Rare Earth Metals: Dahlmann Rose (May 2011)

EQUITY RESEARCH

INDUSTRY INITIATION
Metals & Mining: Minor Metals
May 2, 2011
Anthony Young, Director
Industry Initiation: Expanding Rare
Earth Coverage
ayoung@dahlmanrose.com 212.702.4501
Anthony B. Rizzuto, Jr., Managing Director
arizzuto@dahlmanrose.com 212.702.4500

We continue to view the rare earth sector favorably, as we
Coverage Initiation
anticipate that initiatives by China will be supportive of
Ticker
AVL
Rating
Buy
Target
$15.00
Link
Report
short- to medium-term prices. We are initiating coverage of
HUD.CN Buy C$1.60 Report five stocks, including Avalon, Rare Element Resources and
LYC.AU
MCP
Hold
Buy
--
$125.00
Report
Report
Hudson Resources with Buy ratings, and are increasing our
QRM.CN Hold -- Report price target on Molycorp to $125 from $85.
REE Buy $21.00 Report
We do not anticipate that China will meaningfully change course with respect
to rare earth exports over the near- to medium-term
Over the last five years, China has pursued a path of decreasing exploration, production and
export of rare earth elements. This has pushed current prices for these commodities to record
levels. Given the damage that mining these elements has done to the environment and the
government's desire to protect these strategic assets, we do not foresee China meaningfully
altering its current path, which should help support prices for these elements.

Our valuation uses conservative pricing estimates, allowing for at least a 50%
correction in pricing
Despite China's current policy, increased production from the Western world will negatively
impact rare earth prices. Specifically, increased production from Molycorp and the start up of
Lynas' Mt. Weld project will likely have a dampening impact on rare earth prices. In our base
case model we anticipate that rare earth prices will fall by 50 - 75% over the next five years.

Initiating coverage of AVL, HUD-TSX and REE with Buy ratings. We are also
increasing our price target on MCP to $125 from $85
We are impressed with the progress that Avalon has made developing the Nechalacho
project and like the leverage that earnings exhibit toward heavy rare earth prices. We initiate
coverage with a Buy rating and $15 price target. We like the earnings leverage to neodymium
and simple metallurgy present at Hudson's Sarfartoq project and rate these shares a Buy
with a C$1.60 price target. We also like the simple metallurgy and access to infrastructure at
the Bear Lodge project, and we rate REE shares a Buy with a $21 price target. We continue
to view Molycorp as the best way to participate in the rare earth industry, and we are
increasing our price target to $125 from $85, based upon our increased comfort with
higher rare earth prices. All of our price targets are based upon an NAV analysis.
Please read Required Disclosures & Analyst Certification on the last pages of this report.

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DAHLMAN ROSE & CO. EQUITY RESEARCH

Executive Summary We continue to view the rare earth sector favorably. Over the near-term, we expect continued
upward pressure on the prices for the underlying metals as we do not expect that China,
which essentially controls supply, will meaningfully alter its course of decreasing exploration,
production and exports. Over the medium-term, we expect prices to decrease as Molycorp
and Lynas increase supply. From a supply/demand perspective, certain metals will see a
balanced market by the 2014 timeframe, with a slight surplus possible, but we believe that
metals used in magnets will remain in deficit for some time.

Despite soaring prices, demand for these metals remains relatively well supported, but we
believe it is possible that we are quickly reaching a "pain threshold" where further price
increases may lead to meaningful demand destruction. Demand from electronics, windmills
and electric automobiles should experience meaningful growth over the medium- to long-
term as manufacturers seek to miniaturize applications and maximize efficiency. In fact, it is
possible that increased supply and the possibility for lower prices over the long-term, may
spur development of new applications for these raw materials, which may cause demand to
exceed our expectations.

In our base case, we anticipate that prices will fall 50 - 75%, which may prove to be too
aggressive of a decrease. Despite the possibility of decreasing metal prices, we continue to
see meaningful upside in the equities.

We are initiating coverage of Avalon Rare Metals (AMEX: AVL) with a Buy rating and
a $15 price target. While the company has difficult metallurgy to work through, we like the
progress it has made attacking the project. Further, we like the leverage that the company
has to heavy rare earth metals, which have increased in price less than light rare earth metals
on a percentage basis, and therefore should see less of a contraction in price should the
broader rare earth sector see pricing decline.

