Ucore Is Moving Forward In A Tough Environment: My Conversat
Summary
- Ucore's CEO Jim McKenzie, COO Ken Collison, and VP of Business Development Mark MacDonald answer questions on the state of the REE industry and on Ucore.
- The company is one of the few that has survived the recent REE bear market, which isn't over, but which is closer to the end than to the beginning.
- Management addresses the investor community's concerns regarding complex issues regarding metallurgy and processing.
- Ucore remains a compelling speculation stock, but like every company in the industry it is not without significant risk.
I recently had a chance to speak, once again, with three members of Ucore Rare Metals' (OTCQX:UURAF) management team: CEO Jim McKenzie, COO Ken Collison, and VP of Business Development Mark MacDonald. Despite the relatively in-depth discussion we had back in June, which I published here, we didn't cover a lot of points, as several readers have brought to my attention over the coming months. This, along with general market and share price weakness prompted me to reach out for a follow-up interview, and I am grateful to Ucore's management for being so generous with its time and granting it.
The discussion covered three areas.
- The broad REE market, its weakness, the future of REE prices, and the future of the industry.
- Developments specific to Ucore (e.g. the company's work towards its BFS such as further drilling and metallurgical research).
- Metallurgy and processing, which has become a leading investor concern. Readers have come to me asking about the company's metallurgy, processing, and recovery method considering that it has a unique deposit that requires an unorthodox processing method.
1: The REE Industry
The REE industry has been lousy since I last spoke with Ucore's management, with many of these elements making new lows for the cyclical bear market which began in 2011 in recent months. McKenzie believes that there are two primary factors driving REE prices lower. The first is actually a point he brought up in our June discussion, which is that many of the end-users of REEs stocked up on inventory in 2011 when they were afraid that China would restrict exports. They are still working through this inventory, and McKenzie believes that this can continue for quite some time--12-18 months.
The second factor is simply economic weakness. China's economy has been decelerating and Europe's economy is not growing. While the U.S. economy grew in the second quarter it contracted in the first, which means that the first half was lackluster. While the term "Rare Earth Element" seems to imply that these are precious metals they are in fact industrial metals, and unfortunately this means that a weak global economy has restricted demand, which in turn has kept a lid on prices.
For McKenzie the good news is that the first factor has to reverse eventually, as inventories are finite. Even in a weak economy end-users will have to restock at some point, and this should drive prices higher.
What About The Stocks?
Unfortunately this has hit the shares of REE companies hard, with many making new lows and losing relevance. However a handful have not made new lows, and this, in fact, prompted me to write an article in which I singled out four REE companies as the Alpha plays in the sector: Ucore, Tasman Metals (NYSEMKT:TAS), Texas Rare Earth Resources (OTCQX:TRER), and Northern Minerals (listed as "Northern Uranium (OTC:NOURF)). The first three have actually traded down to the bottom of their trading ranges (an Texas Rare Earth Resources actually breached its support on Tuesday (10/14)) while a positive PFS and metallurgical results have lifted Northern Mineral's shares.
Nevertheless even the better stocks have been weak, and McKenzie attributes this in part to a lingering misconception that all REEs are the same when, in fact, this is simply not true. Companies such as Molycorp (NYSE:MCP) and Lynas (OTCQX:LYSDY) are suffering--at least in part--as a result of the fact that they simply produce the wrong REEs--predominantly cerium and lanthanum--which actually are oversupplied and have lousy long-term supply/demand fundamentals. (This oversupply is so acute that it has led some companies to simply decide not to sell them (e.g. Texas Rare Earth Resources and Great Western Minerals (OTCQX:GWMGF)).) As a result of this misconception the lousy performances of Molycorp and Lynas have led investors to sell across the sector.
While I agree with McKenzie to a certain extent on this point I do think that investors are wising up and they are getting to a point where they know what to look for in an REE junior miner. I decided to ask McKenzie about this, that is, to ask him about what makes an REE company a "winner" going forward. He pointed to several things that I wrote about in my "bifurcation" article, but let's look at his specific responses.
First and foremost he pointed out the size of the project. Companies with enormous projects are not going to be able to get financing, or if they do it will be when REEs have risen substantially in price. Unfortunately, given that metal prices are cyclical, this will be too late, as these companies will most likely get their projects into production at an inopportune moment. Companies with reasonable initial capex needs are in a position to raise money even in this environment if the financier believes in the management, the project, and a future increase in REE prices. McKenzie singled out about $300 million as a "maximum," and so did I, actually, in my bifurcation article. Northern Minerals, Texas Rare Earth Resources, and Tasman all have initial capex requirements of just under $300 million (Texas Rare Earth Resources actually proposed a project with a substantially lower initial capex although it has yet to release the details), and Ucore has an initial capex requirement of about $220 million. We have recently seen some other studies come out that show that there are a couple of other companies with achievable initial capex requirements (e.g. Namibia Rare Earths (OTCQX:NMREF) and Rare Element Resources (NYSEMKT:REE)). However companies such as Quest Rare Minerals (NYSEMKT:QRM) have outrageous initial capital needs that are simply not feasible in the current environment.
