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Mackie Research Capital report on rare earth market and REE companies.

Mackie Research Capital report on rare earth market and REE companies.

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Mackie Research Capital - Rare Earth Horse Race Document Transcript

  • 1. JULY 21, 2011Picking the Front Runners in the “Rare Earth Horse Race”EVENT: PREDICTING THE DIRECTION OF THE RARE EARTHS INDUSTRYAside from an update to our REE price deck, in this note, we offer a framework for evaluating the world’s advanced rareearth projects. We also highlight some recent trends and what they mean for investors in the space.KEY TAKEAWAYSWe have analyzed the characteristics of each of the projects listed below and assigned a score to these projects (figure 6). We areparticularly optimistic about the successful commercialization of the projects that have achieved a score of 16 or higher.Figure 1. Projects Score card Company Mt. Pass Bear Lodge Mt. Weld Strange Lake Zandkopsdrift Montviel Score 20 20 19 19 18 18 Company Nechalacho Dubbo Zirconia Hoidas Lake Steenkampskraal Nolans Bore Kvanefjeld Score 17 17 17 16 14 11Source: Mackie Research EstimatesWe predict that the following projects will come online by 2017. Figures 4 and 5 provide more information on these projects.Figure 2. Estimated Commercial Operations Date Company Lynas Corporation Limited Molycorp Minerals Alkane Resource Limited Arafura Resources Limited Great Western Minerals Rare Element Resources Ticker LYC-AU MCP-US ALK-AU ARU-AU GWG-TSX V RES-TSX Deposit Mt. Weld Mt. Pass Dubbo Zirconia Nolans Bore Steenkampskraal Bear Lodge COD 2012 2012 2013 2013 2014 2015 Company Avalon Rare Metals Inc Greenland Minerals And Energy Ltd Quest Rare Minerals Ltd Frontier Rare Earths Great Western Minerals GeoMega Resources Inc Ticker AVL-TSX GGG-AU QRM-TSX V FRO-TSX GWG-TSX V GMA-TSX V Deposit Nechalacho Kvanefjeld Strange Lake Zandkpsdrift Hoidas Lake Montviel COD 2016 2016 2016 2016 2017 2017Source: Mackie Research EstimatesBy forecasting new supply of each rare earth elements from these projects and using relevant industry growth rates todetermine future demand, we predict that there will be oversupply of cerium and lanthanum. End users will experiencetight supply for praseodymium, and most heavy rare earths. We expect a continued shortage of neodymium, yttrium andterbium (figure 13). Using our proprietary price forecasting methodology, we present our long-term estimate of the marketvalue of the TREO basket of separated rare earth oxide of our selected projects below. In our financial model for Avalon, weuse a long-term TREO basket price of $40/kg even though we believe that Avalon’s long term TREO basket of separatedrare earths should be around $54/kg. This implies that our target price of $11.80/share could be overly conservative. If wewere to use a $54/kg TREO basket price, the valuation of the company would increase to over $17/share.Figure 3. Separated Rare Earth Oxide TREO Basket Price (USD$/KG) Arafura Rare Element Quest Rare Frontier RareOperator Avalon Lynas Corp Molycorp Resource Resources Minerals Earths Steenkampskraal Hoidas Lake Dubbo Zirconia Montviel Kvanfjeld 2017E 54 36 24 41 28 65 37 36 41 46 33 36Source: Mackie Research Capital Matt Gowing, CFA 416.860.8675, mgowing@mackieresearch.com Raveel Afzaal, Associate 416.860.7666, rafzaal@mackieresearch.com This report has been created by Analysts that are employed by Mackie Research Capital Corporation, a Canadian Investment Dealer. For further disclosures, please see last page of this report.
