Mike Niehuser's  Instablog

While Geologix has been recognized by investors and analysts for successfully advancing a low-cost gold-copper project in Mexico, this included exploration on only 10% of the property under its control. The project has a mine life of about 18 years, and economics are significantly enhanced by heap-leaching gold oxides in the early years. We believed that with oxides typically located near the surface, the remaining 90% of the property provided the potential opportunity for additional ore to extend the length of heap-leach operations. While the airborne geophysical survey has provided a number of targets which we believe may lead to fully capturing the potential of the Tepal project, successful location of other resources may boost economics without significant reshaping of the current development plan. While still early in its understanding, the geophysical anomaly outlined to the north of Geologix's resource, referred to as "Target area #1," has the potential of leading to a significant increase and revision of Geologix's plan to develop a mine at Tepal.

The anomaly referred to as "Target area #1" is roughly three by thee kilometers in size and could possibly contain the area including Geologix's resources in the North, South and Tizate zones. Management believes the anomaly has "a textbook geophysical signature for porphyry deposits." Porphyry deposits are significant as they may contain gold and silver in very large amounts, disseminated over large areas, which lead to large long-lived mining operations. The anomaly has a geophysical signature of elevated magnetic, cored by a magnetic low where a potassic signature has replaced the magnetic low. As outcropping is scarce the potential for mineralization at "Target area #1" was likely the reason for this area to have gone unnoticed. Geologix explorationists have already completed a soil sampling program at "Target area #1" taking 220 samples on a grid with 100 by 200 meter spacing. Initial geochemical results indicate gold, copper, silver and molybdenum which are also characteristic of porphyry deposits.

It is important to remember that while interesting; until "Target area #1" is drilled the potential for mineralization is speculative. Even if mineralized there remains a significant amount of work and cost required to advance this area as a new or additional project with current activities at Tepal. On the other hand, as porphyry deposits containing mineralization may be widely disseminated, early exploratory drill holes may provide an early indication of the area's potential. Given the size and characteristics of the anomaly, if drilling is successful in encountering significant mineralization, "Target area #1" may have the potential to lead to a company making resource on its own, which exceeds our earlier optimism about additional gold oxide ore for repayment of capital boosting economics early in the Tepal project's mine life.

Geologix has recently encountered additional positive drill results around the North, South and Tizate zones and is expected to update a resource estimate in the coming weeks, and a Pre-feasibility Study by the end of the second quarter. These scheduled initiatives with any additional upside from exploration following the completion of the airborne geophysical survey should be positively received by investors.

Disclosure: I am long GXEXF.PK.

1. 20 holes completed (2,061 meters) of 6,000 meter drill program
2. Nine of 13 planned trenches completed
3. Down-hole geophysical surveys completed on 16 drill holes

Namibia Rare Earths has selected Area 4 as its priority area of interest based on results from an earlier initial 7,500 meter drill reconnaissance program. The current drill program is intended to lead to establishing an initial resource to a depth of about 75 meters. Additional drilling will step back in order to drill below the identified mineralization to a depth of 100 or 150 vertical meters. In addition, they may also test the ends of the targeted resource for horizontal expansion along strike.

Looking beyond a potential resource in Area 4, mineralization appears traceable by geophysical surveys which detect structures which may have been the conduit for fluids. Namibia Rare Earths has recently completed 100 line kilometers of induced polarization geophysical surveys extending several kilometers along strike to the east of Area 4. They have also completed a pole-dipole array survey to locate additional drill targets between drill fences in the area adjacent along strike from Area 4. This should provide additional drill targets following completion of the resource drilling at Area 4 with the potential of extending the 650 meter area of interest an additional kilometer to the east. While this is ongoing, Namibia Rare Earths will be targeting sampling and mapping programs within the larger area covered by the 100 line kilometers of induced polarization geophysical surveying to the east, for further drilling with the potential for further identification of mineralization, and understanding how mineralization may have occurred.

Investors interested in Namibia Rare Earths should look for consistency of heavy rare earth enrichment, further mineralization encountered at depth and along strike, and information relating to possible extensions of mineralization regionally to the east. It is important that Namibia Rare Earths complete a resource at Lofdal currently scheduled by the third quarter of 2012, that the resource has a competitive mix of heavy rare earths, and that reconnaissance exploration to the east (along with drilling at depth and along strike at Area 4) suggests the opportunity for expansion of a potential resource to add scale.

We anticipate that the establishment of a resource will be a key event in forwarding Area 4 at Lofdal into a competitive position among a limited number of rare earth projects with a NI 43-101 compliant resource. At that point investors will be looking at the content level of heavy rare earths and tonnage that may support positive economics necessary for development. In addition to expanding a potential resource, Namibia Rare Earths will continue with ongoing metallurgical work to support a potential Preliminary Economic Assessment. Given the early stage of work at Lofdal, we anticipate that Namibia Rare Earths will be on the radar for investors interested in rare earths, and compare favorably for its distribution of heavy rare earths with the potential for resource expansion.

Comments on the Molycorp Earnings Release of Rare Earth Prices

We listened in on the Molycorp, Inc.'s (MCP) fourth quarter earnings conference call. While we were impressed with the progress Molycorp has made, we were somewhat surprised with the subsequent negative response by analysts and the decline in the company's stock price. The concerns appear to be concentrated around management comments about increasing costs and general concerns from potential over supply and falling prices of certain light rare earths, namely lanthanum and cerium. While concerns over costs may have been a surprise, the importance of these two light rare earths should come as no surprise with the potential near term impact by successful completion of Molycorp's Phase I at its Mountain Pass project in California. According to the U.S. Department of Energy Critical Minerals Strategy December 2011, potential additional supply of lanthanum or cerium might impact prices. As the addition of new supply from Molycorp's Mountain Pass Phase I is expected to exceed demand in the near term, some reduction in these prices should come as no surprise.

