Bottom-Fish Comment - October 3, 2011: Ucore reports misleading metallurgical results for Bokan
Ucore Rare Metals Inc published results of a metallurgical study by Hazen Research on October 3, 2011 which indicates good recoveries of 84% for heavy rare earths and 87% for the light rare earths with a flowsheet of grinding, sulphuric acid bake, and water leaching, but the economic implications are doubtful because the composite sample grade was substantially higher than the material which will ultimately have to be processed. On March 3, 2011 Ucore published its initial 43-101 resource estimate for the 100% owned Bokan rare earth project in Alaska at various cutoff grades ranging from 0.2% which yielded 6,702,000 tonnes of 0.58% TREO to a 0.8% cutoff yielding 1,021,000 tonnes of 1.054% TREO. The base case of 0.5% cutoff yielded 3,669,000 tonnes of 0.746% TREO. Hazen conducted chemical extraction studies on a composite of 79 samples with an undisclosed weight. Ucore reports the extraction results for two out of an undisclosed number of experiments conducted by Hazen, one involving a grind size of 17 microns which consumed the equivalent of 560 kg of acid per sample tonne for 94% LREE and 84% HREE recovery, while the other at a 130 micron grind size consumed 350 kg acid per tonne for a recovery of 87% LREE and 84% HREE. The good news implicit in these results is that a coarser grind size recovers the same percentage of HREE as the fine grind size while consuming less acid, which is good because the Dotson Shear Zone consists of very hard rock. The somewhat lower LREE recovery is irrelevant because the light rare earths are of lower economic value and not the target in a small, low grade vein deposit such as the Dotson Shear zone. These results, unfortunately, are misleading because the assayed grade of the composite samples was 1.19% TREE, which when converted into the oxide form in which the 43-101 resource estimate was reported, jumps to 1.416% TREO using the individual rare earth grade distribution published with the 43-101 report (incidentally, Ucore managed to file an extraordinarily large 129 MB technical report at SEDAR on April 21, 2011 which not only is a bear to download, but is a corrupted file that will not open, and the company has not troubled to store a copy on its own web site and make a link to it visible, which has its own implications about how unseriously the company takes its goal of developing a heavy rare earth mine on American soil.)
The trouble with Ucore's composite sample grade is that it is 34% higher than the 1.054% grade of its resource at the highest cutoff of 0.8%, which means that the sample has likely been hand-cobbed from the very narrow bands of rare earth mineralization within the Dotson dyke system. During my property visit in September 2009 I observed outcrops of the mineralization within the dyke as wide as 1 metre, but also saw, like in the photo above, locations where the rare earth mineralization occurred as a set of parallel bands within the dyke material (the rare earth ore is harder than the dyke material and weathers less than the rest of the dyke). While the company is correct in stating that the Dotson Shear Zone is well demarcated from the country rock, the rare earth mineralization is not so easily distinguished from the waste material within the dyke, as is evident in the channel sample below with a quarter provided for scale (the darker gray band is the rare earth ore).
Selectively sampling this material and subjecting it to metallurgical studies leaves us in the dark as to what recovery and associated reagent consumption the proposed flowsheet will deliver for run of mill ore. The Bokan underground mine will have to mine a width of at least two metres of ore whose average grade will likely be that implied by the 0.5% cutoff, namely 0.746% TREO, in effect a mill feed diluted by dyke waste rock. It is unlikely that Ucore will be able to separate the higher grade bands of rare earth mineralization from the gangue in a commercial operation because while the dyke material is distinct from the country rock, the rare earth mineralization is barely distinguishable from the waste rock within the dyke. The recoveries and acid consumption achieved for the 1.416% TREO composite samples are not representative of the material that will go into a commercial processing flowsheet. It is possible that the extra waste rock has no impact on acid consumption, but we will not know until Hazen conducts tests on what will be run of mill ore rather than rock collector specimens. It is a shame that Ucore did not collect these samples in 2009 and report these results a year ago so that Ucore could have delivered a PEA in late 2010 as an August 2011 corporate presentation timeline claims to have done, and Hazen could have spent this year on more advanced metallurgical work. Ucore's timeline suggests that after this year's infill and downdip drill results have been received it will be in a position to initiate a feasibility study in Q1 of 2012, though the timeline stops at April 2012. Is this because CEO Jim MacKenzie is mesmerized by the implications of the Mayan Calendar which ends in 2012, or because the company is too gutless to disclose how long it will take to navigate the permitting and feasibility stages of a project with radioactive waste by-products in the Panhandle of Alaska, despite the lip service endorsments from a class of human beings known as American politicians which American voters increasingly view with anything but respect.
