Rare Earth Elements Taking Off

REEs in Early Stage of Prolonged Bull Market

Our roots go back to the uranium industry and we can honestly say that there are many parallels between today’s rare earth mining industry and that of the uranium mining industry nearly 10 years ago, long before the huge run-ups in uranium mining shares.  There is a dominant player in the industry who is a wild card, China, and no one knows what they will do with their supply (think the Russians with their Megatons for Megawatts deal), the entire industry could be had for a little over $1 billion (small peanuts when you consider exactly how strategically important REEs are) and that there are relatively few companies out there right now exploring for them.  There were over 400 uranium miners out there that we could keep track of on the 3 exchanges that we followed and probably countless others that were private, on other exchanges around the world, or just below our radar.  We believe that the search for REEs is currently in the very early stages of a bull market, with plenty of room to run.  These markets do not go straight up, but take legs and we should figure that investors should buy shares and simply tuck them away, or if you must establish two positions, one for long-term, and the other for short- to medium-term trading purposes.

The big news this past week in the Canadian mining industry was most certainly from Quest Uranium.  This is a stock we have liked since C$1/share and had advised buying on dips down to C$2.50.  On Wednesday morning of this past week, Quest Uranium blew away all estimates for their resource estimate on the wholly owned Strange Lake REE property.

Strange Lake consists of two known mineralized areas, the Main Zone, which is only part owned by Quest and their newly discovered B-Zone.  The B-Zone appears to be the company maker here, currently it is still open in all directions and the company will begin further step-out drilling later this year.  At roughly C$4/share the company still appears to be undervalued relative to peers, but also for the potential of the continued addition of potential resources as well as their other properties.  We feel that the market, even after the run-up is discounting this into the stock.

When we saw the press release we were stunned, of all the ‘guesstimates’ we had seen from various sources this was higher than them all.  Quite spectacular indeed, so we began doing some back of the envelope calculations of our own to see exactly where this initial NI 43-101 put Quest relative to peers (keep in mind that the resources are categorized differently, thus it is not a direct comparison).  Once again we were somewhat stunned.  Take a look at the following table:

By our calculations Quest established a top 5 project on its first try and still is not finished drilling.  Granted other things need to be taken into consideration, such as the actual rock value per ton, but based on the numbers we have seen as well as the conversations we have had, Quest’s rock value is most likely higher than Avalon (based on the percentages alone AVL’s 20% to QUC’s nearly 50%) and that of China’s Baiyunebo, although one takes this with a grain of salt as we are not 100% sure what exactly the Chinese have or do not have.  At the end of the day, this is huge and should propel the stock much higher.

How high could the share price go?  Well it is our belief that Quest could be Canada’s version of Australia’s Extract Minerals, the company that found a huge uranium deposit in Areva’s backyard in Namibia.  The same set of events may be about to unfold because both initially found new mineralized zone open in all directions, step out drilling has been successful, and the resource estimates blew away the markets.  Neither one was done with drilling when they announced them though, which leaves us to believe that QUC has a lot of firepower left in the bag, even if they decide to go ahead and raise some money here. 

The heavy REEs are where investors want to be, and Quest appears to have plenty.  We remember as we watched Denison/International Uranium, Paladin and SXR Uraniumone/Urasia race to be the first uranium miners other than Areva and Cameco to have $1 billion market caps.  Our guess is that Quest could well be on its way to that level if the metallurgical tests come back positive over the next few months.  The mines in China get anywhere from 25-50% REO recovery, so our guess is that the market would like to see the higher part of that range announced by Quest with good REO recovery for the heavies being very important.  Many will say that $1 billion is a crazy number, but if all goes well the market will begin to revalue the company upwards and they will most certainly issue more shares, so this figure is not all that farfetched.  Based on some estimates of the stock reaching C$10/share that would put it at roughly C$500 million, so a double from there is both logical and probable hinging on the news and the company’s continued ability to add resources.

QUC shares have been very good to us over the past 9 months and we fully expect them to continue their movement from the bottom left to the upper right of the chart as they like to say.  The company will shortly have the recovery percentages out followed by a steady stream of news regarding drilling and we believe that this news far outweighs any share offerings the company may have in the bag.