I made a quick trip to Rapid City South Dakota and then on to Wyoming to visit an interesting project last week and I want to share my observations with you.
I see all kinds of deposits: they have ranged from gold to Rare Earth Elements. This project in Wyoming contained both, gold and REE. That's pretty unusual and makes for a most interesting investment.
The company is Rare Element Resources (RES-V.) It's tightly held almost to a fault with only 23.8 million shares outstanding. Their primary focus is on an unusual project they call the Bear Lodge deposit. The deposit is both a giant gold deposit that resembles the Cripple Creek gold mine in Colorado being developed by Anglo American and one of North America's largest REE (Rare Earth Elements) deposits.
Before I go any further, I want readers to understand that the REE complex is not rare. REE are found everywhere. But they are rare in that economic concentrations are unusual. RES has done a wonderful job of explaining the REE at Bear Lodge and you should read it.
But first the gold. Bear Lodge has been explored by a variety of companies over the last 30 years. Rare Element picked up 100% of the project in 2004. In 2005 RES completed an agreement with Newmont where Newmont would spend $5 million dollars in exploration to earn 65% of the project. Newmont can earn an additional 15% by completing a feasibility study.
Newmont has been conducting a thorough basic exploration program including drilling where permits had been issued for three years. They have two more years to complete their earn-in. A planned major drill program for this year was put on the back burner as a result of the Forest Service taking too much time to approve a 200-acre disturbance permit in a timely manner. Newmont has spent a considerable amount of time on this permit and will have multiple drill rigs operating with the permit in hand. Their loss is your gain. The stock is the lowest price in the last 12 months right now.
Newmont won't touch a project that doesn't show potential for over 3 million ounces and is on record for saying they believe Bear Lodge is a Cripple Creek look-alike with a minimum of 5 million ounces of gold. That 5 million ounce figure pretty much puts a floor under the value of the stock.
Here is the math. If Newmont proves up 5 million ounces and spends their $5 million, RES's shares is 1.75 million ounces or almost 1/10th of an ounce of gold per share. Gold in the ground is going to vary from $30-$100 an ounce in market cap and more like $300 an ounce in a buyout. Newmont gains nothing by proving more ounces, obviously they would like to own and develop the entire project themselves.
I would be perfectly comfortable saying the 5 million ounces is reasonable based on what I saw and $100 an ounce would be a cheap price to pay to buy out RES. So RES could be worth upwards of $175 million in a purchase. With a market cap of about $12 million today, that makes them an interesting investment.
When you are doing any exploration, it's handy to have a nearby project similar in grade and size and origin. You can come up with easy rule of thumb figures to give you an idea of both cost and potential profit. Cripple Creek gold is a similar fine grain disseminated gold in sulfide-bearing alkaline rock.
The rock at Bear Lodge is a disseminated gold but in oxidized material, near surface and alkaline. Where Cripple Creek has a strip ratio of 2.6-1, Bear Lodge mineralization begins right at surface and will be cheaper to mine. Cripple Creek is sulfide bearing so has to be more finely crushed than the oxide rock of Bear Lodge.
Anglo gets a recovery rate of between 53 and 57% with the crushed rock at Cripple Creek and Newmont's preliminary metallurgical tests on Bear Lodge material suggests recoveries in the mid-60% with run-of-mine material. That means it will be both cheaper to mine and will have higher gold recovery at Bear Lodge.
The jury is still out on grade comparisons between Cripple Creek and Bear Lodge. Cripple Creek has produced over 23 million ounces of gold and has an additional 7 million ounces as a current resource. Newmont has to do a lot more drilling to determine grade and resource at Bear Lodge. Bear Lodge is part of the same gold formations in the Black Hills of South Dakota that produced over 47 million ounces of gold historically.
I like the numbers a lot just based on the information RES already has at Bear Lodge. Since Newmont is spending their own money at Bear Lodge, RES is not caught up in the trap of constantly having to replenish their coffers. They do have an interesting trick up their sleeve in the REE.
The deal with Newmont is with the gold. Newmont has additional ground around the Bear Lodge deposit owned by RES and naturally is planning on developing that as well. But Newmont has no ownership interest in the REE. That icing on the cake is reserved for Rare Element.
Hecla Mining drilled for REE at Bull Hill, part of the Bear Lodge complex in 1991. Their historic resource showed 4.3 million tons of REE averaging 76 pounds per ton. I want to triple warn potential investors here about the pitfalls of making snap decisions about REE investments.
Historically, most REE have come from China. REE are used in a wide variety of new technologies including super magnets and batteries for hybrid cars, electronics and video technology. Without any question, the demand for REE is increasing at a rapid rate. China has imposed new taxes on material being exported and indicated they intend to not export the raw materials in the future. Since China produces over 95% of REE today, it leaves the rest of the world in a scramble for a strategic source of REE.
But from a mining and milling point of view, REE are difficult. Recoveries are poor and it's very expensive to process. So taking any sample grade of material and doing a back of the envelope SWAG (Stupid Wild Assed Guess) as to the economic value of material simply won't work. There has to be a lot of basic work done to determine accurate economic values and costs.
Management of RES is conducting a drill program to outline a bigger and more economic resource at Bull Hill. In addition, they are bringing in the very best experts in the industry to advise them and are conducting extensive processing tests to determine the economic potential at Bear Lodge. I approve, it isn't a simple issue.
But it is interesting. Newmont has generated a giant potential down the road on the gold side. RES is a simple call on the price of gold and you may expect that Newmont management is spending a lot of time trying to determine just when they should put in an offer for RES.
But RES is also a call on future demand for rare earth elements. It isn't a slam-dunk but after this drill season, RES will have a lot more and better information on the deposit. I like the potential on Bear Lodge on the gold side but the REE potential is just as great.
We live in interesting times. Many investors want to stand on a mountain top and scream "manipulation" at the moon. It doesn't do them any good; there is nothing more meaningless than a belief the world is the product of a conspiracy. But for astute investors, there are some wonderful opportunities. You need to take responsibility for your own decisions, you need to do at least due diligence but we are in the midst of the greatest transfer of wealth in world history. It's up to you to determine if you want to be rich or to be poor.
Rare Element Resources is an advertiser. I participated in a private placement at much higher prices a year ago. I am biased. But I really like the approach management is taking. I like RES both as a call on gold and a call on the REE.
Rare Element Resources