Jacob Securities' Report on Rare Earth Elements

JACOB SECURITIES INC.
EQUITY RESEARCH
EQUITY RESEARCH

Luisa Moreno, Ph.D, Analyst
lmoreno@jacobsecurities.com
+1 (416)866-8380

June 8th, 2011

Rare Earth Elements – Our Top picks Stock Rating: SPECULATIVE BUY
Risk Rating: High

The Tight Race to the Finish Line

Jacob Securities Inc. (―Jacob Securities‖) does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

For analyst certification and other important disclosures, refer to the Disclosure Section, at the end of this report

Jacob Securities Inc., 199 Bay Street, Suite 2901, Toronto, ON M5L 1G1 +1-416-866-8300 www.jacobsecurities.com

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June 8th, 2011 EQUITY RESEARCH
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Contents

Investment Summary .............................................................................................................................................................. 3
Valuation of Rare Earth Stocks ............................................................................................................................................... 4
Rare Earth Market Overview ................................................................................................................................................... 7
Summary of Target Prices and Recommendations .............................................................................................................. 11
Capital Cost Analysis ............................................................................................................................................................ 14
Cost Analysis......................................................................................................................................................................... 15
Product Equivalent Analysis .................................................................................................................................................. 16
Rare Earth Companies .......................................................................................................................................................... 18
Matamec………………………………………………………………………..……………………………………………. 19

Rare Element Resources…………………………………………………………………………………..………………. 30

Ucore………………….…………………………………………………………………………………….…………………39

Frontier…………………………………………………………………………………………………………………..…… 50

Avalon……………………………………………………………………………………………………………..…………. 62

Mergers and Acquisitions ...................................................................................................................................................... 76
Rare Earth Elements Investment Risk .................................................................................................................................. 77
Acronyms .............................................................................................................................................................................. 78
Important Disclosures ........................................................................................................................................................... 80

Jacob Securities Inc., 199 Bay Street, Suite 2901, Toronto, ON M5L 1G1 +1-416-866-8300 www.jacobsecurities.com Page 2

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Investment Summary

The Tight Race to the Finish Line

 Rare earths are in increasing demand by many of the highest-growth sectors of the world
economy. At the same time, supply is being increasingly constrained as China, the
dominant global supplier (>95%), dramatically decreased exports, citing domestic needs
and environmental concerns.

 China decreased H1 2011 exports quotas by 35%, compared to H1 2010. However,
The REE market is import numbers from Japan and other countries, suggest that China‘s export quotas are
highly constrained and
prices have increased not being adhered to and instead they are much higher than what was set by the Chinese
by more than 100% this authorities. We expect China to continue to enforce its restrictive rare earths export
year. policies.

 It is expected that as China tightens environmental regulations, operating costs will likely
rise, leading to higher rare earth oxide (REO) prices. In fact, Chinese domestic prices
have increased significantly in the last few months and are approaching international
market prices. International rare earth prices have increased by more than 100% this
year; however, we anticipate that prices will fall when the first rare earth miners outside
China initiate production. Lanthanum and cerium, the two most common rare earth
elements (REE) have had a much sharper price increase compared to the critical
materials (neodymium, dysprosium, europium, terbium, and yttrium). We estimate that the
international prices of these two elements will fall more than 80% in the next five years. In
contrast, we expect the dysprosium real price to continue to increase and stay above
current prices in the long term.

 Rare earth elements have been declared critical materials for the clean energy industry
Our Top Picks include: and essential for U.S. and international security. The U.S. Government has been active in
Matamec, Frontier,
Avalon, Rare Element developing policies to support the re-emerging rare earth industry within the country.
Resources and Ucore Companies with rare earth properties in the United States, such as Ucore and Rare
Element Resources, may gain significant government interest and support all the way to
the finish line.
Our Previously
published “Rare Earth  The companies that first come to production will be the best positioned to lead the
Elements - Industry industry. It is, however, a close race. Lynas and Molycorp both have a good chance to
Primer” report offers a
comprehensive review
start producing before 2013. We believe the other front runners are Rare Element
of the REE sector and Resources (TSX:RES), Ucore (TSXV:UCU), Matamec (TSXV:MAT), Avalon (TSX:AVL)
complements this and Frontier (TSX:FRO). Companies with production targets beyond 2016 will face many
report. barriers to entry. It is critical to secure off-take agreements and partners to develop
refinery facilities to produce the often highly sophisticated REE metal alloys and products
– production laggards might miss out on the strongest agreements and partners.

 We anticipate there will be significant M&A activity in this sector.

 Investors should take the opportunity of the typically weak summer months and cyclical
fluctuations in the commodity market to make investments. We believe there is still
significant upside in these stocks. We are initiating coverage on our TOP PICKS:
Matamec, Frontier, Avalon, Rare Element Resources and Ucore.


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Valuation of Rare Earth Stocks

The rare earth sector is fairly new to investors and it is experiencing a great deal of growth and
volatility driven mainly by the dramatic cuts in export quotas from China. This has led to periodic
frenzies in stock prices of rare earth companies that tend to track and respond to news related to
the Chinese rare earth policies. While constraints in the supply of these materials would certainly
have significant effects on the price of these elements and share prices, there are several other
factors that should be taken into consideration in a ―going concern‖ valuation of rare earth mining
companies, as listed below.

