Independent investment bank Jacobs Securities recently issued a research report on the junior Rare Earth Element (REE) space, including "Speculative Buy" recommendations for Tasman Metals (CVE:TSM) and Montero Mining and Exploration (CVE:MON).
Rare earths refer to a group of 17 specific elements, known as lanthanides, plus scandium and yttrium, used for everything from smartphones to guided missiles. While some rare earths are relatively common, they are dispersed in a way that makes it difficult to find deposits with high enough ore grades to economically exploit.
Demand for the metals is expected to continue to grow steadily as China, which produces 97 percent of the world’s rare earths, has cut exports by more than half of 2004 levels to 30,000 tons in 2010.
Jacobs' Moreno reckons that demand for commodities and specialty materials, such as rare earths, may grow substantially if
emerging markets continue to expand their middle class, who increasingly demand Western standards of living.
Also, many new emerging "green" technologies that are critical to an increasingly populated world require the use of rare earths, and if they are adopted, it could spur REE demand further.
According to the United States Geologic Survey, REE world production was estimated at 130,000 tonnes in 2010. However, the exact production volume is not certain and some sources estimate that it could be as high as 190,000 tonnes, if accounting for China’s illegal production - carried out by artisinal miners - and exports.
Under normal market conditions, it has been estimated that demand for rare earths could grow 5 percent to 15 percent in the next five years, depending on the application.
However, as Chinese rare earth export quotas have fallen from 60,000 tonnes in 2005 to 30,000 in 2010, many end-users have been forced to use less efficient substitutes or to set up manufacturing facilities in China.
In terms of pricing, Jacobs Securities continues to expect long-term rare earth prices to "stay above the historically low prices of 2007–2009 but well below 2011 peak prices".
The Jacobs Securities research note highlights Tasman’s deposit as having "one of the highest concentrations of heavy rare earth elements and the company has been able to definite a relatively large deposit."
Jacobs has started coverage on Tasman Metals with a $3.99 target price.
Tasman is engaged in the acquisition and exploration of rare earth elements properties in Scandinavia. The company owns 175 claims and claim applications for strategic metals, including REEs in Sweden, Finland, and Norway; and various interests in several iron ore exploration claims in the Kiruna district of Sweden.
The company focuses principally on the exploration of the Norra Kärr project in Southern Sweden.
"We believe that Tasman has good potential to establish industrial alliances and partnerships as it progresses toward the final feasibility study," Jacobs Securities analyst Luisa Moreno said.
If the markets are favourable and Tasman is able to secure an industry partner, the company expects to start construction in 2014 and reach full production by the second half of 2016.
"Tasman’s project could supply the market for the critical elements yttrium and dysprosium, which are important for the lighting and magnet industries, respectively," Moreno added.
For Montero Mining and Exploration, Jacobs Securities has started coverage with a target price of $0.28.
Montero primarily explores for REEs, phosphates and uranium deposits and its principal asset is Wigu Hill, a REE project located
in Tanzania. The company also holds uranium interests in two licenses in Tanzania, two properties in Quebec, and four phosphate exploration properties in South Africa.
"Montero has achieved important milestones in this rare earth race and may cross the finish line before all the other companies in our coverage universe," Jacobs Securities' Moreno said.
Catalysts for Montero in next 12 months include the potential for industry partnerships for the construction of the plant in
South Africa or India, and the sale of the phosphate properties.
Jacobs Securities has changed its recommendation on Avalon Rare Metals (TSE:AVL) to "Hold" from "Speculative Buy and cut its price target to $1.87 from $6.06 due to a delay in the definitive feasibility study for its Nechalacho rare earth metals project in the Northwest Territories.
"Considering that Avalon is likely less than 12 months away from the feasibility study, it may be the most advanced rare earth junior company," Moreno said.
On Frontier Rare Earths (TSE:FRO), Jacobs is keeping its "Speculative Buy" but has lowered its target price to $2.07 from
$4.30 as a result of our lower rare earth price forecasts.
Frontier Rare Earths' principal asset is the Zandkopsdrift rare earth deposit in the Namaqualand region of the Northern Cape
Province of South Africa.
Zandkopsdrift is currently the largest NI 43 101-compliant rare earth resource in Africa. Estimated resources amount to 43.7 million tonnes at an average grade of 2.16% and a 1% cut-off grade.
"We believe Frontier is significantly underpriced compared to its peers," Jacobs Securities' Moreno said.
Rare Element Resources (TSE:RES) is focused on REEs and gold. It holds a 100 percent interest in the Bear Lodge property located innortheast Wyoming.
It is one of the few junior rare earth exploration companies to have completed a pre-feasibility study and has one of the highest grades of critical materials (excluding yttrium) in North America.
"The company’s metallurgy results are promising and it may be relatively simple compared to many of its competitors, which
places it in a favourable position as it moves toward production," the Jacobs Securities analyst said.
Jacobs Securities maintains its "Hold" rating and has lowered its target price to $4.17 from $4.50.
"Rare Element is one of the most advanced projects and one of the few that has completed a pre-feasibility study and it seems to be close to a definitive feasibility study," Moreno added.