Rare earth oxide project


Oct 1, 2013 - ...

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Rare Element Resources

Initiation of coverage

Bear Lodge rare earth oxide project

Metals & mining

Rare Element Resources (REE) is well positioned to benefit from the global

1 October 2013

move to de-risk access to rare earth oxides (REOs) by diversifying production away from China. REE is in the process of developing the Bear Lodge REO project in Wyoming, US. The project is large, with expected

Price

output of 10,400tpa of REOs over a potential 40-year life of mine. The ore body is enriched with REOs considered critical by the US Energy and Defence departments, underpinning the investment case. REE has developed a proprietary extraction technology, which should improve product quality and reduce the concentrate price discount. However, it has yet to sign up an off-take partner. Our DCF-based company valuation, at a 10% discount rate, is US$5.39/share.

Net cash (US$m) June 2013

29.05

Shares in issue

44.9m

Revenue (US$m)

PBT* (US$m)

EPS* (c)

DPS (c)

P/E (x)

Yield (%)

06/11

0.0

(12.3)

(31.9)

0.0

N/A

N/A

12/12 (6 months)

0.0

(15.2)

(34.2)

0.0

N/A

N/A

12/13e

0.0

(21.2)

(47.3)

0.0

N/A

N/A

12/14e

0.0

(19.9)

(41.4)

0.0

N/A

N/A

Year end

US$2.67

Market cap

US$120m C$1.035:US$

Free float

93%

Code

REE

Primary exchange

NYSE: REE

Secondary exchange

TSX: RES

Share price performance

Note: *PBT and EPS (GAAP) are normalised, excluding intangible amortisation, exceptional items and share-based payments.

Bear Lodge project: Critical rare earth enrichment REE’s Bear Lodge project is scheduled for start-up in late 2016 (first revenues 2017) and is planned to include a mine, a physical upgrade plant (PUG) and a hydrometallurgical concentrate plant (hydromet plant), which incorporates new proprietary REO concentration technology. The ore body, which contains 944Mlb (428Mkg) TREO, is enriched with critical rare earth element neodymium and heavy rare earth element europium. There is additional mineralisation already identified that could lead to resource expansion over time.

Capable of funding its exploration programme No production revenues are expected before scheduled start-up in late 2016. However, the group had cash of US$29m (US$0.65/share) at 30 June 2013, suggesting that the 2013/14 exploration and evaluation programme is fully funded. We forecast project capex of US$400m, with the bulk of the spending in 2016. REE has yet to sign an off-take partner, which would support its project funding requirement, but may be able to tap into Wyoming state development bonds.

%

1m

3m

12m

Abs

32.2

36.2

(45.7)

Rel (local)

28.4

30.1

(53.5)

52-week high/low

US$4.77

US$1.71

Business description Rare Element Resources is a mineral resource company currently advancing the development of the Bear Lodge rare earth oxide project in Wyoming, US.

Next events September Quarterly

4 November 2013

Analysts Rob Kirtley

+44 (0)20 3077 5700

Valuation: Based on pre-feasibility study

Charles Gibson

+44 (0)20 3077 5724

Our PFS-based DCF (at a 10% real discount rate) valuation for the project is US$905m. This translates into US$5.39/share, assuming a 50% split debt/equity financing structure for the project. Our estimated valuation, including the newly

[email protected] Edison profile page

developed oxalate precipitation stage of the hydromet process, is US$7.23/share. However, these valuations are likely to change as the feasibility study progresses and the capex requirements of the new technology is quantified over the next 18 months.

Rare Element Resources is a research client of Edison Investment Research Limited

Investment summary Company description: Critical rare earth project Rare Element Resources (REE) is an exploration and development company, which is in the process of developing the Bear Lodge project. The project consists of an REO mine, a PUG and a hydromet plant. At full production, output is expected to be 10,400tpa of REOs, with production starting in late 2016 at the earliest. The ore body, which contains 944Mlb (428Mkg) total REO (TREO) is enriched with critical rare earth neodymium and heavy rare earth europium.

