Rare Element awaiting new Bear Lodge resource estimate and Newmont default at Sundance

Bottom-Fish Comment - John Kaiser

Rare Element Resources Ltd has released the final results for the 15 holes it drilled into the Bull Hill Southwest zone on the Bear Lodge rare earth prospect in Wyoming last summer. Results for another 5 holes drilled into the Bull Hill Northwest target are still pending. Don Ranta expects an updated resource estimate for the Southwest zone to be available by the end of Q1 2010. The Southwest drilling was designed to infill the known resource and test the up-dip extension of the oxidized rare earth mineralization for which an inferred resource of 4,560,000 tonnes at 4.29% TREO was reported in April 2009. The hope, based on projections of the dyke structures, was that the oxide resource could be doubled, a target Ranta thinks Rare Element will come close to achieving. Using my four year REO price average as of February 2009 which I have adopted as a benchmark for comparison purposes, the rock value at that grade was US $266 per tonne representing an in situ value of $1.2 billion. In its recent news release Rare Element released the metallic distribution percentages for both the oxide and sulphide zones which were based on total assay analysis of the composites used in the metallurgical studies. This was the first time Rare Element has publicly quantified the presence of the "heavy" rare earths europium, terbium, dysprosium and ytterbium at Bear Lodge. In terms of weight these extra rare earth oxides would boost TREO grade only 1.2% (ie add 0.05% to 4.29% to make 4.34%), but they boost the rock value nearly 25% to $371 per tonne. The question now becomes what percentage of these heavies are recoverable through the processes being investigated by Rare Element. If these heavies report to the concentrate that carries the light rare earths, it could make a meaningful difference to the value of Bear Lodge. The updated pie chart below shows the REO value distribution for the FMR oxide zone. The addition of the heavies plus the effect of minor relative grade variations boost the in situ value of the FMR oxide zone to $1.7 billion.

Rare Element calls the oxidized material FMR for its main host minerals, iron oxide (FeOx), manganese oxide (MnOx) and REE minerals. Should Rare Element succeed in doubling the FMR oxide resource, it would have the critical mass to justify a near surface bulk mining operation. The oxide zone is the preferred target because initial metallurgical work by Rare Element suggests a fairly simple process flow-sheet to extract the light rare earth elements from the host minerals, which in order of relative abundance are synchysite, parisite and bastnaesite, all of which belong to the basnaesite group and are fine grained. Bastnaesite is the preferred mineral because REE represent 75% of the mineral while synchisite is 51% and parisite is 61%. The REE bearing mineral that makes up the deeper unoxidized resource is ancylite whose recovery process will be more problematic. The updated REE distribution results in a rock value of $267 per tonne for the deeper "sulphide" ore which was reported as 4,100,000 tonnes of 3.71% TREO. Some of the holes Southwest holes intersected mineralization as high as 11.83% TREO which would have the effect of doubling or tripling the rock value. Ranta hopes that a sweet spot in the order of 2-3 million tonnes of 7%-9% TREO will emerge within the new resource estimate. Using the latest grade distribution, the rock value at 8% would be $700 per tonne for an in situ value of US $1.4 billion for a 2 million tonne scenario. These numbers appear robust enough to leave room for profit in a discounted cash flow analysis, though at this stage we do not have even rough cost structure estimates. Mountain State Research & Development International is conducting ongoing metallurgical studies whose outcome will be a key part of the preliminary economic assessment (PEA) Rare Element hopes to have in hand by the end of Q3 of 2010. This PEA, which quantifies the cost of the optimal recovery process, will be Rare Element's most important milestone in 2010. Still to come are the 5 holes drilled into the Northwest target where the goal is follow up a high grade intersection Hecla drilled during the late eighties. The goal here is to establish a resource of several million tonnes in the 8%-10% TREO range. If results are good Rare Element will follow up with more drilling this year at Bull Hill Northwest, as well as the more complex target at Whitetail Ridge which is interpreted to be a fault offset part of the Southwest zone. Drilling cannot resume until June because the Forest Service restricts exploration activity during the sharptail grouse mating season