Second, you need to have the right mix of elements. In my "bifurcation" article I singled out dysprosium as the fundamental element that investors should look for, as they give investors exposure to the fastest growing REE product--permanent magnets. The use of dysprosium is also growing faster than the rate of permanent magnet production because dysprosium enhances these magnets and so it is being introduced as an alloy in more of them. Some of the other "heavy" REEs (HREEs) also have compelling stories, but many of them are so rare that research has been limited with regards to manufacturing products on a commercial scale. Nevertheless companies that have a lot of europium and terbium are probably going to do very well.
On the other hand companies with a lot of cerium and lanthanum--which unfortunately are the two most plentiful REEs--are not very attractive, and this makes projects such as Rare Element Resources' Bear Lodge far less attractive than those projects with heavy exposure to the HREEs.
The State of Individual Companies
With prices coming down and investors becoming wiser companies are fighting for survival, which means that they are fighting for scarce capital. During the peak there were several hundred companies in the space whereas now there are probably 6 - 15 that have a fighting chance, depending on how you are filtering them. At the upper end of this range you have the companies that are able to raise enough capital to keep exploring and developing their deposits. Despite the fact that we have seen prices fall we have continued to see several companies continue to explore their properties and even a handful that released prefeasibility studies and preliminary economic assessments.
McKenzie touched on this when I asked about the possibility that REE companies could cooperate with regards to sharing metallurgical research, the potential for toll milling, and so on. For better or for worse he still doesn't believe that the culling of the herd is over, and until then we are in a "survival of the fittest" environment. However afterwards we can see cooperation among the few winners, of which I see potentially 5 or 6, but no more.
What Has Ucore Been Up To?
Ucore is still fighting for a spot in the winners circle, and it has had a busy summer preparing geological and metallurgical data for its bankable feasibility study (NYSE:BFS). The bad news is that the company is behind schedule--it will not get its BFS out this year. However the company has been able to raise money, and as a result it has done a great deal of work.
Before discussing it in detail I should point out that one of the benefits of operating in a lousy environment is that costs come down, and those who have access to capital such as Ucore can complete tasks under budget, and according to Collison and McKenzie this is precisely what we saw with Ucore this summer.
Geology
In preparation for a BFS the company needs indicated resources, which means that it needs to do infill drilling in order to improve its existing inferred resources to the indicated category. This is one of the tasks accomplished this summer.
The company also drilled below the existing resource which can increase its overall. Investors will recall from my previous interview that Ucore's management believes that the resource extends far below where it has drilled thus far, and it has not drilled more in order to preserve capital. The rational here is that once the company has cash-flow it can work towards expanding the resource without diluting shareholders. Nevertheless the company has done work in order to expand the resource, and this should be reflected in the upcoming BFS.
Furthermore, the company put in some hydrogeological holes which are necessary for the permitting process. Other work done in this direction includes additional community relations, which can often times be a nightmare for companies who have to face environmentalists who are against mining. But Ucore has had a relatively easy time dealing with communities who would welcome the boom to its economy, not to mention the jobs. Additionally the company has built a weather station and sampled ground water, both of which are essential for permitting and for producing a BFS. Management hopes that the permitting process will be relatively quick and simple given that Bokan is an underground project and given that there will be no tailings.
Regarding the issue of underground mining I pointed out to Ucore's management that according to the Critical Metals Handbook edited by Gus Gunn (and reviewed by yours truly) there has never been an underground primary REE mine (Great Western Minerals' Steenkampskraal was an underground REE producer but it was a primary uranium mine). Management is not concerned, however, and argued that what really matters is whether it can process the ore. McKenzie and Collison again pointed me to the fact that an underground mine has a smaller environmental footprint and is easier to permit.
Finally the company has done some leach testing on a bigger ore sample than what was used for the PEA, and management is confident that it has a benchmark quality mixed concentrate that will be essential going forward.
Metallurgy and Processing
So this is a big issue, and it is probably the one that is going to finalize the culling of the herd. Companies with smallish projects that contain the "right" REEs are left standing, but processing still remains a significant issue for essentially all of them. Those that come up with simple plans that enable them to go from ore in the ground to REE oxides, chlorides, or oxalates are going to be the last companies standing.
Unfortunately this appears to be a difficult task. In most cases HREEs are found in esoteric minerals, and only one of these--xenotime--has a "standardized" processing procedure. As a result the companies that want to produce HREEs are going to have to come up with novel separation techniques in order to keep the process cost feasible.
Ucore has been doing a lot of work, and it recently provided an update in which it described some of its separation work done at the University of Alaska Fairbanks in tandem with the Alaskan government.
For now the company has a three-step process: ore sorting, leaching, and finally extraction of the individual REEs via a process called solid phase extraction.