There are approximately Mineralogy: There are approximately 200 minerals that host rare earth elements and only about
200 minerals that host 10% of these have the potential to be economically mineable. Most of the extractable resources,
rare earth elements, but however, are associated with only three types of minerals: bastnäsite, monazite and xenotime.
most of the REE
The type of mineral is very important as it ultimately determines which elements will be extracted
resources are found
only in three minerals. (that is, which REE group is to be extracted, light rare earth elements (LREE) or heavy rare earth
elements (HREE)), the mining and milling method (surface or underground mining and the
separation of the minerals from the waste rock), the complexity of the extraction of the elements
from the minerals, processing costs, environmental implications, and reclamation costs and
liability.

Ore Grade: The grade or concentration of an ore mineral has a direct impact on production costs.
Higher grades generally mean a higher percentage of elements can be extracted, which normally
translates into lower unit costs and better margins. The costs associated with the extraction and
the processing of the rare earth elements (generally higher than those of major industrial metals,
e.g. copper) are weighted against the value of the contained elements to determine the cut-off
grade (i.e. the grade of material below which mining is not economical). High grades usually
favour the success of feasibility studies. Furthermore, if the deposit has a disorderly ore quality
distribution, there is a simple rule of thumb that applies to the cut-off grade — if the price of
resources increases (decreases) in a sustainable fashion, the cut-off grade should decrease
(increase). Hence, mines with higher ore grades have a better chance of staying in production
when prices fall.

Metal Equivalent Approach: The Metal Equivalent Approach is commonly used when assessing
deposits with multiple elements. Given that the individual rare earths have dramatic differences in
prices and some are used in completely different applications, they are in essence different
materials. We think that security regulators should mandate that REE prospectors and miners use
the Metal Equivalent Approach when disclosing grades and other mining parameters. Exhibit 1
The industry should
adopt the Metal
presents the grades of various REE companies in %TREO (total rare earth oxide) and in
Equivalent Approach neodymium equivalent percentages. We chose neodymium as the reference material, because it
is one of the most common rare earth elements and is one of the critical materials. However, if we
had chosen a different element as the reference element, instead of neodymium, the ranking
would still be the same, i.e. Molycorp would still show the highest grade, followed by Rare
Element Resources, Frontier, etc. We used the average historical prices from 2007 to 2010, and
excluded the heavy rare earth elements (HREE) holmium, erbium, thulium, ytterbium and
lutetium, as these elements are less traded and their current prices are uncertain. Molycorp, Rare
Element Resources and Frontier have higher percentages of light rare earth elements than
Avalon, Ucore and Matamec. The decrease in grades is more significant for the companies with
higher percentages of light rare earth elements because the prices of these elements are
generally lower compared to HREE. Also, it should be noted that if we had included the other
HREE elements, Matamec‘s and Ucore‘s product equivalent grades would be higher.


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Exhibit1: Grades Comparison — % TREO vs. Neodymium Equivalent % TREO

%TREO Nd Eq. % TREO

8.28%

3.55% 3.46%

2.16%
1.86%
1.27% 1.49%
1.16% 0.75%
0.62%
0.60% 0.45%

Molycorp RES Frontier Avalon Ucore Matamec

Note: calculations exclude holmium, erbium, thulium, ytterbium, and lutetium.
Source:JSI

The drawback of a metal equivalent grade calculation is that it implies a constant relationship
between metals, which is often not the case, but this approach is the most commonly used when
assessing deposits with multiple elements.

Infrastructure: Projects with limited or no infrastructure generally require more funding.
Infrastructure costs usually include the costs of building roads and/or railways and airstrips,
installing sources of energy and water supply, building warehouses to store raw materials and
costs associated with the development of separation and refining facilities, if not outsourced.
Companies with vast infrastructure needs also tend to be further away from production, as they
not only have to raise the funds, which could be delayed by poor market conditions, but if the
project site is in a remote location and difficult to access, it would also likely limit the speed of the
construction process.
Processing REE
minerals is extremely
complex and should Metallurgical Process: This is a major valuation factor. Rare earths are typically found in the
have a major weight in company of other elements and metals and most commonly mined as co- or by-products; as
the valuation such, extraction techniques vary. Since every deposit is unique, the concentration, separation
and refining processes have to be assessed for economic viability and then reproduced in a large
scale. The separation and refining of rare earth elements, in particular, has always been a major
challenge. Extracting gold from ore, for example, is relatively easy. Mixing the gold ore with a
cyanide solution is a common method to extract the gold metal. The separation of individual REE,
on the other hand, is extremely complex and involves many steps because elements have similar
chemical properties.

Environmental Impact: Rare earths are crucial for the development of green technologies but
their mining has environmental issues. Rare earth deposits often contain radioactive materials,
such as uranium and thorium, and, in such cases, the separation process results in radioactive
tailings that could be expensive to safely store or dispose of (if the radioactive materials are not
commercially extractable). Mines with high concentrations of radioactive elements may have
difficulty obtaining the necessary environmental approvals or may be subjected to heavy


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regulations which can cause delays. Furthermore, the refining process often involves several acid
baths that also need to be safely disposed of. Thus, understanding the impact of the mining
activities to local and surrounding environment is extremely important.

Timing: Projects that are feasible when markets are favourable may not be when demand and
China has started metal prices are low. Commodities usually follow cycles, and the possibility of a downturn should
consolidating its rare always be considered. China has started consolidating its rare earth industry, which may set a
earth industry, which
may set a global trend. global trend, leaving small players that emerge later with limited growth possibilities.

Political Climate, Country Risk: Projects or mines in politically unstable countries could be
disrupted by war, acts of terrorism, or violation and/or manipulation of contracts by local
government. Politically unstable countries also tend to have highly volatile economic conditions,
often with high inflation and unstable currencies. Higher discount rates are usually applied in the
The majority of value valuation of companies with high geopolitical risk, and macroeconomic data should be included in
comes from late in the the forecast of the company‘s operations.
value chain, thus the
ability to process high-
Vertical Integration: Companies that are capable of producing finished products could generate
end products is a key
value driver. higher margins. The majority of value comes late in the value chain, thus the ability to process
high-end products is a key value driver.

