The discussion continues around Ucore. Just today @epsteinresearch published an interview with Ken Collison. A few days ago Reed M. Izatt from IBC posted an article on the essential role of REE in the modern military and Steve Mackowski wrote on REE pricing and industry dynamics. This discussion is topical and timely. I look forward to more news from Ucore as they make progress with their pilot plant and potential early-stage production facility.
Since my last article, there has been some discussion on chat.ceo.ca around Ucore and I with that here. @90bigpicture asked why would anyone convert from a non-dilutable royalty to dilutable common equity? In general, I think the answer is that the equity gives a broader exposure than the royalty. In the case of Ucore, the royalty is only based on the "first production client, whereas the equity has expose to all such clients. As I put it in my first article, "Ucore is becoming a multi-engine story". I believe someone else suggested that the mineralization of the Bokan Project was mainly towards DY, which has had large price declines recently. I would point out that MRT is highly selective, which means the company can, to some degree, choose which REE they want to produce regardless of the concentrations of REE in situ. Keen to discuss that further, in case it's too strong language. Finally, Tim Oliver asked about the geology of the deposit. Although it's above my pay grade, I have taken a look at the key reports (here and www.ucore.com/pea/) and describe my impressions below.
Let's start with a few key quotes concerning geology. "Bokan Mountain has few characteristics in common with well studied uranium deposits and mines… The emphasis at Bokan Mountian is on the REE but there are no suitable conceptual models at present which relate in any meaningful way to the mineralization observed on the Bokan Mountain Property." (Page 46-47 of NI 43-101 Report). Well, that's pretty clear. It probably counts as a fatal flaw for some analysts, but not me. I am willing to forgive this lack of direct comparisons because I think a lot of what they are doing has no good comparisons. That said, it does give a good line of questions for management: have you found a better analogue for mineral deposit since the Report in 2011? What are you doing to mitigate risk that you don’t understand the deposit?
Here are some more technical details from the 43-101 Report: "The Dotson Zone is a steeply dipping, tabular zone of numerous veins and narrow veinlets extending from east of the I&L Zone to the shore of Kendrick Bay. The Dotson Zone has a defined strike length of 2140 m, an average width of 50 m and has been traced down dip over a vertical extent of 450 m. On average, the zone strikes 108°, and dips 75° to 85° north." And "The Dotson Zone consists of a network or array of at least 25 sub‐parallel veins. The REE mineralization occurs in individual veins, rarely up to a couple of metres wide and in vein arrays comprised of numerous thin parallel veins over intervals of several metres…. The constituent veins in the Dotson Zone are remarkably planar and show little deviation over tens of metres or more…. All REE‐bearing veins show very sharp, straight and unaltered contacts with the surrounding wall rock."
Translate that geological language into pictures:
And a mine plan:
Good news -- I think I understand this so far. Tension causes hard rock to fracture and minerals form in the gaps. Following this geological model, the mine plan from the PEA seems to make sense: dig holes above and below the veins of mineralization, drill the rock loose, and collect the ore below for processing (blasthole stoping method). Seems relatively straight-forward, but I am somewhat out of depth here.
Apparently "Bokan Mountain lies within the Alexander Terrane… [which] is a composite terrane which does not show any evidence of an early relationship with the western margin but instead, geological data suggest that it originates far from western North America (Laurentia) and was only transported into the Cordilleran realm by later tectonic processes". This leads me to ask the following question: if the surface rock is indeed foreign, then I would expect that the mineralization found at surface would not continue at depth. Drill results since have shown that the mineralization does indeed extend deeply and I wonder what kind of geological story could help explain this?
Another question that occurs to me here: will the mine method be able to capture several veins at a time? Recall that there are a lot of veins (25+) that are each very thin (sub 1-m) and the image of the geological model suggests that they are very close together. If the mine plan takes stopes that are 3.5M wide, then I would hope you get a couple veins in each pull. Recall the earlier comment that the "All REE‐bearing veins show very sharp, straight and unaltered contacts with the surrounding wall rock".
Again, I think there is an interesting line of questions for management here around the mine method and proposed scale of the project. Looking back to 2012, there were 20 and 30 tonne samples minder from the Bokan project for testing. What method was used for that project and would that method be appropriate for an early-stage production facility?
The layout of the mine site proposed in the PEA seems to provide good access points and staging area. I suspect that this mine plan is just one of many options available to management now that MRT is in the mix.