(click to enlarge)
(Source: Metals US)
Ore separation is fairly straightforward and requires no explanation.
The company has experimented with leaching using several different kinds of acid--hydrochloric, sulfuric, and nitric--at various temperatures, and it has been able to produce similar results in each case. However management seems to be set on nitric acid given that the process is at 90 degrees Celsius, which is relatively low. This gives the company a pregnant leach solution (PLS), which then moves on to separation. Thus management is essentially saying that it doesn't matter whether it has xenotime or any other HREE-containing mineral, so long as you can get it to this stage, which can clearly be done.
Separation is the trickiest task. The company intends on using a process known as solid phase extraction (aka "molecular recognition technology")--which is a kind of ion exchange process--in order to separate each REE individually along with some residual metals (e.g. aluminum). Very briefly and generally this means that the REEs in the PLS will be present in an ionic form (with a charge of +3), and it will be sent through a porous binding agent selected to attract the REEs in order to form REE salts (either oxides or chlorides depending on the particular customer's desired end-product).
Note that Ucore's management is very clear that it prefers this method to another--solvent extraction--due to the harsh and caustic nature of the materials used, the harm they do to the environment, and the difficulty that this adds to the permitting process.
While Ucore's management is very clear up to this point details beyond it are not yet available to the public, although it is confident that it has a workable strategy.
As investors we will need to wait for the BFS.
Conclusion
Again, I want to thank Ucore's management for taking the time to answer my questions in detail. Note that the opinions I express are not necessarily those of Ucore's management, and I have mentioned several companies in this article that Ucore's management is in no position to comment on.
With that being said, let's summarize the points I discuss above.
- The REE market remains lousy, and market conditions are such that they may not turn right away. We are in a "survival of the fittest" world, and we are seeing many companies' share prices continue to hit new low after new low while a handful are generating interest at a certain price point (Ucore being one of them).
- Ucore has had a busy summer, and while my impetus for approaching Ucore's management was actually driven by the third set of questions I was most satisfied by its responses to the second set, which dealt with Ucore's development over the past few months.
- Ucore's management largely dismissed the idea that it had an insurmountable task in figuring out an economical way to extract REOs (rare earth oxides) from its ore despite its unique mineral composition. But while management believes the company can fall back on tried and true extraction methods there is still uncertainty, and there are no easy answers. The company will have tentative results from the research it is currently undertaking with the Alaskan government at the University of Alaska Fairbanks towards the end of the year, but for now we will just have to wait and see.
As an REE investor you are taking on a very difficult task. With prices where they are even the best projects are marginally economically attractive. Furthermore each of them has to take on the burden of processing its own unique ore, which is a task that is categorically more difficult for an REE company than it is for, say, a copper or a gold producer, as copper and gold extraction methods have been perfected over decades, centuries, and even millennia.
Not only is this a difficult task for the companies themselves in a lousy environment but there is a lot of conflicting information out there, and investors need to have a lot of specialized knowledge in order to make informed decisions.
Why, then, take the time to do this?
The simple answer is that HREEs are critical elements for the global economy going forward, and there is a tremendous shortage looming. Furthermore a vast majority of production comes from China, and this majority is greater for those elements that are in demand such as dysprosium, terbium, and some of the other HREEs. For instance essentially 98%+ of all dysprosium production comes from China. Export restrictions could devastate the Western world to the point where the word "depression" would not be able to describe it. Electronic devices, computers, cell-phones, and a myriad of other products that have become integral to the economy contain HREEs.
In short prices are set to rise dramatically in the next several years even if near-term conditions are capping prices.
So the potential to make fortunes on these stocks is very real even if recent price performance doesn't reflect this.
Given this I have the following suggestions.
First, diversify. As investors in the industry we all have our "pet" favorites, but of the few leaders each has their advantages and shortcomings. Try to determine what these are and find companies with complementary risk factors.
Second, use the market as your guide. There's a reason why Rare Element Resources and Molycorp continue to hit new lows. Similarly there is a reason that Northern Minerals and Mkango Resources (CVE: MKA) (no US symbol to my knowledge) have seen dramatic gains. Now the market shouldn't be your only guide: as you are aware it can be wrong, and often is. But if you see a stock in the sector breaking out or breaking down there is possibly a good reason for it.
Finally, recognize that these stocks are extremely high risk/extremely high reward propositions. The prices of the best REEs have risen 20 - 50 times in value during the 21st century even after the 80% - 90% declines of the past three years. Given the fundamental supply/demand situation we can see repeats of these gains for the right metals. But also 95% - 98% of REE companies are going to 0. So you're essentially taking a risk with roulette-type odds. The good news is that you can put them in your favor, but even so if you buy shares in 5 of these companies you should probably expect 3 to go under.
This is an exciting market to be in, although it is also incredibly difficult. Ucore has thus far stood out as one of the companies that has a good chance of surviving and thriving going forward. There are others, but not many. With this in mind I strongly urge investors interested in the sector to take a closer look at Ucore.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.