  • 2. www.mackieresearch.com The MORNING CALL – Industry Update Page 2METHODOLOGY TO FORECAST SUPPLY AND DEMAND In this note, we update our supply and demand forecasts for the relevant rare earth elements. Methodology to estimate future supply First, we short-list the likely projects that are expected to commence operations by 2017. This is based on the amount of work that has been performed on the deposit to date, to bring it into production (figures 4, 5 and 8). We also take into account other key factors that will play a role in the successful commercialization of the deposit (figure 6). The first two steps allow us to make a call on when these projects will commence commercial operations (figure 9). We then forecast future supply by analyzing the TREO distribution of the advanced stage projects and our proprietary estimates as to when these projects begin producing. Using the steps listed above, we are able to estimate how much production of each rare earth element will enter the global markets over the next 6 years (figure 13). Methodology to estimate future demand We use Roskill’s estimate of applicable industry growth rates to predict the future demand of each rare earth element (figure 11).SUPPLY ANALYSISFigure 4. Advanced Rare Earth ProjectsSource: Marlene, Cox, Hendrick, Quest Rare Minerals, Modified By Kaiser and Mackie Research Capital
  • 3. www.mackieresearch.com The MORNING CALL – Industry Update Page 3 We believe that the projects with the dotted circles around their location are most likely to come online by 2017. The two projects not shown on the map but are included in our supply and demand analysis are Geomega Resources Inc.’s Montviel deposit and Great Western Mineral’s Hoidas Lake deposit. Below, we present the key characteristics of these advanced rare earth projects.Figure 5. Characteristics Of Advanced Rare Earth Projects Lynas Molycorp Great Western Minerals Arafura Resources Alkane Resources Frontier Rare Earths Main Project Mt. Weld Mt. Pass Steenkampskraal Nolans Bore Dubbo Zirconia Zandkopsdrift P&P Reserves 2,040 48,375 -- - - - (000 tonnes) M&I Resources 12,200 - -- 17,400 37,500 22,920 (000 tonnes) Inferred Resources 5,294 - 250 12,800 35,700 20,810 (000 tonnes) Total Resources 19,534 48,375 250 30,200 73,200 43,730 (000 tonnes) REE Grade 8.8% 7.0% 11.7% 2.8% 0.9% 2.2% (%) Total TREO Inventory 1,720 3,386 29 840 659 946 (000s tonnes) Heavy Rare Earth (%) 3.0% 0.4% 7.7% 4.0% 23.0% 7.8% Annual TREO 22,000 40,000 5,000 20,000 6,500 20,000 Production (tonnes) MRCC Estimate of Current TREO Basket 150 127 161 161 207 167 Value MRCC Estimate of 2015 TREO Basket 48 31 54 56 87 58 Value Capital Expenditure $512.0 $781.0 $70.0 $1,013.7 $177.8 $500.0 (US$ mm) Mine Life 20 30 6 20 30+ 20 (years)* Location Australia California, USA South Africa Australia Australia South Africa Mine Type Open Pit Open Pit Underground Open Pit Open Pit Open Pit Mineral Type Carbonatite Carbonatite Monazite Pegmatite Peralkaline syenite Carbonatite Stage of Construction Construction BFS in progress BFS in progress BFS in progress PFS 2011 Development Estimated Commercial 2012 2012 2013 2014 2014 2015 Operations Date* Infrastructure n/a n/a Good Poor Good Good
  • 4. www.mackieresearch.com The MORNING CALL – Industry Update Page 4 Rare Element Resources Geomega Resources Avalon Rare Metals Inc Greenland Minerals & Energy Limited Quest Rare Minerals Ltd. Great Western Minerals Main Project Bear Lodge Montviel Nechalacho Kvanefjeld Strange Lake Hoidas Lake P&P Reserves - -- 12,001 - - - (000 tonnes) M&I Resources - -- 88,130 365,000 - 2,561 (000 tonnes) Inferred Resources 15,876 133,636 226,880 92,000 114,823 287 (000 tonnes) Total Resources 15,876 133,636 327,011 457,000 114,823 2,847 (000 tonnes) REE Grade 3.5% 1.3% 1.3% 1.0% 1.0% 2.4% (%) Total TREO Inventory 