End-use Market: Rare earths constitute 16 distinct elements that are used in a variety of
applications — they are used extensively in the renewable energy sector and in the automotive
and defense industries with mostly different economic drivers. As China cuts exports, it is
believed to be affecting the supply of all 16 elements; however, as the supply side stabilizes,
greater attention will be paid to the demand side of the equation. Understanding which materials
Significant hurdles exist
for many projects; a company supplies, and the main market for its products, is of major importance.
mines with strong
management teams, in A sound investment will include a company with an experienced management team, a project that
supportive jurisdictions has good infrastructure, has achieved significant milestones, has a good resource grade and
with good infrastructure
material content, and has the ability to fund the project development until its online date
and resource grades will
be the first to come
online.


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Rare Earth Market Overview

There are over 200 rare earth projects around the world. If even half of them were to make it into
production, that would lead to extreme excess supply. That said, however, the critical demand
gap that is currently building due to a combination of REE demand growth and flat Chinese REE
production, has created a tremendous opportunity for the growth of an REE mining industry
outside of China. We believe those that make it first into production will be able to develop a
relatively solid REE business. Others that will follow will be faced with many barriers of entry,
including financing limitations, and it will be harder for them to secure customers.

Exhibit 2: Schematic of the Critical Demand Gap

Critical Demand Gap
Full Supply Scenario
Tonnes of REO

Demand

Chinese Production

Years

Source:JSI

Since releasing the 35% lower export quotas for H1 2011 (compared to H1 2010) last
December, Chinese officials have continued to send signals to the market that they intend to
further restrict REE production and exports and strengthen their mining regulatory system. For
instance, China has introduced a new tariff on rare earth ore. They have also announced that
they would be raising the resource taxes on rare earth exports by ten times. And recently
Chinese officials announced that ferro rare earth alloys with more than 10% rare earth content
will be subjected to export quotas.

According to the Hong Kong-based Economic Information & Agency, China's exports of rare-
earth ores and metals for the first four months of 2011 were higher than the quotas imposed for
H1 2011. It has been suggested that the higher international REE prices are luring Chinese
producers to the international markets, which is causing deficits of some elements, higher REE
prices in China and an apparent increase in illegal exports. Thus, it is possible that China may
decrease the export quotas in the second quarter of 2011 to compensate for the seemingly
increase in illegal exports. If that is the case, it will likely have a positive effect on the REE equity
market.

Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co. Ltd (SSE:600111) has announced that it
will be leading an initiative to set up a Rare Earth Products Exchange. It is not clear at this


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point, if that was a corporate initiative or yet another attempt by the Chinese government to
control production, exports and rare earth prices. At this stage, it appears that the REE
exchange will be a pure spot-exchange market with no futures or swap contracts.

Rare earth elements are not really commodities, as products are for the most part based on
customer specifications and sometimes patented technologies. However, rare earth stocks
recently experienced a price declined together with other commodity stocks, although rare earth
prices and markets are still strong. We expect that relationship to continue and strengthen as
the REE market outside of China matures.

The REE equities have shown a remarkable performance in the last 12 months (Exhibit 3). The
international REE prices have increased significantly, and in a collective fashion, so did the REE
stocks. However, we strongly believe that a few good projects have been overlooked and there
is still significant upside in the sector, in particular for the selected companies that will be able to
materialize their aspirations of becoming an REE producer.

Exhibit 3: Bloomberg REE Index (US$)

400
350
300
Index Value

250
200
150
100
50
0
40182 40547

Source: Bloomberg (ticker:BNREMRS)

Price Forecast

Our price forecast for the period of 2014–2016, which comprises the potential period of
production start for some of the rare earth companies, is shown in Exhibit 4. The forecast was
determined taking into consideration recent historical price relationships between the various
elements, the global resources available for each element, the growth forecast of the associated
industries, and the required price level to support a rare earth industry outside of China.

Chinese REE domestic prices are rising, which may be the result of rising production costs due
to tougher government regulations and an increased presence of commodity speculators that
are entering the rare earth market searching for gains. The difference between domestic
Chinese prices and international prices is narrowing for most elements. Lanthanum and cerium
show the largest gap, which suggests that the international prices for those two elements may
be somehow inflated.

It has been suggested that as the Chinese exporters are given lower export quotas they favour
selling more of the high price elements and are holding back lanthanum and cerium, which have
historically lower prices. We forecast 80% lower prices for lanthanum and cerium in 2015
compared to current prices. We anticipate REE prices will continue to increase in the short term,


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and then fall by 2014 to a level below current prices, with the exception of dysprosium (Exhibits
4 to 6).

