Rare Earth Elements - Our Top Picks by al ng

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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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

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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.

The REE market is highly constrained and prices have increased by more than 100% this year.

 China decreased H1 2011 exports quotas by 35%, compared to H1 2010. However, import numbers from Japan and other countries, suggest that China‘s export quotas are not being adhered to and instead they are much higher than what was set by the Chinese authorities. We expect China to continue to enforce its restrictive rare earths export 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.

Our Top Picks include: Matamec, Frontier, Avalon, Rare Element Resources and Ucore

Our Previously published “Rare Earth Elements - Industry Primer” report offers a comprehensive review of the REE sector and complements this report.

 Rare earth elements have been declared critical materials for the clean energy industry and essential for U.S. and international security. The U.S. Government has been active in developing policies to support the re-emerging rare earth industry within the country. 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. 

The companies that first come to production will be the best positioned to lead the industry. It is, however, a close race. Lynas and Molycorp both have a good chance to start producing before 2013. We believe the other front runners are Rare Element Resources (TSX:RES), Ucore (TSXV:UCU), Matamec (TSXV:MAT), Avalon (TSX:AVL) and Frontier (TSX:FRO). Companies with production targets beyond 2016 will face many 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 200 minerals that host rare earth elements, but most of the REE resources are found only in three minerals.

Mineralogy: There are approximately 200 minerals that host rare earth elements and only about 10% of these have the potential to be economically mineable. Most of the extractable resources, however, are associated with only three types of minerals: bastnäsite, monazite and xenotime. The type of mineral is very important as it ultimately determines which elements will be extracted (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.

The industry should adopt the Metal Equivalent Approach

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 presents the grades of various REE companies in %TREO (total rare earth oxide) and in 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 â&#x20AC;&#x201D; % TREO vs. Neodymium Equivalent % TREO %TREO

Nd Eq. % TREO

8.28%

3.55%

3.46%

1.86%

2.16% 1.27%

1.49%

1.16%

0.75% 0.60%

Molycorp

RES

Frontier

Avalon

Ucore

0.62%

0.45%

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.

Processing REE minerals is extremely complex and should have a major weight in the valuation

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. Metallurgical Process: This is a major valuation factor. Rare earths are typically found in the company of other elements and metals and most commonly mined as co- or by-products; as 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.

China has started consolidating its rare earth industry, which may set a global trend.

The majority of value comes from late in the value chain, thus the ability to process highend products is a key value driver.

Significant hurdles exist for many projects; mines with strong management teams, in supportive jurisdictions with good infrastructure and resource grades will be the first to come online.

Timing: Projects that are feasible when markets are favourable may not be when demand and metal prices are low. Commodities usually follow cycles, and the possibility of a downturn should always be considered. China has started consolidating its rare earth industry, which may set a 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 valuation of companies with high geopolitical risk, and macroeconomic data should be included in the forecast of the company‘s operations. Vertical Integration: Companies that are capable of producing finished products could generate 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 a company supplies, and the main market for its products, is of major importance. A sound investment will include a company with an experienced management team, a project that has good infrastructure, has achieved significant milestones, has a good resource grade and material content, and has the ability to fund the project development until its online date

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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

Tonnes of REO

Full Supply Scenario

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

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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 Index Value

300 250 200 150 100 50 0 40182

40547

Source: Bloomberg (ticker:BNREMRS)

Price Forecast Our price forecast for the period of 2014â&#x20AC;&#x201C;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, Jacob Securities Inc., 199 Bay Street, Suite 2901, Toronto, ON M5L 1G1 +1-416-866-8300 www.jacobsecurities.com

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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

Samarium (US$/kg)

4.5

16.5

120.8

115.5

30.5

22.9

Europium (US$/kg)

300.0

475.0

465.0

550.0

1590.0

1375.0

1061.2

1008.1

Gadolinium (US$/kg)

10.5

9.8

6.5

22.0

69.4

77.0

40.7

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

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

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

Source: IMCOA; Asian Metal; JSI

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

$50

Europium Yttrium

$1600 $1200 $800

Europium Terbium

$400

Dysprosium

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

Source: IMCOA; Asian Metal; JSI

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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 Company

Ticker

Rating

Share Price (C$)

Target (C$)

Market Cap (C$ mln)

NAVPS (C$)

P/NAV

Target P/NAV

Implied 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%

0.39x

0.75x

147%

Average 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 0.55x

0.60x

0.49x

0.50x 0.40x 0.30x 0.20x

0.14x

0.13x

MAT

FRO

0.10x 0.00x RES

AVL

UCU

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 byproducts 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 of this group of companies are quite robust.

Although we forecast a significant decrease in prices, use conservative opex estimates and a relatively higher discount rate of 15% for all the projects, the economics of the projects for this 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)

Company

2015E

2016E

EV (US$)/ Estimated Net Cont. Resources* Recovery Rate 000's tonnes Cont. Resources

Estimated Capex

Est. Capex US$/ kg

Capex US$/ kg

(%)

(US$ mln)

Avg. annual TREO production

Cont. Resources

HREO/TREO

EGTDY/TREO

Matamec

2,899

80%

862

330

112

5.6

36.4%

30.2%

Rare Element Resouces

4,868

8,886

80%

606

705

439

0.7

3.3%

3.2%

Ucore

2,110

80%

3,027

175

6.4

38.6%

33.7%

18,452

70%

945

156

621

0.7

7.8%

7.0%

n.a

9,765

74%

2,949

210

1,220

135

0.4

26.0%

22.2%

Molycorp*

19,500

n.a

1,165

4,060

531

0.5

0.5%

0.4%

Lynas*

11,000

n.a

1,452

2,591

570

0.4

5.4%

4.9%

1,107

555

2.1

16.9%

14.5%

Frontier Avalon

Average

*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$/t Basket Price Ore Milled US$/kg, 2015E

Estimated REO Production (t)

2015E

2016E

Avg. Unit Costs US$/kg

Avg.

REO produced

COGS/Revenue*

Company

2015E

2016E

2015E

2016E

Matamec

178

166

0.3x

136

2,899

35.0%

Rare Element Resouces

171

277

2.4x

1.5x

356

4,868

8,886

25.6%

Ucore

113

0.7x

195

2,110

38.9%

Frontier

701

584

0.2x

210

18,452

29.0%

Avalon

n.a

683

n.a.

0.9x

385

n.a

9,765

29.8%

0.9x

0.7x

32%

Average

256

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

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

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JACOB SECURITIES INC. EQUITY RESEARCH

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

$400

330

175

$0 AVL

FRO

MCP

LYC

RES

MAT

UCU

Source: JSI Estimates

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 5.60

$6.0 $4.0 $2.0

0.70

0.46

0.41

0.39

RES

FRO

MCP

AVL

LYC

$0.0 UCU

MAT

Source: JSI Estimates

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

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SE BC RARE EARTH ELEMENTS â&#x20AC;&#x201C; COMPANY REPORTS June 8th, 2011

JACOB SECURITIES INC. EQUITY RESEARCH

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 Matamecâ&#x20AC;&#x2DC;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 $400

$385

$356 $210

$200

$195

$136

$0 Avalon Rare Element Res. Frontier

Ucore

Matamec

Source: JSI Estimates

Exhibit 14: Cost per Kilo of TREO Produced (US$/kg) $40 $32

$31

$30

$29

$20

$13

$11

$10 $0 Ucore

Avalon

Matamec

Frontier

Rare Element Res.

Source: JSI Estimates

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

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SE BC RARE EARTH ELEMENTS â&#x20AC;&#x201C; COMPANY REPORTS June 8th, 2011

JACOB SECURITIES INC. EQUITY RESEARCH

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 COGS/ a Ce equiv, p US$/kg e 7

Company

TREO Production, tonnes

Cerium Eq. Production, tonnes

Neodymium Eq. Production, tonnes

Capex/ Ce Equiv, US$/kg

Capex/ Nd Equiv, US$/kg

COGS/ Nd equiv, US$/kg

Matamec

2,899

13,382

2,382

138

Rare Element Resources

8,886

20,238

3,603

119

Ucore

2,110

10,234

1,806

Frontier

18,452

49,983

8,896

Avalon

9,765

44,009

7,766

157

Source: JSI Estimates

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 â&#x20AC;&#x201D; 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.

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

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JACOB SECURITIES INC. EQUITY RESEARCH

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

$7.3

Matamec

$7.0

Ucore

$6.4

Avalon

$5.3

$4.8

Rare Element Res Frontier

Source: JSI Estimates

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

$41.2

$39.9

$36.1 $29.9

Matamec

Ucore

Avalon

Rare Element Res

$27.1

Frontier

Source: JSI Estimates

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.

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

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SE BC RARE EARTH ELEMENTS – COMPANY REPORTS June 8th, 2011

JACOB SECURITIES INC. EQUITY RESEARCH

RARE EARTH COMPANIES

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

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SE BC RARE EARTH ELEMENTS – COMPANY REPORTS June 8th, 2011

JACOB SECURITIES INC. EQUITY RESEARCH

Matamec Explorations Inc. (TSXV:MAT; C$0.46)

Selected Rare

Earth Company Snapshots Matamec Explorations Inc. engages in the exploration and development of mining properties in Canada. The company‘s main project is the heavy rare earth-yttrium-zirconium Kipawa deposit, Zeus property in Quebec. The company also explores for gold deposits, platinum group elements, base and precious metals, and rare metals. The company‘s property portfolio includes Montclerg, Matheson-Colbert and Matheson-Explorers properties in Ontario, and Sakami, Tansim, Valmont, Vulcain and Lesperance/Wachigabau properties in Quebec. It also holds 50% interest in the Matheson-Pelangio property, and a 25% interest in the Matheson joint-venture property. Matamec Explorations Inc. was incorporated in 1997 and is headquartered in Montreal, Canada. 



Matamec is currently focused on advancing its main project, the Kipawa deposit at the Zeus property. The company is working on a PEA, which is expected to be completed in Q3 2011. The project is located near infrastructure and the preliminary mine plan outlines an open pit approximately 1,200 m x 50 m x 50 m. At full production, we estimate a plant throughput of 1,795 tonnes per day (tpd) and production of about 3,000 tonnes of TREO



Estimated mineral resources amount to 9.18 million tonnes at an average grade of 0.62% TREO. The percentage of HREO/TREO is 39.4%. The main REE mineral is eudialyte, derived from the Greek word Eu, which means well, and dialytos, which means dissolved, referring to its easy solubility in acid. We estimate that Matamec‘s unit cost on a per-tonne basis would be one of the lowest in this sector.



Matamec has made significant progress with the metallurgy testing, and at the pilot scale the company has reached an impressive 86% net recovery.



We initiate coverage with a Speculative Buy recommendation and a target price of C$1.34. Our valuation is derived using a P/NAV multiple of 0.40x, which is equal to the estimated average P/NAV multiple of the selected peer group, to reflect the size of the project and the stage of development. However, we expect a higher valuation when the company completes the PEA this quarter.