Financials: Sufficient cash for the year No production revenues are expected before 2017. Expenses relate largely to exploration and evaluation (US$13m in the six months to December 2012) and administration (US$4m in the same period). At end-June 2013, the group had cash and short-term investments of US$29m (US$0.65/share), suggesting that the exploration and evaluation programme for the next 18 months is fully funded. Expenditure on exploration is budgeted to drop relative to last year as the group undertakes more process evaluation and less drilling. REE has yet to sign an off-take partner, which would provide an opportunity to settle its project funding requirement, but may be able to finance part of the project with Wyoming state development bonds.

Risks: Technology and financing risks are key New technology risk: REE has developed a new extraction process in the hydromet plant that should result in a higher-quality product commanding a price premium relative to the concentrate price used in the preliminary evaluation studies. The technology has been tested in the laboratory, but its scalability is as yet untested. In our view, new technologies often have teething troubles, requiring time and capital to achieve expected extraction and product purity levels. The development of viable technology is often the most important step in commercialising a rare earth deposit and the risks should not be underestimated. Off-take and financing risk: At present, REE has not entered into any strategic off-take MoUs. It could be difficult for REE to develop the project without the financial and technological capabilities of a strong strategic partner. A strategic partner is unlikely to commit to the project until the product specifications are finalised. Timing and permitting risk: The Plan of Operations was accepted by the Forest Service. It will be the basis for the National Environmental Policy Act (NEPA) process, the next step in a long and potentially time-consuming permitting process. Commodity price risk: Commodity prices are a key factor for the project economics, as the input price is the most sensitive variable in the estimation of project value. REO concentrate pricing (REE’s product) is often difficult to track given the unique output profile of each project. Project economics are supported by the presence of high-value Neodymium, europium and praseodymium, which together are expected to provide 75% of revenue using end August prices as provided by Rare Element Resources and used in our model. Financing, technology development and permitting risks could lead to delays and place the expected production start-up date of late 2016 at risk.

Valuation: Based on PFS and new hydromet design Our valuation is based on the PFS, with updated price and life of mine data. Our base case DCF assumptions yield a project net present value (NPV) of US$905m at a 10% discount rate, which translates into a fully funded 50/50 debt/equity company valuation of US$5.39/share. This increases to US$7.23 if the new oxalate precipitation hydromet process is included in our estimates.

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Company description: Rare earth oxide project Rare Element Resources (REE) is an exploration and development company, which is in the process of developing the Bear Lodge project. The project consists of an REO mine, a PUG and a hydromet plant. At full production, output is expected to be 10,400tpa of REOs. At present, REO production is dominated by China, with c 95% of global supply. The Chinese government has modified export quotas to suit its own strategic needs, thereby restricting supplies to non-Chinese users. Chinese export quota restrictions, coupled with a small non-Chinese producer base, suggest that the market for REOs is thin and changes to supply conditions may have a big impact on prices. Development of non-Chinese sources of production, such as REE’s project, would diversify REO supply risk. In our view, this would be a strategically sound market development, attractive to REO consumers seeking alternative sources of supply.

The REO market – dominated by China China is the largest producer and consumer of REOs. It produces approximately 136,000tpa (c 95% of global production). According to the Industrial Minerals Company of Australia (IMCOA), China currently holds approximately 48% of the world’s REO resources, with the former Soviet states holding c 17% and the US 11%, with the remainder widely distributed throughout the rest of the world. The Bayan Obo mine in China is the largest producer. The mine produced 55,000 tons of REOs in 2010, which equates to 46% of Chinese production and 42% of global production (REE by comparison expects to produce about 10,400 tons of REOs per year). Chinese production costs were so low in the 1990s that it became uneconomic to mine rare earths outside China and led to mine closure in places such as the US. China consumes about 60% of global rare earth production. In 2010, China started restricting export quotas of rare earths to protect its downstream technology and manufacturing sector, leading to a global shortage of rare earths and the consequent spike in prices in 2010 and 2011 with stockpiling occurring during the run up. Slowing demand resulted in prices falling back. The stockpile has been drawn down and, since May 2013, prices appear to be improving for the majority of the elements. Chinese control of the rare earth market is of strategic concern to countries that depend on rare earths, such as Japan and the US. This concern should lend support to new non-Chinese mine development. Importantly, the US Department of Energy is establishing a rare earth research facility to reduce dependence by the US on Chinese rare earth elements. The supply of rare earths grew 4.5% pa from 2000 to 2010. This increase was a consequence of Chinese and global economic growth, resulting in demand for high-technology products such as TVs, mobile phones, metal hydride batteries and computer hard drives. Rare earths are also used in magnets, ceramics, catalysts and military applications. They are a central component of green technologies such as compact fluorescent light bulbs. REOs should benefit if global economic growth resumes and they are central to the implementation of green technologies, providing a secular growth underpin. The PFS is based on forecast global demand growth for rare earth elements of 7-10% per annum to 2020. The demand forecasts were obtained from IMCOA by REE. Rare earth elements consist of the 15 lanthanides (spanning atomic numbers 57 [lanthanum, La] to 71 [lutetium, Lu]), as well as scandium and yttrium. These elements have similar chemical properties, which makes them difficult and expensive to separate from each other. The key to a project such as Bear Lodge is to sign up with a strategic technology partner with the technology and financial strength to refine the REOs. At present, REE does not have a technology partner, which could present a significant development risk for the project, as in our view financing and off-take agreements are critical to economic feasibility. We consider that a technology partner is more likely to participate once the pilot plant testing (currently underway) and the project’s product have been evaluated and the final design parameters have been determined. Failure to secure a technology partner could pose a risk to securing finance and lead to delays in the project time line. The