While the direction of costs and certain light rare earth prices drive analyst sentiment, there appears to be a disconnect in recognizing Molycorp's unique position in the rare earth market as the sole producer of rare earth elements outside of China. In addition, Molycorp reported net income of $117.5 million or $1.27 per diluted share in 2011. Also, Molycorp reported that completion of its Phase I at Mountain Pass is expected to commence production in the third quarter, about three months ahead of schedule. They produced a total of nearly 7,000 metric tons of rare earth oxide products and metals in 2011. They expect to increase production to 8,000 to 10,000 metric tons in 2012, and at a run rate of 19,050 metric tons by the end of the third quarter. As of the conference call, Molycorp reported contracting the sale of 78% of production from Phase I.

Twenty percent of total production is included within the 78% contracted to be used internally for its proprietary XSORBX drinking water purification product. Most interesting to us is that Molycorp's sold about 55 metric tons XSORBX in 2011, with target sales of 1,000 metric tons in 2012, nearly a twenty factor increase. While it is not clear to us how much cerium is required for this product, apparently 20% of total production of rare earth elements at Mountain Pass would support this target. Earlier comments by Molycorp suggest that if introduction of XSORBX is successful, Molycorp may use all the cerium it can produce. This would imply that there would be no cerium available for global demand from Mountain Pass. This vertical integration should provide grist for potential revenues and margin expansion in addition to other initiatives to diversify sources of revenues.

There appears to be a wide range of opinion on Molycorp. It would appear to us that they have established a significant platform to generate profits. In addition, it would appear that the same challenges faced by Molycorp are common with its competitors who may be years away from production. Considering the impact of declining light rare earth prices, the potential risk that many of these projects may never go into production bodes well for stabilization of rare earth prices. From our perspective, Molycorp looks to have good potential of establishing a near monopoly being one of the few rare earth producers outside of China. Overall, with Molycorp's Phase I coming on-line we suspect that lower light rare earth prices may create additional challenges for the bankability of light rare earth dependent projects. This in our opinion may sustain uncertainty for the rare earth industry, with exception to heavy rare earths, which will become increasingly of interest. As we believe Namibia Rare Earths to have the potential of establishing one of the most significant new heavy rare earth resources in 2012, we find both Namibia Rare Earths and Molycorp attractive at current valuations.

Disclosure: I am long MCP.

Alexco completed 6,888 meters of drilling in 25 drill holes on the Bermingham target in 2011. They encountered broad zones of silver mineralization typically three to 10 ounces per ton silver over four to 26 meters thick. This is over a 400 meter strike length to a depth of 350 meters in two fault segments but still open down plunge and along strike. Wider intercepts included K-11-0388 intersecting a 26.3 meter true width interval averaging 158 g/t silver (4.89 ounces per ton), which included a higher grade silver 0.50 meter interval grading 774 g/t silver (22.58 ounces per ton), and K-11-0389 with a 37.8 meter true width intercept grading 64 g/t silver (1.86 ounces per ton). Highest grade drill intercepts include K-11-0392 with 10.4 meters grading 363 g/t silver (10.6 ounces per ton) including a 1.88 meter intercept grading 1,534 g/t silver (47.65 ounces per ton). These results follow a release on December 8, 2011, with highlights including K-11-0372 with a 1.0 meter true width interval grading 4,839.9 g/t silver (141.16 ounces per ton).

Source: Author
Management sees primary silver mineralization at Bermingham to be similar with higher levels of mineralization at Hector-Calumet with the potential to go deeper. Bermingham is located adjacent to the Hector-Calumet roughly 1.5 kilometers along strike. Given the complex structural aspects of faulting at Keno Hill, it is unlikely that the mineralization is continuous between Bermingham and Hector-Calumet, but the similarities suggest the potential for defining a significant resource, which may become apparent only through drilling or production.

The release of drill results from Bermingham follows the release of final drill results on the Flame & Moth prospect on February 14, 2012. Alexco anticipates an initial resource estimate on both of these prospects in the second quarter of 2012. Both of these projects, characteristic with other mines or resources at Keno Hill, have among the highest grades of silver in the world. It is surprisingly a challenge for companies with outstanding grades to gain recognition among investors without a comparable project. While sometimes difficult to locate, we find it interesting that Alexco has two competitive world-class prospects in Flame & Moth and Bermingham, located on its property within trucking district from its new mill at Keno Hill. In addition, we find it interesting that both of the crossections and map of drill holes look surprisingly similar, with a plethora of widely spaced high grade silver intercepts.

While both the Bermingham and the Flame & Moth prospects at this early stage appear to be highly prospective, we anticipate that development at the Flame & Moth will accelerate ahead of Bermingham for logistical reasons. The Flame & Moth prospect is located adjacent to and below the operating Keno Hill mill. It is difficult to locate a potential resource so well and serendipitously located to a new mill. In addition, mineralization is open along strike, at depth, and up-plunge which may allow locating a resource and mine portal even closer to the mill. In addition to mineralization at Flame & Moth being located closer to the surface relative to Bermingham, with substantial infrastructure in the vicinity of the Keno Hill mill, there is greater flexibility of inititiating an aggressive drill program at Flame & Moth, which could lead to an early update of a potential initial resource and mine decision. We anticipate that Alexco will provide additional information on exploration at Keno Hill in the coming weeks.

Disclosure: I am long AXU.