Rating: Speculative Buy Price Target: C$1.34 Risk: High Ticker Date Share Price 52 Week High 52 Week Low Shares Outstanding Market Cap Net Debt Cash & Short Term Investments Debt Total Enterprise Value NAVPS P/NAV EV/Resource Contained Price/Volume Chart

TSXV:MAT June 7, 2011 $0.46 $0.70 $0.11 116.8 $53.7 (6.0) $6.0 $0.0 $47.7 3.34 0.14x US$862

$0.80

4.0

$0.60

3.0

$0.40

2.0

$0.20

1.0

$0.00 Jun-10

Sep-10

Dec-10

Volume

Mar-11

0.0 Jun-11

Price

Project Details Name

Zeus Property (Kipawa Deposit) Location Quebec, Canada Project Stage Scoping Study Size of Property 15,244 ha Type of Ore peralkaline syenite and granite NI 43-101 (or equivalent) Yes Average TREO or TREE 0.62% REO @ 0.016% Dy2O3 cut-off Resource's Principal REEs 13.5% Nd, 3.7% Dy, 22.4% Y, 14.16% La, 29.3% Ce Average Grade of Other Principal 0.944% ZrO2 at 0.016% By-products DyO3 Off take agreement n/a Target Production (year)

2015

Target Production (tonnage)

3,000-5,000 TREO tonnes per year

Resource Measured

n/a

Indicated

4.92Mt @ 0.61% TREO

Inferred

4.27Mt @ 0.63% TREO

Ownership

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

100%

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JACOB SECURITIES INC. EQUITY RESEARCH

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 (19561970), 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, Jacob Securities Inc., 199 Bay Street, Suite 2901, Toronto, ON M5L 1G1 +1-416-866-8300 www.jacobsecurities.com

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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

Source: Company reports

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JACOB SECURITIES INC. EQUITY RESEARCH

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 â&#x20AC;&#x201C; 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

Indicated

Inferred

Geological Zone

Metric tonnes

ZrO2 %

TREO %

HREO %

Y2O3 %

(H+Y)/TREO%

TREO enriched

10,340,000

0.929

0.447

0.048

0.1

ZrO2 Zone

19,770,000

1.015

0.106

0.012

0.022

Total

30,110,000

0.986

0.223

0.024

0.049

TREO enriched

8,740,000

0.997

0.467

0.051

0.108

ZrO2 Zone

12,130,000

1.007

0.103

0.011

0.022

Total

20,860,000

1.003

0.255

0.028

0.058

ZrO2

TREO

HREO

Y2O3

(H+Y)/TREO%

Corresponding tonnages

Category

Geological Zone

Indicated

Total tonnes

296,700

67,200

7,300

14,700

Inferred

TREO enriched tonnes

209,200

53,300

5,800

12,100

Source: Company reports

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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SE BC RARE EARTH ELEMENTS â&#x20AC;&#x201C; COMPANY REPORTS June 8th, 2011

JACOB SECURITIES INC. EQUITY RESEARCH

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

Inferred

TREO enriched

4,260,000

1.008

0.628

0.07

0.149

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

Source: Company reports

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 Matamecâ&#x20AC;&#x2DC;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. Jacob Securities Inc., 199 Bay Street, Suite 2901, Toronto, ON M5L 1G1 +1-416-866-8300 www.jacobsecurities.com

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JACOB SECURITIES INC. EQUITY RESEARCH

Exhibit 23: Project Timeline Project Development

2011 Q2 Q3

2012 Q2 Q3

2013 Q2 Q3

2014 Q2 Q3

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.

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

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Valuation Resources (tonnes)

9,181,000

Average Grade (%)

0.62

Target Production Date

2015

Mill Processing (tpd)

1,795

Mine Life (years)

Long Term Realized Basket Price (US$/kg)

Average Operating Costs (US$/kg)

Capital Costs (C$ Millions)

323

Discount Rate

15%

Total Net Present Value (C$ Millions)

374

Cash and Cash Equivalents

6.0

Debt

Corporate Adjustments

8.6

Total Net asset Value

390

NAVPS (C$/share)

3.34

Current P/NAV

0.14x

Target P/NAV

0.40x

Target Price (C$)

1.34

Matamec‘s current P/NAV at 0.14x, is well below the group average of 0.39x. We believe the stock is excessively discounted compared to its peers. Our C$1.34 price target is based on P/NAV multiple of 0.40x, similar to the group‘s average P/NAV multiple, and a 15% discount rate. We believe this valuation is appropriate given that the company has made significant progress by releasing a NI 43-101 compliant resource that shows reasonable size resource with significant percentage of critical elements. In addition, Matamec has made significant progress with its metallurgical testing, proving for the first time that it is possible to economically extract REE from the eudialyte in the Kipawa deposit and showing significant potential for low unit cost production per tonne. Furthermore, Matamec has also identified other mineralization zones that could significantly augment the current resource size. As the project development progresses and the company complete first a scoping study, followed by a BFS, we expect the stock to receive higher valuations and move closer to NAV. Some of Matamec‘s options and warrants are in the money, our estimated current diluted NAVPS is C$3.01. Sensitivity Analysis Matamec‘s price analysis is presented in Exhibit 24. The company‘s REE basket price, based on our forecast of rare earth oxide prices, is US$79/kg, compared to US$187/kg if current rare earth oxide prices were used. That is a nearly 60% difference between forecast and current prices. If we had assumed that future prices would be the same as current prices, the NAVPS would be C$10.60 compared to our estimate of C$3.34, at the 15% discount rate. On the other extreme, if average historical prices from 2007 to 2010 were used, the basket price for the company would have been US$22/kg, roughly 90% below the basket price based on current oxide prices. Under this extreme assumption, the project would not be feasible. However, we do not believe that longterm prices could revert to the depressed historical levels, given the high cost of processing these

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

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materials and the limited ―economic‖ resources. Rare earths are not rare on the earth‘s crust, but rare earth resources that are economically exploitable are uncommon. Based on our price sensitivity analysis, it seems that the market-implied basket price for Matamec at a 15% discount rate is approximately US$44/kg, a 76% discount to the basket price based on current prices.

Exhibit 24: Matamec Price Analysis NAVPS, C$

Discount Rate

P/NAV (x)

Discount Rate

Target Price @ P/NAV=0.40

Discount Rate

Basket Price % Change

-40%

-30%

-20%

-10%

Base

10%

20%

30%

40%

7.5%

2.85

3.90

4.96

6.01

7.07

8.13

9.18

10.24

11.29

10.0%

2.15

2.98

3.81

4.64

5.47

6.30

7.13

7.96

8.79

12.5%

1.63

2.29

2.95

3.60

4.26

4.92

5.58

6.24

6.90

15.0%

1.22

1.75

2.28

2.81

3.34

3.87

4.40

4.93

5.46

17.5%

0.91

1.34

1.77

2.20

2.63

3.06

3.49

3.92

4.35

20.0%

0.66

1.01

1.37

1.72

2.07

2.43

2.78

3.13

3.49

22.5%

0.47

0.76

1.05

1.34

1.63

1.93

2.22

2.51

2.80

-40%

-30%

-20%

-10%

Base

10%

20%

30%

40%

Basket Price % Change 7.5%

0.16

0.12

0.09

0.08

0.07

0.06

0.05

0.04

10.0%

0.21

0.15

0.12

0.10

0.08

0.07

0.06

0.05

12.5%

0.28

0.20

0.16

0.13

0.11

0.09

0.08

0.07

15.0%

0.38

0.26

0.20

0.16

0.14

0.12

0.10

0.09

0.08

17.5%

0.51

0.34

0.26

0.21

0.17

0.15

0.13

0.12

0.11

20.0%

0.70

0.45

0.34

0.27

0.22

0.19

0.17

0.15

0.13

22.5%

0.99

0.61

0.44

0.34

0.28

0.24

0.21

0.18

0.16

-40%

-30%

-20%

-10%

Base

10%

20%

30%

40%

Basket Price % Change 7.5%

1.14

1.56

1.98

2.41

2.83

3.25

3.67

4.09

4.52

10.0%

0.86

1.19

1.52

1.86

2.19

2.52

2.85

3.18

3.52

12.5%

0.65

0.91

1.18

1.44

1.71

1.97

2.23

2.50

2.76

15.0%

0.49

0.70

0.91

1.12

1.34

1.55

1.76

1.97

2.19

17.5%

0.36

0.54

0.71

0.88

1.05

1.22

1.40

1.57

1.74

20.0%

0.26

0.41

0.55

0.69

0.83

0.97

1.11

1.25

1.39

22.5%

0.19

0.30

0.42

0.54

0.65

0.77

0.89

1.00

1.12

Source: JSI

Market Matamec‘s yttrium production is expected to account for 24% of total production and 12% of total sales (Exhibits 25 and 26). Yttrium is widely used for phosphor applications and is regularly alloyed with aluminum, chromium and a variety of other metals, to name a few applications. The phosphor and metal alloy sectors are expected to grow at 6–10% and 8–12%, respectively. Based on our forecast prices, dysprosium would account for 43% of the total sales. Neodymium is expected to make up the second-largest portion of sales. Dysprosium and neodymium together are used in the production of permanent magnets. This sector is expected to experience robust growth of 10–15% per year in the next five years. Jacob Securities Inc., 199 Bay Street, Suite 2901, Toronto, ON M5L 1G1 +1-416-866-8300 www.jacobsecurities.com

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JACOB SECURITIES INC. EQUITY RESEARCH

Exhibit 25: Production per Element La 15%

Other REEs 8% Y 24%

Ce 31% Dy 4%

Nd 14%

Pr 4%

Source: JSI

Exhibit 26: Revenue per Element Other REEs + Zr 6% Y 12%

La 4%

Ce 9%

Pr 4%

Nd 17% Dy 43%

Eu 5%

Source: JSI

Justification of Target price We used the DCF NAV calculation, which is a common valuation methodology for development properties and producing mines. Our C$1.34 price target is based on a P/NAV multiple of 0.40x, similar to the group‘s average P/NAV multiple. Given the emerging nature of the sector, we used a 15% discount rate which is in general higher than what is used in PEAs. Key Risks to Price Target The rare earth mining sector is fairly new and in addition to the common inherent risks of a mining business there are sector specific risks. The list of risks are presented below and explained in the section ―Rare Earth Elements Investment Risk‖. • • • • • • • •

Exploration Risk Financing Risk Geopolitical Risk Rare Earth Distribution Risk Price Risk Metallurgical Process Risk Currency Risk Acquisition Risk

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

Page 27

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SE BC RARE EARTH ELEMENTS – COMPANY REPORTS June 8th, 2011

JACOB SECURITIES INC. EQUITY RESEARCH

Officers and Directors André Gauthier, President and CEO

André Gauthier holds a Bachelor of Business Administration degree and has completed the required Masters courses in Project Management from University of Quebec in Montreal. From 1994 to 1996, he held the post of Vice President of Q.E.X. Resources Inc. (which became Adventure Gold Inc. in 2007), a company that was listed at the Montreal Stock exchange and the post of secretary-treasurer and CFO of Abior Exploration Inc. (which became Exploration Diabior Inc., when it merged with Virginia Gold Mines Inc.), from 1984 to 1992. André Gauthier is President and Director of Mistassini Mineral Resources Inc., a public mining company and was Secretary-Treasurer and CFO of Prêt à porter Subito Presto Inc., a company that worked in the manufacturing sector of medium to high-end clothing (main client Mexx Canada), from February 1999 to September 2003.

Aline Leclerc, VP Exploration

Aline Leclerc has been a geologist since 1974. She holds a Bachelor of Earth Sciences degree from the University of Quebec in Montreal. She has supplied consulting services in mining exploration and mining exploration project management since 1995. From 1974 to 1995, she worked for various companies and governmental agencies within the framework of exploration projects. She sat on the Board of Directors of Soquem from 1996 to 2000.

Laval St-Gelais, Secretary Treasurer

Laval St Gelais holds a diploma in Business Administration and a license in accounting from the University Laval. He has been a Chartered Accountant since 1978, and in 1982 he specialized in investment project and reorganization of small firms. Since 1994, he has been a partner of Groupe Desjardins Campeau. Between 1999 and 2000, he was Director of Sirios Resources Inc., a mining exploration company listed on TSX Venture Exchange (SOI).