Exhibit 4: Snapshot of Rare Earth Oxide Pricing
JSI Forecast
2007A 2008A 2009A 2010A 20/05/2011 2011F 2014F 2015F 2016F

Lanthanum (US$/kg) 3.1 7.8 5.9 22.8 138.5 147.9 34.2 25.6 19.2

Cerium (US$/kg) 2.5 4.4 4.2 21.3 140.0 140.3 32.4 24.3 18.2

Praseodymium (US$/kg) 28.0 27.0 15.2 45.5 215.3 227.5 110.1 82.6 61.9

Neodymium (US$/kg) 29.0 27.0 15.3 47.0 229.8 188.0 136.5 102.4 102.4

Samarium (US$/kg) 4.5 4.5 4.5 16.5 120.8 115.5 30.5 22.9 22.9

Europium (US$/kg) 300.0 475.0 465.0 550.0 1590.0 1375.0 1061.2 1008.1 1008.1

Gadolinium (US$/kg) 10.5 9.8 6.5 22.0 69.4 77.0 40.7 30.5 30.5

Terbium (US$/kg) 555.0 650.0 350.0 530.0 1290.5 1060.0 993.4 943.7 896.5

Dysprosium (US$/kg) 85.0 110.0 105.0 225.0 719.0 798.8 950.7 950.7 950.7

Yttrium (US$/kg) 7.0 15.0 13.5 26.3 157.5 131.3 57.9 43.4 39.1

Note: Average annual prices for a ‗standard‘ 99% purity of individual elements and for the generic composite of rare earth distribution.

Source: IMCOA; Asian Metal; JSI

We believe the Chinese economy will continue to growth at higher rates than most of the
developed world, with occasional slowdowns, but still grow at higher rates than the average world
economic growth. This period of continuous growth should keep the Chinese demand for
commodities and the rare earth products fairly strong. Also, if Chinese inflation stays high, it may
cause REE prices in China to continue to rise.

Exhibit 5: LREE Historical and Forecast Prices (US$/kg)

$300

$200
Lanthanum
Cerium
$100
Praseodymium
Neodymium
$0

Note: Average annual prices for a ‗standard‘ 99% purity of individual.


The economic situation in Europe is still critical and the U.S. does not seem to have totally
recovered from the recent recession yet; as such, a severe slowdown in the West may lead to
tighter credit markets and likely a withdrawal of credit and project financing. A tighter credit market
would inevitably slow down the progress of the various rare earth projects, and potentially
increase REE prices. Japan is the second-largest consumer of REE, and the country‘s recent
natural disaster seems to have caused an economic slowdown. However, we believe that Japan


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will continue to import as much REE as possible to support its inventory of these very critical
elements for its manufacturing industry.

Exhibit 6: HREE Historical and Forecast Prices (US$/kg)

$250

$200

$150 Samarium
$100 Gadolinium
Europium
$50
Yttrium
$0

$1600

$1200

$800 Europium
Terbium
$400 Dysprosium

$0

Note: Average annual prices for a ‗standard‘ 99% purity of individual elements.



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Summary of Target Prices and Recommendations

Exhibit 7 summarizes our recommendations. We incorporate the forecast prices presented
above in our valuations, and we used a discount rate of 15%, a current United States dollar
exchange rate of C$0.98 and A$0.93, and a long-term exchange rate of C$1.10. The models are
highly sensitive to the prices of the individual elements. We assumed the price of lanthanum and
cerium would fall more than the other elements, thus if the current prices of these elements
prove to be sustainable, our target price for Rare Element Resources and Frontier would be
significantly conservative. The price targets were all derived from the estimated Net Asset Value
(NAV) of each project multiplied by a P/NAV multiple. The company specific multiple was
selected based on the development stage of the project, the resource size and rare earth
distribution.

Exhibit 7: Valuation Summary
Share Target Market Cap NAVPS Target Implied
Company Ticker Rating P/NAV
Price (C$) (C$) (C$ mln) (C$) P/NAV return

Matamec TSXV:MAT Spec. Buy 0.46 1.34 58.4 3.34 0.14x 0.40x 190.4%

Rare Element Res. TSXV:RES Spec. Buy 11.34 18.43 521.1 18.43 0.62x 1.00x 62.5%

Ucore TSXV:UCU Spec. Buy 0.63 1.09 107.4 1.28 0.49x 0.85x 72.7%

Frontier TSX:FRO Spec. Buy 2.20 9.83 228.4 16.39 0.13x 0.60x 347.0%

Avalon TSX:AVL Spec. Buy 6.85 11.28 693.2 12.53 0.55x 0.90x 64.6%

Average 0.39x 0.75x 147%

Valuation date: June 4th , 2011
Source: JSI; Capital IQ

Exhibit 8 shows that our current coverage universe is trading well below its NAVPS. The
average P/NAV for the group is currently at 0.39x.

Exhibit 8: Price per NAV

0.70x
0.62x
0.60x 0.55x
0.49x
0.50x
0.40x
0.30x
0.20x 0.14x 0.13x
0.10x
0.00x
RES AVL UCU MAT FRO

Valuation date: June 4th , 2011
Source: JSI; Capital IQ


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We believe that based on the collective development stage of individual projects relative to the
broad group of rare earth projects, a 0.75x P/NAV multiple for the group is appropriate, as it
accounts for the current project risk while allowing room for growth. All the companies in this
group have a NI-43-101 compliant resource, have initiated metallurgical test and have
completed or are in the process of completing a scoping study or pre-feasibility study in the next
6 month. It should be noted that Matamec and Frontier are significantly underpriced in a P/NAV
basis compared to their peers. Frontier is also underpriced on an EV/tonne of contained
resource basis, which makes us believe that the stock is the most undervalued in the group
(Exhibit 9). Our TREO production estimates are generally lower than those estimated by the
companies, because we account for the recovery rates. We expect recovery rates for Matamec,
Rare Element Resources and Ucore to be near 80%, given the progress of their metallurgical
testing to date. Avalon‘s recovery rate is based on the amount disclosed in their Preliminary
Economic Assessment (PEA), and we assumed a lower recovery rate for Frontier because the
company has not completed a scoping study and the market has had limited updates on the
progress of their metallurgy.