549 1,764 4,298 4,616 1,148 68 (000s tonnes) Heavy Rare Earth (%) 3.3% 2.0% 26.0% 14.0% 47.0% 4.0% Annual TREO 10,000 10,000 43,729 12,100 4,000 Production (tonnes) MRCC Estimate of Current TREO Basket 222 208 301 218 313 234 Value MRCC Estimate of 2015 TREO Basket 40 44 97 60 133 57 Value Capital Expenditure $87.7 $300.0* $863.0 $2,310.0 $563.4 $150.0 (US$ mm) Mine Life 20 n/a 20 23 20 n/a (years)* Location Wyoming, U.S Quebec, Canada NWT, Canada Greenland Quebec, Canada SK, Canada Mine Type Open Pit Open Pit Underground Open Pit Open Pit Open Pit Mineral Type Carbonatite Carbonatite Peralkaline syenite Peralkaline Peralkaline syenite Monazite Stage of PFS 2011 PEA Q1/2012 BFS PFS PFS 2011 Exploration Development Estimated Commercial 2015 2015 2016 2016 2016 2017 Operations Date* Infrastructure Good Good Poor Poor Poor PoorSource: Company reports, Mackie Research Capital Below, we present a score card for the projects. While we expect all of these projects to come online, we are particularly optimistic about the projects that have obtained a score of 16 or higher.Figure 6. Projects Scorecard MRCC Company Deposit Former Operational Mine Political Risk Mineralogy Capex Open-Pit Flagship Project 2015 TREO Price TREO Grade Radioactivity Total Estimate Ticker 0 = No 0 = High 1 = Simple 5 = Low 0 = No 0 = No 0 = Low 0 = Low 0 = High Of COD 1 = Yes 5 = Low 0 = Complex 0 = High 1 = Yes 1 = Yes 5 = High 5 = High 5 = Low 2012 LYC-AU Mt Weld 0 3 1 3 1 1 2 5 3 19 2012 MCP-US Mt. Pass 1 5 1 2 1 1 0 5 4 20 2013 ARU-AU Nolans Bore 0 5 0 1 1 1 2 3 1 14 2013 ALK-AU Dubbo Zirconia 0 5 0 4 1 1 3 0 3 17 2014 GWG-TSX V Steenkampskraal 1 2 0 5 0 1 2 5 0 16 2016 FRO-TSX Zankopsdrift 0 3 1 3 1 1 2 3 4 18 2015 RES-TSX Bear Lodge 0 5 1 5 1 1 1 4 2 20 2017 GMA-TSX V Montviel 0 5 1 3 1 1 1 2 4 18 2016 AVL-TSX Thor Lake 0 3 0 1 0 1 5 2 5 17 2016 GGG-AU Kvanefjeld 0 2 0 0 1 1 2 1 4 11 2016 QRM-TSX V Strange Lake 0 4 0 3 1 1 5 1 4 19 2017 GWG-TSX V Hoidas Lake 0 4 0 4 1 0 2 3 3 17Source: Mackie Research Capital
  • 5. www.mackieresearch.com The MORNING CALL – Industry Update Page 5Figure 7. Project Scorecard Graph Score card 25 20 Score card 15 10 5 0 ld l ia ke ke t e re l ke ie ss d r if aa dg je on el tv Bo La La sd La Pa kr ef tW Lo on rc op ps an s or e as Zi t. M n ng M ar Th M am nk Kv id la o Be ra bb Za Ho No nk St Du ee St Deposit NameSource: Mackie Research CapitalFigure 8. Progress On The Selected Projects Steps To Production Pilot Plant Deposit Prove Reserve Process Defined PEA PFS Beneficiation Extraction Separation EIS Approval Letters of Intent BFS & Funding Begin Construction Mt Weld Mt. Pass Dubbo Zirconia BFS Ongoing Nolans Bore BFS Ongoing Steenkampskraal Ongoing Ongoing BFS Ongoing Bear Lodge Nechalacho Kvanefjeld Strange Lake Zandkopsdrift Hoidas Lake MontvielSource: Using IMCOA, Dudley North Methodology, Mackie Research Capital
  • 6. www.mackieresearch.com The MORNING CALL – Industry Update Page 6 We analyze the score card for each project along with the amount of development progress made on each project to determine the commercial operations date for each of these projects. This is important as this allows us to better predict the supply of rare earths over the next 6 years. For example, Frontier Rare Earths expects its Zandkopsdrift mine to be in operation by 2014 while Rare Element Resources expects its Bear Lodge mine to be in operation by 2015. Figure 6 tells us that Bear Lodge is a more attractive deposit and Figure 8 shows us that more work has been performed on the Bear Lodge deposit compared to the Zandkopsdrift deposit. As a result, we have pushed back the commercial operations date for Frontier’s project back by 2 years. Our estimates are summarized in the figure below.Figure 9. Expected COD Date For Rare Earth Projects Mgmt Guidance MRCC Estimate Primary