Ucore Management Team Says Valuation too Cheap Given Recent News

Peter Epstein |

Ucore_Rare.jpg

The following interview of Ucore Rare Metals (UCU:CA) (UURAF)  Jim McKenzie, President, CEO and Chairman was conducted by phone and by email over the course of several days ending March 31st. The opinions and facts contained within this article/interview are entirely that of Ucore’s senior management. The management team is excited about recent developments that they feel are worthy of attention. Please continue reading to find out more. Editors' Note: This article discusses a penny stock/microcap. Such stocks are easily manipulated; please do your own due diligence. 

On March 2nd, Ucore announced that it had successfully separated individual rare earths at a high purity level. Many were excited, some were skeptical. Can you explain the skepticism?

McKenzie: Any time a new and potentially disruptive technology is introduced, the initial reaction is often denial. Separating the lanthanide suite of metals without the use of expensive and environmentally invasive Solvent Extraction methodologies is the holy grail of the REE sector. The MRT technology has a long pedigree in the metals processing industry. As pundits and investors in the REE space come to understand the technology and its attributes they will accept it very quickly. In hindsight, MRT’s applicability in the REE sector will seem like an obvious solution. Readers should understand that the MRT technology is already deployed commercially in 40 locations globally, just not for the purpose of separating rare earths….yet.

Your deposit is in Alaska, do you expect to be able mine year round? Will infrastructure and manpower be a significant challenge?

McKenzie: Our location at the southern most tip of the Alaskan panhandle has a temperate climate. The weather is in the same system as Vancouver with lots of rain and little snow. The Bokan Mountain project and Kendrick Bay port will operate year round. Key to our story is that our deposit is on a previously mined property. Thus, a road network and other infrastructure is already in place. Our site is less than 1 km from a deep water port facility. 

Please describe, in layman’s terms, how the MRT process works and why Ucore thinks it could be a game-changer?

McKenzie: The secret sauce in the MRT process is the high selectivity of the IBC designed ligands. The ‘Superligs’ (IBC engineered molecule) are designed to use chemical attributes of the target elements to ensure the ‘selection and capture’ process is accurate and complete. The process by definition puts the complexity of the separation process into the upfront engineering and design of the ligand. Because the ligand works so well, the system does not need heat or pressure, making it incredibly fast and clean. The pregnant leach solution “PLS” is run through columns that contain Superligs. The Superligs are ligands tethered to solid beads that form a filter in the column. As the PLS is flowed through the column, the target element is trapped and held by the Superlig. Importantly, only the target element is trapped, giving us +99% purity and all of the target element is captured, giving us +99% recovery. 

The chemicals used in the system from start to finish are innocuous. There is usually a trade off between percentage purity and percentage recovery in any separation process. However, the unprecedented selectivity factor resident in IBC’s technology has delivered performance metrics previously unavailable in the REE sector. The nature of the process, fast, small, clean and accurate contributes directly to the technology’s cost effectiveness. Think of it this way - if one had a barrel of M&M’s, using the MRT technology would be like capturing (or recovering) virtually all of a single color M&M. Amazingly, it would pull out 99+ / 100 of that colored M&M. By comparison, solvent extraction, like that used in China, has closer to an 85% recovery. The difference between 85% and 99%+ recovery is staggering as our superior recovery is a pure margin boost. 

I read that Ucore owns the global rights for MRT in metals recycling and tailings processing. Could you generate cash flow before the Bokan Mountain project begins?

McKenzie: That is correct and there is tremendous interest from mining and processing parties globally. We are currently focused on progressing the Bokan project but we have capacity to do some development work in collaboration with the owners of other compelling projects. Largely ignored by the investment community is that we will have the ability to remediate and even create new revenue streams from tailings ponds and waste dumps. Make no mistake, we remain laser focused on Bokan, but we feel that use of MRT technology in other applications could result in significant nearer-term cash flow. Ucore shareholders could benefit from spin-off opportunities.

How does Ucore’s Bokan Mountain project compare in size and importance to existing and emerging global peers?

McKenzie: Bokan Mountain is very much a ‘right-sized’ project. We have drilled enough of a resource to give us a compelling 43% IRR with an 11-year mine life according to our PEA. The products that we will produce will supply the critical requirements of American industry. There is tremendous ‘blue-sky potential’ to grow our resource but our engineers believe that our cash is better spent on advancing our project to production.

Which key rare earth elements will Ucore produce? Which will be the greatest contributors to project economics?

McKenzie: We feel our products are exactly what the US market requires, 90% of our revenue will come from CREO’s. CREO’s are a term coined by Jack Lifton for Critical Rare Earth Oxides, Dysprosium, Terbium, Yttrium and Neodymium. 

Can you explain the US $145M that Ucore is slated to receive? Who it is from and what form it will take?

