3 Reasons to Buy Ucore Rare Metals Now, Not Later

Please see applicable disclosures

Peter Epstein, CFA, MBA    EpsteinResearch.com  @peterepstein2   epstein.peter4@gmail.com   Linked-In Home Page

Ucore Rare Metals Inc(UCU.V) / (UURAF) has released a plethora of good news since early March, yet the stock price is virtually unchanged, at $0.35. But up from 30% from early May. Intuitively and fundamentally this makes little sense. In an article I wrote on April 22nd, I listed 10 reasons to buy Ucore’s stock. As a reminder for those who read it, the 10 reasons were listed in the final paragraph. This time, spoiler alert be damned, I’m listing the top 3 reasons right here. Rest assured, I still believe in my, “10 compelling reasons to buy” thesis.

Have investors forgotten about the US$145 million AIDEA loan?

The top 3 reasons to buy Ucore stock sooner rather than later are 1) the AIDEA loan of up to US$ 145 million, old news? 2) very significant progress on Ucore’s and technology partner IBC Advanced Technologies’ “IBC” Molecular Recognition Technology, “MRT,” and 3) an unwarranted cheap valuation. Diving right in, lost in the shuffle of the MRT excitement and debate is last year’s news that Ucore obtained what appears to be a pre-approved loan of up to $145 million from an Agency in the AAA-rated State of Alaska. For those skeptical of the State of Alaska’s “AIDEA” willingness to move forward, consider that,

 

“Ucore is pleased to comment on the passage of Senate Bill 99 by a unanimous vote, with all 38 representatives in attendance voting in favor of the bill. SB 99… would authorize the Alaska Industrial Development and Export Authority ‘AIDEA” to issue bonds to finance the infrastructure and construction costs of the Bokan-Dotson Ridge rare earth element project up to a principal amount of US$ 145 million…” 

The key progress made since early March de-risks the Bokan-Dotson Ridge project and the company as a whole. The faster Ucore advances towards pre-construction, the more rapidly the AIDEA loan will be disbursed. The progress of Ucore’s MRT segment could help self-fund the development of Bokan-Dotson. Assuming the AIDEA loan comes through, shareholders’ equity commitment is likely to be a lot smaller than that of peers. To reiterate, the potential $145 million AIDEA loan is quite valuable to shareholders. Other lenders might be interested in co-investing with the State of Alaska. That would suggest the possibility of less equity dilution down the road.

 
Another vote of confidence in MRT
 

Reason # 2 regards MRT news, namely that it, “…successfully separated each of the rare earth elements (“REE’s”) at high purity.” How high? 7 of the 14 reported results came in at 99.9% with the single lowest purity at 99.0%. For skeptics of these lab-scale results, this was no magic trick. This is the culmination of years of hard work, spearheaded by IBC. The following day’s news was highly significant as well. Ucore entered into an agreement with IBC to acquire exclusive rights to IBC’s SuperLig® MRT for rare earth separation, recycling and tailings processing applications.

 

The latest newsworthy event is a vote of confidence in MRT. Ucore entered an agreement with a high net worth U.S. (full disclosure, it wasn’t me!) Investor in which the Investor will pay US$ 4.0 million (approximately C$ 4.9 Million) to Ucore for a royalty on the sale of products and services related to the processing of rare earth elements and other specialty metals utilizing, “MRT.” This deal means that shareholders are not initially diluted and probably never will be (my opinion only). Even though the investment can be converted into common shares, the higher the stock trades, the less likelihood of conversion because a higher share price would presumably mean a successful pilot plant, putting MRT a leap closer to commercialization.

 

An investment at this early stage of MRT’s rare earths development is telling. The high net worth Investor did substantial due diligence, including retaining experts in fields applicable to the separation of rare earth elements. More experts, investors and interested parties are kicking MRT’s tires. In a recent interview of Ucore’s Mark MacDonald, and Reed and Steve Izatt of IBC, the following quote by Steve Izatt is instructive,

 

“We have separated the entire suite of individual rare earths. This offers incontrovertible proof that our MRT process works at lab scale. We have scaled up numerous other projects outside of REEs based on our proprietary SuperLig® products. The proven separation characteristics of MRT, coupled with our actual accomplishments in scaling up similar processes should give investors significant confidence… MRT is supported by world-class science in its development and commercial applications. Both the chemistry and engineering of the MRT processes is well understood. We are very familiar with the key parameters necessary for successful scale-up and commercialization…”

In other words, MRT has been scaled up in many applications, just not in rare earth elements yet. IBC and Ucore have already done the heavy lifting, separating rare earths at high purity and 99% recoveries. The pilot scale project is a stage that IBC experts have been through dozens of times. In my opinion, Ucore’s eventual use of MRT at commercial scale is an exercise in engineering, not contingent on technological advances or chemistry. See full interview here.

 
Is Ucore’s valuation too low?
 

Reason #3 to buy Ucore’s stock is valuation, a topic subject to many opinions. I believe Ucore controls three valuable assets. A highly prospective rare earth deposit, skewed meaningfully towards heavy rare earths, a potentially game-changing separation technology and (in my opinion) the expectation of obtaining the US$ 145 million AIDEA loan based on the unanimous vote by the Alaskan Senate. In Ucore, the whole is worth considerably more than the sum of its parts. Assuming that Ucore’s development of Bokan-Dotson is reasonably valued at C$65 million, i.e. the market cap of the company, then investors get a free option on MRT.

 

Why should one assume that the valuation of Bokan-Dotson is fair? Look no further than the proposed AIDEA loan. As far as I know, no other emerging rare earths company has that magnitude of potential support. Again the whole is worth more than the sum of its parts. Therefore, the assumption that investors get a free option on MRT is not an aggressive one. The question of how to value MRT is the most subjective of all. One could point to the high net worth Investor’s royalty deal as an indication. C$4.9 million for a royalty in a single, “Tier 1” MRT project. Not multiple projects, not exclusive rights in a jurisdiction(s), one MRT project. Due to my bullishness on MRT, I think that the high net worth Investor is getting a good deal, and won’t convert into common shares of Ucore. However, Ucore is not giving away all that much if MRT scales up to become a viable solution to rare earth peers and in hundreds or even thousands of tailings and remediation applications. The Net Present Value, “NPV” of steady, recurring income from royalties and/or leasing MRT could be quite large over time. That’s why I mentioned the NPV.

 
Conclusion
 

There are comparable companies much, more advanced than Ucore, that have steady, recurring revenues, one is Franco-Nevada, (FNY) and another is Silver Wheaton (SLV). These two royalty / streaming companies trade at 14x-16x trailing 12 month revenues. By no means do I forecast or expect MRT to command that type of valuation, I mention this simply because investors love steady and recurring revenues. The quicker Ucore / IBC can move through the pilot plant stage and construction of their first commercial scale rare earths separation facility, (not a sure thing) the more self-funding of Bokan-Dotson and an increasing understanding of how to value MRT on its own. I submit that shareholders and prospective investors are getting a free option on MRT, an option with several years until expiry, a valuable option.

 
 

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