Reasons For Delay Deposit Expected COD Expected COD Mt Weld 2011 2012 Permitting Issues In Malaysia Mt. Pass 2012 2012 N/A Dubbo Zirconia 2013 2013 N/A Nolans Bore 2013 2013 N/A Steenkampskraal 2013 2014 Milestones met lower than 2013 producers Bear Lodge 2015 2015 N/A Nechalacho End of 2015 2016 N/A Kvanefjeld 2015/2016 2016 N/A Strange Lake 2016 2016 N/A Zandkopsdrift 2014 2016 Milestones met lower than 2015 producers Hoidas Lake 2016 2017 Mgmt focus is on Steenkampskraal project Montviel 2015 2017 Milestones met lower than 2015 producersSource: Mackie Research Capital We use this information to predict the timing of first production by project over a number of years. For example, we use individual project grades and anticipated project start-up to show production of terbium as shown below.Figure 10. Supply Forecast For Terbium (tonnes) Country Company Deposit 2010 2011 2012 2013 2014 2015 2016 2017 China Multiple Current Production 252 252 252 252 252 252 252 252 Australia Lynas Corp. Mt. Weld (2012) - 8 15 15 15 15 15 U.S. Molycorp Mountain Pass (mid 2012) - - - - - - Vietnam Joint Venture Dong Pao (2013) - - - - - South Africa Great Western Minerals Steenkampskraal (2014) 4 4 4 4 Australia Alkane Resources Dubbo Zirconia (2013) 9 9 9 9 9 Australia Arafura Nolans Bore (2013) 10 10 10 10 10 South Africa Frontier Rare Earths Zandkopsdrift (2016) 34 34 Quebec, Canada Geomega Montviel (2017) - U.S. Rare Element Resources Bearlodge (2015) 17 17 17 NWT, Canada Avalon Rare Metals Inc. Nechalaco (2016) 54 54 Greenland Greenland Minerals & Energy Ltd Kvanefjeld (2016) 87 87 Quebec, Canada Quest Rare Minerals Ltd Strange Lake (2016) 73 73 SK, Canada Great Western Minerals Hoidas Lake (2017) 3 Total Supply (Tonnes) 252 252 260 286 290 307 555 558Source: Mackie Research Capital
  • 7. www.mackieresearch.com The MORNING CALL – Industry Update Page 7DEMAND ANALYSIS Volume growth outlook for rare earths usage is high. In the figure below, we provide a forward-looking comparison by usage for various rare earths consumption growth rates as forecast by industry experts. What is striking is the general expectation for high growth rates across all categories. In certain end-markets, i.e., those products that require terbium and dysprosium, such as magnets, growth rates are expected to sustain double-digit increases, even approaching 15%. Additionally, almost all of the end-markets are expected to experience average estimated growth ranging from 8% to 11%.Figure 11. Industry Growth Rate % of % of % of 9-yr 08-14 11-14Application Element 2005 Supply 2008F Supply 2014F Supply* CAGR** Growth** GrowthMagnets Dy, Nd, Pr, Sm, Tb 17,150 18.0% 26,500 21.4% 39-43,000 22.8% 10.2% 7.5% 10-15%Metal alloys Ce, La, Nd, Pr 7,200 7.6% 22,500 18.1% 43-47,000 25.0% 22.6% 12.2% 15-20%Catalysts Ce, Nd, La 21,230 22.3% 23,000 18.5% 28-30,000 16.1% 3.5% 3.9% 6-8%Polishing Ce, La, Pr 15,150 15.9% 15,000 12.1% 19-21,000 11.1% 3.1% 4.9% 6-8%Glass Ce, Er, Gd, La, Nd, Yb 13,590 14.3% 12,500 10.1% 12-13,000 6.9% -0.9% 0.0% 0-1%Phosphors & pigments Eu, Tb, Y 4,007 4.2% 9,000 7.3% 11-13,000 6.7% 13.0% 4.9% 7-10%Ceramics 0.0% 7,000 5.6% 8-10,000 5.0% n/a 4.3% 7-9%Other 16,935 17.8% 8,500 6.9% 10-12,000 6.1% -4.7% 4.4% 7-9%Total 95,262 100.0% 124,000 100.0% 170-190,000 100.0% 7.3% 6.4% 8-11%Source: Roskill, IMCOA As most rare earths are used in several industries, we use the growth rate for the core industry in which a rare earth is used to predict its future growth rate.Figure 12. Growth Rate For Selected Rare EarthsElement Growth Rate 2010 2015 2017 Assumption (%) Demand (tonnes) Demand (tonnes) Demand (tonnes)Terbium 10% 300 483 585Dysprosium 10% 1,000 1,611 1,949Yttrium 10% 9,500 15,300 18,513Gadolinium 10% 820 1,321 1,598Europium 10% 500 805 974Neodymium 15% 20,000 40,227 53,200Cerium 5% 48,000 61,262 