5 Most Interesting Rare Earth Stocks – Part 1

Every Toyota Prius uses 25 pounds of rare earth elements.

If it weren’t for rare earth elements, a collection of seventeen chemical elements in the periodic table that are generally found together in ore deposits, the world as we know it today would look a whole lot different. Rare earth elements are used in iPods, GPS navigation systems and plasma televisions; a single Toyota Prius uses 25 pounds.

With 97% of the world’s current supply under their control, China’s hold over this sector is making people nervous. Although China did state it will not use rare earth metals as a bargaining tool, concern about the global supply and demand imbalance of rare earths has driven their prices through the roof since China began to restrict their export. And last July, Asia’s most dominate nation announced a 72% year over year reduction in exports.

In general terms, there are two types of rare earth element deposits including those associated with carbonatites (Molycorp’s Mountain Pass; Lynas’ Mt Weld; Great Western’s Hoidas Lake) and those associated with peralkaline igneous complexes (Avalon’s Thor Lake; Quests’ Strange Lake; Greenland Mineral’s Kvanefjeld). Generally, the deposits that are associated with peralkaline complexes are relatively enriched in heavy rare earth elements. The most expensive rare earth element is terbium metal, a heavy rare earth which costs just over US$3,000 per kilogram, used in various high technology applications. For a complete rare earth price list – CLICK HERE.

This month we feature the “5 Most Interesting Rare Earth Stocks” in no particular order. These companies caught our attention for various reasons but they do share one thing in common – 2011 has been a watershed year for them all.

1. Avalon Rare Metals Inc. (TSX: AVL)

Avalon Rare Metals is best described as big and heavy. Avalon owns one of the largest rare earth element deposits outside of China and potentially the largest in North America. The company has a NI 43-101 indicated mineral resources to 57.49 million tonnes grading 1.56% TREO and an estimated inferred mineral resource of 226.88 million tonnes grading 1.30% TREO. Avalon boasts one of the highest concentrations of heavy rare earth elements in its peer group with a 20.72% HREO/TREO ratio reported within the indicated mineral resource.

According to Jon Hykawy, an analyst at Byron Capital Markets in Toronto, it’s the miners who have a favorable combination of light and heavy rare earths that have the potential to become profitable producers in the coming years. “Most investors realize that the heavy rare earth element(s) command the higher price because they are rarer. Avalon has one of the highest levels of heavies located outside China,” said Mr. Hykawy.

On December 21st, 2010, Avalon announced it would list on the NYSE Amex exchange and that’s when things got interesting. The company’s shares rose more than 20 percent after the announcement, to close the day at $4.91. The added liquidity of a U.S. listing has apparently served the company well. Shares reached an all time high of just over $9.50 in April this year. Since then, Avalon’s stock has seen some selling pressure. Affected by the overall sell-off in equities this spring, and perhaps the news that the company filed a final base-shelf prospect with the intent of raising $500 million via an equity offering in May, the company’s shares drifted to under $6.00 earlier this month. Avalon is currently trading at around $6.40.

However, Avalon Rare Metals remains a Bay Street darling and the company’s Nechalacho project has attracted the support of many analysts. On February 17th, when Avalon was trading at the $7.50 range, Mackie Research analyst Matt Gowing said he saw Avalon as undervalued and set a C$10.50 target price for its shares.  “We think that the market is not anywhere close to where the valuation of the mine should be,” said Gowing, at the time noting that the Avalon recently updated Nechalacho’s resource size and identified new higher-grade material.

2. Frontier Rare Earths Ltd. (TSX: FRO)

Drill rigs at Frontier's Zandkopsdrift Rare Earth project in South Africa.

The completion of an IPO earlier in late 2010 marked the arrival of a new late-stage player on the Canadian listed rare earths scene, Frontier Rare Earths. Frontier began trading on the TSX exchange on November 17th, 2010 after the completion of a $60 million unit financing at $3.40 concurrent with the company’s IPO. The unit offering consisted of 1 share and 1/2 share purchase warrant at $4.60 expiring after 2 years. Since then, the company’s shares have been trending down hitting a low of $1.86 earlier this month and are now trading at $1.97.

Frontier’s flagship project is the Zandkopsdrift rare earth element deposit in the Northern Cape province of South Africa. The company’s NI 43-101 technical report states that Zandkopsdrift is one of the largest known undeveloped rare earth deposits outside China. The independent report, prepared by South African consultants MSA Group in October, 2010, identifies an indicated resource of approximately 23 million tonnes at an average grade of 2.32 percent TREO, representing 532,000 tonnes of contained TREO. In addition, the report identifies an additional inferred resource of approximately 21 million tonnes at an average grade of 1.99 percent TREO, representing 415,000 tonnes of contained TREO. Frontier hopes to supply up to 20,000 tonnes per year of REO and is working on validating the production potential from the ongoing prefeasibility study projected to be completed towards the end of this year. The company is quick to point out that their Zandkopsdrift B Zone, which is contained within the overall Zandkopsdrift resource estimate, is the third highest grade rare earth deposit outside of China after Lynas and Molycorp.

Jacob Securities Analyst Luisa Moreno likes Frontier Rare Earths, she has a price target of $9.83 on the stock. In a report from June 8th, 2011, she states, “Although Molycorp’s grade at Mountain Pass deposit is 8.28% compared to Frontier’s with 2.16% TREO, Frontier’s critical heavy element grades (dysprosium, europium and terbium) are higher, which means that Frontier will be able to produce more of these critical materials (circa 370 tonnes) and generate higher sales for these elements than Molycorp (circa 80 tonnes) despite Molycorp’s overall production target being twice that of Frontier.”

The Prospecting Right for Zandkopsdrift is held by Sedex Minerals, a South African company that is 74% owned by Frontier while the remaining 26% of Sedex is held by South Africa’s Black Economic Empowerment (BEE) through which 21% ownership is extended to Namaqualand Empowerment Trust (NET). NET is a broad-based community trust established for the benefit of historically disadvantaged South Africans principally in the Namaqualand region of the Northern and Western Cape Provinces of South Africa. From the BEE Commission Report in 2002, the post-apartheid program is aimed at redressing the imbalances of the past by seeking to substantially and equitably transfer and confer ownership, management and control of South Africa’s financial and economic resources to the majority of the citizens. It seeks to ensure broader and meaningful participation in the economy by black people to achieve sustainable development and prosperity. An interesting approach that has proven to be somewhat successful in South Africa.

Although Frontier has a direct 74% interest in Zandkopsdrift, company Chief Executive James Kenny noted that the provisions of  Sedex’s shareholder agreement in fact gives Frontier an effective 95% economic interest in Zandkopsdrift when he connected with MiningFeeds.com. To find out more about Frontier’s South African project – CLICK HERE – for the exclusive interview.

For 5 Most Interesting Rare Earth Stocks – Part 2CLICK HERE.

Mike Luft

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