Rare Earth Metals: Dahlmann Rose (May 2011)


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Rare Earth Metals: Dahlmann Rose (May 2011)

  1. 1. 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 governments 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 Chinas 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 Hudsons 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.MEMBER: FINRA/SIPC www.dahlmanrose.com
  2. 2. DAHLMAN ROSE & CO. EQUITY RESEARCHExecutive 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 companys 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 companys 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 mayMEMBER: FINRA/SIPC 2 www.dahlmanrose.com
  3. 3. DAHLMAN ROSE & CO. EQUITY RESEARCH 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 companys 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 companys cost profile.Exhibit 1: Coverage Universe Comp SheetAs of 4/29/2011 Total Resource Market Cap /Company Ticker Rating Target/NAV Price Currency Market Cap Base (mt REO)** Resource BaseAvalon Rare Metals Inc AVL Buy 15.00 9.09 USD 941,805,537 4,277,156 220Hudson Resources Inc HUD-V Buy 1.60 1.11 CAD 93,906,000 212,838 441Lynas Corporation Ltd LYC-AU Hold 2.85 2.09 AUD 3,462,818,590 1,415,668 2,446Molycorp Inc MCP Buy 125.00 73.30 USD 6,032,639,111 1,015,938 5,938Quest Rare Minerals Ltd QRM-V Hold 8.40 8.15 CAD 568,870,000 583,148 976Rare 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 estimatesSource: Company Reports, Dahlman Rose & Co. estimatesMEMBER: FINRA/SIPC 3 www.dahlmanrose.com
  4. 4. DAHLMAN ROSE & CO. EQUITY RESEARCHChina continues to dominate the rare Despite increased production from the West, we anticipate China will continue to dominateearth 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 worlds 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 DemandSource: Chinese Society of Rare Earths, Dahlman Rose & Co. estimatesMEMBER: FINRA/SIPC 4 www.dahlmanrose.com
  5. 5. DAHLMAN ROSE & CO. EQUITY RESEARCH 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 countrys 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. estimatesMEMBER: FINRA/SIPC 5 www.dahlmanrose.com
  6. 6. DAHLMAN ROSE & CO. EQUITY RESEARCHWhere do rare earth prices find While we believe that a correction is possible, we do not anticipate that prices will fall to levelssupport? 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 158Source: Metal-Pages, Dahlman Rose & Co. estimatesSupply / 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 5,604Source: Dahlman Rose & Co. estimatesMEMBER: FINRA/SIPC 6 www.dahlmanrose.com
  7. 7. DAHLMAN ROSE & CO. EQUITY RESEARCHIndustry 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 Earths 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 Earths 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.MEMBER: FINRA/SIPC 7 www.dahlmanrose.com
  8. 8. DAHLMAN ROSE & CO. EQUITY RESEARCHKey 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 60Sales (in millions) 50 40 30 20 10 - 2007 2008 2009 2010 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2020eSource: 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 mayMEMBER: FINRA/SIPC 8 www.dahlmanrose.com
  9. 9. DAHLMAN ROSE & CO. EQUITY RESEARCH 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 fromMEMBER: FINRA/SIPC 9 www.dahlmanrose.com
  10. 10. DAHLMAN ROSE & CO. EQUITY RESEARCH 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 elements 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 Molycorps 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 comparedMEMBER: FINRA/SIPC 10 www.dahlmanrose.com
  11. 11. DAHLMAN ROSE & CO. EQUITY RESEARCH 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 BreakdownSource: Geology.comMEMBER: FINRA/SIPC 11 www.dahlmanrose.com
  12. 12. DAHLMAN ROSE & CO. EQUITY RESEARCHExhibit 9: Composition of Ore DepositsElement Symbol Hudson Lynas Molycorp REE Avalon QuestLight Rare EarthsCerium 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 EarthsDysprosium 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%Source: Dahlman Rose & Co. estimatesMEMBER: FINRA/SIPC 12 www.dahlmanrose.com
  13. 13. DAHLMAN ROSE & CO. EQUITY RESEARCHValuation Methodology & Investment RisksValuation MethodologyFor companies with operating assets in the Metals & Mining space, we apply a multiple to our one-year forward EBITDA estimate to achieve ouryear-end price targets. Our applied multiple is based on historical industry-wide and company specific multiples. For Metals & Mining companieswhose assets are primarily in pre-production, we apply an NAV analysis to future cash flows to achieve a one year forward price target.Investment RisksThe global macro economy poses the biggest risk to the Metals & Mining industry as demand for metals and minerals is highly correlated toeconomic growth. In particular, China is the world’s largest consumer of aluminum, coal, copper, iron ore, nickel and steel. A material slowing inChina’s economic growth trajectory could result in lower prices for commodities. Further, with China being a significant producer of aluminum andsteel, 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.MEMBER: FINRA/SIPC 13 www.dahlmanrose.com
  14. 14. DAHLMAN ROSE & CO. EQUITY RESEARCH 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.MEMBER: FINRA/SIPC 14 www.dahlmanrose.com
  15. 15. DAHLMAN ROSE & CO. EQUITY RESEARCHDisclosuresDisclaimer:The information presented in this report is for informational purposes only. It was prepared based on information and sources that we believe to bereliable, but we make no representations or guarantees as to the accuracy or completeness of the information contained herein. This report is not tobe 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 thisreport, that the recommendations and opinions expressed accurately reflect the analysts personal views and no part of the analysts compensationwas, 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 positionsequal 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 oradvisory 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 subjectcompanies discussed in its research reports and may receive compensation for such services during the three months following publication ofthis 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. Fordisclosures regarding investment banking activity in the past 12 months, please contact Compliance, Dahlman Rose & Company, LLC, 1301 Avenueof 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 providespecific disclosures for the companies mentioned by reference. To access current disclosures for the all companies in this report, clients should referto 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 securitiesrecommended in this report.For disclosures regarding market making activity, please contact Compliance Department, Dahlman Rose & Company, LLC, 1301 Avenue of theAmericas, 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 pointshigher than the general market return.MEMBER: FINRA/SIPC 15 www.dahlmanrose.com
  16. 16. DAHLMAN ROSE & CO. EQUITY RESEARCHSell – The fundamentals/valuations of the subject company are deteriorating and the investment return is expected to be 5 to 15 percentage pointslower 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 inline with the general market return.Ratings Distribution:Ratings Distribution & Investment Banking DisclosureRating Count Ratings Distribution* Count Investment Banking**Buy -rated 122 52.60 37 30.33Hold -rated 105 45.30 35 33.33Sell -rated 5 2.20 2 40.00MEMBER: FINRA/SIPC 16 www.dahlmanrose.com