Eco Investor June 2011

Micro Cap Companies

Three Rare Earth And Lithium Explorers

The boom in rare earths and lithium continues with three IPOs, two of which have already been successful.

Rare earths explorer Kimberley Rare Earths (ASX: KRE) and rare earths and lithium explorer Lithex Resources (ASX: LTX) listed on the ASX on 18 May and 17 May respectively, while rare earth and rare metals investor Strategic Elements (ASX: SOR) is aiming for a 15 July listing.

Demand for Kimberley Rare Earths’ offering was strong enough that the company issued a supplementary prospectus to increase the amount it was seeking from $14.3 million to $18.2 million. It raised the full amount. The issue price was 20 cents.

A less ambitious Lithex Resources offered 10 million shares at 20 cents to raise $2 million and oversubscriptions for another $2 million to bring the total to $4 million, and it too raised it all saying its offer was “heavily oversubscribed”.

No doubt Strategic Elements is hoping the market’s keenness keeps up long enough for it to raise $1 million at 20 cents a share and oversubscriptions for another $3 million, to give it $4 million of new capital.

The share prices have also held up, though not strongly and there have been no big stag profits. Kimberley Rare Earths fell to 17.5 cents and reached 22.5 cents but is back to around 20 cents. Shares in Lithex Resources fell to 18 cents and reached 22 cents, and are also back around 20 cents. Perhaps any excess demand was cleverly soaked up by the oversubscriptions?

Nonetheless, the two IPOs have been successful both in the capital raised and their share prices, and the third IPO must be hopeful. So what are the companies up to?

Kimberley Rare Earths
Kimberley Rare Earths has been spun out of gold explorer Navigator Resources with an initial 25 per cent of Navigator’s Cummins Range rare earths project in the Kimberley region of WA.

The company can increase this to 55 per cent by sole funding $10 million of exploration over four years; and reach up to 80 per cent by producing a Bankable Feasibility Study. With $18.3 million of new cash, it should have no difficulty finding the $10 million.

The company says its board has significant experience in exploration, mining, mineral processing, commodities marketing and finance, and is putting together an executive team with experience to develop the Cummins Range Project.

The tenements, 130 kilometres southwest of Halls Creek, cover 48.5 square kilometres, and contain a near-surface resource with a low waste to ore ratio. Navigator completed an aeromagnetic survey and drilling in 2007. These gave a JORC Compliant Inferred Mineral Resource estimate for total rare earth oxides (TREO) including yttrium at three cut off grades.

At 3 per cent the TREO is 0.32 million tonnes, at 2 per cent 1.09 million tonnes and at 1 per cent 4.17 million tonnes.

The deposit is up to 50 metres thick and has significant uranium, niobium, tantalum and phosphate as well as thorium over a 500 metre x 400 metre area. At over 3 per cent REO the grade is said to be high, and surrounded by “a halo of lower grade (1 per cent-2 per cent REO) material”.

“The deposit is similar in style to the Central Lanthanide Deposit at Mt Weld (WA) and has a similar ratio of light rare earth metals,” says the company. It seems there is no shortage of companies that like to be compared to Lynas Corporation.

See larger image

The prospectus says “The resource status of the Project meets the criteria for inclusion on the Bloomberg Rare Earth Mineral Resources Index (BNREMRS:IND) (Index) and Navigator has been included on that Index since its launch in December 2010. The Board expects that KRE would replace Navigator on that Index post listing.”

The independent geologist, SRK Consulting, is quoted as saying “there is considerable potential to extend the currently known resource and to identify additional mineralisation”.

However one problem with the prospectus is that it is hard to find exactly which light rare earths the project has or is looking for. This information would be useful in knowing what purposes the rare earths could be put to.

The prospectus says “Cummins Range is considered comparable in style to the Mt Weld deposit in WA, containing a similar mix of REE and low thorium levels (Sanders, 2008).”

An oblique passing references is made to “The drilling delineated a zone within the centre of the carbonatite, which has a high REE content, particularly europium (Richards, 1984).”

And there is chart with a note that mentions yttrium, a mention of scandium, and another note saying “TREO = Total rare earth oxides including yttrium; LREO = Light REO (La-Nd); MREO = Middle REO (Sm-Dy); HREO = Heavy REO (Ho-Lu)”. This would seem to indicate Lanthanum, Neodymium, Samarium, Dysprosium, Holmium and Lutetium.

Fortunately, Eco Investor has also previously reported (Feb 2011 Edition) that Navigator Resources was prospective for “Yttrium, Lanthanum, Neodymium, Samarium, Dysprosium, Holmium, Lutetium”.

With a four year exploration timetable there is plenty of time to find out what Kimberley finds. Meanwhile, Kimberley Rare Earths is a speculative investment with a promising project but a long way to go to reach production.