The sexual antics of the sharptail grouse may prove problematic for Newmont, which apparently is short about $700,000 of the $3.5 million it has to have spent by June 1, 2010 as part of its option to earn 65% of the non-rare earth metal rights to the Bear Lodge property known as the Sundance option. To fully vest Newmont must spend $5 million by June 1, 2011. Newmont optioned the project in June 2006 but then got sidelined when it applied for a 200 acre surface disturbance permit, an exercise in overkill when it comes to exploration, but not for a mine development. Newmont regarded the alkaline-igneous complex that underlies the Bear Lodge/Sundance project as similar to the Cripple Creek complex in Colorado from which more than 20 million ounces have been mined and appeared to have high expectations with regard to its ability to establish a large open-pittable resource at Sundance. The major did not get permit approval until July 2009, and drilled only 18 holes before quitting in September even though Rare Element carried on with its Bear Lodge REE drilling into December. Results reported so far are not indicative of a major gold system, and the body language emanating from Newmont is that Sundance is not shaping up to meet its minimum size threshold. This would certainly be the case if Ranta's view that with sufficient drilling Rare Element could put together a 1-2 million ounce low grade open pittable heap leachable gold play is correct. Newmont drilled its 45 degree angled holes on 200 metre fences to intersect inferred vertical structures, but Ranta feels that given that 90% of the property lacks outcrop this large scale drill spacing does not do justice to the project. However, he also concedes that Bear Lodge is much less eroded than Cripple Creek, which means that the high grade feeder zones which make Cripple Creek world-class will be deep and require serious patience and geological sleuthing to find at Bear Lodge. A much better scenario would involve a junior putting a 1-2 million ounce open pit heap leach mine into operation and then fund ongoing exploration from cash flow with the possibility that one year a deep drill hole will hit the mother lode, as happened at Carlin during the eighties. Rare Element management is thus hoping that come June 1, 2010 Newmont will concede that it has not met its commitment and will walk away rather than grind Rare Element for an extension. This would eliminate the option of Newmont of going to 80% after it vests for 65% by completing a positive feasibility study, a deal that really isn't a good one for the junior which would still have to put up 20% of development costs. Only in a truly world-class outcome would this be a good deal. Should Rare Element regain 100% title to the Sundance "property" it would be in a position to subdivide the property by isolating the Bull Hill rare earth portion and treating the gold portion as a separate property. This in turn would set the stage for splitting the junior into two companies, one retaining the rare earth assets and the other the gold asset. So come June 1 the good news will be the bad news that Newmont has dropped its Sundance option, clearing the way for Rare Element to recover market value for its gold potential which at this point has been entirely displaced by the rare earth potential.

Rare Element was recommended a medium priority bottom-fish buy in the $0.30 - $0.49 range on December 24, 2008 and converted to a Spec Cycle Hold 100% on July 13, 2009 after the stock surged in response to the awakening of Rare Earth Mania. Since then the stock has been as high as $4.69 on October 1, 2009 and is currently under pressure due to general market uncertainty. The junior, however, still has only 34.6 million shares fully diluted, and its 100% owned Bear Lodge rare earth project has an implied value of only $119 million. In comparison to other light rare earth dominated deposits such as Bayan Obo in China's Inner Mongolia, the world champion in size terms with TREO grades ranging 2%-6%, Molycorp's Mountain Pass deposit in California with grades in the 10%-15% range, and Lynas Corp's smaller sized but similar grade Mt Weld deposit in Australia, Bear Lodge is on the smallish side, though it does appear to have resource expansion potential. However, if Rare Element can double the FMR oxide resource into the 8-10 million tonne range without sacrificing grade, and establish a recovery process that yields 80%-90% REO recovery without breaking the bank with processing costs, it would end up with an in situ resource with a recoverable gross value of $2 billion using my benchmark prices. Given the looming need to develop a domestic American supply of light rare earths which Mountain Pass may only partly feed by the time it gets back into production, there should be considerable end-user interest in seeing Bear Lodge developed. Add in the possibility that the Chinese rare earth production cost structure will increase as China further curtails inefficient and polluting operations, possibly doubling the light rare earth prices by 2015 when Bear Lodge might hope to be in production, a dream target project value of $500 million for Bear Lodge is plausible. So, subject to dilution risk, bottom-fishers could hope to see the price of Rare Element double or triple from current levels over the next couple years based on Bear Lodge alone. This does not include the possibility that Rare Element may be able to leverage its current strong position to make other significant rare earth related acquisitions at lucrative valuations, or salvage value from the gold potential at Sundance should Newmont decide to drop the option.

On this basis I am maintaining my bottom-fish Spec Cycle Hold 100% recommendation for Rare Element Resources Ltd in anticipation of a stock price in the $7-$10 range later this year, especially if the rare earth space achieves critical mass as I expect it to do during Q2 of 2010.

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