Marcel Bergeron, Independent Director

Marcel Bergeron, CA and CMA, obtained a Bachelor‘s degree in accounting sciences of the University of Quebec in Montreal. He has been a member of l‘Ordre des comptables en management accrédités du Québec (CMA) since June 1981 and l‘Ordre des comptables agréés du Québec (CA) since December 1983. From 2006 to 2009, he was with Devimco Inc., a commercial real estate development company, as General Manager, and he took part in important financing and real estate transactions. From July 1990 to June 2006, he was partner of Petrie Raymond l.l.p., chartered accountants, and participated in the auditing of mining companies. He has been Director and a member of the Audit Committee of Strateco Resources Inc. since March 2007. He was also Director and member of the Audit Committee of Fairstar Explorations Inc. from 1995 to 2005 and MDN Inc. from 2007 to 2008.

Normand Tamaro, Independent Director

Normand Tamaro joined Matamec Explorations Inc. in 2009 as an independent director. Called to the Quebec Bar in 1982 and LL.D since 1995, Mr. Tamaro is in private practice with the firm Mannella, Gauthier, Tamaro, and he is specialized in intellectual property law. Furthermore, he is the author of many articles published in specialized reviews and several books, in French and in English regarding copyright.

Sylvie Prud’homme, Independent Director

Sylvie Prud‘homme has been a geologist since 1979. She holds a B.Sc. in geology from the University of Montreal and is a member of the Quebec Order of Geologists. From 1979 to 2005, she worked both in Quebec and abroad as a geologist in charge of exploration projects and mine development, and as a manager of oil and gas exploration projects. She has worked for various mining and exploration companies, consulting firms and various companies and government agencies. Since 2005, she has actively participated in the development of Osisko Mining Corporation, where she currently holds the position of Director of Investor Relations.

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

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SE BC RARE EARTH ELEMENTS – COMPANY REPORTS June 8th, 2011

JACOB SECURITIES INC. EQUITY RESEARCH

Strategic Committee for Rare Earths: Anthony Mariano

A PhD geologist, worked on the identification of eudialyte and other rare earth-bearing minerals at the Kipawa Alkalic Complex.

Alex Knox

A MSc geologist with more than 34 years of field experience in exploration.

Raynald Vézina

A mining engineer with more than 35 years of experience in the mining industry.

Shareholders Top Institutional shareholders Shares

% Ownership

Consolidated international Investment Holdings

11,679,920

10.01%

Pinetree Capital Ltd.

11,150,001

9.56%

Andre Gauthier

1,617,467

1.39%

Aline Leclerc

150,000

0.13%

Marcel Bergeron

135,000

0.12%

Officers and Directors

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

Page 29

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JSI .

SE BC RARE EARTH ELEMENTS – COMPANY REPORTS June 8th, 2011

JACOB SECURITIES INC. EQUITY RESEARCH

Rare Element Resources Ltd. (TSX:RES; C$11.34) Selected Rare Earth Company Snapshots Rating: Speculative Buy Rare Element Resources Ltd. engages in the acquisition, exploration and development of mineral properties in Canada and the United States. The company is focused on rare earth elements and gold. It holds a 100% interest in the Bear Lodge property located in northeast Wyoming. Rare Element Resources Ltd. was incorporated in 1999 and is based in Vancouver, Canada.



Rare Element Resources owns the Bear Lodge property, which contains significant high-grade REE in carbonatite dikes as well as gold mineralization. This deposit is one of the largest deposits of disseminated rare earth elements in North America.



The NI 43-101 inferred mineral resource estimate reports two REE deposits containing 17.5 million tonnes averaging 3.46% REO (@1.5% cut-off). At a 4% REO cut-off grade, the deposits contain 4.4 million tonnes averaging 6.65% REO.



Rare Element Resources is one of the few junior rare earth exploration companies to have completed a scoping study. The company is currently working on updating its resource estimates using the winter drilling results.

Price Target: C$18.43 Risk: High

Ticker Date Share Price 52 Week High 52 Week Low Shares Outstanding Market Cap Net Debt Cash & Short Term Investments Debt Total Enterprise Value NAVPS P/NAV EV/Resource Contained Price/Volume Chart

TSX:RES June 7, 2011 $11.34 $17.85 $1.94 43.2 $489.5 (71.5) $71.5 $0.0 $418.1 18.43 0.62x US$705

$20.00

2.0

$15.00

1.5

$10.00

1.0

$5.00

0.5

$0.00 Jun-10

0.0 Sep-10

Dec-10

Volume



The company expects to complete the pre-feasibility study in 3Q 2011/1Q 2012. The pre-feasibility study is expected to include a refinery plant to separate the individual fifteen elements.



Rare Element Resources has one of the highest grades of critical materials (excluding yttrium) in North America. Preliminary metallurgical testing of the oxide material is encouraging with 90% recovery.



The property has well-developed surrounding infrastructure. The mine plan is for an open-pit mine. We estimate that the company will be producing at full ramp up, an average of 11,000 tonnes of REO. The production is projected to start in 2015.



We are initiating coverage of Rare Element Resources with a Speculative Buy recommendation and a target price of C$18.43, based on the project‘s estimated NAV.

Project Details Name Location

Mar-11 Price

Bear Lodge Crook County, Wyoming, US

Project Stage Size of Property Type of Ore NI 43-101 (or equivalent) Average TREO or TREE Resource's Principal REEs

Pre-feasibility 971 ha Carbonatite and alkaline Yes 3.46% REO @ 1.5% cut-off 16.8% Nd, 4.8% Pr, 45.0% Ce, 29.3% La Average Grade of Other Principal n/a By-products Off take agreement n/a Target Production (year)

2015

Target Production (tonnage)

11,400 TREO tonnes per year

Resource Measured

n/a

Indicated

n/a

Inferred

17.5Mt @ 3.46% REO

Ownership

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

100%

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SE BC RARE EARTH ELEMENTS – COMPANY REPORTS June 8th, 2011

JACOB SECURITIES INC. EQUITY RESEARCH

Key Assets Bear Lodge The Bear Lodge property is located in Crook County, Wyoming. The property is 100%-owned by Rare Element Resources through its wholly owned subsidiary, Paso Rico Inc. The Bear Lodge properties were initially prospected for gold and base metals. The rare earth potential of the property was first explored by Duval Corporation in 1972. Duval discovered the rare earth potential in the region while exploring for copper and molybdenum. In a joint venture with Molycorp, Duval performed a drill program for two years (1978–1980). In 1980, Molycorp withdrew from the project due to financial constraints, and Duval consequently ceased the project in 1984. Other companies that explored the Bear Lodge region, mostly for gold and base metals, include FMC Corporation, International Curator Resources Ltd. Coca Mines, Inc., Hecla Mining Company (for REE and gold), Newmont Exploration Limited and Phelps Dodge (now Freeport-McMoRan). In 2003, Rare Element Resources Ltd. acquired Paso Rico Resources Ltd., and started exploring the Bear Lodge property. The infrastructure in the region is good. The property is about 12 miles from the town of Sundance and 55 miles from the town of Gillete, is accessible by paved roads, and is close to major highways and rail lines. Power lines run within a mile of the project area. The company should be able to have access to water from both the Minnelusa and Madison acquifiers about 5 miles from the property, by purchasing water rights. The company may be forced to source and store additional water from other locations if a mill and refinery facilities are built in the region. Mineralogy and Resources Rare Earths: REE mineralization on the Bear Lodge property is contained primarily within dikes and veins of carbonatite, transitional carbonatite and FMR (FeOx-MnOx-REE). REE mineralization in the carbonatite consists primarily of ancylite (Sr(La,Ce)(CO3)2OH•H2O), bastnasite, parisite, synchysite, and in smaller amounts, monazite. Historical results suggest that REE grades in the carbonatite can reach more than 10% REO, but are on average 5% REO.

Exhibit 27: Inferred Resources Resource Area

Grade (%REO)

REO (kt)

Bull Hill Southwest

14.3

3.38

483

Bull Hill Northwest

3.2

3.80

122

Total

17.5

3.46

605

Source: Company reports

In May 2010, an NI 43-101 compliant resource estimate for the Bull Hill SW and Bull Hill NW areas was completed (Exhibit 27). Recently reported results from the 2010 winter drilling

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

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SE BC RARE EARTH ELEMENTS – COMPANY REPORTS June 8th, 2011

JACOB SECURITIES INC. EQUITY RESEARCH

campaign supports the company‘s belief that grade and resources could be larger. These results will be incorporated into an updated NI 43-101 compliant resource. Gold: Mineralization occurs in a variety of different mineralization styles, including intrusive and hydrothermal breccias, fracture-fault zones, Paleozoic clastic and carbonate sediments, and fenitized Precambrian granite. The alkaline complex at Bear Lodge shares many attributes with the Cripple Creek complex in Colorado, which has produced more than 23 million ounces of gold since discovery in 1878. Key aspects of the Cripple Creek complex are being used as a guide to model the gold exploration efforts at Bear Lodge. Metallurgical tests Rare Earths: Metcon, SGS Lakefield, MSRDI and IntelliMet performed parallel metallurgical tests. Metcon and MSDRI have shown that the REE mineralization in both the oxidized FMR and carbonatite material could be recovered by an acid leach process. SGS Lakefield investigated the use of a hot-flotation process similar to that used by Molycorp, but found that considerable REEs were lost to the slimes when using the Bear Lodge mineral samples. Tests were performed on different ore samples, and it was determined that both the concentration ratio and the recovery are a function of the feedstock minerals and the grade. Recoveries of 80–90% were achieved. Leach testing was conducted with sulfuric acid and hydrochloric acid, and the hydrochloric acid was selected as the preferred process for solubilizing the REE, as it produced better recovery rates. Another economic advantage is that the hydrochloric acid could potentially have a large portion of it recycled back to the leach step of the process. Recovery of REE from carbonatites have been extensively studied and documented. Additionally, the REE hydrochloric acid leach process and the hydrochloric acid recycling process have both been employed commercially. We believe that Rare Element Resources will face relatively fewer challenges when developing the concentration process at a commercial size, compared to other early stage products. Test work is continuing in order to define the operating parameters to produce the optimum recovery and grade of the product, and IntelliMet is carrying out test to separate individual REEs, using the ion-exchange method. Rare Element Resources intends to include the separation step in the pre-feasibility study, expected to be released in 4Q 2011/1Q 2012. Gold: Newmont Metallurgical Services Laboratory performed gold metallurgical work. Recoveries of 78.4% and 87.9% were achieved on samples with grades of 0.79 and 2.21 g/t Au, respectively. Consumption of cyanide and lime was found to be low. Project Development Stage Rare Element Resources is one of the few rare earth junior players that have completed a scoping study. The company expects to update its resource-compliant NI 43-101 in the second quarter of 2011, with the results obtained from the drilling campaigned last winter. Once the metallurgical tests are completed by the end of 2011, the company expects to report a prefeasibility study, including a refinery plant that would separate and refine individual rare earth elements. Additional exploration is expected to be conducted in the area up until 2013, with the aim of identifying higher-grade area in the deposit and augment resources. A complete BFS is expected to be completed by 2014. The company expects to start production by 2015.

