Heavy Rare Earth Element Arena Seeing Movement
by Matthew Smith - Seeking Alpha

October 25, 2011

     

The Heavy Rare Earth Elements (HREEs) space is certainly interesting these days. We expect it to get far more interesting over the next three months as well as there is a ton of news scheduled to come out. On top of the scheduled news, we also expect some to take the opportunity during earnings releases and conference calls, as well as some analyst presentations, to provide updates on their plans for HREE production. All of this should be happening by year end, but we think maybe the largest news is already out.

First, we think it is highly likely that Molycorp (MCP) will either voluntarily provide further details on their HREE targets which came to light via an article from The New York Times (see Reuters article here). The company has a presentation available on its website, but we predict that when analysts and investors are allowed to ask questions during the conference call in November the company will have further information and clarifications to provide.

Rare Element Resources (REE) has indicated that they have some of the HREEs which were discovered with their last round of drilling. Although not a large find of HREEs or one which dramatically alters the composition of HREEs over the entire project, further drilling could discover more HREE mineralization which would only continue to enhance the economics of the project which already has the gold kicker. Between REE and MCP, we are inclined to value REE’s old HREE news more than that of MCP’s due to the lack of work MCP has put into their new HREE areas.

China’s news of freezing their rare earth industry to allow prices to rebound was good news for everyone. The above companies, Rare Element and Molycorp, should benefit from Light Rare Earth Element (LREEs) prices staying elevated making their projects more economical in the future as their production is highly skewed to the LREEs. The HREE plays, such as Quest Rare Minerals (QRM) and Avalon Rare Metals, we think benefit exponentially from moves such as these. Right now Molycorp still steals the headlines, however when you look at the deposit composition, as LREE prices fall and HREE prices either rise or stay steady, the HREE plays see their projects become far more valuable in comparison to the LREE plays. The Canadians understand this, Americans do not. This is why we still think that the HREE plays should be the better investments as we move forward.

From a bargaining perspective, HREE players will own the market. When Cerium and Lanthanum prices come back to Earth, the HREE producers will be the only ones able to sign contracts to supply LREEs as we see that as a precondition for getting the HREEs. If you want HREEs, you have to be a buyer of the less desirable LREEs. The concept is much like season ticket holders for sports teams, buy the less desirable season tickets and get the right to buy the more desirable holiday and/or playoff game packages. Avalon and Quest today are discounted due to their perceived weakness due to risk of getting their projects off of the ground. As we move closer to their estimated production startup dates and further along the production timelines, we would expect to see shares increase in price as the market begins to see what we already do. Quest will be updating investors on their resource and economics in the near future, and we believe this will get the analysts excited again as they update their resource tables, cash flow projections and net present value calculations. QRM could see analysts raise share price estimates if their numbers are anywhere near our calculations, and by extension AVL could see shares rise due to its similar nature.

This brings us to Stans Energy (HREEF.PK) which has probably had the most interesting news since our article, as it is company generated (not from analysts or newsletter writers) and of significance both on a company level and an industry perspective. The company put out a press release late last week which on the surface does not say much, however we believe that it provides enough information to say that the company will in fact be one of the first supplies of HREEs to the marketplace. The press release can be found here.

Stans has had a relationship with VNIIHT, which is a Russian state rare earths company. This is the company which was behind Russia’s rare earth industry and was behind the technology at Stans’s processing plant as well as the plant in Estonia which Molycorp purchased. Also of interest is the fact that VNIIHT is the one entity outside of China which has consistently researched REEs over the years and never stopped, not even when prices plummeted as cheap Chinese production flooded the market.

Of importance to investors, the company finally admitted what many already knew; that over the past 2 years Fortune 500 companies have been onsite and discussed with Stans the possibility of helping bring Kutessay II into production. Nothing has been signed as of now, but the fact that this management team felt comfortable enough to discuss the subject we believe to be telling, from past interaction with the CEO and others at the company we find them never wanting to over promise or lead a stray. It is our guess something will happen in the next 3-6 months in regards to Kutessay II.

From the press release, the company states it has, “finalized a framework agreement with VNIIHT that specifically outlines the short and long term joint program of activities.” We believe this to be very important, but most investors probably were scratching their head in regards to the Kashka Rare Earths Plant section of the news release which read:

 

“Stans has recently hired Mr. Victor Kashtanov to lead the team of experts to restart production of Heavy Rare Earth Elements (HREEs) from outsourced concentrates at Plant #3 in 2012, and to assist our engineering team to design of a new Plant #1 (a thorium extraction facility) and a solvent extraction [SX] plant with a 1500 t.p.y. capacity. Stans is actively engaged in the selection of an existing facility and site to host the new SX plant. Going forward the plan is to have both the first module of Plant #1 and the 500 t.p.y. SX plant in operation by 2013.”

