Texas Rare Earth Resources Has At Least 25% Upside As the Rare Earths sector continues to stabilize, Douglas Ehrman sees an asymmetric opportunity in Texas Rare Earth Resources thanks in part to its critical rare earth minerals. The rare earth resource space has seen periods of brilliance and periods of hardship, but the one constant is the reality that these materials are critical to several industries, and thus, not going to fade away any time in the foreseeable future. One of the most overlooked opportunities in the space comes from Texas Rare Earth Resources (OTC:TRER), largely because the companys primary asset - its Round Top Mountain project - has be viewed purely in terms of grade, and because most CapEx projections, including the one in the 2012 PEA, have focused on using froth floatation methods for resource recovery. Recently, it has become clear that heap leaching is both viable and preferable, and that grade concerns are likely unfounded. As such, the company is pushing for an updated PEA, which has the potential to be a major catalyst for moving the company and the stock forward. In the immediate term, with shares trading around $0.40 per share (at $0.46 as of this writing), there is a minimum 25% upside as shares retest recent highs above $0.50 per share; longer term, however, the upside is far more significant. Company Insight I recently had the opportunity to speak with Texas Rare Earths Chairman, Anthony Marchese about the current position and prospects for his company. One of the driving messages behind his insight on the companys resource and future is that relative to peers with greater name recognition, like Molycorp (MCP) and Lynas (OTC:LYSCF), Texas Rare Earths has a much stronger profile in terms of heavy rare earth elements ((HREEs)). In a recent article, Jack Lifton, industry consultant and newly elected TRER board member, defends the position that grade should be of secondary concern to the overall economics of a specific project: it is not grade that is important in the production of the rare earths from mines but rather the proportion of the total rare earths contained that is made up of critical rare earths. It is of note to mention that after years of consulting on an independent basis, Lifton recently decided to join the companys board. With China the main source of rare earths, both light and heavy, it has become increasingly important for other sources to be identified. To put this into some perspective, as of the companys last PEA, the deposit is estimated to contain 660,098,000 kg of measured, indicated and inferred rare earth oxides, with 70% being yttrium and HREEs; the Chinese produce roughly 25,000 tons per year, exporting only a small fraction. Long-term demand for these materials is not likely to wane, so the Round Top resource has significant long-term potential. Processing and CapEx The companys last PEA, completed in June of 2012, estimated total life-of-mine capital costs around $3.0 billion. This includes $92 million in pre-construction costs, $2.1 billion in construction costs, and another $860 million to sustain the mine. While the overall economics at this level are still favorable, the prospects for identifying a partner willing to commit to this level of outlay may be remote. These projections, however, are based on using froth floatation to recover the HREEs. It should be noted that the 2012 PEA placed the net present value (NPV) of the project at over $1 billion. In an upcoming paper, Dr. Nicholas Pingitore, a Professor at the University of Texas El Paso and director at Texas Rare Earth Resources, details some of the advantages of the site, specifically how heap leaching using sulfuric acid can be used to significantly alter the cost structure of the project. From the abstract: Leaching experiments show that the YREEs are easily liberated by dissolution with dilute sulfuric acid, due to the solubility of yttrofluorite. Floatation separation of the yttrofluorite has been demonstrated, but was rendered inefficient by the micro-scale grain size of yttrofluorite. Under assumptions based on a heap leaching approach, Marchese estimated that the projects economics could be better estimated at between $150 million and $300 million for the project. At this level, the project and the company becomes a far more interesting play for a partner looking ahead. Timing and Estimates With Texas Rare Earths pursuing completion of an updated PEA, I believe the time to take a position in the stock is now. A retracement back to the top of the stocks recent trading range will represent a roughly 25% return, but new financial projections could act as the type of catalyst needed to drive the stock much higher. While there is undoubtedly a speculative element to this trade, the upside potential more than justifies the risk. Additionally, if you were to use market capitalization as a roadmap for setting a price target, TRERs valuation would be significantly higher. UCore Rare Metals (UCU.V) trades at a market cap near $45 million, while Avalon (AVL) is closer to $90 million. By comparison, TRER is only at $18 million, meaning if it grew to the market cap of its peers, it would trade between $1.21 and $2.42 per share. This is not a perfect proxy for setting a price target, but adds to the argument that TRER has significant upside. When considering the industry, while Marchese does not see much recovery ahead for light rare earth material prices - driven largely by oversupply - he had a positive view for heavies. First, he believes the company can be profitable at current rare earth price levels, which sets a solid baseline for a longer-term investment. Looking ahead, however, given the scarcity of readily available HREE, he believes price appreciation is inevitable, although the timing could be hard to nail. The Investment Thus far the market has made two errors in the way that it is pricing the stock: relying on the initial CapEx estimate and failing to distinguish between light and heavy rare earth materials. I expect the solution to the first issue to drive a solution to the second. As a part of the updated PEA, dramatically reduced project capital requirements are expected to classify the Round Top resource in a much improved light. A part of this includes the viability and preference for using heap leach technology to recover the HREEs in the formation. This updated information should drive investor understanding that Round Top is an accessible, easily mined resource for HREE, which can and should trade on a different basis than some of the light rare earths. As investors understand the breadth of the opportunity, the attraction of the company should grow. It should be noted that Texas Rare Earths has very solid infrastructure in place already. Very near the highway, and with ample power options, Round Top is the only resource of its kind on state rather than federal land. Already possessing a positive relationship with the state government, TRER will face fewer permitting delays than competitors. The catalyst for the stock will be the release of the updated PEA, expected later this year. This will include the recent finding on heap leaching versus froth floatation, so I expect an initial pop, followed by positive momentum as investors wade through the methodology and why the opportunity has significantly changed. A secondary catalyst will be improving overall conditions in the rare earth sector. While the turn has been slow, I expect that some of the industry standard bearers will begin to show strengthening demand. While the economics of HREEs are more attractive, all of these companies tend to be painted with the same brush at times, meaning positive news for the more well-known names is good for all players. As I mentioned above, if TRER were able to achieve a similar market cap to some of its peers, the stock could easily be valued at $1.25 or higher. The updated PEA has the potential to drive the stock here, but a more conservative price target seems more appropriate. In early 2012, TRER traded above $2 per share very briefly, falling as the industry faced mounting challenges. A 25% retracement, which I believe is quite attainable, would put the stock at roughly $0.84 per share. Setting a price target range between $0.75 and $0.85 seems both attainable and not overly aggressive. The stock should be able to reach these levels by the end of the first quarter of 2014, if all other factors play out as expected. I do believe the stock continues to have a largely speculative element to it, with major risk factors including a delay on the updated PEA, or conflict over the heap leaching conclusion. With the NPV of the project sitting at $1 billion, however, I see limited downside risk relative to upside potential. TRER has capital for the next year, and the overall structure of rare earths is not likely to worsen, particularly for HREEs. The trade will require some patience, but should ultimately pay off. Ultimately, the stock represents a significant opportunity over the next several months as the overall sector stabilizes. This stabilization, I believe, will drive the stock back to the high end of the range by year-end, with the PEA serving as the catalyst for a move much higher. The largest risk factor for the trade is a delay in the release of the PEA because preliminary indications on heap leaching are positive and not likely to change. As such, Texas Rare Earth Resources represents an Alpha Rich opportunity at current levels with a minimum upside of 25%, but a more robust price target of $0.75 to $0.85 more appropriate over the next few quarters.
Posted on: Fri, 08 Nov 2013 10:11:18 +0000
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