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scheduled project start date of late 2016 is vulnerable to delays until the technology is proven at scale.

Background: Wyoming – a long history of exploration The Bear Lodge project is located in the Bear Lodge Mountains of north-eastern Wyoming. The area was originally prospected for gold more than 100 years ago and thorium and rare earth occurrences were discovered in 1949. REE (then known as Paso Rico USA) began examining the project in 1998-99 when it acquired the property from Phelps Dodge/Freeport. REE and Newmont established a gold exploration venture in 2006. In 2009, the Forest Service completed an environmental assessment for a gold exploration programme. The Newmont/REE agreement was terminated in 2010 and REE is now the sole owner of the Bear Lodge REO project. Exploration for rare earth elements was focused in the Bull Hill area and limited drilling programmes were conducted before the more comprehensive evaluation activities of 2009-12, which have delineated other potential deposits such as the Whitetail Ridge. Exhibit 1: Location of the Bear Lodge project

Source: Rare Element Resources, June 2013 investor presentation

In our view, the location of the Bear Lodge project, some 20km from Sundance, Wyoming, offers REE significant competitive advantages. The first core advantage is the highly developed road, power and water infrastructure in the region. The mine would have easy access to the road network, as Interstate 90 is nearby, as well as readily available power. The infrastructure is largely in place and can be used from the start. The property contains extensive Forest Service roads, some of which will be upgraded for heavy use access to get equipment and consumables to the mine and plant and to ship the pre-concentrate produced on site to the hydromet plant at Upton, some 65km away. The Upton plant already has a spur for rail access for shipping to the end user. The second possible advantage is the well-established history of mining in Wyoming, making it a mining-friendly environment and one that could facilitate the permitting process as precedents are likely to be well established. Wyoming has been ranked fifth in the world’s top mining jurisdictions by the Fraser Institute. A well-established mining history may make community support easier to obtain and provides a mining-literate pool of potential labour.

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Thirdly, Wyoming State Treasury has a policy of supporting natural resource development and has allocated US$300m to purchase Industrial Development Bonds to finance economic development. These could provide a possible source of financing for the project. To apply for these funds, REE would have to provide a business plan and ensure an equity base of 25% of capital, and acquire all necessary operating permits and approvals.

Geology: Enriched with heavy and critical REOs The Bear Lodge Mountains expose alkaline plugs, sills and dikes intruded into basement and sediments. The Bear Lodge REO deposits are associated with the carbonatite and carbonatiterelated intrusions. Exhibit 2: Bear Lodge project deposits