An overhead picture by me with the Dotson Zone (approximately) in orange:
Although the mine layout is subject to change from MRT, I suspect that the proposed flowsheet will largely stay the same. I say this because I believe that MRT is a substitute for Solid Phase Extraction (SPE) at the last stage of processing. There's a quite few things to talk about here.
What happened to SPE? There were past news releases about the breakthroughs associated with SPE (example). These were genuine breakthroughs that earned a lot of attention, but Ucore has apparently stopped working with SPE and shifted to MRT instead. They seem to be relatively similar technologies. Maybe the biggest difference is that SPE is still a science project, whereas MRT is a business line. I would really like to hear Management address this topic in public. I am sure it would be difficult to do so without risking bad blood between Management and others, but I think it is worse to have as unknown or secret part of the company history.
The proposed flowsheet in the PEA seems pretty complicated, but it has some appealing features. I am glad to see X-Ray Technology used for sorting (shout out to Ken Collison for helping make XRT happen here) and curious to learn more about the magnetic separation. In general, I would like Management to describe what aspects of this flowsheet are unique or new, and why they are using them. You may have noticed a theme that Ucore is doing things that don't have direct comparisons and I think Management should own that to their benefit across all aspects of marketing.
I am also curious about how MRT will fit into the flowsheet. Ucore will need to process the ore in some way to get the PLS to put through the MRT plant. I wonder that will look like. Will magnetic seperation and XRT still be in the mix? Again, this leads into a discussion about what a smaller-scale mine could look like. Maybe produce PLS at Bokan, then ship it elsewhere for processing into REE salts? I don't know the options here but would like to know that Management is considering them.
One of the big selling points of MRT, or even SPE, is that it will cause cost savings relative to SX. I am willing to believe that may be the case, but would like to see some evidence to suggest "how much?". For example, I would like to see some comparison of both capital and operating costs under different processing regimes (SX, SPE, MRT). I appreciate that it may be hard to do because it is new technology, but it is important and would be helpful for grounding the ongoing discussion in hard numbers.
The flipside of costs is pricing and this is always a hot topic for REE. I understand that it may be difficult to get a good sense of REE pricing but a few things jump out at me. For one, the PEA states that "…it is expected that the final REO products will be sold within the US." Really? I wonder if the US market is ready for REE primary products. Maybe Jack Lifton's comments that we need to go "from mine to magnet, not mine to metal" will prove prescient here. It is an exciting idea that sells well (apparently even The Donald picked up on it), but I am afraid it has high execution risk. The first one through the wall tends to get bloody, eh? Some further discussion on pricing and evidence of Ucore's ability to market these products is essential going forward.
You could say that Ucore will get a better sense for REE pricing after they operate the MRT pilot plant using PLS from Bokan. Great, I agree. But I would point out that we have been down this road before. There was a pilot plant under construction using SPE in 2013: "The pilot plant, scheduled for Q4 2013, is the final stage of bulk scale testing of the production circuit prior to the release of a Bankable Feasibility Study and the prospective commencement of mine construction." (Source). Again, this isn't a deal-breaker for me but I really need some explanation of what happened with the SPE initiatives to understand the character of Management.
The PEA proposed a timeline to start the Feasibility Study immediately. Well, the FS started in January 2015. And I will point out that they didn’t mention an expected completion date for the FS, which is probably a good thing given how difficult deadlines can be. I have been watching Ucore for a while, but I still get déjà vu with timelines when I look back through their releases over the past years.
If they didn't start the FS for two years, then what have they been doing? Well, they actually address that in the news release that announce the FS. Quoted at length:
The Bokan project was the subject of a Preliminary Economic Assessment (“PEA”) prepared by Tetra Tech of Vancouver and published in Q1 2013 (see Ucore press release dated January 15, 2013). Since then, Ucore has undertaken multiple field and desktop initiatives required to deliver the final FS, as summarized below:
• Bulk Sampling & XRT Testing – Bulk samples totalling 40 tonnes were collected from the Bokan site and upgraded via XRT ore sorting at Tomra Ultrasort’s testing facility located near Hamburg, Germany (see Ucore press release dated June 25, 2013). The resultant upgraded material is being used for final laboratory testing and will be utilized as feedstock to the pilot plant.
• Environmental Testing – Environmental studies designed to provide baseline data required for the permitting process has been underway since 2012. Engineering for permitting was recently completed and is now being incorporated in the Plan of Operations for the proposed mine site.