We are initiating coverage of Rare Element Resources (AMEX: REE) with a Buy
rating and a $21 price target. We like the straightforward metallurgy that is present at the
company's Bear Lodge deposit and access to infrastructure that is present at this deposit. In
fact, we believe that these aspects make the company an attractive candidate to be acquired
by a producing rare earth company over the medium-term.

We are initiating coverage of Hudson Resources (TSX: HUD) with a Buy rating and
a C$1.60 price target. We like the leverage that the company has to neodymium, a rare
earth element that we anticipate will have the most robust demand profile of any metal in
the category. Further, we like the relatively straightforward metallurgy that is present at
the company's Sarfartoq deposit in Greenland and the expansion opportunities that are
available at this deposit. Given the relatively early stage of the project and the fact that it
is in Greenland, an area where not many large scale projects have been constructed, we
are applying an extremely high discount rate of 20%. We expect that this discount rate may

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move meaningfully lower as the company makes progress developing this asset, creating
substantial upside for the shares.

We are increasing our price target on Molycorp (NYSE: MCP) to $125 from $85 and
reiterating our Buy rating on the shares. We continue to view Molycorp as the best way
to participate in the near-term strength that we forecast in the rare earth market. The reason
for the increased price target is our comfort with rare earth prices and our belief that prices
will exceed our previous expectations. With construction well underway at the Mountain Pass
mine and the company having 50+ years of experience separating and processing rare earth
elements from this deposit, we believe that the company should be able to quickly ramp
production in 2012 when the construction is complete. Further, we like the company's low-
cost structure, and we believe that once production commences at this facility the company
will look to be a consolidator in the rare earth segment.

We are initiating coverage of Lynas (ASX: LYC) with a Hold rating. Management has
done an excellent job of shepherding the Mount Weld and Advanced Materials Plant projects
through the development stage toward production, but we remain concerned that the
company may face start-up issues as it looks to commence production in 3Q11. Over the
near-term, we are concerned that the shares will exhibit less leverage to rare earth prices and
more leverage to geopolitical negotiations.

We are initiating coverage of Quest Rare Minerals (TSX: QRM) with a Hold rating.
While we find the mix of rare earth elements that the company will be providing to the market
interesting, we believe that it will be some time before the project commences production.
Additionally, we are concerned with the difficult metallurgy present at the deposit. In order for
the company to enter production in the timeframe envisioned, it may be necessary for Quest
to license technology from another mining company, increasing the company's cost profile.

Exhibit 1: Coverage Universe Comp Sheet
As of 4/29/2011

Total Resource Market Cap /
Company Ticker Rating Target/NAV Price Currency Market Cap Base (mt REO)** Resource Base
Avalon Rare Metals Inc AVL Buy 15.00 9.09 USD 941,805,537 4,277,156 220
Hudson Resources Inc HUD-V Buy 1.60 1.11 CAD 93,906,000 212,838 441
Lynas Corporation Ltd LYC-AU Hold 2.85 2.09 AUD 3,462,818,590 1,415,668 2,446
Molycorp Inc MCP Buy 125.00 73.30 USD 6,032,639,111 1,015,938 5,938
Quest Rare Minerals Ltd QRM-V Hold 8.40 8.15 CAD 568,870,000 583,148 976
Rare Element Resources Ltd REE Buy 21.00 14.45 USD 673,370,000 549,301 1,226

**Total resource base includes measured, indicated, and inferred resources and is inclusive of any reserve estimates

Source: Company Reports, Dahlman Rose & Co. estimates



China continues to dominate the rare Despite increased production from the West, we anticipate China will continue to dominate
earth sector the rare earth sector. China accounted for approximately 95% of rare earth element
production in 2010, and while its percentage of rare earth production is set to decline, the
country will continue to be the largest producer for the foreseeable future.

Exhibit 2: Global Rare Earth Production 2013 (151,000 metric tons)
India, 3% Recycling, 4%
Russia, 4%

Australia, 7%

US, 13%

China, 70%

Source: Dahlman Rose & Co. estimates

We believe that China continues to view rare earth metals as strategic assets and will
not waiver from its current path of decreasing exports, limiting exploration, and tightly
controlling production. In our opinion, China is pursuing this path in order to limit damage to
its environment and in an effort to lure high technology manufacturing to within its borders by
being able to supply lower-cost raw materials. Given that China will maintain its position as
the world's largest producer of rare earths, the internal Chinese price will be a key indicator
of the direction of global pricing, and we note that this price has been moving meaningfully
higher recently.