 

The number of people that the company has been hiring over the past year indicated to us that something was up, but there was but one idea we had that they could be up to, which was a long shot. The fact that the company stated they expect to have the Plant #3 (the HREE section of the process) restarting production of HREEs in 2012, “from outsourced concentrates,” was enough to convince us our idea is not that long of a shot anymore.

As many of our readers know, Russia continues to possess large above ground stockpiles from their centralized planning days, the most widely known is the uranium from their decommissioned nuclear warheads. What many do not know is that Russia also has a large stockpile of HREE concentrates. This was first reported via Rare Metal Blog here on June 28, 2011. The article stated that, “the Russians have studied four possible sites for processing the concentrate. These could between them produce lanthanum carbonate and oxides, cerium, neodymium, praseodymium, samarium, terbium, dysprosium, europium, erbium, gadolinium and yttrium. Production at one plant in the Sverdlovsk region will include manufacturing magnets. It is expected that production of magnets containing REE will be possible from 2016.” Stans’s plant is the only facility outside of China to have produced the full spectrum of REEs and most certainly one of the four sites the Russians have already looked at, and most likely why VNIIHT has been assisting the company in their endeavors thus far and working on securing a Russian project together (of which Stans Energy’s CEO said at a recent conference they had settled upon – 1 out of about 300!).

The article from Rare Metal Blog stated that 2,500 tons of TREO would be possible for production on a per annum basis (an amount far exceeding the initial plans Stans indicated via the press release) and at the same time be highly profitable. So if it is the Russian REE concentrate then Stans will be doing only part of the production due to production capacity constraints with their plant (not having enough capacity to take on all of the work themselves). We think this stockpile will eventually feed Stans, but until the Thorium separation plant is up they will be getting concentrate from elsewhere (notice there is a 2012 and 2013 date in the press release). Most likely a company with the ability to separate the LREEs, but lacking the expertise to extract the HREEs is our guess. This is all based on that window of actually being in production however not having the Thorium separation capacity/ability on their end.

We already knew that the company would be continuing exploring the property to prove up what the Russians have recorded as being there, and we think that it is likely that the company will be successful as they move forward, however that is a long-term project and the company is more concerned with getting the plants up and running at this point. The one real question mark from our readers was in regards to the Beryllium deposit (Kalesay) next door to the Kutessay II deposit. The company will most likely mine both the REEs and the Beryllium at the same time as the deposits are together, however they indicated in the press release that they would have to resample as their previous samples were open to weathering. This is not a big deal in our opinion as the exact same issue arose when the company was conducting the sampling program for the REE JORC. The results were skewed due to weathering on the host rock providing results which were not indicative of historical records from the Russians, which the company had obtained when they purchased the property and its plant. Stans will simply go in, resample from rock within the shaft which is unexposed to weathering and the elements and get ore which is more indicative of the deposit as a whole.

It is possible that we have not connected the dots correctly, but last week we increased our holdings in Stans by roughly 10%, and although we own a large portion of our shares at prices cheaper than today’s, we also have a fair number of shares purchased at prices far north of here in the $1-2.50 range. We think that news of a Russian project is worth US$1.00/share to current prices as it cements the company’s legitimacy in the region and ‘proves’ to investors that the company has political cover. Our guess is that Stans Energy becomes to REEs what UraniumOne is to U3O8 (uranium) for the Russians (for those who do not know, UraniumOne was a Canadian/South African company operating in the Kazakhstan uranium industry threatened with the prospect of losing their projects to the government until the Russians came in and gave the company cover.).

This news puts Stans in-line with Great Western Minerals (GWMGF.PK) in regards to initial production of HREEs, although Great Western will be actually mining their ore (keep in mind that Stans has enough ore already onsite to begin production, it is just a matter of expanding the plants’ capacity and having all aspects (the various plants in the overall process open). At this point it appears that Stans Energy’s production will be sold on the open market while Great Western will use the HREEs for their own manufacturing needs. So investors need only ask themselves what they want to invest in, a company focused on supplying the market, or one who is focused on the entire supply chain. Great Western and Stans both have the ability to reward shareholders should both get into production, but at this point only one has the man power to pull this off.

The HREE space is constantly changing. Keeping up with the different timelines which are continually being altered is a task in-and-of-itself, however based on what we know have been told we think that the way to play the HREEs for the short-term at this time, and possibly the longer-term going forward, is to focus on those companies with potentially significant HREE production. Due to recent events we have moved Stans Energy back up into our top buy list as we believe the political fears are overblown, production is near-term and the company should have news regarding a joint venture or new project in Russia in the near future.

Disclosure: I am long QRM, HREEF.PK.

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