We excluded five heavy rare earth elements from our valuations because the market for these
elements is fairly small and for lack of price information. The elements that we excluded were
holmium, erbium, thulium, ytterbium and lutetium. The group of heavy rare elements included in
the analysis are europium, gadolinium, terbium, dysprosium and yttrium, which we refer to as
EGTDY, based on the first letter of their names. As expected, the difference between
HREO/TREO (heavy rare earth oxides to total rare earth oxides) and EGTDY/TREO ratios is
higher for the companies with higher HREO, which include Matamec, Avalon and Ucore (Exhibit
9). Considering that most of the HREE had historically higher prices, and we estimate that same
relation in our forecast is not surprising, the estimated basket price for the companies with high
EGTDY/TREO is higher. However, given that it is more complex and likely more expensive to
separate the heavy rare earths, we expect the unit costs for the heavy deposits to be somewhat
higher as well (Exhibit 10). Our estimates resulted in slightly higher COGS as percentage of
revenue for Ucore relative Matamec and Avalon, the other two companies with high
HREO/TREO ratio. It should be noted, however, that Avalon and Matamec revenues include by-
products sales (e.g. zirconium). USGS has reported that Ucore‘s deposit also has other
products, however, that has not been proven in an NI 43-101 compliant report.

The project economics Although we forecast a significant decrease in prices, use conservative opex estimates and a
of this group of relatively higher discount rate of 15% for all the projects, the economics of the projects for this
companies are quite
robust. group of companies have shown a significant robustness. Thus, we believe that the sector is still
fairly cheap, and there are still opportunities for significant gains.


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Exhibit 9: Resource and Capital Cost Analysis
Estimated REO Production (t) Estimated Net Cont. Resources* EV (US$)/ Estimated Capex Est. Capex US$/ kg Capex US$/ kg (%) (%)
Company 2015E 2016E Recovery Rate 000's tonnes Cont. Resources (US$ mln) Avg. annual TREO production Cont. Resources HREO/TREO EGTDY/TREO

Matamec 2,899 2,899 80% 58 862 330 112 5.6 36.4% 30.2%

Rare Element Resouces 4,868 8,886 80% 606 705 439 43 0.7 3.3% 3.2%

Ucore 2,110 2,110 80% 28 3,027 175 82 6.4 38.6% 33.7%

Frontier 18,452 18,452 70% 945 156 621 34 0.7 7.8% 7.0%

Avalon n.a 9,765 74% 2,949 210 1,220 135 0.4 26.0% 22.2%

Molycorp* 19,500 19,500 n.a 1,165 4,060 531 27 0.5 0.5% 0.4%

Lynas* 11,000 11,000 n.a 1,452 2,591 570 52 0.4 5.4% 4.9%

Average 1,107 555 69 2.1 16.9% 14.5%

*Resource amounts are actual reserves
USD:AUD = 0.93 and USD:CAD = 0.98
Source: JSI Estimates

Exhibit 10: Basket Price and Unit Cost Analysis

EBITDA US$ Millions EV/EBITDA Estimated Avg. Unit Costs US$/t Estimated REO Production (t) Avg. Unit Costs US$/kg Avg.
Basket Price
Company 2015E 2016E 2015E 2016E US$/kg, 2015E Ore Milled 2015E 2016E REO produced COGS/Revenue*

Matamec 178 166 0.3x 0.3x 84 136 2,899 2,899 29 35.0%
Rare Element Resouces 171 277 2.4x 1.5x 47 356 4,868 8,886 11 25.6%
Ucore 113 113 0.7x 0.7x 88 195 2,110 2,110 32 38.9%
Frontier 701 584 0.2x 0.2x 54 210 18,452 18,452 13 29.0%
Avalon n.a 683 n.a. 0.9x 83 385 n.a 9,765 31 29.8%

Average 0.9x 0.7x 256 23 32%

* Avalon and Matamec revenues include by-product sales
USD:CAD = 1.07 (2105E), 1.10 (2016E)


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Capital Cost Analysis

Exhibit 11 presents the estimated capital costs for the companies in our coverage universe and
for some of their more advanced peers. At first look, it is quite noticeable the estimated amount
of capex required for Avalon compared to Ucore for instance. In fact, we believe that Ucore‘s
capital requirements will be one of the smallest among its peers. However, Exhibit 12 shows a
significantly different ranking, which uncovers the relationship between Avalon‘s capital costs
and the size of its resources.

Exhibit 11: Estimated Capital Costs (US$ Millions)
$1,600
1,220
$1,200

$800 621
531 530
430
330
$400 175

$0
AVL FRO MCP LYC RES MAT UCU


Given the limited Ucore funding requirements, we believe the company is exposed to less
financing risk; however, Avalon‘s resource size and favourable rare earth elements distribution
could position the company as one of the largest rare earth producers in the world, if the market
for REE continues to expand. Another important consideration is the relationship between the
estimated capital requirements and the planned size of the operations. One way of capturing
this relationship is by looking at the capex per annual REE production (or capacity), presented in
Exhibit 9 above. Our estimates, which are based on TREO amounts, suggest that the projects
with higher HREO are somewhat more capex intensive. We observed a less dramatic difference
however when analyzing the capex/production ratio using the product equivalent approach, as
shown in the Product Equivalent Analysis Section.

Exhibit 12: Estimated Capital Costs per Resources (US$/kg)

$8.0
6.40
$6.0 5.60

$4.0

$2.0
0.70 0.70 0.46 0.41 0.39
$0.0
UCU MAT RES FRO MCP AVL LYC



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Cost Analysis

Our analysis of production costs per ore milled indicates that Matamec may become one of the
lowest-cost producers outside of China (Exhibit 13). The main mineral in Matamec‘s deposit is
eudialyte, which is highly amenable to acid leaching.

