The Rare Earths Junior that Just Got a Contract With the US Defense Logistics Agency

At the end of last month, Texas Rare Earth Resources (OTCMKTS:TRER) was awarded a research contract by the US Defense Logistics Agency’s (DLA) Strategic Materials Division.
Under the terms of the agreement, Texas Rare Earth and its partner K-Technologies will work over the next three months to demonstrate their ability to separate and refine three rare earths products at bench scale. That will include refining yttrium oxide to a minimum of 99.999 percent purity, ytterbium oxide to a minimum of 99.99 percent purity and a third rare earth oxide, which has not been publicly disclosed, to a minimum of 99.99 percent purity.
So far, the company has seen some positive progress with K-Tech’s continuous ion exchange and continuous ion chromatography processes, and the DLA contract no doubt lends more credibility to the companies’ work. Anthony Marchese, chairman of Texas Rare Earth Resources, was able to give more insight into what’s been going on with the company lately.

The importance of technology

Marchese couldn’t say much about Texas Rare Earth’s research agreement with the DLA, but the deal is certainly interesting to say the least. As the company’s release explains, the DLA’s strategic materials division is responsible for “maintaining cognizance of worldwide strategic and critical material’s supply chain” and for “developing mitigation solutions when access to materials are insufficient to provide support for national defense and emergency response.”
“The DLA contract lends a significant amount of credibility to what we’re doing,” Marchese said, agreeing that the deal will help draw more interest to Texas Rare Earth in terms of further partnerships.
“Since the DLA award, we’ve made no secret of the fact that we have been speaking to potential strategic partners for our project,” he added. “And the DLA would clearly benefit them in terms of credibility.”
However, Marchese said that the company won’t be actively looking at toll processing agreements using its process. “Being a toll processor is not that easy. Every deposit has its own unique set of challenges,” he said, explaining that Texas Rare Earth and K-Tech will likely license their technology to other businesses instead.
Certainly, investors will be watching for more news from the companies as their research progresses over the next 90 days.

Tough market

Overall, Marchese isn’t worried about the fact that the company’s share price didn’t respond to news of the DLA contract, citing broader pressure on the resource space. “I think what you’re seeing is not necessarily a reaction to our announcement, but the malaise in the entire resource space,” he said. “I think many participants are just tired of losing money … what people are waiting for is a turn in sentiment in the sector.”
Of course, Molycorp’s (OTCMKTS:MCPIQ) recent application for bankruptcy protection and the shutdown of its Mountain Pass operations in California hasn’t helped matters, and Marchese agreed that those events have definitely hurt investor sentiment in the rare earths sector specifically.
“Molycorp, to their credit, did a great job of selling the company as the US rare earth company,” he explained. “In the minds of most investors, Molycorp is and was the rare earth market. The fact that our project is a heavy rare earth project, and Molycorp’s is a light rare earth project, is absolutely lost on 99 percent of investors.”

Project economics

As with many other rare earths juniors out there, Texas Rare Earth’s Round Top project is much different than Mountain Pass. In addition to being focused on heavy rare earths and not light, Marchese noted that Round Top is a significantly smaller project with economics that make sense at today’s rare earths prices.
“We believe that at current Chinese internal [rare earth] prices, in conjunction with our significant by-product revenue, we would be highly profitable,” he stated. Beyond rare earths, Round Top is set to produce respectable amounts of lithium, scandium, beryllium and uranium. 
Of course, plenty of analysts have pointed out that relying on by-product revenue can be complicated. However, Texas Rare Earth has no qualms about securing contracts for its lithium, scandium and beryllium. Marchese pointed out that the company has already secured an offtake agreement for its uranium with a subsidiary of AREVA (OTCMKTS:ARVCF).
“You can take our uranium announcement as an indication of what our strategy is with our by-product,” Marchese stated. “We view ourselves as a rare earth company first and foremost. Our goal with our by-products is to find offtake agreements with people who know how to sell it or who already have a vested interest in the market.”
Texas Rare Earth’s December 2013 preliminary economic assessment for Round Top considers a 20,000-tonne-per-day heap leach operation with approximate weighted average total rare earths recoveries of 71.5 percent. The mine is to produce an average of 3,325 tonnes of rare earth oxides per year over its 20-year mine life.
Initial capital costs came in at $292.7 million for a pre-tax NPV of $1.47 billion at a 10-percent discount and a pre-tax IRR of 69 percent with a 1.5-year payback period. At the time, the company put breakeven IRR for the project at a 52-percent discount to 2013 rare earths spot prices.
Texas Rare Earth’s share price is currently trading at $0.203. The company has a market cap of $8.38 million and has traded within a 52-week range of $0.16 to $0.44.
 
Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.