Exhibit 3: Chinese Rare Earth Export Quotas, Actual Exports and Western World Demand
70,000

60,000

50,000
metric tons

40,000

30,000

20,000

10,000

-
2004 2005 2006 2007 2008 2009 2010 2011e

Chinese Export Quota Chinese Exports Western World Demand

Source: Chinese Society of Rare Earths, Dahlman Rose & Co. estimates



While we believe it is premature to forecast that China will eventually be an importer of
rare earth elements, certain Chinese agencies have been indicating that this is a distinct
possibility and that it might occur as soon as 2015. Additionally, steps by the Central
government to crack down on illegal mining appear to point toward concerns about the long-
term economic viability of Chinese deposits, unless rare earth prices are well above their
historical averages. Our belief stems from our observations of Chinese mining of other raw
materials such as iron ore and molybdenum, where illegal miners will attempt to "cherry-pick"
high grade areas, which damages the long-term viability of an entire deposit. Thus, a portion
of Chinese regulators enforcement initiatives appear to be focused on sustaining the long-
term economics of the country's assets.

Lower Prices on the Horizon? Rare earth prices have been surging higher since the 2Q09 timeframe, with prices increasing
by as much as 1000% for many classes of rare earths. We are uncertain that this price level
is sustainable over the medium- to long-term. In fact, in our base case valuation analyses we
anticipate that rare earth pricing will fall by 50 - 75%. While a decrease in rare earth prices will
have a short-term negative impact on the shares, we believe that many of the companies in
the sector can still produce tremendous earnings power in a lower price environment. Thus,
despite the likelihood of lower prices on the horizon, we continue to see meaningful upside in
the shares.

Exhibit 4: Rare Earth Relative Price Comparison
1800

1600

1400

1200
Relative Price (%)

1000

800

600

400

200

0

01 02 03 0 4 05 0 6 07 08 09 1 0
20 20 20 20 20 20 20 20 20 20
0 4/ 04/ 0 4/ 04/ 0 4/ 04/ 0 4/ 04/ 0 4/ 04/

Source: Metal-Pages, Dahlman Rose & Co. estimates



Where do rare earth prices find While we believe that a correction is possible, we do not anticipate that prices will fall to levels
support? of three to five years ago, nor do we anticipate that prices will fall to the levels present at
the beginning of last year. We believe that the crackdown on rare earth production in China
will have a lasting impact on the global structure of rare earth prices. Therefore, we would
look to the Chinese price as a level where these metals will find substantial support. With
two exceptions, we set our long-term price deck near the current Chinese price. Demand for
lanthanum and yttrium will be will be well supported which should lead to pricing that exceeds
the current Chinese price.

Exhibit 5: Rare Earth Oxide Price Comparison ($/kg)
Element 1 Year Ago Chinese Domestic Prices DRCO Long Term Estimate Spot
Lanthanum 6 16 60 131
Cerium 5 23 30 131
Praseodymium 30 98 100 200
Neodymium 31 99 100 220
Dysprosium 193 498 500 690
Yttrium 11 32 75 158

Source: Metal-Pages, Dahlman Rose & Co. estimates

Supply / Demand From a supply/demand perspective, we anticipate that decreasing deficits will lead to lower
prices. While deficits are decreasing, we anticipate that it will be some time before the market
tips into a surplus, and therefore estimate a gradual decrease in price over many years.
Further, it is possible that market participants may exhibit more discipline, decreasing supply
in order to support pricing, than we currently forecast. If this were to come to pass, prices may
exceed our expectations.

