Penny mining stock holds top REEs deposit

Electric vehicle adoption is pushing up demand for rare earth elements (REEs), according to contributor Mike Kachanovsky. As of now, he says, China controls most of the global supply. However, large deposits are in mining-friendly Quebec. This leads him to conclude that a bargain mining stock could be a powerful Canadian growth stock.

The group of elements known as rare earths is of interest to industry, and humanity at large, because those elements are essential to manufacturing permanent magnets that are required in basically every electric motor produced.

These elements are produced in relatively low tonnages and from very limited sources, with an estimated 90 per cent of the total supply coming from China.

China has implemented policies to clean up its domestic mining sector, shutting down illegal miners and improving its environmental standards. This has resulted in the closure of some mines while reducing output at others.

In the tiny rare earth element (REE) market, even a small disruption in supply can have an immediate impact on prices, thus constraints on mining are now contributing to rising prices for REEs.

Worldwide demand for REEs has been steadily rising as new initiatives encourage the transition to fully electric vehicles from internal combustion engines. For example, Norway has already established a policy that only electric vehicles may be sold in the country by 2025. Many other countries are setting ambitious target levels for electric vehicles in the years ahead.

Electric vehicles require REEs during manufacturing. So, if more electric vehicles will be on the roads in the years ahead, then the production of REEs must also rise to supply this demand. I do not see a lot of media attention on this reality, and in fact this trend may be the early stages of a stealth bull market.

New REE deposits will have to be advanced through to production. However, some very promising discoveries have ultimately succumbed to metallurgical challenges. Despite several years of exploration for REEs by dozens of companies, only a handful of deposits with favourable metallurgy and grade have emerged.

Looking for a bargain basement mining stock?

Commerce Resources Corp. (TSXV-CCE) is one bargain basement stock that has actively pursued a legitimate REE development prospect, and kept up that pursuit even during the lean years for this subsector. Its flagship Ashram project, located in northern Quebec, now stands as one of the top undeveloped REE deposits in the world.

There are several critical factors to suggest that Ashram may be developed into a profitable mine. Strong support at the provincial government level in mining-friendly Quebec has played a role.

Earlier this year, Ressources Qu?(C)bec, a government-sponsored investment fund, bought $1 million worth of Commerce Resources equity in a private deal, working out to 20 million shares. This validates the strength of the project, and also illustrates the desire for mining development in the province.

In addition, a provincial infrastructure initiative is investigating construction of a new road corridor strategically placed to improve access to several undeveloped resource deposits in the district, including Ashram.

For shareholders of Commerce Resources, the completion of a new road could amount to savings of more than $100 million in capital expenditures for mine development. This potential road is very significant, and may assist the company to attract a partner.

Samples suggest healthy recovery

The geology of the deposit is extremely favourable, hosted with carbonatite mineralization that promises the most efficient processing options. Advanced metallurgical testing of sample material has indicated healthy recovery levels for the contained REEs.

Metallurgy is perhaps the most important technical consideration for any aspiring development prospect, and is the issue that has derailed most of the other REE projects earlier in this cycle.

Yet Commerce Resources appears to have demonstrated very appealing recovery efficiency from its deposit, as well as an enormous resource that could sustain mining for decades.

Meanwhile, work has continued to outline key parameters over and above those detailed in a May 2012 preliminary economic assessment (PEA) of the project, including the realization of a "free" fluorite byproduct. This will generate another production stream from mining and contribute to additional sales revenues. The company is also following up on a zone of high-grade niobium at Ashram, which could result in production of yet another high-value metal, improving the mine's economics.

Commerce is currently working on a smaller production scenario focused on a "starter pit" in an area rich with the elements most in demand for magnets.

This would create optimum economics and require lower overall capital spending to build a mine. A preliminary feasibility study (PFS) is in the works, along with pilot plant testing to confirm the metallurgical characteristics of the sample material on a larger scale.

Things move very slowly when a large-scale mine is the objective. Speculators are notoriously focused on the short term, and thus apt to look elsewhere when the hype of any one sector may fade.

Commerce Resources is an extreme value story, since the company has presented a high-profile development candidate, yet its market cap has declined even as Ashram has crept up the value curve. It is a bargain commodity stock that is also a prime Canadian growth stock.

China has proven willing to threaten restrictions on REE exports

A PEA prepared in 2015 estimated the net present value of Ashram at more than $2.3 billion. The market cap for the entire company as it stands today is less than $25 million. Conventional wisdom suggests this discount will give way to a premium market valuation for the company in the future.

I believe the importance of the REEs overall, combined with the potential for a serious supply disruption, will contribute to a rapidly-escalating price window for these elements.

China has already proven that it is willing to threaten restrictions on REE exports as a matter of economic policy, and of course, there is always the potential for production issues to arise at the individual mine level.

With so few development candidates to resolve a serious supply crunch if one comes up, senior development partners are looking closely at Ashram. If the company successfully achieves favourable metallurgy from the pilot plant circuit, then industrial end-users will step up to get a deal done and establish a long-term mine.

Patience is required, but I believe this project will continue to move forward, and some form of supply disruption for REEs is inevitable. When a sense of urgency returns to this subsector, a story like Commerce Resources will be very compelling and the stock is capable of rising sharply higher from its current value range.

Mike Kachanovsky is a freelance writer who specializes in junior mining stocks and also covers technology companies.

This is an edited version of an article that was originally published for subscribers in the November 3, 2017, issue of Investor's Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor's Digest of Canada.

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