67,541Lanthanum 6% 33,000 44,161 49,620Praseodymium 10% 7,350 11,837 14,323Samarium 10% 750 1,208 1,462Source: Mackie Research CapitalINTEGRATING SUPPLY & DEMAND ANALYSIS The net result shows that there will be an over-supply of certain elements such as cerium and lanthanum as new rare earth mines come online. This contrasts with the situation for certain heavy rare earths such as yttrium and terbium, in particular. To be clear, not all light rare earths are expected to undergo a severe price correction. We expect there to be a deficit of neodymium by 2017. The supply of praseodymium is also expected to remain tight.
  • 8. www.mackieresearch.com The MORNING CALL – Industry Update Page 8Figure 13. Supply And Demand Dynamics For 2010, 2015 and 2017 2010 Demand 2010 Excess Supply Samarium Samarium Praseodymium Praseodymium Lanthanum Lanthanum Cerium Cerium Element Element Neodymium Neodymium Europium Europium Gadolinium Gadolinium Yttrium Yttrium Dysprosium Dysprosium Terbium Terbium - 10,000 20,000 30,000 40,000 50,000 (1,500) (1,000) (500) - 500 1,000 1,500 2,000 Tonnes Tonnes 2015 Demand 2015 Excess Supply Samarium Samarium Praseodymium Praseodymium Lanthanum Lanthanum Cerium Cerium Element Element Neodymium Neodymium Europium Europium Gadolinium Gadolinium Yttrium Yttrium Dysprosium Dysprosium Terbium Terbium (5,000) 5,000 15,000 25,000 35,000 45,000 55,000 65,000 (8,000) (6,000) (4,000) (2,000) - 2,000 4,000 6,000 8,000 10,000 Tonnes Tonnes 2017 Demand 2017 Excess Supply Samarium Samarium Praseodymium Praseodymium Lanthanum Lanthanum Cerium Cerium Element Element Neodymium Neodymium Europium Europium Gadolinium Gadolinium Yttrium Yttrium Dysprosium Dysprosium Terbium Terbium - 10,000 20,000 30,000 40,000 50,000 (3,000) 2,000 7,000 12,000 17,000 Tonnes TonnesSource: Mackie Research Capital
  • 9. www.mackieresearch.com The MORNING CALL – Industry Update Page 9FORECASTING PRICING USING SUPPLY & DEMAND ANALYSIS Price forecasting methodology explained: We have forecasted and analyzed supply and demand imbalances for each of the relevant rare earth elements using our proprietary methodology in order to derive our rare earth price estimates. The future demand projections for each element are based on Roskill’s projected CAGR for the specific industries that use the respective rare earths in their manufacturing processes. We have used estimates provided by the companies and Technology Metals Research to determine individual rare earth content in existing and upcoming mines. This, coupled with our analysis regarding the commercial operations start date of the new mines, allows us predict future supply of individual rare earths on a year-to-year basis. We then analyze the relationship between historical demand and supply imbalances and the price for each of the rare earths under consideration. After analyzing the correlation between excess demand and price from the years 2005 to 2010, we have used this same correlation to forecast rare earth prices for the 2011 to 2017 period. For each element, this is done by calculating the average change in price per one tonne increase in excess demand (where excess demand equals global supply less global demand per element). The following figure summarizes our forecasts.Figure 14. Separated Rare Earth Oxide Price Forecasts (USD$/KG) Price Assumptions Heavy Rare Earths 2007A 2010A Current 2011 2015E 2017E Europium 324 640 6,000 801 432 Gadolinium 10 70 255 10 14 Terbium 590 610 3,803 1,566 450 Dysprosium 89 305 2,340 642 129 Yttrium 11 78 179 187 60 Light Rare Earths Lanthanum 1 60 150 5 5 Cerium 1 60 150 5 5 Praseodymium 27 87 240 87 36 Neodymium 29 90 318 179 149 Samarium 3 35 140 6 6Source: Mackie Research Capital We predict that the majority of the rare earth projects that are likely to succeed will enter production by 2017. As