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

Page 32

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SE BC RARE EARTH ELEMENTS – COMPANY REPORTS June 8th, 2011

JACOB SECURITIES INC. EQUITY RESEARCH

Financials Rare Element Resources incurred a net loss of US$1.7 million for fiscal 2010, and US$4.5 million for the nine-month period ended March 31, 2011, a significant rise due to increase in exploration expenses. The company‘s current cash position is about US$73 million and has no debt. Current cash burn rate is estimated at US$300,000/month. As of April 7, 2011, Rare Element Resources had 3,252,500 options outstanding, with prices ranging from C$0.55 to C$15.16, 119,287 warrants outstanding with a price of C$4.75 and 316,503 agent warrants outstanding at C$9.00. Valuation Indicated Resources (tonnes)

17,500,000

Average Grade (%)

3.46

Target Production Date

2015

Mill Processing (tpd)

10,080

Mine Life (years)

Long Term Average Basket Price (US$/kg)

Average Operating Costs (US$/kg)

Capital Costs (C$ Millions)

323

Discount Rate

15%

Total Net Present Value (C$ Millions)

694

Cash and Cash Equivalents

Debt

Corporate Adjustments

Total Net asset Value

814

NAVPS (C$/share)

18.43

Current P/NAV

0.62x

Target P/NAV

1.00x

Target Price (C$)

18.43

Rare Element Resources is one of the few junior rare earth companies that have completed a scoping study, a year earlier than most of its peers. The main rare earth minerals in the deposit are ancylite and the vastly commercially processed bastnäsite. Given the more advanced stage of this project compared to its peers, the favourable rare earth distribution (i.e. high percentage grade of some of the critical elements) and the potential for a perhaps less complex metallurgy, our target price of C$18.43 is based on a P/NAV of 1.00x applied to the NAVPS. We assumed a 100% equity financing and used a 15% discount rate. Our NAVPS does not incorporate equity dilution, which based on current issued options and warrants would imply a NAVPS of C$15.92. Rare Element Resources has a current cash position of US$73 million, which should be sufficient to take the company to the end of the feasibility study.

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

Page 33

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JSI

SE BC RARE EARTH ELEMENTS – COMPANY REPORTS June 8th, 2011

JACOB SECURITIES INC. EQUITY RESEARCH

Sensitivity Analysis Based on our oxide price forecast, the company‘s average basket price is US$41/kg. If we take the current rare earth oxide price as our average long-term forecast price, the company‘s basket price would be US$164/kg and NAVPS would be C$96.7. Based on the average 2007–2010 rare earth oxide prices the basket price would be US$16/kg and the NAVPS would fall significantly to C$2.50. However, the project would still have a positive net present value, even at a discount rate of 22.5%, in contrast with some of its peers. The estimated market implied basket price at a 15% discount rate for Rare Element Resources is US$31/kg, 80% below the company‘s basket price based on current prices and 24% below our average forecast basket price for the company. Exhibit 28: Rare Element Resources Price Analysis NAVPS, C$

Discount Rate

P/NAV (x)

Discount Rate

Target Price @ P/NAV=1.00

Discount Rate

Basket Price % Change

-40%

-30%

-20%

-10%

Base

10%

20%

30%

40%

7.5%

16.49

21.41

26.33

31.26

36.18

41.10

46.02

37.65

55.87

10.0%

12.75

16.71

20.66

24.62

28.57

32.53

36.49

29.76

44.40

12.5%

9.95

13.17

16.39

19.61

22.83

26.05

29.26

23.79

35.70

15.0%

7.84

10.49

13.13

15.78

18.43

21.07

23.72

19.22

29.01

17.5%

6.23

8.43

10.63

12.82

15.02

17.22

19.42

15.68

23.81

20.0%

4.99

6.83

8.67

10.51

12.36

14.20

16.04

12.91

19.72

22.5%

4.03

5.58

7.14

8.69

10.25

11.81

13.36

10.72

16.47

-40%

-30%

-20%

-10%

Base

10%

20%

30%

40%

Basket Price % Change 7.5%

0.69

0.53

0.43

0.36

0.31

0.28

0.25

0.30

0.20

10.0%

0.89

0.68

0.55

0.46

0.40

0.35

0.31

0.38

0.26

12.5%

1.14

0.86

0.69

0.58

0.50

0.44

0.39

0.48

0.32

15.0%

1.45

1.08

0.86

0.72

0.62

0.54

0.48

0.59

0.39

17.5%

1.82

1.35

1.07

0.88

0.75

0.66

0.58

0.72

0.48

20.0%

2.27

1.66

1.31

1.08

0.92

0.80

0.71

0.88

0.58

22.5%

2.82

2.03

1.59

1.30

1.11

0.96

0.85

1.06

0.69

-40%

-30%

-20%

-10%

Base

10%

20%

30%

40%

Basket Price % Change 7.5%

16.49

21.41

26.33

31.26

36.18

41.10

46.02

37.65

55.87

10.0%

12.75

16.71

20.66

24.62

28.57

32.53

36.49

29.76

44.40

12.5%

9.95

13.17

16.39

19.61

22.83

26.05

29.26

23.79

35.70

15.0%

7.84

10.49

13.13

15.78

18.43

21.07

23.72

19.22

29.01

17.5%

6.23

8.43

10.63

12.82

15.02

17.22

19.42

15.68

23.81

20.0%

4.99

6.83

8.67

10.51

12.36

14.20

16.04

12.91

19.72

22.5%

4.03

5.58

7.14

8.69

10.25

11.81

13.36

10.72

16.47

Source: JSI

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

Page 34

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JSI

SE BC RARE EARTH ELEMENTS – COMPANY REPORTS June 8th, 2011

JACOB SECURITIES INC. EQUITY RESEARCH

Market Rare Element Resources‘ production of lanthanum and cerium is expected to account for 78% of the company‘s total volume, the revenue contribution from these elements, based on our price forecast, is expected to be 31% to total revenue. Exhibit 29: Production per Element Eu 2%

Dy 1%

Other 3%

Nd 12%

La 31%

Pr 4%

Ce 47%

Source: JSI

Exhibit 30: Revenue per Element Other 6% Dy 8%

La 17%

Eu 12%

Nd 26%

Ce 24%

Pr 7%

Source: JSI

Given the sizeable production of lanthanum and cerium, we believe the catalyst market would be of great relevance to the company. The catalysts market is expected to grow at 4–5% per year in the next five years and is well established in the United States, in contrast with the magnets market, which is virtually non-existent in North America and more predominate in Asia. Furthermore, lanthanum and cerium comprise a relatively small portion of the total catalyst processing costs and thus are less sensitive to price increases. We estimate that neodymium and dysprosium, two of the critical materials, would account for 34% of the total sales. These materials are used, for instance, to produce the powerful permanent magnets. This sector is expected to grow at 10–15% per year. Justification of Target price We used the DCF NAV calculation, which is a common valuation methodology for development properties and producing mines. Our target price of C$18.43 is based on a P/NAV of 1.00x applied to the NAVPS. Given the emerging nature of the sector, we used a 15% discount rate which is in general higher than what is used in PEAs.

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

Page 35

<TITLE>OCTOBOCTER

JSI

SE BC RARE EARTH ELEMENTS – COMPANY REPORTS June 8th, 2011

JACOB SECURITIES INC. EQUITY RESEARCH

Key Risks to Price Target The rare earth mining sector is fairly new and in addition to the common inherent risks of a mining business there are sector specific risks. The list of risks are presented below and explained in the section ―Rare Earth Elements Investment Risk‖. • • • • • • • •

Exploration Risk Financing Risk Geopolitical Risk Rare Earth Distribution Risk Price Risk Metallurgical Process Risk Currency Risk Acquisition Risk

Officers and Directors

Donald Ranta, President & CEO

Dr. Ranta is an exploration and development mining executive experienced in planning, implementing and directing successful exploration and acquisitions throughout North and South America and internationally. He is also a former president and board member of SME and is currently the Vice President, Finance, and a board member of AIME. He has successfully directed and led innovative exploration efforts resulting in the discovery, evaluation and/or acquisition of several major deposits, including Montana's McDonald gold and Mexico's Santa Gertrudis gold ore bodies. He has also participated in the acquisition or discovery of a number of other gold deposits, including Baja California's Paradones Amarillos, Idaho's Kilgore, Montana's Seven-Up Pete, Mexico's Dolores gold-silver, Burkina Faso's Youga gold and Russia's Kuranakh gold. In addition, he serves as a director of Animas Resources Ltd. and has been a Vice President of Exploration for Echo Bay Mines and Manager/Vice President for North American Exploration at Phelps Dodge Mining Company.

Mark Brown, CFO and Director

Mark Brown is President and Director of Pacific Opportunity Capital Ltd. Headquartered in Vancouver, B.C, Pacific Opportunity is a financial consulting and merchant banking firm active in venture capital markets in North America. Mr. Brown is also an officer and/or director of a number of public and private companies, including Almaden Minerals, Animas Resources, Avrupa Minerals, Pitchstone Exploration and Tarsis Resources. His corporate activities include transactions, financings and corporate financial planning. Prior to joining Pacific Opportunity, Mr. Brown‘s background included managing financial departments of two TSE 300 mining corporations: Eldorado Gold and Miramar Mining. Mr. Brown has a Bachelor of Commerce from the University of British Columbia and became a Chartered Accountant while with PriceWaterhouseCoopers.

Jim Clark, VP, Exploration

Jim Clark brings 30 years of industry experience to Rare Element Resources. He has planned, organized and conducted all aspects of project exploration and target generation work as an employee and a consultant for a variety of mining companies, including Molycorp and Hecla Mining Company. Dr. Clark has a strong field orientation with extensive supervisory and project management experience in

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exploration programs for industrial minerals, precious and base metals, and specialty metals. He was senior geologist, and then exploration supervisor for Hecla, from 1986 to 1992, and played a key role in identifying Rare Element Resources' current Bear Lodge REE resource and the property's underlying gold mineralization potential, now joint ventured with Newmont. Dr. Clark has extensive experience in exploration and academic studies of commodities related to alkaline igneous rocks, including REE's, Nb and gold. He is the current owner and Chief Geologist of Applied Petrographics, a consulting company he formed in 1998 to provide petrographic and microanalytical services to the mining industry. Clients include Barrick Gold, Newmont Mining, Hecla Mining, AngloGold and CVRD, as well as many smaller companies. He holds a Ph.D. in volcanic geology and igneous petrology from the University of Oregon, an M.S. in geological oceanography from Oregon State University, and a B.S. in geology from The Ohio State University. He is a licensed geologist in Washington state. M. Norman Anderson, Director

Mr. Anderson has had a long and distinguished career in the mining industry. Since 1987, he has been an active consultant, with a focus on due diligence and evaluation for financial institutions and mining companies. Prior to this, he worked for Cominco, during which time he spent a four-year period in an executive position with Amax Lead Zinc. Inc. In 1978, he became President and Chief Operation Officer, and in 1980 he assumed complete responsibility for Cominco‘s business as Chairman and Chief Executive Officer. Mr. Anderson brings a wealth of experience in specialized metals to Rare Element.

Norman Burmeister, Director

Mr. Burmeister graduated from the Colorado School of Mines in Mining Geology in 1961 and has over 40 years of experience in the mining industry. He was Chief Geologist for Silver Standard Resources from 1965 to 1978. In 1980 he founded Bull Run Corporation and served as its Chairman and CEO until 1992. During that time, Bull Run successfully found, explored and developed a significant gold mine in Elko County, Nevada.

Stephen P. Quin, Director

Mr. Quin is the President of Midas Gold Corp and was formerly the Executive Vice President and Director of Miramar Mining Corporation. Mr. Quin is a graduate in mining geology from the Royal School of Mines, London, and has over 25 years‘ experience in exploration, mining and corporate affairs. Mr. Quin was with Miramar through its formation, growth and reorganization to focus on the Hope Bay Project. He joined Miramar as an independent director in 1987, and became Executive Vice President in 1991. Mr. Quin is also an independent director of Mercator Minerals Ltd.

Gregory McKelvey, Director

Mr. McKelvey, MS. Geol., has more than 40 years of extensive, international experience in Latin America, Africa and Europe in expanding responsibilities for significant mining companies, such as Kennecott, Cominco, Homestake and Phelps Dodge. He also acts as an Adjunct Faculty member at the University of Arizona in its International Center for Mining Health, Safety and Environment, and has worked for the USGS in Latin America. He has also consulted for Lundin, Codelco, Phelps Dodge, Newmont Mining, Gerald Metals and Quadra Mining. He is currently President of Animas Resources Ltd.