Source: Rare Element Resources

The Bear Lodge deposits show distinct zones of heavy and critical rare earth oxide (HREO and CREO) enrichment. Due to their scarcity, heavy rare earths command a premium over the light rare earths. Furthermore, a number of REOs have been classified as critical minerals by the US Department of Energy and the US Department of Defence given their scarcity and strategic nature (see critical REOs in Exhibit 3). The deposits at Whitetail Ridge and the exploration target areas at Carbon and Taylor exhibit HREO and yttrium enrichment, while the Bull Hill deposit has a higher proportion of light rare earths. Up to 84% of the expected annual revenue generated from the project resides in the heavy and critical REOs. The Taylor and Carbon exploration targets are not yet included in resources and offer REE longer-term expansion potential. The two largest contributors by revenue are neodymium (a valuable critical light REO) and europium (an HREO). Although cerium accounts for 43% of the contained REOs by mass, it only contributes 8.5% of expected revenue at prices provided by REE and used in our model. Radionuclides are present in the form of uranium and thorium. The level of radionuclides in the preconcentrate is expected to be under 0.25% and under 0.01% in tailings, below regulatory guidelines. The uranium is not concentrated in the process and will be sent to tailings, while the thorium will be recovered and sent to a licensed disposal facility for safe storage offsite.

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Exhibit 3: REO annual production Bear Lodge REOs Neodymium Europium Praseodymium Dysprosium Terbium Yttrium Critical REOs* Cerium Lanthanum Samarium Gadolinium Light REO Total REO

% Distribution by weight % 17.7% 0.6% 5.0% 0.3% 0.1% 1.0% 24.7% 43.5% 27.4% 2.8% 1.4% 75.1% 99.8%

% Revenue % 41.2 % 18.0 % 15.8 % 5.2 % 3.1 % 0.6 % 83.9 % 8.5 % 5.0 % 0.6 % 1.9 % 16.0 % 99.9 %

Tons 1,844 63 521 31 10 104 2,574 4,533 2,855 292 146 7,826 10,400

US$/kg 5.5 2.4 2.1 0.7 0.4 0.1 11.2 1.1 0.7 0.1 0.3 2.1 13.4

Source: Rare Earth Resources, September 2013. Note: *Elements identified as critical by the US Department of Energy, except for Pr, although Pr is included because it can be substituted for Nd in high intensity magnets. Prices are as used in our model and are based on REE guidance.

The Bull Hill and Whitetail deposits are sizable, potentially supporting a mine life of more than 40 years at the 1,000tpd production rate outlined in the PFS. At a cut-off grade of 1.5%, the project deposits contain 14.65Mt at a grade of 3.22% equating to 944Mlb (428Mkg) of total REOs. The deposits have a high-grade core containing 566Mlb (257Mkg) of total REO at a cut-off grade of 3%, which could support a phased development approach and improved project economics. Exhibit 4: Geologic resources Measured and indicated resources (at a 1.5% cut-off grade) Deposit Bull Hill Measured Indicated Whitetail Ridge Measured Indicated Total High-grade core Measured and indicated

Tons (m)

Grade (TREO %)

Contained TREO (Mlb)

1.94 10.46

3.93 3.22

153 674

0.00 2.25 14.65

2.61 3.22

0.00 117 944

6.00*

4.72

566

Source: Rare Element Resources. Note: Slight errors may arise due to rounding. * Includes high grade at both deposits.

Production process: Mining, physical upgrading, concentration The production process involves mining followed by physical upgrading of the ore to produce a preconcentrate and then concentration in a hydromet plant to produce REO containing concentrate. Exhibit 5: The production process Open pit mine

PUG

Hydromet

• • •

• • •

• • • •

1,000tpd 40+ years LOM Truck and shovel

Crushing, washing and screening At mine site TPD pre-concentrate

Trucking 65km to Upton

Proprietary technology Upgrade to concentrate 90% REO Rail line for final delivery

Source: Edison Investment Research, based on Rare Element Resources’ flow chart

The open-pit mine would be a typical truck and shovel operation. The expected production rate is 1,000tpd. The existing resource could support a life of mine of 40 years at a rate of 1,000tpd. This technology is well proven, suggesting that mining risk is likely to be low. The ore is then sent for preliminary upgrading at the PUG, where it would be crushed, washed and screened to yield a preconcentrate, which would then be trucked by road to the hydromet. The PUG would be located