a result, we believe that the 2017 prices should be used to value these projects. Below, we present the market value of the TREO basket of separated rare earth oxide of our selected projects from Figure 5.Figure 15. Separated Rare Earth Oxide TREO Basket Price (USD$/KG) Arafura Rare Element Quest Rare Frontier Rare Operator Avalon Lynas Corp Molycorp Resource Resources Minerals Earths Steenkampskraal Hoidas Lake Dubbo Zirconia Montviel Kvanfjeld Project Nechalacho Mt Weld Mountain Pass Nolans Bear Lodge Strange Lake Frontier/ZC1 GWG GWG Alkane GeoMega Greenland Minerals 2010A 85 70 65 71 70 95 73 70 72 79 69 73 2011E 301 217 181 226 222 313 241 208 234 247 208 218 2015E 97 48 31 56 40 133 58 54 57 87 44 60 2017E 54 36 24 41 28 65 37 36 41 46 33 36Source: Mackie Research Capital In our financial model for Avalon Rare Metals (AVL-TSX, SPEC. BUY rated, $11.80 target), we use a long-term TREO basket price of $40/kg even though we believe that Avalon’s long term TREO basket of separated rare earths should be around $54/kg. This implies that our target price of $11.80/share could be overly conservative. If we were to use a $54/kg TREO basket price, the value of the project would increase to over $17/share.
  • 10. www.mackieresearch.com The MORNING CALL – Industry Update Page 10ANALYSIS OF CURRENT PRICE TRENDS IN EXPORT AND DOMESTIC (CHINESE) MARKETS Over the last 1 year, we have seen the light rare earth prices outperform the heavy rare earth prices. However, over this period, we have been continually reiterating our thesis that this is a short-term phenomenon and that the heavy rare earth prices should outperform the light rare earth prices. More recently, we have started to see the heavy rare earth prices outperform the light rare earth prices as shown in the figure below. We also note that domestic prices have outperformed export market prices over the last 4 months. We attribute these pricing gains to the supply restrictions that China is currently imposing through consolidation of the industry, crack down on illegal smuggling and shut down of mining operations in the south of China that were skewed towards heavy rare earth production.Figure 16. Separated Rare Earth Oxide Price Trend (March 2011 – Current, USD$/KG) Element Export Prices Domestic Prices Difference between Mar-11 Current Change (%) Mar-11 Current Change (%) Export And Domestic prices Light Rare Earths Cerium 100 150 50% 11 27 152% 454% Lanthanum 100 150 50% 6 23 278% 546% Praseodymium 155 240 55% 62 170 177% 41% Samarium 90 140 56% 4 21 444% 570% Neodymium 175 318 82% 77 232 202% 37% Heavy Rare Earths Terbium 805 3,803 372% 615 3,097 403% 23% Gadolinium 100 200 100% 31 116 278% 72% Yttrium 110 179 63% 15 67 333% 169% Europium 840 6,000 614% 692 4,491 549% 34% Dysprosium 520 2,340 350% 431 2,013 367% 16%Source: Mackie Research Capital Over the last one month, we have seen a relative slow down in pricing gains for rare earths, particularly, light rare earths. We expect further gains in heavy rare earth prices primarily due to the tight supply and demand dynamics. However, we expect the light rare earths to start stabilizing at these levels in the near-term. Over the next two years, we expect the light rare earth prices to undergo a correction partly due to the build-up of light rare earth inventory in China and partly due to the new mining operations that are expected to commence in 2012. We believe that price stability for rare earth prices is important from the end-user perspective and this should allow the rare earth industry to flourish.Figure 17. Separated Rare Earth Oxide Price Forecasts (June 2011 - Current, USD$/KG) Element Export Prices Domestic Prices Jun-11 Current Change (%) Jun-11 Current Change (%) Light Rare Earths Cerium 150 150 0% 28 27 -3% Lanthanum 150 150 0% 23 23 0% Praseodymium 