Quest Rare Minerals: Rare Earth Player Poised to Move Significantly Higher

December 28, 2010

Matthew B. Smith

Over the past few months we have watched rare earth stocks trading in America catch fire.  It all started with the IPO of Molycorp (MCP – NYSE) followed by Rare Element (REE –AMEX) and, most recently, Avalon Rare Metals (AVL – AMEX) both getting dual listings.  In each case, American investors’ appetite for liquid, marginable rare earth plays has fueled spectacular gains.

For Canadian investors who do not have the opportunity to watch American investment networks such as CNBC and Fox Business, rare earths have begun to capture the attention of the most popular stock shows and their hosts.  Further fuel for the fire is the fact that many institutions are beginning to plow funds into these issues.  American listed rare earths plays are quite rare, really only these three unless you want to go to the pink sheets and that is not an option for these big funds, so for institutions to get direct exposure to these stocks they have to focus exclusively on the few trading in the States.  Yes there are electronically traded funds offering exposure to these rare earth plays (and their counterparts to the north), however the ETFs also have exposure to other metals thus not truly pure-plays on the REE sector.

One of the best opportunities we currently see for investors for undervalued rare earth plays with real properties is Quest Rare Minerals (QRM – TSX Venture).  The company recently announced that they were hiring a new auditor, Ernst & Young, LLP, in order to help the company obtain, “a listing on a stock exchange in the United States.”  With both Rare Element and Avalon Rare Metals we have seen investors add hundreds of millions to their market capitalizations due to the listing in America.  We have always viewed Quest as one of the premier rare earth plays and always thought that they should trade at a minimum of par with Avalon, if not a premium due to the extra rare earth exposure the company has via their exploration plays.  As of the close on Tuesday, Avalon now sports a healthy 580 million market cap while Quest is at 278 million.  Over the next few months we believe that this gap will shrink, with Quest once again achieving, at least, par with Avalon on a market cap basis. 

It is our opinion that Quest will obtain an AMEX listing in the United States at some point in the next 3 months.  After the listing the company will probably have some drilling news to release to investors to provide some support and bring attention to the new listing in the US.  In our estimation the company should have a decent news flow once the New Year rolls around as they have assays coming in from their exploration properties, including some drill results.  

The stock has been one of our best performers over the past 18 months or so, due to a good management team, low share float, and healthy balance sheet.  Also of significance is the fact they have one of the most promising rare earth projects that is at surface and open-pittable. 

According to the company’s press release dated March 23, 2010 when they updated investors on their Misery Lake exploration plans for 2010, the company stated they planned to have rigs drilling in August for a 2,500 diamond drilling program.  If everything has gone according to plan regarding the timeline on the drilling, we would expect that the lab should come back with the results soon, assuming that the company has not already received the results and is sitting on them as they lock up more property.  If REE mineralization is encountered in significant amounts on the Misery Lake property, it will be a game changer.  As we have previously stated, this news (should it be positive) will put Quest into a whole new league among the rare earth juniors.

As rare earths have continued their upward trend, many companies’ valuations have been altered from that of their peer group due to day traders and other insignificant short-term factors.  It is our opinion that this bull market continues into future years, however the older the bull gets the more important it will be to own quality in your portfolio, and not quantity.  Quest Rare Minerals provides investors with not only that quality factor, but also with significant upside potential based upon its valuation to its peer group.