Tuesday, November 22, 2011

Quest Rare Minerals (QRM) Goes Heavy Into HREEs

It's time to check out a rare earth stock.  Quest Rare Minerals (QRM) mines heavy rare earths in Canada.  They were formerly known as Quest Uranium (QUC) until they rebranded themselves for the rare earths sector.  The rebranding made some kind of sense in that Quest was originally spun off from Freewest Resources Canada (which in turn became part of Cliffs Natural Resources) so the parent company could focus on finding precious and base metals.  Quest inherited Freewest's uranium exploration projects in 2008.  Let's consider how they performed before they switched gears to hunt REEs.

Net Income (from annual reports):
2007:  ($23.9K)
2008:  ($419K)
2009:  ($1.62M)
2010:  ($4.6M)
Nine months ended July 31, 2011: ($9.5M)

This company excels at losing money.  Maybe that's what prompted them to switch from uranium to rare earths.  Maybe they realized their rare earth deposits were more valuable than their uranium.  Maybe they got caught up in all of the excitement generated these past few years over China's export quotas on REEs.  I can't read management's minds, but I can read their financial statements and pitchbooks

Their October 2011 pitchbook is the one I decided to mark up with notes.  Pages 7-14 have a lot to say about the global rare earths market and nothing to say about the company.  Page 15 reveals that the entire Strange Lake deposit is far enough north on the Quebec-Labrador border that inclement weather may close off access during winter months.  Since I've never lived that far up north, maybe a local could tell me how long roads are closed due to snowdrifts.  Page 17 indicates that the Main Zone of their historical discoveries is over 2.5km from the nearest body of water (Lac Brisson) at its closest point.  Water for leaching operations must be pumped that distance, leading to higher production costs for any producer who wants to join the party.  The newly discovered B-Zone is much closer to the lake, so perhaps extraction costs will prove to be lower there.  Page 19 indicates a rudimentary road network runs through the B-Zone property.  That's potentially good news if it can handle daily truck volume, although the sloped elevation and lack of nearby ground cover make me wonder about the effects of erosion.  Page 25 has a bullet referencing a proposed air strip and a potential access road; it's easy to read between the lines to determine that logistical access from the outside world to the entire deposit is extremely poor.  A passing mention of Plan Nord does not indicate whether the Quebec government will spend money to improve infrastructure in the Strange Lake area. 

Quest should consider emphasizing its LREE deposits as much as it touts its HREE deposits.  If the LREE mineralization is closer to the surface then the HREE, as some of the data indicates, it will be extracted first and thus have a more immediate impact on Quest's bottom line.  Hey, Quest, investors will want to see some progress on that bottom line at some point. 

In fairness, Quest has always been an exploration company.  It does not extract or refine ore but must have drill results of sufficiently heavy grades to convince larger partners to pay for working interests in its properties.  Only recently has Quest discovered such promising deposits in the B-Zone.  The next step is for Quest to convince larger miners to sign up for development. 

Full disclosure:  No position in QRM (or other companies mentioned) at this time.