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close to the mine, while the hydromet plant would be located in Upton, a town with an industrial area some 65km to the south. The mining and PUG processes are standard technology, but the hydromet plant contains an additional proprietary process – the oxalate precipitation process. The PFS was based on a concentrate containing 45% REOs. The oxalate step could result in a concentrate containing over 90% REOs. The concentrate is the saleable product, which attracts a pricing discount relative to pure REOs. This price discount should reduce as the level of contained REO in concentrate rises, and impurities fall. The discount was expected to be 40%, but REE indicates that it should narrow to 30% with the inclusion of its proprietary oxalate precipitation technology. The higher concentration factor should result in an improved product requiring less refining and easier end-user processing relative to the original low-concentration product. This should make it more attractive to potential strategic partners, which are essential for the development of this project. Strategic technology partners usually require final product specifications before committing to off-take. The new oxalate precipitation hydromet technology is being patented and was not included in the PFS. The technology has been confirmed by two independent laboratories and will be tested at the pilot plant level. REE is currently incorporating the technology in trade-off studies. These results, along with other studies underway, will be completed in the next two-to-four months and incorporated in the feasibility study. At present, there is no indication of likely changes to capex, operating expenditure or output assumptions since the May 2013 resource update as a result of the new technology. Although the PFS has been superseded by the inclusion of the new hydromet technology, we have assumed that the PFS remains broadly representative of the scale and costs of the project, but caution that the hydromet capex and opex could vary significantly from the base line PFS.

Permitting: Process is underway The US Forest Service has accepted REE’s Bear Lodge Plan of Operations. This allows the NEPA process to proceed. Although project development may now advance to the next stage, final permitting could take considerable time. Permitting is beyond management control, but REE is budgeting for completion by 2015. A mining permit is needed from the Wyoming Department of Environmental Quality, as well as other entities, including the Nuclear Regulatory Commission, the US Army Corps of Engineers and local permits and approvals. There do not appear to be any issues relating to First Nations, and REE is working to create good relations with local communities and every level of government, which is facilitated by Wyoming’s positive attitude towards mining.

Project development: Capex and timing key uncertainties The construction of the mine and infrastructure is estimated to begin in Q315 once all permitting and approvals are in place. Production start-up is pencilled in for Q416. Full production is budgeted to be reached within one year, but ramp-up could take longer if unforeseen start-up problems are encountered, which is typical of early stage projects. In our opinion, project and production timing is a source of risk, especially given uncertainties relating to permitting, financing, market conditions and the evaluation and application of new technology, which could lead to production timing slippage. Life-of-mine capex was estimated in the PFS at US$404m, including US$108m on the hydromet plant and US$95m on the PUG. There have been no further updates on capex estimates following the design change of the hydromet plant. We have assumed at this stage that the mining and PUG plant will remain the same, although the hydromet plant capex is likely to increase. Capital expenditure is, in our view, a key source of uncertainty as other REO producers are expecting considerably higher capex spend. Although projects are not strictly comparable, we note that Alkane is expecting to spend A$996.4m to produce 10,000tpa of REO concentrate, Avalon expects to spend US$1.6bn, which includes refining 10,000tpa of separated rare earth metals, and

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Molycorp US$1.3bn for 19,500tpa, expanding to 40,000tpa during development of the second phase of the project. In our valuation, we test the value of the project at different capex levels.

Valuation Edison’s valuation is based largely on the base case DCF assumptions detailed in the PFS, with modifications to input prices and life, which yield a project NPV of US$905m. This translates into a valuation for the company of US$5.39 per share, assuming a financing debt/equity split of 50/50, for the purposes of our model. Incorporating the hydromet oxalate precipitation process increases the company valuation to US$7.23 per share. We have assumed that the company raises US$200m in debt and issues 80m shares at a theoretical US$2.50 per share. The debt is netted off the NPV to yield a company net asset value.

Assumptions: Based on PFS, adjusted for new technology The assumptions used in the DCF model are largely drawn from the PFS and are shown in the following table. The REO price of US$13.4/kg used in the model is 23% lower relative to the (April 2012) PFS price of US$17.4/kg to reflect weaker market prices through to August 2013. The life of mine has been extended from 19 years in the PFS to 40 years to reconcile the current size of the resource with the expected annual production rate. Exhibit 6: Input assumptions Concentrate price TREO concentration Annual production (concentrate) Annual production (contained REO) Capex PUG Hydromet Capital replacement EPCM – mining, tailings, infrastructure Annual cash opex PUG Hydromet Mining G&A Cash tax rate Salvage value Start-up (Edison assumption one year later than PFS) Life of mine