Exhibit 6: Rare Earth Supply/Demand Estimates (metric tons)
Supply 2010 2011 2012 2013 2014 2015
Baotou Iron Ore 55,000 60,000 60,000 60,000 60,000 60,000
Sichuan 10,000 12,000 15,000 20,000 20,000 20,000
Ionic Clay 35,000 30,000 25,000 25,000 20,000 20,000
India 3,000 3,000 4,000 4,000 4,000 4,000
Russia 4,000 5,000 5,500 6,000 6,500 7,000
Mt. Weld - - 7,000 10,000 15,000 22,000
Mountain Pass 3,000 3,000 8,000 20,000 35,000 40,000
Recycling/Other 5,000 5,000 5,500 6,000 8,000 10,000
Total 115,000 118,000 130,000 151,000 168,500 183,000
Demand
Magnets 31,500 34,650 38,115 41,927 46,119 50,731
Battery Alloy 18,600 21,018 23,750 26,838 30,327 34,269
Mettallurgy ex batteries 11,700 11,817 11,935 12,055 12,175 12,297
Auto Catalytic Converters 9,000 9,540 10,112 10,719 11,362 12,044
Refinery Catalysts 21,300 22,152 23,038 23,960 24,918 25,915
Polishing Powder 14,000 14,700 15,435 16,207 17,017 17,868
Glass Additives 7,800 7,800 7,800 7,800 7,800 7,800
Phosphors 7,900 8,374 8,876 9,409 9,974 10,572
Other 5,700 5,700 5,800 5,800 5,900 5,900
Total 127,500 135,751 144,862 154,713 165,592 177,396
S/D Balance (12,500) (17,751) (14,862) (3,713) 2,908 5,604




Industry Overview The name “rare earths” is misleading. The term is used to represent 15 specific elements,
known as lanthanides, with some industry participants also including scandium and yttrium.
Some of these elements are actually quite plentiful in nature. Cerium, for example, is the 25th
most abundant element in the Earth's crust. Each of the elements share similar chemical
and physical properties. While some rare earths are relatively common, they are dispersed
in such a manner that makes it difficult to find deposits with high enough ore grades to
economically exploit. Very few large, high grade ore deposits have been discovered, and
it is this scarcity of economic projects that has driven rare earth prices substantially higher.
Greenfield exploration has increased in proportion to the move higher in rare earth prices, but
we continue to believe that it will take at least 12 - 15 years to commence production upon
the discovery of an economic rare earth ore body. (This development time line is not unique
to rare earth deposits; in fact, we are seeing this across the basic materials sector.) Once an
ore body has been discovered, there are several steps that must be taken to arrive at finished
rare earth oxides (REO) and rare earth alloys that can be consumed by end-users.

Rare Earth Extraction Mining
Open pit mining is well understood and utilized for numerous forms of base metals, bulk
materials and precious metals and is used more often when surface mineralization is high.
Mining can either be performed in an open pit or underground configuration, with open pit
mining being the more common in rare earth mining. In either configuration, ore is liberated
using explosives and then loaded onto large trucks or conveyor belts to be initially crushed,
typically by a primary crusher. The crushed ore is then transported to a mill where it is further
ground into fine grains.

Flotation
Material is often ground down to 50 micrometer particles (± 15 micrometers), de-slimed and
passed over magnets to remove impurities. This material is mixed with a reagent (this reagent
will vary with the chemical composition of the deposit) which will combine with the rare earth
mineral and cause the mineral to float when combined with water. The resulting slurry is then
pumped into rougher cells, where the minerals float to the top and form concentrate that is
skimmed off the solution.

Hydrometallurgy / Separation
A rare earth production company can be described as a chemical processing facility, with a
mine attached to it. As we described before, rare earth elements are relatively common in
the Earth's crust, but it is the hydrometallurgy/separation of these elements which is difficult
to achieve. In fact, with several rare earth projects planning on reaching tolling agreements
to process their concentrate, it is possible that hydrometallurgy/separation facilities may be
a bottleneck in achieving higher production in the 2015 - 2016 timeframe. The separation of
rare earths often involves the consumption of two different types of acids (hydrochloric and
sulfuric) along with placing the material under high temperature (up to 600 degrees C) and
pressure.



Key Rare Earth Element Uses Rare Earth Magnets
Rare earth magnets, specifically neodymium-iron-boron magnets, are the strongest
permanent magnets known and are expected to be one of the primary drivers of rare earth
demand in the future. The strength of the magnetic field generated by these elements
allows much smaller rare earth magnets to be used, allowing for the miniaturization of many
applications. These magnets are used in everyday items like hard drives, audio speakers,
microphones and numerous consumer electronic applications, but it is the less common
uses that are gaining traction and will foster future demand. Turbines found in windmills are
shaping up to be a significant driver of demand for permanent magnets. It is estimated that
a three megawatt windmill would consume nearly 700 pounds of neodymium. Additionally,
hybrid and electric vehicles are shaping up to be significant drivers of demand for permanent
magnets. While the amount of magnets consumed per vehicle will vary upon the size, we
estimate that each vehicle may consume 3 - 5 kg of permanent magnets. The current push
toward energy efficiency and environmental protection will benefit both the hybrid car and
alternative energy industries, which bodes well for rare earth magnet demand, currently
estimated to represent 25% of rare earth demand.