Winnie Wong, Corporate Secretary

Winnie Wong C.A received a Bachelor of Commerce degree (Honours) from Queen's University in 1996 and is a member of the Institute of Chartered Accountants of British Columbia. She is currently Vice President of Pacific Opportunity Capital Ltd. Her role is

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to manage the financial administration team and to assist Pacific Opportunity Capital Ltd.'s management group on corporate finance projects. Prior to joining Pacific Opportunity Capital Ltd., Ms. Wong was the controller of Pivotal Corporation, a company providing software, services and support to a variety of businesses. Between 1996 and 1999, Ms. Wong worked with Deloitte & Touche.

Shareholders Top Institutional Shareholders Shares

% Ownership

Van Eck Associates

1,187,524

2.71%

Invesco Ltd.

802,378

1.83%

Geologic Resource Partners

650,000

1.48%

Wellington Management

422,970

0.96%

MFC Global Investment Management

367,270

0.84%

% Ownership

Mark Brown

628,000

1.43%

Norman Burmeister

495,000

1.13%

Donald Ranta

182,000

0.41%

915,645

2.09%

Officers and Directors

Others Pacific Opportunity (Mark Brown)

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Ucore Rare Metals Inc. (TSXV:UCU; $0.63) Ucore Rare Metals Inc. engages in the exploration and development of rare earth element and uranium properties. The company‘s principal property is the Bokan Mountain/Dotson Ridge property, which is located on the southern part of the Prince of Wales Island in South-Eastern Alaska. It also has properties in Nunavut, in Stephenville, Newfoundland, and in Labrador. Ucore Rare Metals Inc. is based in Halifax, Canada.



Ucore‘s 100%-owned Bokan Mountain property covers 30 sq. km (19 sq. miles) and includes the former high-grade Ross Adams Mine, which is Alaska‗s only prior-producing uranium mine (1958–1971).



The Bokan deposit has been identified by the USGS as the most significant heavy rare earth deposit in the United States. The NI 43-101 compliant resource for the Bokan area is estimated at 3.7 million tonnes at 0.75% TREO, at a cut-off grade of 0.5%. The percentage of HREO/TREO is estimated at 39%.



The Ucore project has attracted significant attention from state and federal governments in the United States, given its relatively high percentage of heavy rare earth elements, identified as critical for the energy and defense industries. Based on this apparent interest and support, we believe Ucore‘s Bokan Project would most likely cross the finish line. The company‘s relatively small project size and estimated capital cost are potentially advantageous for the company given the somewhat lower financing risk. The company is currently working toward the completion of a scoping study, expected to be completed in 4Q 2011. Our valuation is based on a 10-year mine life, with a plant throughput of 1,014 tpd and 2,100 tonnes of rare earth oxide production. We initiate coverage of Ucore with a Speculative Buy recommendation. Our target price of C$1.09 is based on a NAVPS of C$1.28 applied to a 0.85x P/NAV multiple.

Rating: Speculative Buy Price Target: C$1.09 Risk: High

Ticker Date Share Price 52 Week High 52 Week Low Shares Outstanding Market Cap Net Debt Cash & Short Term Investments Debt Total Enterprise Value NAVPS P/NAV EV/Resource Contained Price/Volume Chart

TSXV:UCU June 7, 2011 $0.63 $1.28 $0.20 149.13 $93.95 (11.64) $11.64 $0 $82.31 $1.28 0.58x US$3,027

$1.50

15.0

$1.00

10.0

$0.50

5.0

$0.00 Jun-10

Sep-10

Dec-10

Volume Project Details Name Location Stage of Production Size of Property Type of Ore NI 43-101 (or equivalent) Average TREO or TREE Resource's Principal REEs

Mar-11

0.0 Jun-11

Price

Other Principal By-products

Bokan Mountain SE Alaska, U.S. Discovery Delineation 3,000 ha Peralkaline Yes 0.75% REO @0.5% cut-off 25% Y, 3.9% Dy, 3.62 Gd; 14.5% Nd; 29.5% Ce; 10.3% La n/a

Off take agreement

n/a

Target Production (year)

2015

Target Production (tonnage)

3000

Resource

3.7 Mt @ 0.75% REO

Ownership

100%

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Key Asset(s) Bokan Mountain Ucore‘s Bokan Mountain property is located in the southern part of the Prince of Wales Island, in Alaska. The company owns 100% of the property, subject to certain royalties. The property is located in a remote and uninhabited area, accessible year round mostly by helicopter, boat or on foot. The nearest road and railhead are located 133 km to the southeast, in Prince Rupert. Existing infrastructure associated with the previously operated Ross Adams mine and exploration work consists of a 4-km gravel road from Kendrick Bay to Ross Adams and I & L zones, a water line, floating landing docks and a barge loading area. There are abundant sources of fresh water available throughout the year. There is no electrical infrastructure on the property and diesel generators will most likely be the source of power for any mine operations in the area. The two closest cities to the property are Ketchikan, 60 km southwest and Prince Rupert, 130 km southeast in British Colombia. The Bokan Mountain Project covers 30 sq. km (19 sq. miles) and includes the former Ross Adams mine, which is Alaska‘s only prior-producing uranium mine.

Exhibit 31: Location Map — Bokan Mountain on Prince of Wales Island, Alaska

Source: USGS

A study conducted by the United States Geological Survey (USGS) in 1989 estimated the Bokan Mountain property as potentially one of the largest heavy rare earth deposits in the United States, extensively enriched in yttrium and heavy rare earth. Ucore acquired the Bokan Mountain property in 2007, and since then has explored the area with the aim of confirming the property‘s potential. Ucore recently completed the first NI 43-101 resource compliant REE estimate for the property, which confirmed a significant percentage of heavy rare earths compared to light rare earths. The

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company has also recovered several thousand metres of historical drill core related to its Bokan area, which will assist it with identifying on-site targets for additional resources. Alaska is known as a mining-friendly jurisdiction with a proven history of successful mine permitting, and the recently introduced Rare Earth Supply-Chain Technology and Resource Transformation Act of 2011, could help fast track the progress of the Bokan Mountain Project. United States Congress Rare Earth Mining Bill The U.S. Congress has introduced the Rare Earth Supply-Chain Technology and Resource Transformation Act of 2011. The goal of this bill is to support the development of the rare earth industry in the United States. The bill would require federal agencies to expedite the permitting process of REE projects, initiate a temporary rare earth industry loan guarantee program, create a Defense Logistics Agency rare earth inventory and establish a rare earth program at the USGS. We believe that, while the bill encompasses all the REE projects in the United States, Ucore‘s project in Alaska would certainly benefit from it. The Bokan Mountain Project has captured significant attention from federal and state government officials, as it has been identified as the largest known heavy rare earth deposit in the United States, with good amounts of the critical elements that are used in the defense and alternative energy industries. One of the biggest supporters of the Mountain Bokan rare earth property development is the Alaskan government, which in 2010 passed the House Resolution 16, addressing the need to fast track the development of the mining and production of rare earth elements, as well as the entire REE industry supply chain in Alaska and the United States. In addition, the Alaskan government has been supporting the Bokan Project with loans for research and it is intensely lobbying the federal government for additional assistance to fund and expedite the permitting process of REE projects. Other Projects Ucore has several other projects in Canada, mostly with a uranium focus. The projects include the Makkovik River Project, which is within Labrador‘s promising Central Mineral Belt, the Sandybeach Lake Project in Nunavut and the Lost Pond uranium and rare earth project near the coast of Newfoundland. Mineralogy and Resources Mineralization at Bokan Mountain is related to a peralkaline ring dike complex known as the Bokan Intrusive Complex. Variable concentrations of REE, zirconium, beryllium, tantalum and niobium are associated with the uranium mineralization, and most of the mineralization is characterized by multiple, steeply dipping, uraniferous quartz-pegmatite veins localized by radial fractures near the margin of the complex. The most significant mineralized occurrences in the property include the Ross Adams, I & L veins, Dotson Shear, Sunday Lake and the Geiger zones. According to USGS, the geologic work on the Bokan deposit conducted by the U.S. Bureau of mines in the mid-1980s revealed that the yttrium in the mineralized dikes is associated with thalenite and tengerite, and the other rare earths were associated with a variety of minerals, including bastnäsite, xenotime, monazite, parasite and synchrysite. The USGS found that the dike systems are enriched with high levels of yttrium and heavy rare earth compared to light rare earth, with mostly negligible amounts of thorium and uranium. In addition, minor amounts of other elements, such as gold and silver, were also identified. The vein systems also showed complex mineralization. For instance, in the I&L vein zone, the rare earths were found in allanite, bastnäsite, xenotime and monazite, and in some zones, the REE showed an unusual distribution,

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where some veins contain mostly LREE (e.g. in bastanasite), and other parts of the same vein would have mainly HREE (e.g. in xenotime). In addition, anomalous amounts of beryllium, niobium, zirconium, strontium, barium, tin, lead, zinc, copper and molybdenum were also found. The USGS concluded that the Bokan property mineralization could have ―considerable economic potential‖. However, these collective findings have yet to be confirmed in a NI 43-101 technical report. Ucore‘s principal economic target is the Dotson zone, which is characterized by a tabular zone of numerous veins and narrow veinlets, with a strike length of 2,140 m, 50-m average width and approximately 450 metres depth. The company released a NI 43-101 compliant resource estimate of the deposit on March 7, 2011, which showed an inferred mineral resource of 3.7 million tonnes grading 0.75% TREO, at a cut-off grade of 0.5%. The results also revealed that the heavy rare earths constitute about 39% of the total rare earths in the deposit. The company is currently working on a drilling program aimed at significantly increasing the size of the resource. Exhibit 32: Bokan Mountain Property

Source: Company reports

Metallurgy As mentioned previously, the Bokan property has been identified by the USGS as potentially containing the largest concentration of HREE in the United States soil. Due to the increasing demand for some of the heavy rare earth metals in the energy and defense industries, in mid1990s the Federal Bureau of Mines Research led a comprehensive study to examine the metallurgy of the Bokan Mountain HREE with a particular focus on recovering yttrium, which was then considered the most critical element. Samples were obtained from the Bokan-Dotson Ridge zone. The study revealed that sulfating the ore at 250°C for one hour at a 1:1 ratio of sulphuric acid to ore content, and then water leaching the sulfated material for one hour at 20% solids and 25°C, solubilizes 75% of the yttrium and over 85% of the lanthanum. Solvent extraction, using a Jacob Securities Inc., 199 Bay Street, Suite 2901, Toronto, ON M5L 1G1 +1-416-866-8300 www.jacobsecurities.com

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synergistic combination of 0.05M octyl phenyl phosphate and 20% di(2-ethylhexl) phosphoric acid, selectively loaded 100% of the yttrium in as little as five minutes. Yttrium was then stripped directly as a solid precipitate using 2.5M sodium hydroxide liquor at 35°C, with an acid to ore ratio of 1:1. When the solvent extraction circuit was tested in a continuous basis, yttrium loading and stripping were 100% and 96%, respectively. To determine if the study complied with the NI 43-101 standards, Ucore contracted the services of Mountain States R&D International (MSRDI). After careful examination of the study and documented results, MSDI found that the methodologies and conclusions satisfy the NI 43-101 standards. However, Ucore is currently performing additional metallurgical work with a broader focus of recovering all the rare earths, at the lowest possible cost. Project Development Strategy Ucore recently set out an aggressive project development strategy for the Bokan-Dotson Ridge deposit. The company‘s 2011 field program comprises 12,000 linear metres of new drilling, and the objective is to significantly expand the size of the existing resource and upgrade the previously released inferred resource to an indicated category by infill drilling. Additional underground work is to be conducted via a proposed adit, and the permitting process has been initiated. The adit should provide all-season drill access and improve locations for collaring holes intended to extend the deposit at depth. The adit will also be used to access bulk sample material for metallurgical testing. Moreover, Ucore has initiated the collection of baseline environmental data required for the permitting of prospective mining operations. The mine engineering, environmental assessment and metallurgical work are anticipated to contribute to an NI 43-101 compliant PEA scheduled for completion in Q4 2011; the pre-feasibility study will be conducted in parallel and should be completed shortly after. Ucore expects to take the project to bankable feasibility in the next two years. Assuming the project stays on schedule and the BFS is positive, the company foresees that construction will start in 2013 and production by 2015. Financials Ucore incurred a net loss of US$4.3 million in 2010, compared to US$1.3 million in 2009. The increase in net loss was due to losses associated with the writedown of resource properties and increase in operating costs associated with investor relations and corporate activities. At December 31, 2010, the company had working capital of $10.4 million, and cash and cash equivalents of $11.6 million. We estimate that Ucore‘s average cash burn rate for the year is about US$160,000/month. As of April 2011, Ucore had 5,167,920 stock options with an average exercise price of US$0.60 and an average expiry date of 2.7 years, and 7,551,901 warrants with an average exercise price of US$0.46 and an average remaining life of 1.55 years.

