bottom-Fish Price Gainers
Company
Volume High Low Close Chg Status
Strategic Metals Ltd (SMD-V) 747,200 $4.240 $3.460 $4.240 $0.640 BF MP Buy $0.10-$0.19
Wesdome Gold Mines Ltd (WDO-T)
1,617,600 $2.930 $2.530 $2.890 $0.340 Good Relative Spec Value Buy
Impact Silver Corp (IPT-V) 774,000 $2.400 $1.960 $2.350 $0.240 BF MP Buy $0.30-$0.49
Lydian International Ltd (LYD-T) 2,886,900 $2.950 $2.440 $2.740 $0.240 BF MP Buy $0.20-$0.29
Gunpoint Exploration Ltd (GUN-V) 15,000 $0.950 $0.800 $0.950 $0.200 New BF TP Buy $0.76-$1.00
Orko Silver Corp (OK-V) 1,616,200 $3.220 $2.740 $3.180 $0.190 BF TP Buy $0.30-$0.49
Pachamama Resources Ltd (PMA-V) 74,300 $1.080 $0.900 $1.080 $0.180 New BF MP Buy $0.20-$0.29
Torex Gold Resources Inc (TXG-T) 2,308,800 $2.080 $1.740 $2.020 $0.180 BF Spec Cycle Hold 100%
Gold-Ore Resources Ltd (GOZ-T) 536,500 $0.900 $0.720 $0.900 $0.170 BF MP Buy $0.10-$0.19
Verde Potash PLC (NPK-V)
185,000 $7.800 $7.190 $7.650 $0.170 Good Absolute Spec Value Buy

Top 10 Bottom-Fish Price Percentage Gainers
Company
Volume High Low Close Chg Status
Lithic Resources Ltd (LTH-V) 369,200 $0.215 $0.125 $0.200 54% New BF XP Buy below $0.10
Inter-Rock Minerals Inc (IRO-V) 25,000 $0.110 $0.110 $0.110 29% BF XP Buy below $0.10
Gunpoint Exploration Ltd (GUN-V) 15,000 $0.950 $0.800 $0.950 27% New BF TP Buy $0.76-$1.00
Eagle Plains Resources Ltd (EPL-V) 354,100 $0.340 $0.265 $0.340 26% BF XP Buy below $0.10
Gold-Ore Resources Ltd (GOZ-T) 536,500 $0.900 $0.720 $0.900 23% BF MP Buy $0.10-$0.19
Source Exploration Corp (SOP-V) 378,000 $0.330 $0.260 $0.330 22% BF XP Buy below $0.10
Argus Metals Corp (AML-V) 622,700 $0.175 $0.145 $0.175 21% New BF MP Buy $0.10-$0.19
Pachamama Resources Ltd (PMA-V) 74,300 $1.080 $0.900 $1.080 20% New BF MP Buy $0.20-$0.29
Red Crescent Resources Ltd (RCB-T) 98,900 $0.480 $0.420 $0.480 20% BF TP Buy $0.20-$0.29
Lexam VG Gold Inc (LEX-T) 665,000 $0.790 $0.620 $0.760 19% BF MP Buy $0.10-$0.19

Top 10 Bottom-Fish Price Losers
Company
Volume High Low Close Chg Status
Quest Rare Minerals Ltd (QRM-V)
1,287,200 $5.820 $5.100 $5.200 ($0.650) Good Relative Spec Value Buy
Rare Element Resources Ltd (RES-T)
209,800 $10.190 $9.480 $9.530 ($0.480) Good Relative Spec Value Buy
Orvana Minerals Corp (ORV-T) 2,145,000 $2.760 $2.230 $2.310 ($0.390) BF TP Buy $0.50-$0.75
Afferro Mining Inc (AFF-V) 4,500 $1.650 $1.540 $1.540 ($0.310) New BF MP Buy $1.01-$1.25
Anfield Nickel Corp (ANF-V) 88,900 $4.800 $4.550 $4.650 ($0.250) BF Spec Cycle Hold 100%
Avalon Rare Metals Inc (AVL-T)
1,931,100 $6.440 $5.980 $6.100 ($0.250) Good Absolute Spec Value Buy
Fox Resources Ltd (FAX-V) 10,000 $0.400 $0.400 $0.400 ($0.150) New BF LP Buy $0.20-$0.29
Polar Star Mining Corp (PSR-T) 114,800 $0.740 $0.650 $0.650 ($0.120) BF MP Buy $0.20-$0.29
Ur-Energy Inc (URE-T) 605,500 $1.600 $1.460 $1.490 ($0.090) BF MP Buy $0.50-$0.75
Magellan Minerals Ltd (MNM-V) 484,900 $0.930 $0.780 $0.850 ($0.080) BF Spec Cycle Hold 100%

Top 10 Bottom-Fish Price Percentage Losers
Company
Volume High Low Close Chg Status
Prima Colombia Hardwood Inc (PCT-V) 5,213,900 $0.180 $0.090 $0.105 -38% BF XP Buy below $0.10
Fox Resources Ltd (FAX-V) 10,000 $0.400 $0.400 $0.400 -27% New BF LP Buy $0.20-$0.29
Afferro Mining Inc (AFF-V) 4,500 $1.650 $1.540 $1.540 -17% New BF MP Buy $1.01-$1.25
Corazon Gold Corp (CGW-V) 51,500 $0.420 $0.300 $0.365 -16% New BF LP Buy $0.10-$0.19
Uravan Minerals Inc (UVN-V) 15,000 $0.220 $0.200 $0.210 -16% BF MP Buy $0.10-$0.19
Polar Star Mining Corp (PSR-T) 114,800 $0.740 $0.650 $0.650 -16% BF MP Buy $0.20-$0.29
Boss Power Corp (BPU-V) 142,000 $0.130 $0.110 $0.110 -15% BF XP Buy below $0.10
Skeena Resources Ltd (SKE-V) 258,000 $0.065 $0.055 $0.055 -15% New BF MP Buy $0.10-$0.19
Inca Pacific Resources Inc (IPR-V) 54,300 $0.180 $0.165 $0.165 -15% New BF LP Buy $0.10-$0.19
Vulcan Minerals Inc (VUL-V)
370,000 $0.230 $0.205 $0.205 -15% Good Absolute Spec Value Buy

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