• Final Resource Definition – A diamond drill program totalling over 4000 meters was completed in the summer of 2014. Assay results for that program are anticipated in the near term and will be incorporated into an updated resource model. The finalized resource calculations, to be prepared by Aurora Geosciences of Juno, Alaska, are anticipated in Q1 2015 and will be utilized in the forthcoming FS.
• Metallurgical Process – Testing on the metallurgical process flow sheet has continued and is currently under analysis by metallurgical staff at Ausenco.
• Separation Process – Ucore has delivered a 99.5% pure heavy rare earth concentrate from Bokan feedstock. The concentrate was produced by IBC Advanced Technologies of American Fork, Utah, utilizing Molecular Recognition Technology (see Ucore press release dated November 12, 2014). The finalization of the separation process continues in early 2015, with the objective of delivering individual high purity rare earth oxides suitable for industrial and technology applications.
This looks like a good list of achievements to me. It shows that Management has addressed some (all?) of the Recommendations from PEA and it shows that they are aware that they may be seen to be falling behind past schedules. I think they are better positioned now than if they had followed the schedule in the PEA, but perceptions are important here. Further, I think the reason that Management are sensitive to this potential issue is that many (all?) of the people associated with the company have been there for a long time. That includes key insiders like Jim Mckenzie (10 years as CEO) and outside analysts (Jack Lifton since 2010). I don't know if Management will be the best choice to actually build the mine, but they are doing a great job advancing the project.
The history of the Ucore share price tells a tough story. The hype of new company pursuing uranium in 2007, the pivot towards REE in 2009, you can even see the spike in October 2012 when they achieved a breakthrough in processing REE with SPE: the stock price ran from a low of 0.28 in July to 0.60 after news of breakthrough. It has traded at 0.28 and that has been high! The price has been flat for several years now, which is actually strong relative to the broader market. The company has survived and gotten stronger. This survival has comes at the cost of some dilution: back in 2012 there were 150M shares out, 10M warrants and 7M options; as of Q3 2015 there were 200M shares out, 55M warrants and options. Warrants are up to 40M in Q3 2015 from 20M at the end of 2014. I would be curious to hear Management's thoughts on different types of financing available now and how they would like to proceed.
The financial statements show that total expenses (G&A) are large and steady, approximately half of total financings in 2014 and 2015. The other half cash flow from financing goes into the properties. Cash flow for the first 9 months in 2014 were as follows: cash from stock 7,878,127; spend on resource (3,671,296); total expenses (3,026,285). Cash flow for first 9 months in 2015: cash from royalty 6,415,800; Purchase of intangible assets (2,185,791); Cash spent on resource property interests and options (1,566,932); total expenses (2,838,987). If I am interpreting that correctly then that may be another fatal flaw for some investors.
The key focus for Ucore recently has been preparing the FS on Bokan Project and launching the MRT pilot plant. The work on Bokan has been light in recent quarters as money has been spent acquiring the MRT rights (intangible assets) instead: "In total, the Company incurred expenditures totalling $1,249,000 on the project during the nine months ended September 30, 2015, including $282,000 in the third quarter". And the heavy lifting on the pilot plant seems to be done by IBC. That leads me to wonder what management has been up to? I see that Management has been using MRT rights to raise money with royalties, but I wonder what else. I hope that Management has been pursuing serious business development activities based on MRT, but I wonder how much they can commit before they have proved the pilot plant. One of the royalty financings in 2015 noted that the first production client is defined as one that provides "gross revenue volume to Ucore exceeding CAD$50 Million per annum". I certainly look forward to further info on who could serve as such a partner and on what timeframe.
My sense of Ucore has long been that something exciting is going to happen here. It can be exhausting waiting for it to happen because the story has both tension and release: The geology of the Bokan Project has no clear analogue amongst other economic REE deposits in the world, but the mine engineering suggests it is straightforward. Processing REE is a huge challenge, but the company has a record of securing new technology to make breakthroughs with REE. It seems like Management pays themselves well, but they have been advancing the project. All of this just reminds me of how much time and money it takes to get ready to even decide whether to build the mine or not! Daunting. The strategic backdrop and state involvement in Ucore is compelling. The potential value from MRT is unknown to me at present. All of these unknowns keep me coming back to the company. I will note that I talked briefly with Byron King in 2015 about the company and said simply "they have a lot of potential". Indeed.
To conclude, here is my best estimate of the company going forward: it's the reverses image of the long-term chart for the Ucore share price. I am only half joking with that. I hope my discussion here is helpful for bringing some attention to the company and stimulating productive discussion. It's my pleasure to practice going through this sort of analysis here in public and would appreciate your comments.