Units US$/kg % tons tons US$m US$m US$m US$m US$m US$m US$m US$m US$m US$m % US$m calendar years

Base 13.4 45% 23,111 10,400 (476) (95) (108) (40) (233) (62) (6) (39) (10) (7) 10% 0 2017 40

Hydromet oxalate 31.2 90% 11,556 10,400 (530) (95) (162) (40) (233) (66) (6) (43) (10) (7) 10% 0 2017 40

Source: Rare Element Resources, Edison Investment Research estimates

Indicative REO prices are available, but product variability between producers and off-take partners suggests that mines receive a unique price for their product. In the PFS, REE was budgeting on a 40% discount relative to pure REO prices due to the low concentration level of 45%. The new oxalate process in the hydromet plant is expected to increase concentrate levels to 90% contained REO, which, according to management, should narrow the concentrate price discount to about 30% relative to pure REO prices. The inclusion of the oxalate step in the recovery process is therefore assumed to improve project economics. However, this improvement cannot be stated with certainty as the changes in capex and operating expenditure for the hydromet technology are not yet known and the possible teething troubles – common with new technologies – have not been factored in. The inclusion of the acid-oxalate stage in the hydromet process will affect the project economics. At this stage, it is not possible to quantify the effect on opex, capex and final product pricing. We conclude that the price received should improve as the concentrate discount narrows. We estimate that improved concentration and lower pricing discount could lead to a 17% improvement in the

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overall price received. However, in our view, opex and capex should rise. We have modelled a 50% increase in the hydromet capex and 10% in the hydromet opex, and have left mining and PUG assumptions unchanged. The reworked valuation, taking into account higher pricing and costs, results in a new project NPV of US$1.156bn. This is a 27% increase over the base case scenario and equivalent to a corporate valuation (at a 10% discount rate) of US$7.23/share.

Valuation sensitivity: Price and discount rate sensitive The project’s key sensitivity lies in REO pricing and the discount rate. We estimate that a 10% change in REO prices would lead to a 19% change in project NPV. We estimate that an increase in the discount rate to 12.5% from a base case 10% would reduce the NPV to US$611m, a drop of 32%. The project does not appear to be too sensitive to cost changes. A 10% change in opex results in a 5% change in project NPV, while a 10% change in capex yields a 3% change in NPV. Exhibit 7: Sensitivity analysis REO Price US$/kg 20.1 18.7 17.4 16.0 14.7 13.4 12.0 10.7 9.4 8.0 6.7

Price change % 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50%

NPV US$m 1,785 1,609 1,433 1,257 1,081 905 729 553 377 201 25

NPV change % 97% 78% 58% 39% 19% 0% -19% -39% -58% -78% -97%

Discount rate sensitivity Rate NPV US$m 0.0% 6,885 2.5% 3,770 5.0% 2,219 7.5% 1,385 10.0% 905 12.5% 611 15.0% 422 17.5% 294 20.0% 206 22.5% 143 25.0% 97

Source: Edison Investment research estimates

Rare Element Resources is valued at a premium to the peer group average valuation per expected production ton. However, a peer analysis is complicated by differing REO product mixes, pricing structures, off-take arrangements and project timing and capex. The peer analysis shows a wide and dispersed range of values, reflecting this complication. Exhibit 8: Peer analysis – limited comparability Company

Rare Element Resources Avalon* Great Western Namibia Rare Earths Frontier Rare Earths Alkane** Average

Market cap US$m 112 91 49 15 32 129

Expected production Tpa Timing 10,400 10,000 5,000 2,500 20,000 4,988

2017 2017

2016

Valuation Market cap/ton 10,763 9,068 9,767 6,047 1,587 6,221 7,242

Relative to average 49% 25% 35% -17% -78% -14% 0%

Source: Edison Investment Research. Note: *Produces partially separated metals. **Excludes Zr. Prices at 17 September 2013.

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Sensitivities: Risks and investment case The following is a summary of the risks and positive attributes of the investment case:

Risks 

Lack of a strategic partner: It could be difficult for REE to develop the Bear Lodge project without the financial and technological capabilities of a strong strategic partner.



New technology: The new hydromet technology should result in a higher-quality product commanding a price premium relative to the expected original concentrate price. However, it is untested at production scales, although the pilot plant-scale test programme currently underway should reduce this risk markedly.