McKenzie: We are confident we can overcome the most daunting hurdle, financing our CAPEX. With 70% already covered by the State of Alaska through the Alaska Industrial Development & Export Authority “AIDEA” we have tremendous interest from other financiers to partner with Ucore and the State to expand the risk profile of the proposed bond issue to cover the full CAPEX requirement of $221M. Another advantage is the method in which the loan will be deployed. The State issues a bond and uses the proceeds to build our surface infrastructure. AIDEA then leases the infrastructure back to Ucore. This turns the $145 M expense in year -1, and 0 into an operating expense spread over up to twenty years. This is a huge asset to the feasibility of the project. The payback period will be shortened and the IRR will increase dramatically.

What are some of the most important uses of your main eare earths?

McKenzie: Quite simply, our ore basket has been referred to as a virtual permanent magnet recipe. The demand for permanent magnets is forecasted to grow by 8-11% CAGR until 2020. This will create a serious supply deficit as the Chinese Heavy Rare Earth Elements “HREE” resources are depleted. We are already seeing signs of Chinese ‘Resource Nationalism’ where end users in China are getting access to HREEs at the expense of Rest of World (ROW) customers. Permanent magnets are largely responsible for miniaturization. They are often referred to as ‘The Magic Metals’ because of their unique properties including incredible strength to weight ratios. They are very important in all high tech, green tech, and military systems industries.. Specific products are EV/HEV automobiles, wind turbines, smartphones, missile systems, drones….

Where do you expect to ship your products? Who are the logical end-users?

McKenzie: Direct shipping will be to metal, alloy or magnet manufacturers unless of course those production systems come to us. Alaska is very interested in creating industrial clusters where industry verticals can be developed. There is developing technology in the US for metal making and the manufacture of permanent magnets that could well complete a secure domestic supply of permanent magnets for American industry.

What are the catalysts to watch for this year?

McKenzie: We have a number of key catalysts this year. First, a resource upgrade with potential expansion. Next we have our Pilot Plant development. The Pilot Plant will demonstrate to strategic investors, skeptics and shareholders alike that the MRT technology scales up from lab to Pilot scale as expected. Then, a Plan of Operations filing, “POO” filed shortly kicks off the final permitting process. That should take 12-18 months. By the first half of 2016, a Feasibility Statement should be completed. Finally, winning MRT processing clients. Contracts could come later this year, or in 2016. 

Will you need to raise additional capital this year?

McKenzie: We have a multi-million dollar treasury and have reduced our cash burn dramatically now that our major technical projects have been completed. Part of our ongoing function is to effectively manage our capitalization on the road to production. As of September 30th, 2014, we had 4.7mm in cash. We are comfortable for the time being, but if the need arises, we might have to issue more shares, hopefully at a higher stock price.

Where does Ucore stand regarding partnerships, JVs, strategic investors, off-take agreements, etc?

McKenzie: We have a number of JV opportunities under development. The only one I can discuss is with IBC, as previously mentioned. We have been in ongoing off-take discussions with major American, European and Japanese parties over the last two years. These discussions are protected under non-disclosure agreements. We are well supported by our shareholders including Canadian and European resource funds and key local business leaders in South East Alaska. Ucore’s management team and Board are also significantly invested.

Please comment on the current prices of Ucore’s rare earths, where prices have been and where they might be headed.

McKenzie: As we predicted, there’s increased pressure on HREE pricing in China. Huge stockpiles were created during the crisis in 2010-12. These stockpiles are starting to be depleted. With growing demand for permanent magnets in concert with declining supply of HREEs from China, we have seen a steady increase in Magnet material prices since November, 2014. As GDP growth in the US and China recovers we expect these pricing metrics to continue to improve.

What is your view on China’s role in the rare earths sector today? How do you see China’s evolving over time?

McKenzie: China is working hard to get their Rare Earths industry under control. The 13th, five-year economic plan begins in 2016. A pillar of this plan will be to address environmental issues. This will require the implementation of improved mining and processing techniques as well as significant work on remediation. This will increase the overall production costs of REE operations. China was early in recognizing the importance of REE’s in the modern world. They have a distinct advantage in production and processing because of their experience. They will continue to dominate the market and attract downstream producers due to their resource advantage. On the HREE side however, the Chinese recognize that they will require more magnet input materials than they can possibly produce. In my view, China would already be a net importer of HREE except there is no significant production outside the country. We are starting to see Chinese investment in HREE projects outside of China such as in Northern Minerals, in Australia. That took the only HREE resource, at a similar development stage to Ucore, off the market.

Are there any misconceptions about Ucore that you would like to address?

McKenzie: We have always had our naysayers, but we continue to deliver. We have the right product, in the right place and it looks more and more like our timing is right as well. The quality of our ore and the tremendous logistical advantages of our jurisdiction are enhanced by the financial support from the state of Alaska. We cannot overstate the importance of the support we receive from Alaska and their funding arm AIDEA. Our new partnership with IBC giving us access to MRT will unlock tremendous value in the Bokan project. Not only will it lower our costs but it will enable us to sell pure oxides that have a 40% revenue uplift compared to our competitors that contemplate selling a ‘mixed mineral concentrate.’ This technology will also enable us to consider adding scandium, niobium, tantalum, and halfnium to our value basket.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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