The cost per-kilo of production results are shown in Exhibit 14. Our estimates revealed a
substantial cost gap between companies with a high HREO/TREO ratio, compared to those with
a lower HREO/TREO ratio. We estimate the cost of processing HREE will likely be more capex
and opex intensive. The difference is not that negative when we consider that HREO prices are
usually higher as well. Also, there seems to be a higher likelihood of supply constraints of heavy
rare earths, which could push their prices higher. Again, it should be noted that the analysis is
based on the total tonnes of rare earth oxide produced, and it does not account for the fact that
some elements are more expensive than others. For instance, the current price of 99.9%
dysprosium oxide is approximately US$1,300 while the price of cerium is about US$140. The
following section will show the unit costs using the Product Equivalent Approach.

Exhibit 13: Cost per Tonne of Ore Milled (US$/tonne)

$600

$385 $356
$400
$210 $195
$200 $136

$0
Avalon Rare Element Res. Frontier Ucore Matamec


Exhibit 14: Cost per Kilo of TREO Produced (US$/kg)

$40
$32 $31
$29
$30

$20
$13
$11
$10

$0
Ucore Avalon Matamec Frontier Rare Element
Res.



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Product Equivalent Analysis

In Exhibit 15, we present estimated production and costs parameters using the Product
Equivalent Approach. In order to show the effect of using an element different from neodymium,
we also present results using cerium as the reference element. We picked cerium as it is
usually the most common element in almost all the deposits (excluding the China adsorption
clays and deposits rich in xenotime).

Exhibit 15: Metal Equivalent Parameters, Capital and Operating Cost per Unit of Production
C
Cerium Eq. Neodymium Eq. Capex/ Capex/ COGS/ COGS/
TREO Production, a
Company Production, Production, Ce Equiv, Nd Equiv, Ce equiv, Nd equiv,
tonnes p
tonnes tonnes US$/kg US$/kg US$/kg US$/kg
e
Matamec 2,899 13,382 2,382 25 138 7 41
Rare Element Resources 8,886 20,238 3,603 21 119 5 30
Ucore 2,110 10,234 1,806 17 97 7 40
Frontier 18,452 49,983 8,896 12 70 5 27
Avalon 9,765 44,009 7,766 28 157 6 36


As expected, the ranking in the analysis is the same independently of which element is selected
as the main element. For instance, Frontier is always listed as the largest producer and Ucore
as the one with the smallest production. It is interesting to note, however, the changes in
production and the cost difference between companies when the product equivalent approach is
used — in particular between Avalon and Frontier. In TREO terms, Avalon production is almost
half that of Frontier; however, on a cerium and neodymium equivalent basis, the difference in
production is smaller.

The cost analysis also reveals interesting results. In the Exhibit 14, the unit costs of companies
with higher light rare earth elements (i.e. Rare Element Resources and Frontier) were
significantly lower than for those companies with higher HREE (i.e. Avalon, Matamec and
Ucore); however, the cost per product equivalent shows a narrow gap in cost between the two
groups. Exhibit 16 shows the cerium equivalent unit costs and Exhibit 17 shows the neodymium
equivalent unit costs.


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Exhibit 16: Cost per Kilo of Ce Equivalent (US$/kg)

$7.3 $7.0
$6.4
$5.3 $4.8

Matamec Ucore Avalon Rare Element Res Frontier


Exhibit 17: Cost per kilo of Nd Equivalent (US$/kg)

$41.2 $39.9
$36.1
$29.9
$27.1

Matamec Ucore Avalon Rare Element Frontier
Res


It is important to note that Matamec and Avalon unit costs would be lower if the tonnage
equivalent amounts of their by-products are included.

The estimated capital and operating costs were based on the published preliminary economic
assessments of rare earth projects and from discussions with various experts and consultants in
the sector. However, advances in processing technology or techniques could considerably
improve the economics of a project leading to lower capital and operating costs.


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RARE EARTH COMPANIES


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Matamec Explorations Inc. (TSXV:MAT; C$0.46) Selected Rare
Earth Company Snapshots
Matamec Explorations Inc. engages in the exploration and Rating: Speculative Buy
development of mining properties in Canada. The company‘s main Price Target: C$1.34
project is the heavy rare earth-yttrium-zirconium Kipawa deposit,
Zeus property in Quebec. The company also explores for gold Risk: High
deposits, platinum group elements, base and precious metals, and Ticker TSXV:MAT
rare metals. The company‘s property portfolio includes Montclerg, Date June 7, 2011
Matheson-Colbert and Matheson-Explorers properties in Ontario, Share Price $0.46
52 Week High $0.70
and Sakami, Tansim, Valmont, Vulcain and 52 Week Low $0.11
Lesperance/Wachigabau properties in Quebec. It also holds 50% Shares Outstanding 116.8
interest in the Matheson-Pelangio property, and a 25% interest in Market Cap $53.7
Net Debt (6.0)
the Matheson joint-venture property. Matamec Explorations Inc.
Cash & Short Term Investments $6.0
was incorporated in 1997 and is headquartered in Montreal, Debt $0.0
Canada. Total Enterprise Value $47.7
NAVPS 3.34
P/NAV 0.14x
 Matamec is currently focused on advancing its main project, EV/Resource Contained US$862
the Kipawa deposit at the Zeus property. The company is Price/Volume Chart

working on a PEA, which is expected to be completed in Q3 $0.80 4.0

2011. $0.60 3.0

$0.40 2.0
 The project is located near infrastructure and the preliminary
mine plan outlines an open pit approximately 1,200 m x 50 m $0.20 1.0
x 50 m. At full production, we estimate a plant throughput of $0.00 0.0
1,795 tonnes per day (tpd) and production of about 3,000 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11
tonnes of TREO Volume Price