Timing and permitting: Moving into the NEPA process is the next step in a long and potentially time-consuming permitting process. Uncertainties in permitting timings could render the PFS scheduled 2016 production date vulnerable. (Our model assumes start-up in 2017.)



Commodity price risk: With weakening prices, the project’s economic attractiveness diminishes. In addition, lower prices could deter investors from providing much-needed capital. However, the recent price trend is positive, with the REE basket price up 21% since the low point in May 2013.

Positives 

The ore body contains critical REO enrichment, as per the US defence and energy departments’ classification. In addition, the US Department of Energy is establishing a rare earth research facility, confirming the strategic importance of REO supply to the US.



Uranium and thorium disposal should not pose a problem.



Location: Wyoming is mining friendly and has well-developed infrastructure.



Partial debt financing may be possible from Wyoming state development bonds.



The proprietary hydromet process should result in a value-added product relative to the original PFS concentrate expected to be produced.



Positive project economics: The PFS indicated that the IRR for the project is 48% (before the new hydromet process).

Financials Earnings, cash flow and balance sheet REE is in the process of developing the Bear Lodge project and therefore has no revenues. No production revenues are expected before 2017. At this stage, expenses relate largely to exploration and evaluation (US$13m in the six months to December 2012) and administration (US$4m in the same period). At end-June 2013, the group had cash of US$29m (US$0.65/share), suggesting that the 2013/14 exploration and evaluation programme is fully funded. Expenditure is forecast to be approximately US$23m in 2013 (of which US$8.0m has been spent to June 2013), remaining at similar levels as the group intends to raise equity to continue its evaluation programme. The group will require additional funding to complete the project, although the timing and quantum of any equity raise is unknown at present. We have assumed the group will raise US$15m in both 2014 and 2015 through the issue of 6.0 million shares in each year at a theoretical US$2.50/share, sufficient to maintain the current evaluation spend. REE has the capacity to raise equity opportunistically under its shelf prospectus and is in a position to exploit any strength in equity market conditions. The group will have to raise considerably more capital if the project proceeds.

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Substantial capital expenditure of over US$400m will be needed to bring the project to fruition. The group has no debt at present and has the possibility of raising debt through the Wyoming development bonds. The tie-up with a strategic off-take partner could also facilitate capital raisings. Exhibit 9: Financial summary December PROFIT & LOSS Revenue Cost of Sales Gross Profit EBITDA Operating Profit (before amort. and except.) Intangible Amortisation Exceptionals Share based payments Other Operating Profit Net Interest Profit Before Tax (norm) Profit Before Tax (FRS 3) Tax Profit After Tax (norm) Profit After Tax (FRS 3) Average Number of Shares Outstanding (m) EPS - normalised (c) EPS - normalised and fully diluted (c) EPS - (IFRS) (c) Dividend per share (c) Gross Margin (%) EBITDA Margin (%) Operating Margin (before GW and except.) (%) BALANCE SHEET Fixed Assets Intangible Assets Tangible Assets Investments Current Assets Stocks Debtors Cash Other Current Liabilities Creditors Short term borrowings Long Term Liabilities Long term borrowings Other long term liabilities Net Assets CASH FLOW Operating Cash Flow Net Interest Tax Capex Acquisitions/disposals Financing Dividends Net Cash Flow Net Cash Flow calendar 2012* Opening net debt/(cash) HP finance leases initiated Other Closing net debt/(cash)

US$ '000s

2011 US GAAP

2012(6mths) US GAAP

2013 US GAAP

2014e US GAAP

2015e US GAAP

0 0 0 (10,569) (10,607) 0 3,077 (7,414) (2,345) (17,289) 632 (12,320) (16,657) 0 (12,320) (16,657)

0 0 0 (15,454) (15,544) 0 1,457 (1,643) (1) (15,731) 301 (15,243) (15,430) 0 (15,244) (15,430)

0 0 0 (21,293) (21,489) 0 0 (2,300) 0 (23,789) 241 (21,248) (23,548) 0 (21,248) (23,548)

0 0 0 (19,723) (19,919) 0 0 (2,300) 0 (22,219) 56 (19,864) (22,164) 0 (19,864) (22,164)

0 0 0 (21,351) (21,547) 0 0 (2,300) 0 (23,847) 35 (21,512) (23,812) 0 (21,512) (23,812)