Lithex Resources
Lithex Resources is an early stage exploration company, but its interest is not confined to lithium and rare earths as it is also keen on tantalum, tin and potassium, which are prospective in its projects. Its aim is to build a “rare metals” business.

The company has three large strategic tenements in the East Pilbara, Gascoyne, and East Kimberley regions of WA.

The location of Lithex Resourcesí projects.

In the Pilbara the Moolyella, Shaw River and Pilgangoora projects are between Marble Bar and Port Hedland.

Lithex acquired 90 per cent interests in the Pilbara assets from Montezuma Mining for 1.525 million shares. The projects are part of an area that for nearly 100 years was mined for tin with secondary tantalum and niobium. Operations ceased 25 years ago due to weak demand and prices.

Lithex will use modern techniques to explore the abandoned fields. Project evaluation is about to commence with mapping and sampling of the overburden, tailings dumps, un-mined leads and hard rocks.

Chairman Malcolm Carson says “Lithex’s projects are well placed to move from exploration to development and to achieve an early cash flow which places the Company in a strong position to take advantage of the demand and high prices for these rare minerals.”

The lithium potential is west of Marble Bar in tenements with potential to also contain tin, tantalum, and rare earths. These are near the Wodgina tin and tantalum mine operated by Talison Minerals.

In the Gascoyne, the Arthur River project is 250 kilometres east of Carnarvon in a region known to contain rare metals. Lithex acquired 100 per cent of the Arthur River Project from Hazelwood Resources for 2 million shares and 1 million options, giving Hazelwood 4.6 per cent of Lithex.

A geologist’s report says it is very significant for lithium, rubidium, tin, cerium, and uranium, and significant for niobium, thorium and cesium .

The tenement is near the niobium mine operated by Tantalum Australia. Tantalum occurs naturally with niobium, and is used in computers and mobile phones and in gas turbine blades that operate at very high temperatures.

Mineralization sample at Lithex Resourcesí Arthur River project.

Lithex has also just completed the acquisition of 90 per cent interests in tenements in the east Kimberley that give it the right to explore and mine for tin, tantalum and lithium. Consideration for the tenements was $100,000, 2.3 million shares and 2.5 million options to DCL, plus shares to other parties.

Overall, Lithex has many exploration options and it remains to be seen if and how important lithium and rare earths become for its business. From that point of view it is a company to keep an eye on.

Strategic Elements
Strategic Elements is an investment company that will use the up to $4 million it raises to invest in a small portfolio of companies that are targeting large scale rare earths and rare metal projects.

If successful the company will be the only ASX listed rare earths Pooled Development Fund. The PDF structure means that shareholders pay no tax on capital gains or dividends.

The PDF already has two investments: Strategic Materials Pty Ltd and Australian Advanced Materials Pty Ltd, both 100 per cent owned.

Strategic Materials has five permits. It is an early rare earths mover in New Zealand where its tenements on the South Island cover 900 square kilometres. It has a tenement in Queensland and in New South Wales, and has applied for one in Western Australia.

Strategic Materialsí projects and mineral exploration targets.

The company is prioritizing projects that target the “heavy” rare earths as it says this sector will provide more sustainable upside, and it has a team of technical advisors with experience in rare earths geology and rare metals and mineral exploration.

The locations of Strategic Materialsí projects.

Australian Advanced Materials has analyzed 10 years worth of Australian rare earths R&D, and “is using this proprietary knowledge base to develop technology transfer and licensing opportunities”. The company’s strategy is to focus on licensing intellectual property related to the spectral, electronic or magnetic properties of rare earth elements.

Shareholder value will be created through selling part or all of Australian Advanced Materials, or through the distribution of licensing royalties.

Strategic Elements already has $2.3 million of cash, so if it raises $1 million it will have $3.3 million and if it raises the full $4 million it will have $6.3 million.

Between $1 million and $1.75 million will be invested in Strategic Materials and between $0.32 million and $0.83 million in Australian Advanced Materials, leaving between $0.28 million and $1.8 million for other investments.

Further capital can be had through an agreement with New York based institutional investor Bergen Global Opportunity Fund II, under which Bergen Global will be offered a right of first refusal to invest further equity in Strategic Elements, thus increasing the company’s ability to invest in other companies.

Strategic Elements’ strategy is to be an early investor in small and medium companies and to assist them with capital, technical expertise and alliances with other industry players.

If the IPO, which is expected to close on 29 June, is successful, Strategic Elements will be a small but focused investment company with two investments and capital to make a small number of further investments. The portfolio is early stage, but each company gives it another chance to achieve success.

Like Kimberley Rare Earths and Lithex Resources, Strategic Elements is a speculative, high risk, long term investment.





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