Project Details
 Estimated mineral resources amount to 9.18 million tonnes at Name Zeus Property (Kipawa
Deposit)
an average grade of 0.62% TREO. The percentage of Location Quebec, Canada
HREO/TREO is 39.4%. The main REE mineral is eudialyte, Project Stage Scoping Study
derived from the Greek word Eu, which means well, and Size of Property 15,244 ha
Type of Ore peralkaline syenite and
dialytos, which means dissolved, referring to its easy solubility granite
in acid. We estimate that Matamec‘s unit cost on a per-tonne NI 43-101 (or equivalent) Yes
basis would be one of the lowest in this sector. Average TREO or TREE 0.62% REO @ 0.016%
Dy2O3 cut-off
Resource's Principal REEs 13.5% Nd, 3.7% Dy, 22.4%
 Matamec has made significant progress with the metallurgy Y, 14.16% La, 29.3% Ce
testing, and at the pilot scale the company has reached an Average Grade of Other Principal 0.944% ZrO2 at 0.016%
By-products DyO3
impressive 86% net recovery.
Off take agreement n/a
Target Production (year) 2015
 We initiate coverage with a Speculative Buy recommendation Target Production (tonnage) 3,000-5,000 TREO tonnes
and a target price of C$1.34. Our valuation is derived using a per year
Resource
P/NAV multiple of 0.40x, which is equal to the estimated
Measured n/a
average P/NAV multiple of the selected peer group, to reflect
Indicated 4.92Mt @ 0.61% TREO
the size of the project and the stage of development. Inferred 4.27Mt @ 0.63% TREO
However, we expect a higher valuation when the company
completes the PEA this quarter. Ownership 100%


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Key Assets

Zeus Property

The Zeus property, 100%-owned by Matamec, is located in the Témiscaming region of Quebec,
about 160 kilometres south of Rouyn-Noranda and 65 kilometres east of the town of
Témiscaming.

The property is located near infrastructure (Exhibit 18), is reachable by a network of logging
roads, and is also accessible by boat from the Red Pine Falls, Black Creek, Desjardins and
Kipawa rivers. Float-equipped aircraft can also land on nearby lakes (Sheffield and Sairs lakes).
Matamec acquired the property in 2003 and Zeus is currently the company‘s most significant
asset. The Kipawa deposit (also known as the Sheffield area), which is found on the Zeus
property, is Matamec‘s main exploration target for the rare earths. The Témiscaming region has
an established pulp and paper industry. The property is also located less than 200 km from
Xstrata, a leading diversified mining company. Matamec could potentially source its reagents from
the local paper industry and/or from Xstrata.

Exhibit 18: Location of the Zeus Property

Source: Company reports

Exploration was first initiated in the region in 1956, after the uranium-gold mineralization was
found about 26 kilometres northwest of the Zeus property. During Period I of exploration (1956-
1970), twenty very rare minerals, including eudialyte, eucolite and britholite, were identified in the
region. Later additional academic work in the area led to the recognition of the Kipawa Alkalic
complex.

In the 1980s, when the ion-adsorbed clays in Southern China, rich in yttrium and HREE, were
discovered, it was thought that the easily dissolved yttrium and HREE in eudialyte could compete
economically with the South China Clays. That led to a search for yttrium-bearing eudialyte
deposits around the world and the beginning of the Period II exploration of the Zeus property.
Thus, from 1985 to 1990, the Kipawa deposit was extensively explored for its HREE potential by
Unocal Canada Inc. and its subsidiary Molycorp Inc. Exploration work included geological
mapping, rock chip sampling, airborne radiometric‐magnetic‐VLF surveys, adjacent
metasediments, ground radiometric and magnetic surveys, a soil geochemical survey, trenching,


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channel sampling and diamond drilling. Metallurgical work was also performed on six half‐ton bulk
samples at Mountain States Research Laboratories.

By the end of the 1980s, Unocal was in financial constraints and went through a period of
restructuring, in which it divested itself of all its non‐U.S. mineral assets, including its Kipawa Y‐Zr
property. The property remained inactive for 20 years. In 2003, Matamec purchased the Zeus
property.

Other Assets

Matamec also owns a significant portfolio of other rare metals, precious and base metals
prospects in Ontario and Quebec.

In Ontario, the company is currently exploring for gold at the Matheson property in Timmins.

Matamec is also exploring for gold in Quebec, on the Lespérance/Wachigabau property, with
Northern Superior Resources Inc.

The company is exploring for lithium and tantalum on the Tansim property and for precious and
base metals on the Sakami, Valmont and Vulcain properties, all in Quebec.

Matamec has committed C$6 million for the exploration of its additional properties. We anticipate
the company may spin off its other assets as the Zeus project becomes more advanced.

Mineralogy and Resources

The mineralogy is contained in a syenite body within the Kipawa deposit of about 1,450 m x 200
m x 50 m. Three concordant sheets inside of the syenite are enriched in lanthanides and yttrium
(Exhibit 19). The main-bearing REE mineral is eudialyte. The zone called Eudialyte contains70%
of the deposit‘s TREO. However, all zones contain good levels of HREE. Zirconium is also
present in the deposit within the vlasovite mineral. According to academic research, the eudialyte
at Kipawa has the highest percentage of HREO compared to other eudialyte deposits. Further, it
has a unique advantage of easy physical beneficiation and is highly amenable to chemical
processing.