It is also odd that Ucore chose to report the results in metallic grade form rather than the oxide form with which it has reported drill results and its resource estimate. The net effect is to disguise how far above the measured grade of the Dotson Shear Zone the metallurgical composite sample actually is. Hazen may have provided the data in metallic form, but for the sake of consistent information flow Ucore could easily have done the conversions in its news release to help out its shareholders. Was this omission due to laziness, ignorance or a desire to mislead shareholders? Not a good set of answer options, though somehow I doubt anybody will bother to harass the CEO on this issue. But let's focus on the bright side. At REO basket prices as of September 29, 2011 the Bokan composite material has a recoverable rock value of $3,068 per tonne at FOB spot, $1,679 per tonne at domestic spot, $893 per tonne at 3 year FOB average, and $481 per tonne at 3 year domestic average. At the base case grade of 0.746% TREO, just a bit more than half of the high grade material handed off to Hazen, the recoverable rock value is $1,616/t FOB spot, $884/t domestic spot, $470/t 3 year FOB average, and $240/t at domestic 3 year average. Those are numbers which are a lot better than the spot FOB and domestic numbers that prevailed in late 2009 when I visited the project and first recommended Ucore as a strategic logic based bottom-fish. Unfortunately management is still trapped in a bad case of deposit envy; the company's latest presentation includes neither Matamec's Kipawa nor Quest's Strange Lake projects as heavy rare earth comparables, exclusions whose absence hints at the agenda of Ucore's corporate finance backers, though it is true that the "discovery" by Byron's corporate finance poodle that Kipawa could be depleted at 4,000 tpd over a 7 year period may have blind-sided Ucore management.
Ucore management, whose board of directors consists of only three people, in effect Jim MacKenzie's fiefdom, behaves as if time is on its side. It is nearly a year since Ucore ceremoniously retained Ken Collison to develop a mining plan and complete a preliminary economic assessment (scoping study), but now it looks like Ucore will go directly to a feasibility study with an indefinite timeline. (To be fair, it is possible that nobody in charge actually reviews the corporate presentations IR gives at various conferences which increasingly feature Pixies of Inconsequentiality as key speakers. And that would make it unfair of me to infer that corporate PR material endeavors to convey an accurate portrayal of management's goals and expectations. So I stand to be corrected that nothing published should be taken literally.) That Ucore will deny shareholders the risk reduction disclosures of a PEA and PFS before embarking on a make or break feasibility study is unfortunate, because it leaves the market guessing as to how to assess the potential value of the Bokan project. This darkness is a favorite condition for the Pixies of Inconsequentiality who prefer to fabricate outlandish mining scenarios in the absence of published corporate guidance or to scold Molycorp for not rushing to acquire inconsequential projects such as Bokan while wailing about demand destruction and the unsustainability of high REO basket prices of the sort needed to make Bokan interesting as a development prospect. Even as I write this there are rumblings that Molycorp is about to unveil a new heavy rare earth discovery within its Mountan Pass project, which if true may provide the market with an opportunity to recognize the extent that Molycorp management has lied about its capacity to supply the full spectrum of rare earths. Indirectly an acknowledgement by Molycorp that heavy rare earths are important and Mountain Pass will produce very little should benefit Ucore, but probably will not because neither Alaska nor California are overly swift in approving new mine developments despite the flapping of lips by politicians who these days are so confused they no longer know whose boots to lick or whose ass to kiss. Furthermore, if there has been any political pressure on Molycorp to acquire Bokan and put it into production, this new story will allow Molycorp to stave off such pressure by playing the entrepeneurial card of deploying internal resources to solve a problem while wishing Ucore lots of luck deploying its resources in a competitive race to solve a collective American problem. Because I lack confidence that Ucore can furnish the market with meaningful information on a timely basis that would allow the market to treat Bokan as a small but serious supply contender during what is shaping up to be a difficult period for the rare earth sector, and I take my cue directly from that triumverate of Jack Lifton, Chris Ecclestone and Jon Hykawy, I am closing out the open Spec Cycle Hold 75% bottom-fish recommendation with a Spec Cycle Sell 75% Hold 0% at $0.46, which, when we include the Sell 25% Hold 75% recommendation we published at $1.03 on March 7, 2011, translates into an overall 6.1% loss from the $0.49 bottom-fish buy limit. Ucore is a member of the KRO Rare Earth Index, and so we will continue to monitor progress in moving Bokan forward as a solution to the world's rare earth supply problem. In fact we may even revisit Ucore as a Spec Value Hunter Buy, but that will probably be after the spells woven by the Pixies of Inconsequentiality have turned into stardust.