210 240 14% 101 170 69% Samarium 118 140 19% 12 21 80% Neodymium 260 318 22% 155 232 50% Heavy Rare Earths Terbium 2,950 3,803 29% 1,549 3,097 100% Gadolinium 175 200 14% 77 116 50% Yttrium 160 179 12% 39 67 72% Europium 1,950 6,000 208% 1,703 4,491 164% Dysprosium 1,000 2,340 134% 774 2,013 160%Source: Mackie Research Capital Thesis remains intact to overweight the premier heavy rare earth names. In this note, we have presented a framework to analyze the most advanced rare earth projects in the world. Additionally, the conclusions of this update also support our SPEC BUY ratings on Avalon Rare Metals Inc., and Dacha Strategic Metals Inc. Both of these names provide considerable exposure to heavy rare earths, and should continue to benefit from macro events impacting the sector.
  • 11. www.mackieresearch.com The MORNING CALL – Industry Update Page 11 RISKS TO TARGET Risks include rare earth price cyclicality, possible technological substitution away from rare earths, and actions by the Chinese government that impacts the rare earth marketplace. Exploration, mining and development risks apply to rare earth mining companies. RELEVANT DISCLOSURES APPLICABLE TO: AVALON RARE METALS INC. AND DACHA STRATEGIC METALS INC. Avalon Rare Metals Inc.: 1. Within the last 3 years, Mackie Research Capital Corporation has managed or co-managed an offering of securities by the subject issuer. 2. Within the last 3 years, Mackie Research Capital Corporation has received compensation for investment banking and related services from the subject issuer. 3. Matt Gowing visited the operations of Avalon Rare Metals in April 2011. Costs of the trip were paid in part by the subject issuer. Dacha Strategic Metals Inc.: 4. Within the last 3 years, Mackie Research Capital Corporation has managed or co-managed an offering of securities by the subject issuer. 5. Within the last 3 years, Mackie Research Capital Corporation has received compensation for investment banking and related services from the subject issuer. ANALYST CERTIFICATION Each analyst of Mackie Research Capital Corporation whose name appears in this report hereby certifies that (i) the recommendations and opinions expressed in this research report accurately reflect the analyst’s personal views and (ii) no part of the research analyst’s compensation was or will be directly or indirectly related to the specific conclusions or recommendations expressed in this research report.Information about Mackie Research Capital Corporation’s Rating System, the distribution of our research to clients and the percentage of recommendationswhich are in each of our rating categories is available on our web site at www.mackieresearch.com.The information contained in this report has been drawn from sources believed to be reliable but its accuracy or completeness is not guaranteed, nor inproviding it does Mackie Research Capital Corporation assume any responsibility or liability. Mackie Research Capital Corporation, its directors, officers andother employees may, from time to time, have positions in the securities mentioned herein. Contents of this report cannot be reproduced in whole or in partwithout the express permission of Mackie Research Capital Corporation. (US Institutional Clients - Mackie Research USA Inc., a wholly owned subsidiary ofMackie Research Capital Corporation, accepts responsibility for the contents of this report subject to the terms and limitations set out above. US firms orinstitutions receiving this report should effect transactions in securities discussed in the report through Mackie Research USA Inc., a Broker-Dealer registeredwith the Financial Industry Regulatory Authority (FINRA)). Toronto 416.860.7600 - Montreal 514.399.1500 - Vancouver 604.662.1800 - Calgary 403.218.6375 - Regina 306.566.7550 - St. Albert 780.460.6460