Exhibit 7: Global Hybrid Vehicle Sales Growth (2007 - 2020)

Global Hybrid Vehicle Sales Growth

80

70

60
Sales (in millions)

50

40

30

20

10

-
2007

2008

2009

2010

2011e

2012e

2013e

2014e

2015e

2016e

2017e

2020e

Source: JD Power and Associates, Dahlman Rose & Co. estimates

Battery Alloys
Nickel-metal hydride batteries are found in hybrid-electric vehicles and utilize large amounts
of lanthanum (10 – 15 kg). These rechargeable batteries have two to three times the capacity
of similar sized nickel-cadmium batteries. While it is possible that lithium-based batteries may



be a substitute over the long-term, we believe that lanthanum based NiMH batteries will be
the device of choice for the hybrid car industry over the near- to medium-term.

Phosphors
The phosphor market will continue to be an important area for rare earth elements. These
elements are used extensively in compact fluorescent lighting (CFL), and europium continues
to be an important element utilized in the television industry. Given energy conservation
initiatives that are occurring globally, we anticipate that CFL will continue to take market
share from incandescent bulbs, and therefore we expect above trend growth in the phosphor
market.

Catalysts
Rare earths play an important role in the manufacturing of automotive catalytic converters
and catalysts used in the cracking of crude petroleum at refineries. We anticipate strong
growth in the auto catalyst area, as we expect rare earth element based catalytic converters
to take market share from catalytic converters that consume larger amounts of platinum.
While we do not expect above trend growth in the fluid cracking catalysts consumed in the
refining industry, we do expect demand in this area to remain firm and to trend modestly
higher over the intermediate term.

Element Descriptions Light Rare Earths
Lanthanum
Lanthanum, one of the light rare earth elements, is also one of the most common,
representing roughly 20% of the rare earth content of global ore bodies. Lanthanum is used
primarily in the production of LaNiH (nickel-metal hydride) batteries, as a fluid cracking
catalyst, and as an additive to increase the refractive index of glass. The hybrid car market
presents a large demand opportunity, as a typical Toyota Prius hybrid requires between
10 and 15 kg of lanthanum. This amount may increase as Toyota seeks to increase fuel
efficiency. Currently, Toyota is selling over 16,000 hybrids a month, up over 60% from a
year ago. During this time, the price on lanthanum has increased from about $10/kg to over
$130/kg. While there is a threat of substitution from lithium batteries, we expect demand for
lanthanum to increase an average of 6% per year through 2015 and for the current supply
deficit to continue over the near-term.

Cerium
Cerium, representing about 40% of the rare earth content of source minerals and 0.046%
of the Earth’s crust by weight, is the most abundant of all the rare earth elements and is
considered a light element. Cerium is used mainly in catalytic converters in cars, polishing
powders for TVs, monitors, mirrors, silicon chips, and as an additive in glass to decrease
transmission of UV light. Since cerium is the most abundant of the REEs, it is also the first
one projected to be in a supply surplus, possibly by 2014. In response to this future supply
overhang, producers are developing new products to utilize cerium, most notably Molycorp’s
XSORBX product used for water treatment. Prices for cerium have steadily increased from



the $7-$9/kg range from 2008 through mid-2010, to over $120/kg currently. We project annual
demand growth of 3% through 2015.

Neodymium
We expect neodymium demand growth to be among the strongest of the rare earths over the
medium-term. NdFeB magnets are among the strongest magnets known. These magnets are
used in many products such as microphones, loudspeakers, and computer hard disk drives.
We also expect increased demand from windmills and electric vehicles. Prices for neodymium
have risen more than tenfold from $17.50/kg in early 2009 to around $220/kg currently. We
anticipate annual demand growth of 12% through 2015, out pacing global GDP, due to the
increased usage and importance of rare earth magnets.

Praseodymium
Praseodymium is a light rare earth element that constitutes approximately 4-5% of the
rare earth content of ore bodies that have been identified globally. Its use in neodymium-
iron-boron magnets is expected to serve as a primary demand driver for the element going
forward, and its current supply deficit is not expected to abate. Current estimated demand
is roughly twice current supply, and we believe that inventories have reached critically low
levels. Praseodymium is also used to make high-strength alloys in the production of aircraft
engines and is used by the movie industry to make studio and projector lights. Prices for
praseodymium have increased drastically, from around $15/kg in 2009 to the $200/kg range
currently. Similar to neodymium, we anticipate annual growth of 12% through 2015 for
praseodymium.

