|Present Estimated Bokan Basket Price Case||$75.85/kg.|
|Flagship Project||Bokan Mountain|
|Mineral Resources (M&I)||23,752,458 kg REOs|
|Average Annual Production||2,051,349 kg|
|Payable REOs||22,564,836 kg|
|True All-in Cost (TAIC)||$51.73/kg.|
|Total Operating Costs||($636,000,000)|
|Total Capital Costs||($221,000,000)|
|Net Profit Margin||32%|
|Absolute Cost Structure (ACS)||68%|
|Cash Flow Multiple||5x|
|Net Average Annual Cash Flow||$49,478,538|
|Future Market Cap||$247,392,688|
|Market Cap Growth||316%|
Notes: All Values in U.S. Dollars
FCM 2020 BOKAN MOUNTAIN BASKET PRICE CASE BREAKDOWN
|Updated||Heavy Rare Earth Metals||Last 2020 Price ($/kg)||TOTAL PRODUCTION (kg)|
|17-Jan-20||Europium Oxide (Eu₂O₃)||$30.62||75,537|
|17-Jan-20||Gadolinium Oxide (Gd₂O₃)||$23.69||778,320|
|17-Jan-20||Terbium Oxide (Tb₄O₇)||$513.87||133,350|
|17 -Jan-20||Dysprosium Oxide (Dy₂O₃)||$248.57||889,121|
|17-Jan-20||Erbium Oxide (Er₂O₃)||$22.96||388,222|
|17 -Jan-20||Yttrium Oxide (Y₂O₃)||$2.92||4,782,634|
|Updated||Light Rare Earth Metals||Last 2020 Price ($/kg)|
|17 -Jan-20||Lanthanum Oxide (La₂O₃)||$1.71||2,009,622|
|17 -Jan-20||Cerium Oxide (CeO₂)||$1.68||6,096,947|
|17 -Jan-20||Praseodymium Oxide (Pr₂O₃)||$48.10||758,162|
|17 -Jan-20||Didymium Oxide (Nd₂O₃Pr₂O₃)||$40.74||2,940,686|
|17 -Jan-20||Neodymium Oxide (Nd₂O₃)||$42.42||2,940,686|
|17 -Jan-20||Samarium Oxide (Sm₂O₃)||$1.82||771,549|
It’s important to keep in mind that we performed our Ucore analysis at prevailing rare earth prices (Table), so its 100%-owned Bokan Mountain Project is viable today with an admirable 32% Net Profit Margin.
Ucore’s IBAS bid partnership with high performance alloy supplier Materion is a plus, too.
How does Ucore compare to Texas Mineral Resources?
Upon completion of a bankable feasibility study, TMRC’s stake in Round Top will be reduced by 70%. Its stake will be further reduced by an additional 10% following a one-time $3M payment by U.S. Rare Earths. We can’t justify holding shares for an extended period in a company with a future stake of but 20% in its core asset. If management is looking for an exit, we are, too.
UPDATE, 19 January 2020
Readers* were kind enough to point out that a few pieces of data in our analysis were dated, including share count, which has grown by 29% since our first analysis was completed on 30 September 2019. This has had the effect of reducing our True Value and Target by 25%.
In addition, our Lanthanum Oxide price was printed incorrectly, which has altered both our estimated prevailing basket price and Gross Revenue.
*Not all readers were kind nor gracious. You would think they had a paying subscription to the site and were owed something.
I thought your analysis was quite wonderful, especially with the outstanding shares corrected. I noticed you used the bid price on the metals. Wouldn’t Ucore sell at a minimum the ask price (25% more)or even a premium to that price? That would certainly push the true value number up quite a bit. Thank you.
For our basic economic analysis, we used a simple, conservative (albeit unlikely) penetration pricing model which took cues from Chinese benchmark prices.
It is hard to guess what type of premium REOs will fetch under a North American pricing regime, but I think it is safe to say that there will indeed be one, though it may be regulated by long-term contracting prices negotiated by strategic supply chain partners with defense contractors.
Is the lifetime value of Ucore’s REO inventory high? Not particularly as a go-alone enterprise, but certainly in partnership with Materion, as Materion has sufficient market share to elevate Ucore’s lifetime value by forcing a small N. American REO re-rating that will boost Ucore’s margins without sacrificing a portion of its market share to competitors.
Ucore may also prove capable of operating in a multiple-price system environment, with an equilibrium fraction of production free to transact on the spot market in combination with majority fixed contract pricing.
In a word, we think this is the eventual probable model in N. America once pricing flexibility in industrial defense REO markets are better understood: the coexistence of long-term contracts and spot transactions. But right now, no one really has a well-developed demand-management policy hammered out, as we haven’t yet had direct experience of market-clearing mechanics following a long-term supply shock. Defense in the aggregate will want assurances of some price inelasticity for a handful of REOs including Neodymium, Praseodymium, Dysprosium, and Yttrium, while other h- and lREEs may be freer to transact in a multiple-pricing ecosystem, with a spot skew.
I am of the personal belief that the Walrasian model could annihilate the burgeoning N. American hREE market before it is properly established, so am a staunch proponent of a multiple-pricing model in which private forward-contracting takes center stage.
We also think a small fraction of initial N. American output will be purchased by industries with high tolerances for auction pricing, with the balance — Defense — being risk averse, with the auction-tolerant insuring Defense through the spot market by addressing unexpected income variances associated with the seller (Ucore).
In closing, Bob, we think Ucore will be subject to two prices: contract and spot. And we have no idea what those prices will look like.
Have a wonderful afternoon.
We don’t think the assumption that the hREE market will be oligopolistic, vertical and risk-averse while immature, and horizontal with shared risk when mature is a realistic one. Much as has been observed in the uranium market, where a thin residual spot market is maintained to equilibrate shocks, we think rare earths, too, will experience a successional pricing scheme wherein spot transactions grow thinner and thinner, taking an eventual back seat to vertical, risk-averse, long-term contracting, wherein primary shocks reside with the seller, who will counter with variable producer prices.
These producer prices will likely stem from oligopolistic cartelization, the framework of which we can already see shaping up under IBAS and NTIB. Cartel prices will likely positively diverge from spot prices to the extent that a two-price system becomes untenable. This will have the effect of driving down producer prices to a bit above cost, at which point insurance against unexpected income variances at the level of the producer diminishes, followed by an abandonment of cartel pricing and a return to a spot regime, completing the cycle.
Uranium is one stage away* from completing the described cycle, and can be illustrative of the N. American pricing schema that rare earths generally, and HREEs in particular, will experience.
*As an aside, this bodes well for primary uranium producers, though the why of it is little discussed and remains poorly understood. Buyers, unaccustomed to supply shocks, have been unwilling to pay an implicit security premium to primary producers outside of the state-owned secondary market, and as a consequence seller profits have become very vulnerable. Consequently, buyers no longer have deep insurance against shocks originating with the seller through incentive spot pricing (which heals seller income variances), which necessitates a rapid reinsurance program through spot appreciation and an implicit reinstatement of long-term contract security premiums.