UCORE Publishes the Full PEA --An Important Update

Over a month ago, Ucore Rare Metals Inc.(symbol UCU in Canada and UURAF on the pink sheets) reported the result of the preliminary economic assessment (PEA) for its Bokan Mountain property in Alaska.  The PEA showed a net present value for the mine property of $577 million which comes to $3.80 per share.  That is pretty good for a company whose stock is selling for just under 50 cents per share.  In the past few days, UCORE released the full text of the PEA.  It can be seen here.  The PEA is over 200 pages of technical analysis and reports.  Nevertheless, there are a few very important bits of information that need to be kept in mind when considering the results.  These include the following:

1)  The net present value of the mine was calculated using a 10% discount rate.  In today's low interest rate environment, that is a very conservative number.
2)  The net present value of the mine was calculated based upon the average prices for rare earth elements for the last three years.  That includes the big bump in REEs that occured when China moved to limit export of these materials.  While using the average prices over this time is certainly a valid methodology, the large gyrations in REE prices during those years add a bit of uncertainty to the calculation.
3)  The net present value of the mine is calculated without considering the impact of state and federal taxes on the cash flow.  An analysis that includes the potential taxes brings the net present value per share of the mine to below $3.00, but the details of the calculation are not given.  If there are changes to the corporate tax structure (which supposedly both Democrats and Republicans in Washington are seeking), this figure could change in a meaningful way.
4)  The PEA analysis is based upon only a portion of the property.  The so called Dotson zone is included, but the I & L zone is omitted.  While the Dotson zone covers the bulk of the mine area, it may not include the same large percentage of the REE deposits.  Also, the PEA only uses the results of the drilling done on site in 2008 to 2010, but it does not consider the much larger drilling program of 2011.  This last point is extremely important.

When the 2011 drilling program results were released by the company in January of 2012, UCORE said the following about them:

"The 2011 drill program is remarkable for being the most ambitious to date, generating more linear metres of core during one season than in all of the previous drill seasons combined. The sheer size of the 2011 program clearly demonstrates that Ucore is rapidly increasing the scale and intensity of its development activities at Bokan. What’s more, the rare earth grades obtained this year surpass all prior years, with several intercepts ranging from 2-3% TREO."  (Emphasis added)

 

The PEA uses total concentration of REEs of 0.4% as the dividing line for which ore would be economic to process.  In the 2011 drill program, only three holes (or less than 10% of the total) turned up results where the concentration was below 0.4%.  This bodes quite well for the project.

 

UCORE has also made clear that it is working to update the PEA with the results of the 2011 drill program.  Its latest press release say this:

 

"The PEA was prepared based on the Inferred Resource Estimate Technical Report calculated by R.J. Robinson of Aurora Geosciences and filed by the Company on April 21st, 2011. The resource utilized in the PEA omitted the I&L Zone and did not include drilling completed in 2011 with the objective of expanding the size of the resource, and upgrading its status from Inferred to Indicated. The results of this drilling, released by the Company in January of 2012, are currently being modelled by Mr. Robinson, and the Company expects to release the results of that analysis within the next month."

 

So we know that these very good drill results are going to be incorporated into a PEA which already provides great results for UCORE.  Most likely, this will result in a meaningful increase to the net present value of the mine.

 

The Bokan property remains a speculative mining venture.  It may never be built.  Nevertheless, the projected economics of the mine are likely to improve in the near future when the 2011 drill results get incorporated into the PEA.  At that point, UCORE stock is likely to rise to reflect that new value.

 

There is, of course, the other side that needs to be considered.  UCORE management had a very poor track record with regard to meeting promised scheduling for the release of the PEA.  They kept announcing that they expected to release the PEA in a month or two for about a year.  Another such delay by the management would undermine confidence in the validity of any projection of value.  ON the other hand, if the new figures are released by the end of February, they ought to provide quite a large boost to the stock price.

 

DISCLOSURE:  I have been and remain long UCORE stock.