Heavy Rare Earths

Dysprosium
Dysprosium is considered a heavy rare earth element and makes up approximately 1% of
the rare earth content of ore bodies globally. Dysprosium can be substituted for a portion
of neodymium in neodymium-iron-boron magnets in order to raise the magnet’s ability
to withstand high temperatures for use in hybrid electric motors, wind turbines, and hard
drives. Additionally, dysprosium oxide-nickel cement is used to make control rods for nuclear
reactors, due to the element's high thermal neutron absorption rate. The element is also used
to make lasers (when combined with vanadium) and high intensity lighting. Dysprosium is
currently in a supply deficit that should continue going forward due to the high demand of rare
earth magnets. Prices for dysprosium have steadily increased from roughly $100/kg in 2009
to $690/kg currently. We anticipate annual growth of 10% through 2015.

Europium
Europium is a heavy rare earth element that comprises about 0.5% of the rare earth content
of ore bodies globally. Europium is also used as a red phosphor in televisions and fluorescent
lights. When Molycorp's Mountain Pass mine initially opened, it was the supplier of europium
for the color red in virtually every TV in the world. Demand for europium is small compared



to the other rare earth elements, but since it only makes up a small percentage of rare earth
content, it is in a slight supply deficit which is expected to persist. Prices for europium were in
the $400 - $500/kg range for most of 2008 and 2009 and have since risen to over $1,000/kg.
We anticipate a 2% annual growth rate for europium through 2015.

Yttrium
While not a rare earth element, it is sometimes found with these elements in ore bodies
and has chemical properties similar to rare earth elements. Yttrium is used as a phosphor
in compact fluorescent lights and sometimes combined with Europium to produce the color
red in television sets. Pricing for yttrium has ranged from a low of $10/kg in late 2009 to over
$150/kg currently. While we see improving demand for this element, the opportunity to recycle
is also robust; therefore, we see demand for this metal beyond recycled material increasing
by 3% annually.

Exhibit 8: Rare Element Breakdown

Source: Geology.com



Exhibit 9: Composition of Ore Deposits
Element Symbol Hudson Lynas Molycorp REE Avalon Quest

Light Rare Earths
Cerium Ce 39% 45% 49% 47% 36% 27%
Lanthanum La 12% 25% 34% 31% 16% 13%
Neodymium Nd 33% 17% 12% 12% 18% 11%
Praseodymium Pr 7% 5% 4% 4% 5% 3%
Samarium Sm 5% 2% 1% 2% 4% 3%

Heavy Rare Earths
Dysprosium Dy 0% 1% 0% 0% 3% 4%
Erbium Er 0% 0% 0% 0% 1% 3%
Europium Eu 1% 1% 0% 1% 1% 0%
Gadolinium Gd 2% 2% 0% 1% 4% 3%
Holmium Ho 0% 0% 0% 0% 1% 1%
Lutetium Lu 0% 0% 0% 0% 0% 0%
Terbium Tb 0% 0% 0% 0% 1% 1%
Thulium Tm 0% 0% 0% 0% 0% 1%
Ytterbium Yb 0% 0% 0% 0% 1% 3%
Yttrium Y 0% 2% 0% 1% 12% 28%




Valuation Methodology & Investment Risks
Valuation Methodology
For companies with operating assets in the Metals & Mining space, we apply a multiple to our one-year forward EBITDA estimate to achieve our
year-end price targets. Our applied multiple is based on historical industry-wide and company specific multiples. For Metals & Mining companies
whose assets are primarily in pre-production, we apply an NAV analysis to future cash flows to achieve a one year forward price target.

Investment Risks
The global macro economy poses the biggest risk to the Metals & Mining industry as demand for metals and minerals is highly correlated to
economic growth. In particular, China is the world’s largest consumer of aluminum, coal, copper, iron ore, nickel and steel. A material slowing in
China’s economic growth trajectory could result in lower prices for commodities. Further, with China being a significant producer of aluminum and
steel, it is possible that the country may be less disciplined and export large quantities of these materials, further depressing global prices.

Primary Molybdenum Investment Risks include:

Molybdenum prices remain significantly above their marginal cost of production, and over the long term, prices may return to a reasonable margin
above cost.