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Valuation Resources (tonnes)

3,700,000

Average Grade (%)

0.75

Target Production Date

2015

Mill Processing (tpd)

1,014

Mine Life (years)

Long Term Average Basket Price (US$/kg)

Average Operating Costs (US$/kg)

Capital Costs (C$ Millions)

175

Discount Rate

15%

Total Net Present Value (C$ Millions)

183

Cash and Cash Equivalents

Debt

Corporate Adjustments

Total Net asset Value

194

NAVPS (C$/share)

1.28

Current P/NAV

0.49x

Target P/NAV

0.85x

Target Price (C$)

1.09

Ucore‘s current P/NAV multiple is 0.49x, which is above the average peer group P/NAV multiple. As mentioned above, the Bokan Mountain deposit is unique, in the sense that it is possibly one of the few, if not the only, economic deposits in the United States with high levels of the critical heavy rare earth elements. For this reason, the project has attracted significant interest and support from government officials and entities. Based on historical exploration, it seems that Bokan Mountain has other mineralization targets in addition to the Dotson zone, which is Ucore‘s current exploration target. The Bokan Mountain deposit could potentially contain much larger resources than what is indicated in the recent NI 43-101 technical report. Also, the company recently announced that it has completed physical staking and claim recording on approximately 11,400 acres located in the Ray Mountains, in Alaska. The initial assay results indicate 1 to 8 %TREO and high HREE content. We believe that the company‘s relatively small project size could work to its advantage. The estimated capital cost is currently less than US$200 million (to bring the project into production), which is relatively small compared to what is required for other projects. Despite its limited size, a combination of rare earths distribution, geographic location and apparent government support, positions Ucore as one of the likely projects to cross the finish line in the next five years. Our target price of C$1.09 is derived from a multiple of 0.85x applied to our NAVPS of C$1.28. We believe that despite the size and the project development stage, the 0.85x multiple is appropriate given the potential of the project. It is also possible that as the company overcomes some of the key hurdles (e.g. metallurgy optimization), the valuation would rise above the NAV. Ucore options and warrants are currently in the money, the diluted NAVPS is C$1.22.

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

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Sensitivity Analysis Ucore‘s basket price based on our forecast prices for the rare earth oxides (base scenario), is US$83/kg, compared to US$186/kg assuming current prices, a 123% difference. If forecast prices were 40% higher (i.e. US$116/kg) than estimated, at a 15% discount rate the NAVPS would be C$2.29 and the target price at a 0.85x P/NAV multiple would be US$1.95 (Exhibit 33). At current prices and a 15% discount rate, NAVPS would be US$4.41/kg and the target price at a 0.85x P/NAV multiple would be C$3.75, a 244% increase relative to our forecast. Exhibit 33: Ucore Price Analysis NAVPS, C$

Discount Rate

P/NAV (x)

Discount Rate

Target Price @ P/NAV=0.85

Discount Rate

Basket Price % Changes

-40%

-30%

-20%

-10%

Base

10%

20%

30%

40%

7.5%

0.67

1.10

1.54

1.97

2.40

2.83

3.27

3.70

4.13

10.0%

0.50

0.86

1.22

1.58

1.94

2.30

2.66

3.02

3.38

12.5%

0.37

0.67

0.97

1.27

1.57

1.87

2.17

2.47

2.77

15.0%

0.26

0.52

0.77

1.02

1.28

1.53

1.78

2.04

2.29

17.5%

0.18

0.40

0.61

0.83

1.04

1.25

1.47

1.68

1.90

20.0%

0.12

0.30

0.48

0.66

0.85

1.03

1.21

1.40

1.58

22.5%

0.06

0.22

0.38

0.53

0.69

0.85

1.00

1.16

1.32

-40%

-30%

-20%

-10%

Base

10%

20%

30%

40%

Basket Price % Changes 7.5%

0.94

0.57

0.41

0.32

0.26

0.22

0.19

0.17

0.15

10.0%

1.26

0.73

0.52

0.40

0.32

0.27

0.24

0.21

0.19

12.5%

1.71

0.94

0.65

0.50

0.40

0.34

0.29

0.25

0.23

15.0%

2.38

1.22

0.82

0.62

0.49

0.41

0.35

0.31

0.28

17.5%

3.48

1.59

1.03

0.76

0.61

0.50

0.43

0.37

0.33

20.0%

5.47

2.11

1.31

0.95

0.74

0.61

0.52

0.45

0.40

22.5%

10.09

2.87

1.67

1.18

0.91

0.74

0.63

0.54

0.48

-40%

-30%

-20%

-10%

Base

10%

20%

30%

40%

Basket Price % Changes 7.5%

0.57

0.94

1.31

1.67

2.04

2.41

2.78

3.14

3.51

10.0%

0.43

0.73

1.04

1.34

1.65

1.95

2.26

2.56

2.87

12.5%

0.31

0.57

0.82

1.08

1.34

1.59

1.85

2.10

2.36

15.0%

0.22

0.44

0.66

0.87

1.09

1.30

1.52

1.73

1.95

17.5%

0.15

0.34

0.52

0.70

0.88

1.07

1.25

1.43

1.61

20.0%

0.10

0.25

0.41

0.56

0.72

0.88

1.03

1.19

1.34

22.5%

0.05

0.19

0.32

0.45

0.59

0.72

0.85

0.99

1.12

Source: JSI

According to the expected rare earths distribution for the Dotson Zone, Ucore‘s estimated production of light rare earths would comprise 60% of the total REO produced and revenue from the sale of the LREE would correspond to 30% of the total revenue, based on our forecast prices. This suggests that changes in HREE prices relative to LREE prices would have a much higher impact on the project economics, as expected. The implied market basket price is approximately US$60/kg, 28% lower than our forecast basket price for Ucore and 68% lower than a basket price based on current prices.

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

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Market We expect lanthanum and cerium to account for about 42% of the total rare earth oxide produced by Ucore, and based on our price forecast lanthanum and cerium will make up 11% of the company‘s total revenue. Thus, we conclude that the catalyst market will be of less relevance to Ucore compared to its peers in the United States. In contrast, dysprosium sales would account for the largest portion of sales at 42%. Exhibit 34: Production per Element Other 12%

La 11% Ce 31%

Y 26%

Dy 4%

Nd 15%

Tb 1%

Source: JSI

Exhibit 35: Revenue per Element Other 6% Y 12%

La 3%

Ce 8%

Nd 17%

Dy 42%

Eu 5% Tb 7%

Source: JSI

Dysprosium is one of the critical metals identified by the United States Department of Energy and is used to improve a magnet‘s strength and corrosion resistance, and given its high melting point is used in nuclear control applications with likely relevance to the energy and defense industries. Neodymium is expected to account for 16% of Ucore‘s production volume and 17% of total sales. Both dysprosium and neodymium are used to make magnets, and this sector is expected to grow at 10–15% per year in the next five years. Europium, yttrium, terbium and cerium all have similar contributions to Ucore‘s sales (i.e. 7–12%). These materials are extremely important for the phosphors industry, which is expected to grow at 6–10% per year for the next five years. Ucore is somewhat penalized in our valuation because we assume no market for five of the heavy rare earth elements for which prices are usually not available or updated.

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

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Justification of Target price We used the DCF NAV calculation, which is a common valuation methodology for development properties and producing mines. Our target price of C$1.09 is derived from a multiple of 0.85x applied to our NAVPS of C$1.28. Given the emerging nature of the sector, we used a 15% discount rate which is in general higher than what is used in PEAs. Key Risks to Price Target The rare earth mining sector is fairly new and in addition to the common inherent risk of a mining business there are sector specific risks. The list of risks are presented below and explained in the section ―Rare Earth Elements Investment Risk‖. • • • • • • • •

Exploration Risk Financing Risk Geopolitical Risk Rare Earth Distribution Risk Price Risk Metallurgical Process Risk Currency Risk Acquisition Risk

Officers and Directors James McKenzie, President & CEO

Mr. McKenzie is an entrepreneur with over 25 years‘ experience managing, owning and operating companies within the Canadian private and public equity sectors. From 2002 until 2006, he was the President and principal shareholder of Worldmax Inc., Canada‘s largest independent partner of MTS Allstream Corp. Between 1999 and 2002, he variously served as Vice President, President and CEO of a wholly owned subsidiary of AT&T Canada and U,S,-based AT&T Corp, helming a voice and data network spanning from Vancouver to Halifax. From 1988 until 1999, he was the President and sole shareholder of Mediapro Inc., a voice and data enterprise with offices in major centres Canada-wide, until the company was bought by AT&T Canada in early 2000. Between 1992 and 1998, he was a director of Tagcom Canada Inc., an interconnect provisioner operating across Western Canada. He has spearheaded multiple business and technical initiatives for major organizations such as the Department. of National Defense (DND/MARCOM), Lucent Canada, BCE and AT&T Global Solutions. Mr. McKenzie served as Chair of the 2008 Canadian Uranium Symposium under the direction of The Canadian Institute. He holds a Bachelor of Commerce degree from Dalhousie University in Halifax.

Harmen J. Keyser, Vice President, Project Development

Mr. Keyser is a geologist with 25 years of experience in mineral exploration in 20 countries working with various majors, juniors, and as an independent consultant. He was involved in the discovery of the San Martin gold mine in Honduras, the Cerro Blanco gold deposit in Guatemala and the Skukum Creek gold-silver deposit in the Yukon. He previously worked for AGIP Canada Ltd. exploring for uranium deposits in Saskatchewan; has worked as an independent consultant on uranium exploration in the Yukon, Manitoba, Nevada, Utah, Tanzania, Algeria and Egypt; and also has experience in epithermal gold, volcanogenic massive sulfide and porphyry copper-gold exploration. He is a director of Radius Gold Inc., Northland Resources Inc. and Sound Energy Inc. He obtained a Bachelor of Science degree in geology from Saint Mary‘s University in 1981, is a member of the Northwest Territories Association of Professional Engineers, Geologists and Geophysicists, and is a ―Qualified Person‖ in accordance with National

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

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Instrument 43-101. Peter Manuel, CFO & Corporate Secretary

Peter Manuel is a Chartered Accountant with more than 17 years‘ experience providing consulting services to companies in a range of sectors, with a focus on the financial services and resource sectors. He joins Ucore having spent the last 10 years in England and The Republic of Ireland, providing assurance, strategic planning, corporate finance and other consulting services to a portfolio of both public and private entities, including licensed banks, proprietary trading operations and international corporate treasuries. Mr. Manuel holds a Bachelor of Commerce degree from Dalhousie University.