Exhibit 19: Kipawa Deposit Schematic Cross-Section



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Matamec has also identified two large rare earth and niobium soil anomalies in the nearby
Surprise zone (Exhibit 20). Striping and channel sampling data has revealed best results of 2 m
@ 5.3% TREO – the ratio of heavy rare earths + yttrium to total REO was found to be 66%.
Matamec has identified many other areas of potential REE mineralization at the Zeus property
and it believes there is potential for a significant increase in mineral resources.

Exhibit 20: Eudialyte Mineral at the Surface (Kipawa) and Surprise Showing site

Source: JSI

The resource has been considered under two scenarios: 1) A resource with a 0.50% ZrO2 cut-off
(Exhibit 21).

Exhibit 21: Resources
Scenario 1 : TREO resources with a 0.5% ZrO2 cut-off. November 29th 2010
Category Geological Zone Metric tonnes ZrO2 % TREO % HREO % Y2O3 % (H+Y)/TREO%

TREO enriched 10,340,000 0.929 0.447 0.048 0.1 33

Indicated ZrO2 Zone 19,770,000 1.015 0.106 0.012 0.022 32

Total 30,110,000 0.986 0.223 0.024 0.049 33

TREO enriched 8,740,000 0.997 0.467 0.051 0.108 34

Inferred ZrO2 Zone 12,130,000 1.007 0.103 0.011 0.022 32

Total 20,860,000 1.003 0.255 0.028 0.058 34

Corresponding tonnages
Category Geological Zone ZrO2 TREO HREO Y2O3 (H+Y)/TREO%

Indicated Total tonnes 296,700 67,200 7,300 14,700 33

Inferred TREO enriched tonnes 209,200 53,300 5,800 12,100 35


Under this scenario, contained indicated resources are estimated at 67,200 tonnes of TREO while
contained inferred resources are estimated at 53,300 tonnes TREO, and 2) A resource with
contained indicated resources of 29,800 tonnes of TREO and contained inferred resources of


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26,700 tonnes TREO, using a 0.016% Dy2O3 cut-off (Exhibit 22). Thorium and uranium contents
have been found to be low and no additional permitting requirements are expected.

A definition drilling campaign is currently under way, with the objective of converting the majority
of inferred resources into the indicated category.

Exhibit 22: Resources
Scenario 2 : TREO resources with a 0.016% Dy2O3 cut-off. November 29th 2010
Category Geological Zone Metric tonnes ZrO2 % TREO % HREO % Y2O3 % (H+Y)/TREO%

Indicated TREO enriched 4,920,000 0.883 0.607 0.064 0.136 33

Inferred TREO enriched 4,260,000 1.008 0.628 0.07 0.149 35

Corresponding tonnages
Category Geological Zone ZrO2 TREO HREO Y2O3

Indicated TREO enriched tonnes 43,400 29,800 3,100 6,700

Inferred TREO enriched tonnes 43,000 26,700 3,000 6,400


Metallurgy

The results of metallurgical testing performed by SGS Canada Inc. are very encouraging.
Extracting rare earth, yttrium and zirconium from eudialyte mineral was thought to be extremely
complex due to the formation of a silica gel in the leaching step during processing. However, the
new process developed for the Kipawa eudialyte concentrate greatly reduces the silica gel
formation. These results were achieved by means of a proprietary process developed by
Matamec. The company recently announced an 89.2% recuperation in the leaching of rare earths
from whole rock from Kipawa's Eudialyte zone, and metallurgical tests are ongoing at SGS
Lakefield on concentrates to further optimize the process. The results suggest that the physical
characteristics of the Kipawa ore allow for low-cost chemical extraction, competitive with the
South China Clays. Based on the type of metallurgical work, the company believes that once the
metallurgy has been optimized, the scaling-up process to commercial size will be fairly straight
forward.

Project Development Strategy

Matamec‘s drilling campaign in the heavy rare earths-yttrium-zirconium Kipawa deposit is
expected to continue until the end of 2011. The main goal of the drilling program is to upgrade the
quality of resources and increase the resource size. The new drill holes will also supply additional
material for more comprehensive metallurgical tests. The PEA is expected to be conducted with
the support of the "Mine and Mineral Processing" team of the engineering firm Roche, and
completed by the end Q3 2011. The prefeasibility study is expected to be completed by Q3 2012,
assuming sufficient progress has been made with the metallurgical work. Once the resource
estimate campaign is competed by the Q3 2013, Matamec expects to have a bankable feasibility
study (BFS) finalized (Exhibit 23).

Most of the permitting work is expected to be completed by 2014. We anticipate that if the majority
of the project is achieved, the company would be in production by late 2015 or 2016.


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Exhibit 23: Project Timeline

Project 2011 2012 2013 2014
Development Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Zeus
Exploration
Kipawa

Resource Update

Metallurgical Test

PEA

Prefeasibility

Feasibility

Business Plan

Permitting

Source: Company reports; JSI

Financials

In 2010, Matamec recorded a loss of C$1.7 million and working capital of C$6.1 million. The
current cash position is close to C$6 million, and the cash burn rate is approximately
C$110,000/month. Matamec expects that exploration expenditures will generate more than $2
million reimbursable tax credits in cash in the first half of 2012. We anticipate that Matamec will
need to raise funds before the end of 2011 to complete the feasibility study.

Matamec has currently 6,033,200 stock options that could be exercised at prices between $0.16
and $0.40, with maturity dates ranging from July 20, 2011 to October 25, 2015. The company also
had 15,352,264 warrants issued, that could be exercised at prices between $0.15 and $0.50, with
maturity dates ranging from December 31, 2010 to June 28, 2012.


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Jacob Securities' Report on Rare Earth Elements

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