Roasting molybdenum produces carbon dioxide and sulfuric acid. Increased government regulation, with respect to the storage or sequestration of
these materials, could negatively impact company economics.

The widespread acceptance of a molybdenum substitute for molybdenum could negatively impact demand for the metal.

Primary Uranium Investment Risks include:

The Japanese nuclear disaster intensifies in magnitude causing more countries to halt new reactor build rates or shut down reactors that are
already operating.

New technologies are developed to more efficiently recycle spent fuel, effectively increasing supply since fuel currently considered spent still
contains significant amounts of fissile material that cannot currently be used with existing technology.

Government entities liquidating stocks of highly enriched uranium from warhead stockpiles more quickly than forecast, thereby flooding the market
with supply.

Primary Rare Earth Investment Risks include:

In the past, China, which controls 97% of global supply, has flooded the market with rare earths, depressing the price. If China were to remove all
export restrictions, it is possible that rare earth prices may fall beyond our expectations.

If prices of rare earth elements continue to trend significantly higher, it is possible that substitution will begin to affect demand. For example, lithium
batteries can be used as a substitute for nickel-metal hydride batteries, which use lanthanum.



If national governments begin to classify rare earths as strategic assets and begin building stockpiles, uneconomical mining of rare earths may be
subsidized in order to increase supply, and therefore pressuring prices.



Disclosures
Disclaimer:

The information presented in this report is for informational purposes only. It was prepared based on information and sources that we believe to be
reliable, but we make no representations or guarantees as to the accuracy or completeness of the information contained herein. This report is not to
be construed as an offer to sell or a solicitation of an offer to buy any security. The opinions expressed in this report may change without notice.

Certification:

Each analyst identified in this report certifies in accordance with SEC Regulation AC, with respect to any company and securities discussed in this
report, that the recommendations and opinions expressed accurately reflect the analyst's personal views and no part of the analyst's compensation
was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed herein.

Required Disclosures:

No analyst who participated in the creation of this report owns securities issued by the subject companies.

Dahlman Rose & Company, LLC, and/or its affiliates may have positions in the securities discussed in this report. However, none of those positions
equal or exceed 1% of the equity securities outstanding for the subject companies.

Dahlman Rose & Company, LLC, and/or any of its analysts, officers or employees, or any household members do not serve as an officer, director or
advisory board member of any of the companies discussed in this report.

Dahlman Rose & Company, LLC intends to seek to be a financial advisor or to engage in investment banking services with one or any of the subject
companies discussed in its research reports and may receive compensation for such services during the three months following publication of
this Report. As a result, investors should be aware that the firm might have a conflict of interest that could affect the objectivity of this report. For
disclosures regarding investment banking activity in the past 12 months, please contact Compliance, Dahlman Rose & Company, LLC, 1301 Avenue
of the Americas, 44th Floor, New York, NY 10019.

This report constitutes a compendium report (covers six or more subject companies). As such, Dahlman Rose & Company, LLC. chooses to provide
specific disclosures for the companies mentioned by reference. To access current disclosures for the all companies in this report, clients should refer
to our Disclosure Site or contact your Dahlman Rose & Company, LLC. representative for additional information.

Dahlman Rose & Company, LLC is not a tax or legal advisor and provides no legal or tax advice or opinions with respect to the securities
recommended in this report.

For disclosures regarding market making activity, please contact Compliance Department, Dahlman Rose & Company, LLC, 1301 Avenue of the
Americas, 44th Floor, New York, NY 10019.

Stock Ratings:

Dahlman Rose & Company, LLC assigns the following ratings to the securities of its subject companies:

Buy – The fundamentals/valuations of the subject company are improving and the investment return is expected to be 5 to 15 percentage points
higher than the general market return.



Sell – The fundamentals/valuations of the subject company are deteriorating and the investment return is expected to be 5 to 15 percentage points
lower than the general market return.

Hold – The fundamentals/valuations of the subject company are neither improving nor deteriorating and the investment return is expected to be in
line with the general market return.

Ratings Distribution:

Ratings Distribution & Investment Banking Disclosure
Rating Count Ratings Distribution* Count Investment Banking**
Buy -rated 122 52.60 37 30.33
Hold -rated 105 45.30 35 33.33
Sell -rated 5 2.20 2 40.00


Rare Earth Metals: Dahlmann Rose (May 2011)

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