Nick T. Vermeulen, MBA

Mr. Vermeulen is a successful businessman and entrepreneur, with over 20 years of business experience. In the late 1980s and early 1990s, Mr. Vermeulen ran an international sales and marketing team for International Computers Ltd., a Fujitsu IT subsidiary, from a European base. He successfully sold database machine technology to become part of IBM & Oracle‘s core business in a $80 million deal. In 1994, Mr. Vermeulen moved to Western Canada and played an instrumental role in a number of high-tech start-ups, latterly in the high-tech security market until 2002. For the past 5 years, he has been involved as a managing partner in successful ―niche market-focused‖ real estate development projects. Mr. Vermeulen holds a Master of Science degree in Structural Geology with a minor in Business Administration from University of Utrecht, Netherlands. His unique combination of geological background, combined with his array of business experience, allows him to effectively bridge the technical and business aspects of the exploration business.

Jaroslav Dostal, Director

Dr. Dostal is Professor Emeritus of Geology at Saint Mary‘s University in Halifax. He has over 35 years‘ experience in geology, ore deposit studies and geochemistry. He has published more than 250 scientific papers, and is a widely acknowledged expert on uranium mineralization in granitoids and volcanic rocks and mobility of uranium in metamorphic and volcanic rocks. He is the recipient of the 2005 Career Achievement Award of the Volcanology and Igneous Petrology Division of the Geological Association of Canada and the 2007 Gesner Medal for Distinguished Scientist of the Atlantic Geoscience Society. He is also Honorary Professor of Mongolian University of Science and Technology in Ulaanbaatar.

Jos De Smedt, Director

Mr. De Smedt is the Chief Financial Officer of Radar Acquisitions Corp., a publicly traded coal resource exploration and development company based in Calgary, Alberta. He had previously been a Business Consulting Partner with IBM Canada Global Business Services since 2002 and brings more than 20 years‘ experience in the finance/accounting/auditing and management consulting industry. Starting as a chartered accountant in Belgium with increasing responsibilities for major publicly traded companies, he became a partner with PricewaterhouseCoopers Canada in 1998. In 2000, he took over responsibility for the Travel & Transportation industry consulting practice for the Canadian Marketplace. Prior to taking on a management consulting role and his industry leadership role, Mr. De Smedt worked in the Audit and Business Advisory Services Practice of PricewaterhouseCoopers in Brussels, Belgium, and Montreal, Canada. In this capacity, he held senior manager responsibilities for major audit engagements and financial due diligence assignments. Mr. De Smedt holds a Bachelor of Commerce & Finance degree from VLEKHO University in Brussels, Belgium.

Wayne Reid, Advisory Board Member

Mr. Reid has in excess of 30 years‘ experience in exploration and mining geology, spanning a variety of Canadian geological terrain, from Newfoundland to Northern B.C. and Alaska. His positions have included Exploration Manager for St. Andrew Goldfields, Canadian Exploration

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

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Manager for Echo Bay Mines, as well as District Manager for Noranda Exploration and Hemlo Gold Mines Inc. Mr. Reid was instrumental in the discovery of the Brewery Creek Gold Deposit in the Yukon and the Boundary Massive Sulphide Deposit/Duck Pond mine in central Newfoundland. His experience includes uranium exploration experience in Saskatchewan‘s Athabaskan region, as well as in Newfoundland & Labrador. Mr. Reid holds a BSc. in Geology from Memorial University in Newfoundland and has a Professional Geologist designation from the Association of Professional Geologists of Ontario. Anthony Mariano, Advisory Board Member

Anthony Mariano, Ph.D. is a recognized authority on rare earth element (REE) mineralogy and deposits at a world level. Dr. Mariano has nearly 50 years of experience as a consultant, exploration geologist, senior earth scientist and adjunct professor. His rare earth-related field experience extends to 52 countries in North and South America, Europe, Asia, Africa and Australia. Dr. Mariano was instrumental in the original delineation of rare earth minerals at one of the world‘s largest rare earth deposits at Mt. Weld, Australia. He originally examined the Alaska-based Bokan-Dotson Ridge rare earth deposit in 1988 and has significant knowledge of the rare earth mineralization at that location.

Shareholders Top Institutional Shareholders Shares

% Ownership

Pinetree Capital

10,500,000

7.05%

Global Strategy Financial

7,818,082

5.25%

Smith and Williamson Inc

868,656

0.58%

Brigus Capital Inc

538,888

0.36%

% Ownership

James McKenzie

3,577,000

2.40%

Harmen Keyser

220,135

0.15%

Jos De Smedt

182,000

0.12%

Nick Vermeulen

75,000

0.05%

Officers and Directors

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

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Frontier Rare Earths Ltd. (TSX:FRO; C$2.20) Frontier Rare Earths Limited is a Luxembourg headquartered, mineral exploration and development company that is exclusively focused on rare earth elements. Frontier was incorporated in 2002 with the objective of developing a portfolio of mineral exploration projects in Southern Africa. The company‘s principal asset is the Zandkopsdrift rare earth deposit in the Namaqualand region of the Northern Cape Province of South Africa. 

Frontier‘s Zankosdrift property is currently the largest NI 43101 compliant rare earth resource in Africa, and one of the largest in the world. Estimated resources amount to 43.7 million tonnes at an average grade of 2.16% and a 1% cut-off grade. Our economic model is based on a 20-year mine life, based only on the size of the indicated resources (22.9 million tonnes); the mine life could be extended further, based on the existing resource which remains open laterally and at depth.



The property is located near infrastructure and the total capital cost per tonne is expected to be lower compared to its peers. Given that the project is in Africa, we expect absolute capital costs to be lower than its peers with similar expected production size in North America.



Frontier's resource size and consequent expected production level (20,000 tonnes) combined with a unique rare earths distribution means that the company could produce more volume of the critical elements (neodymium, praseodymium, dysprosium, europium and terbium) than some of the more advanced juniors with higher percentages of HREO/TREO but lower TREO production. Frontier has good levels (about 22% by volume) of the critical elements. This is higher than certain light rare earth deposits e.g. Molycorp (about 16% by volume), which may look to gain a more diversified rare earths distribution by merging with companies containing higher levels of these critical elements.



Given the high mining asset protectionism that has been manifested in North America and Australia in recent years, we believe that when China becomes a net importer of rare earth it will likely find ―easier‖ partners in Africa than elsewhere. Given the potential of Frontier‘s project, Chinese (and other) rare earth companies and customers may become attracted to the project.



Price Target: C$9.83 Risk:High

Ticker Date Share Price 52 Week High 52 Week Low Shares Outstanding Market Cap Net Debt Cash & Short Term Investments Debt Total Enterprise Value NAVPS P/NAV EV/Resource Contained Price/Volume Chart

TSX:FRO June 7, 2011 $2.20 $3.75 $2.01 89.56 $197.04 (50.00) $50.00 $0 $147.04 $16.39 0.13x US$156

$4.00

2.5 2.0

$3.00

1.5 $2.00



Rating: Speculative Buy

1.0

$1.00 $0.00 Nov-10

0.5 0.0 Jan-11

Mar-11

Volume

May-11

Price

Project Details Name Location

Zandkopsdrift Northern Cape Province, South Africa Stage of Production Scoping study Size of Property 58,862 ha Type of Ore probably supergene, monazite and crandallite NI 43-101 (or equivalent) Yes Average TREO or TREE 2.16% REO @1% cut-off Resource's Principal REEs 44.17% Ce, 25.42% La, 4.55% Pr, 15.77% Nd, 2.32% Sm; 4.07% Y Average Grade of Other Principal n/a By-products Off take agreement n/a Target Production (year)

2015

Target Production (tonnage)

20,000

We believe Frontier is severely underpriced compared to its peers. The company is currently trading at 0.13x P/NAV, and EV/tonnes of contained resources of US$156, compared to US$1,107 for the peer group.

Resource

We initiate coverage of Frontier with a Speculative Buy recommendation and a target price of C$9.83 based on 0.6x our NAVPS estimate of C$16.39.

Ownership

Measured

n/a

Indicated

22.9Mt @ 2.32% TREO

Inferred

20.8Mt @ 1.99% TREO

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

74% (Direct) 95% (Economic Interest)

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Key Asset(s) The Zandkopsdrift property is Frontier‘s main asset, and is located in the Namaqualand region of the Northern Cape Province of South Africa. The region is sparsely populated by farmers, and has good transportation infrastructure. Namaqualand is the longest established mining province in South Africa with over 150 years of mining activity. The closest towns include Garies, located approximately 25 km northeast, and Bitterfontein is 30 km southeast. The property is 475 km from Cape Town and there is railhead approximately 30 km away. The railway line leads to other mining and smelting facilities in the region. The area has flat sections that could accommodate an air strip for faster access to the property. Cellular communications are available in the area, and the nearest high-voltage line is located approximately 100 km to the south. According to Frontier‘s independent technical report, Eskom, the South African electricity generation and distribution authority, has plans to develop an 800 MW Kudu Combined Cycle Gas Turbine (CCGT) power station in the region, which may include building a high power line passing close to the Zandkopsdrift property. However, no dates have been set for the development of this project. Until then, we believe the company would likely set up a diesel electric generator to power its mining and concentration plant. Exhibit 36: Project Location Map

Source: Company reports

The majority of the water supply in the region is currently sourced from groundwater reservoirs. Water sources seem to be sufficient to support current drilling work at the site; however, Frontier is currently exploring other sources of water to be used once in operation. The company has several options, including, pumping water from two seasonal rivers (the Groen and Swartdoring), Jacob Securities Inc., 199 Bay Street, Suite 2901, Toronto, ON M5L 1G1 +1-416-866-8300 www.jacobsecurities.com

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and/or building a desalination plant, given the proximity to the coast. Bringing more water to the region would certainly be seen favourably by the farming community in the area. The Zandkopsdrift carbonatite has been highly prospected over the past 40 years, starting in 1950s for its manganese potential, and then explored for phosphate (P2O5) and niobium (Nb2O5) from 1973 to 1978, and in the mid-1980s for its REE potential. The majority of the historical work was carried out by Anglo American. Frontier has acquired all of Anglo American‘s data, including diamond core, RC chips and sample pulps, and has fully evaluated and validated the data. Frontier owns 74% of the Zandkopsdrift Project, through its ownership of Sedex Minerals (Pty) Ltd. The remaining 26% is owned by the Historically Disadvantaged South Africans, in agreement with the South African Black Economic Empowerment (BEE) equity ownership requirements set out by the Mining Charter and the Minerals Petroleum Resources Development Act (MPRDA). The Company is entitled to a payment from its BEE partner equivalent to 21% of the value of the project on completion of a feasibility study thus giving an effective 95% economic interest in the project. Rare Metals Cluster Frontier plans to build its REE refinery facility in the Saldanha Bay area, approximately 250 km from the Zandkopsdrift deposit. The concentrate could be transported by a combination of road and railway. Saldanha Bay is one of the deepest water ports in Southern Africa. The region is industrially developed but, more importantly, it has been targeted for a government-sponsored initiative to establish the rare metals industry in South Africa. As part of this industrial development, there are plans to build a power plant to boost the energy capacity in the region and significantly expand the local port cargo capacity. We believe Frontier‘s rare earth project is a perfect match for this industrial initiative and will benefit from the infrastructure improvements. Additionally, the industrial complex is expected to house some of the major industrial metal companies, such as Arcellor Mittal, and leading rare metals producers, who could potentially collaborate with Frontier in its efforts to bring its REE products to market. Exhibit 37: Saldanha: Port, Iron Ore Rail Line and Existing Arcellor Mittal Steel Works