38.6 (31.9) (29.4) (43.2) 0.0

44.6 (34.2) (31.1) (34.6) 0.0

44.9 (47.3) (43.1) (52.4) 0.0

47.9 (41.4) (38.0) (46.2) 0.0

53.9 (39.9) (36.9) (44.1) 0.0

N/A N/A N/A

N/A N/A N/A

N/A N/A N/A

N/A N/A N/A

N/A N/A N/A

2,490 0 1,814 676 72,993 0 44 72,312 637 (1,093) (1,093) 0 (297) 0 (297) 74,093

15,694 0 544 15,150 25,490 0 17 24,985 488 (3,599) (3,599) 0 (238) 0 (238) 37,347

718 0 718 0 16,451 0 60 16,211 180 (777) (777) 0 (250) 0 (250) 16,142

708 0 708 0 11,646 0 60 11,406 180 (820) (820) 0 (256) 0 (256) 11,278

608 0 608 0 5,275 0 60 5,035 180 (859) (859) 0 (259) 0 (259) 4,766

(23,799) 241 0 (360) 15,144 0 0 (8,774)

(19,674) 56 0 (180) (6) 15,000 0 (4,805)

(21,310) 35 0 (90) (6) 15,000 0 (6,370)

(24,985) 0 0 (16,211)

(16,211) 0 0 (11,406)

(11,406) 0 0 (5,035)

(6,680) 0 0 (143) (521) 68,196 0 60,852 (11,460) 0 0 (72,312)

18m (12,698) 301 0 (11) (27) 390 0 (12,045) (35,282) (72,312) 0 0 (24,985)

Source: Company data, Edison Investment Research. Note: *Reflecting year-end change to December, for 2012 we show P&L for six months to December, balance sheet at 31 December 2012. 2012 cash flows include the net cash flows for 12 months to June 2012.

Rare Element Resources | 1 October 2013

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Contact details

Revenue by geography

225 Union Blvd, Suite 250 Lakewood, CO 80228 USA 01 720.278.2460 www.rareelementresources.com

N/A

CAGR metrics EPS 09-13e EPS 11-13e EBITDA 09-13e EBITDA 11-13e Sales 09-13e Sales 11-13e

Profitability metrics N/A N/A N/A N/A N/A N/A

Balance sheet metrics

ROCE 12 Avg ROCE 09-13 ROE 12 Gross margin 12 Operating margin 12 Gr mgn / Op mgn 12

N/A N/A N/A N/A N/A N/A

Gearing 12 Interest cover 12 CA/CL 12 Stock days 12 Debtor days 12 Creditor days 12

Sensitivities evaluation N/A N/A N/A N/A N/A N/A

Litigation/regulatory Pensions Currency Stock overhang Interest rates Oil/commodity prices

     

Management team President, CEO and director: Randall J Scott

Chief Operating Officer: Jaye T Pickarts

Mr Scott is a metallurgical engineer, who holds a BSc degree in metallurgical engineering and an MBA. He has over 30 years’ experience in the mining industry and has been involved in initiatives in operations, administration and project development, as well as business improvement and development.

Mr Pickarts is a senior process engineer. He has more than 25 years’ experience in project development, acquisitions, engineering design and process operations, as well as involvement in permitting and reclamation, mine closure and water management. His has operated in many countries globally.

Chief Financial Officer: David Suleski

Vice President, Exploration: Jim Clark

Mr Suleski is a past certified public accountant and has held senior financial positions in a number of international mining companies.

Mr Clark holds a PhD in volcanic geology and igneous petrology, and is a licensed geologist. He has 30 years’ experience in planning and conducting project exploration work.

Principal shareholders

(%)

Directors and management Van Eck Associated Corporation CPP Investment Board Invesco PowerShares Capital Management, LLC D.E. Shaw & Company, L.P. Portola Group, Inc. Susquehanna Financial Group, LLLP

7.10 2.34 0.89 0.68 0.66 0.55 0.55

Companies named in this report Avalon Rare Metals (AVL: TSE), Great Western Minerals (GWG: CVE), Namibian Rare Earths (NRE: TSE), Frontier Rare Earths (FRO: TSE), Alkane Resources (ALK: ASX).

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