Pele Mountain Resources (TSX Venture: GEM) and its Eco Ridge Mine project, which hosts a large, uranium resource, provides investors with excellent leverage to uranium.
Not surprisingly, Pele's 5-year trend correlates closely to the spot uranium price which, in 2007, reached as high as $138 with Pele stock trading as high as $1.50 per share. Subsequently, when the uranium price dropped to around $40 per pound, Pele's share price also declined dramatically, ultimately falling to less than ten cents.
After forming a bottom around $40 per pound over the last two years, the uranium price has ratcheted higher in recent months. This price increase is now accelerating, with last week's closing of $57.50 per pound marking its highest level since mid-2008. Likewise, Pele's share price has also increased during this period, roughly doubling in the last two months.
As I've reported previously, Pele shares are also supported by current strength in the market for Rare Earth Elements (REE), and the quest for stable long-term supplies. Pele's Eco Ridge deposit hosts the full suite of REE, including the highly-valued "heavy" REE, along with uranium. An updated NI 43-101 resource estimate including REE at Eco Ridge is expected prior to year-end.
We view Pele shares as a timely speculative opportunity providing excellent leverage to the rising uranium price along with significant exposure to strategically critical REE. The recent increase in Pele's trading volume and share price suggests that considerable new interest is building for its uranium and REE project at Eco Ridge.
Overview
The Outlook for Uranium and REE
Uranium spot prices have risen over 20% since July. Much of this uptrend occurred during the past month as price levels of U3O8 increased $5.50 per pound last week to $57.50 per pound which is the highest level reported since November 2008.
On the demand side, many countries including China, India, Russia, and Japan have publicly committed to the construction of nuclear reactors over the next decade. The list of countries embracing nuclear power is increasing as the global nuclear renaissance takes hold. Large uranium deposits around the world, like Pele Mountain's Eco Ridge Mine project are the focus of increasing attention from countries striving to secure long term reliable new sources of fuel to sustain their nuclear new build programs. For example, France and China recently negotiated a long-term, nuclear energy trade agreement covering everything from constructing reactors to recycling fuel. Japan has already coordinated its nuclear power industry under an association named JINED. This group, comprised of Toshiba, Hitachi, Mitsubishi, nine nuclear utilities (including TEPCO) and the Innovation Network Corporation of Japan, is engaged in an effort to supply emerging markets with Japanese reactors, technology and experience. Germany is currently seeking to extend the operating life-time of its 17 reactors by an additional 12 years which, alone, has the potential of creating a demand for another 100 million pounds of uranium consumption.
Supply-side constraints are becoming more frequent and pronounced. The Megatons to Megawatts deal with Russia to down-blend its weapons-grade uranium for use as nuclear fuel ends in 2012. Production targets were missed by major uranium producers this year, most notably by Australia's ERA, which entered the spot market to buy uranium to offset its production shortfall. In Canada, Cameco, which produces over 18 million pounds of uranium annually from its MacArthur River and Key Lake mines, was threatened with a potential labour strike and their giant Cigar Lake joint venture with Areva is still years away from a possible start date. Suppliers expect prices to continue climbing and thus, are under no pressure to sell. Therefore, spot uranium supplies available for sale are extremely thin.
In the rare earth elements markets, concerns are rising around the issues of sustainable supply and skyrocketing price levels as a result of recent extraordinary export restrictions imposed by China, which produces about 97 percent of the global supply. There are going to be many challenges to overcome before new supplies, outside of China, can come to market, including enormous costs and technological complexities relating to REE metallurgy and refining.
Yet, Molycorp's President, Mark Smith, said, in an October 28 interview, "I don't believe there is a bubble. These prices are absolutely sustainable and that's really based upon the very simple facts of supply and demand….The Chinese are only exporting 30,000 tons of material to the rest of the world right now and the rest of the world needs 50,000 tons of this material a year." Said Smith, "We don't see the fundamentals of this changing anytime in the near future. The demand is like I've never seen it in 25 years in this business."
Pele Mountain Resources
On September 28, Pele Mountain announced that based on the production rate in its NI 43-101 Scoping Study, along with assays on 30 drill holes and recovery data from leach testing at SGS Canada, its Eco Ridge Mine leach solutions could contain up to 218,000 kilograms of recoverable total Rare Earth Oxides ("TREO") annually, in addition to 826,000 pounds of uranium oxide. These TREO would contain about 50% heavy REE plus yttrium, which are among the most valuable REE because they are in very short supply around the world today. Another advantage of Pele's planned mining and processing designs is that the REE at Eco Ridge can be available in the uranium leach solutions at no extra mining or milling costs and that Elliot Lake is the only mining camp in Canada where chemical extraction of REE has been commercially successful in the past. In fact, Elliot Lake was historically the most important source of heavy REE in North America.
Given the rapidly increasing global demand for uranium and REE and the world class size of Pele Mountain's Eco Ridge Mine deposit, it makes sense for downstream users to seek out a partner such as Pele Mountain in order to secure long-term access to these strategic metals. Likewise, it could be beneficial to Pele Mountain to align itself with a partner that could facilitate participation in the value-added production chain.
Bottom Line
Pele Mountain Resources is a timely, speculative opportunity that can provide investors with leverage to the rising prices of uranium and exposure to the strategically critical REE in a stable and mining-friendly jurisdiction. We have every confidence in the excellent management skills of this company and that the Eco Ridge Mine uranium and rare earth elements deposit can be brought into production within a reasonable time frame. We view Pele Mountain Resources as owning the right commodities in the right place at the right time.
Mark Weaver, of MoneyinMetals.com, is an independent analyst working in association with Jay Taylor of Taylor Hard Money Advisors. Mark Weaver began coverage on Pele Mountain Resources in October 2010, when its stock was trading in the market at $0.17.
Source: Pele Mountain Resources Inc.