Source: Google Images

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

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It should be noted that Frontier is aware of the opportunities that the rare earth industry complex could bring; however, the company is running an independent schedule to bring its project to production, targeted for 2015. Mineralogy and Resources The rare earth mineralization at Zandkopsdrift is believed to be associated with different phases of carbonatite intrusion that went through multiple stages of alteration and weathering resulting in a deeply weathered, vertically zoned horizon. The REE-enriched zones have been found to be mostly at the surface and about 80 m in depth. The carbonatite body is associated with deep weathering/alteration and supergene enrichment zones. Most of the rare earths are believed to be contained in late stage, probably supergene, monazite and crandalite. Uranium and thorium are both present in the deposit at relatively low concentrations of about 60–70 ppm for uranium and 215–235 ppm for thorium. Exhibit 38: Resource Estimate Total Resources Cut-off grade (%TREO)

Tonnes (Mt)

Average Grade (%TREO)

Contained TREO (kt)

Indicated Resources

1.0%

22.9

2.32%

532

Inferred Resources

1.0%

20.8

1.99%

415

Cut-off grade (%TREO)

Tonnes (Mt)

Average Grade (%TREO)

Contained TREO (kt)

Indicated Resources

1.5%

16.6

2.74%

453

Inferred Resources

1.5%

12.9

2.48%

319

Cut-off grade (%TREO)

Tonnes (Mt)

Average Grade (%TREO)

Contained TREO (kt)

Indicated Resources

2.5%

7.8

3.67%

287

Inferred Resources

2.5%

4.5

3.61%

163

Cut-off grade (%TREO)

Tonnes (Mt)

Average Grade (%TREO)

Contained TREO (kt)

Indicated Resources

3.5%

3.2

4.57%

148

Inferred Resources

3.5%

1.5

4.72%

A Zone

B Zone - Contained within Zone A

C Zone - Contained within B Zone

Source: Company reports; JSI

The total resources, assuming a cut-off grade of 1%, is estimated at 22.9 million tonnes of indicated resources at an average 2.32% TREO and 20.81 million tonnes of inferred resources at an average of 1.99% REO. However, Frontier has identified high-grade zones within the deposit Jacob Securities Inc., 199 Bay Street, Suite 2901, Toronto, ON M5L 1G1 +1-416-866-8300 www.jacobsecurities.com

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that could be exploited individually. These are indicated in Exhibit 38 above as A Zone, B Zone and C Zone. The B Zone is contained within the A Zone and the C Zone is contained within the B Zone. Metallurgy In the past, Anglo American conducted metallurgical testing on samples from the Zandkopsdrift site, utilizing a variety of processes. Leach test work results on the highly weathered samples resulted in positive recoveries above 90% and acid consumption of about 40–60 kg/tonne of material. However, higher acid consumption was recorded for samples with lower grades. More recently, SGS Minerals has conducted metallurgical review of the Zandkopsdrift REE deposit and concluded that there is strong potential for upgrading by flotation and there would likely be numerous leaching options that could result in recovery rates above 90% for the REE elements in solution, which is similar to Anglo America‘s findings. Preliminary results have been very encouraging; however, additional tests and a detailed metallurgical test need to be completed to determine the most economic beneficiation process. Metallurgical test work which is being undertaken by SGS Mineral Services is currently in progress. Project Development Strategy In January 2011, Frontier initiated a drilling program with a target of up to 20,000 metres of drilling. Samples from this program will be used in the ongoing metallurgical work and to improve the confidence level of resource classification. Frontier expects to complete the PEA by Q4 2011. Aspects of the prefeasibility study are being carried out in parallel with the PEA and assuming the economic assessment is favourable, the PFS is expected to be completed in Q1 2012. If all the work is performed on scheduled and the prefeasibility is successful, the company expects to complete the BFS by the end of 2012. Contingent on a successful BFS, the company will need to raise funds in 4Q 2012–Q1 2013, to advance the project to production. Frontier expects to start construction in mid-2013 and commence production of rare earths by early 2015. Financials In 2010, Frontier reported an operating loss of $3.0 million consisting of general operating expenses of $1.0 million, employee and director costs of $1.1 million and an expense of $1.9 million associated with loans that were converted into equity. These expenses have been partially offset by foreign exchange gains of $1.1 million, due to variations in the exchange rate between the U.S. dollar, the Canadian dollar and the South African rand. Frontier has no debt and cash on hold is currently US$50 million. These funds are expected to be more than sufficient to fund the company‘s operations until the end of the BFS, expected to be completed in approximately two years. The recently completed NI 43-101 technical report estimates that the total cost of advancing the project to completion of a BFS would be approximately $17.7 million (excluding discretionary expenditures). Excess funds could be used to expand the exploration work on the Zandkopsdrift Project or to acquire any new rare earth project opportunities that may be identified. Operating costs including group overhead for the next two years are expected to be approximately US$6.1 million, corresponding to a monthly cash burn rate of US$254,000/month. Most of the cash is held in unhedged Canadian dollars, although the functional currency is the U.S. dollar. A significant depreciation of the Canadian dollar against the U.S. dollar would likely have a negative impact on the company reported earnings. Frontier has hedged C$12 million against the South African rand to cover expected core development expenditures for the next two years. Jacob Securities Inc., 199 Bay Street, Suite 2901, Toronto, ON M5L 1G1 +1-416-866-8300 www.jacobsecurities.com

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JACOB SECURITIES INC. EQUITY RESEARCH

Frontier has currently 11,472,716 warrants exercisable at C$4.60, and 1,087,962 stock options th with an exercise price of C$3.29 expiring two years after the initial public offering (17 November 2012), and 5,312,184 options with an average exercise price of C$2.81, expiring in seven years. Valuation Total Resources (tonnes)

43,700,000

Average Grade (%)

2.32 (for indicated resources only)

Target Production Date

2015

Mill Processing (tpd)

3,137

Mine Life (years)

Long Term Average Basket Price (US$/kg)

Average Operating Costs (US$/kg)

Capital Costs (C$ Millions)

621

Discount Rate

15%

Total Net Present Value (C$ Millions)

1,597

Cash and Cash Equivalents

Corporate Adjustments

267

Non-controlling interest

415

Total Net asset Value

1,498

NAVPS (C$/share)

16.39

Current P/NAV

0.13x

Target P/NAV

0.60x

Target Price (C$)

9.83

The company is currently trading at an extremely low 0.13x multiple compared to peers with similar rare earths distribution and project size. The project is also undervalued in an EV/tonne basis compared to peers, Frontier is trading at a US$156/tonne below the average US$1,107 for the selected peer group in this report. We believe the potential of the project is somehow poorly understood and off the radar for most investors, in particular the retail investors, who have been very active in this sector. From the IPO in 4Q 2010, Frontier raised more than US$60 million, enough to fund the project to the end of the feasibility study. The deposit is surrounded by good infrastructure and the project could benefit from synergies that may be created from the Rare Metals Cluster that is being developed in the area where it plans to build its refinery facility. We estimate that Frontier would have one of the lowest capex per resource given the large resource potential and the low capital costs in Africa relative to North America, Europe or Australia. Despite the average TREO grade, the size of the contained resources is comparable to deposits with higher grades, like Molycorp. Another important advantage of the Zandkopsdrift deposit is the rare earths distribution, the aggregate percentage of critical elements (i.e. neodymium, europium, terbium, dysprosium and yttrium). Although the deposit is in essence a light rare earth deposit Frontier has a favourable distribution of the critical elements. Due to this favourable distribution and the size of the project, Frontier should be able to produce more of the critical elements than Avalon, Rare Element Resources or Quest Rare Minerals.

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

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It is important for investors to understand that although the total TREO grade is important, the grade of individual elements is especially vital in assessing the economic viability of a project. For instance, although Molycorp‘s grade at Mountain Pass deposit is 8.28% compared to Frontier‘s with 2.16% TREO, Frontier‘s critical heavy element grades (dysprosium, europium and terbium) are higher, which means that Frontier will be able to produce more of these critical materials (circa 370 tonnes) and generate higher sales for these elements than Molycorp (circa 80 tonnes) despite Molycorp‘s overall production target being twice that of Frontier. Our target price of C$9.83 for Frontier is based on a P/NAV multiple of 0.6x applied to our NAVPS of C$16.39. In our view, Frontier is one of the most undervalued REE projects. We believe the market will eventually recognize the potential and quality of the project, leading to higher valuation. Most of the company‘s options and warrants are not in the money. For the portion that is currently in the money, the diluted NAVPS would be C$16.04.

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

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Sensitivity Analysis Frontier‘s basket price, based on our average long term forecast price is equal to US$49/kg, compared to US$170/kg if we had assumed that current prices would be maintained for the long term. The 247% difference between current and forecast prices is relatively high because we assume the certain light rare earth prices, specifically cerium and lanthanum, which would represent approximately 70% of the total production volume of the company (but only 32% of the value of sales based on our forecast prices), will fall more than the critical element prices. If current prices are sustainable and stay at this level, however, Frontier‘s estimated NAVPS at a 15% discount would be C$62.30. Exhibit 39: Frontier Price Analysis NAVPS, C$

Discount Rate

P/NAV (x)

Discount Rate

Target Price @ P/NAV=0.60

Discount Rate

Basket Price % Change

-40%

-30%

-20%

-10%

Base

10%

20%

30%

40%

7.5%

15.62

19.52

23.42

27.32

31.21

35.11

39.01

42.91

46.80

10.0%

12.69

15.70

18.70

21.70

24.71

27.71

30.71

33.72

36.72

12.5%

10.54

12.89

15.24

17.59

19.94

22.29

24.64

26.99

29.34

15.0%

8.93

10.79

12.66

14.53

16.39

18.26

20.12

21.99

23.85

17.5%

7.71

9.21

10.71

12.21

13.71

15.21

16.71

18.21

19.71

20.0%

6.77

7.99

9.21

10.44

11.66

12.88

14.10

15.32

16.55

22.5%

6.04

7.05

8.05

9.06

10.06

11.07

12.08

13.08

14.09

-40%

-30%

-20%

-10%

Base

10%

20%

30%

40%

Basket Price % Change 7.5%

0.14

0.11

0.09

0.08

0.07

0.06

0.05

10.0%

0.17

0.14

0.12

0.10

0.09

0.08

0.07

0.06

12.5%

0.21

0.17

0.14

0.13

0.11

0.10

0.09

0.08

0.07

15.0%

0.25

0.20

0.17

0.15

0.13

0.12

0.11

0.10

0.09

17.5%

0.29

0.24

0.21

0.18

0.16

0.14

0.13

0.12

0.11

20.0%

0.32

0.28

0.24

0.21

0.19

0.17

0.16

0.14

0.13

22.5%

0.36

0.31

0.27

0.24

0.22

0.20

0.18

0.17

0.16

-40%

-30%

-20%

-10%

Base

10%

20%

30%

40%

Basket Price % Change 7.5%

9.37

11.71

14.05

16.39

18.73

21.07

23.41

25.74

28.08

10.0%

7.62

9.42

11.22

13.02

14.82

16.63

18.43

20.23

22.03

12.5%

6.32

7.73

9.14

10.55

11.96

13.37

14.78

16.19

17.60

15.0%

5.36

6.48

7.60

8.72

9.83

10.95

12.07

13.19

14.31

17.5%

4.62

5.53

6.43

7.33

8.23

9.13

10.03

10.93

11.83

20.0%

4.06

4.79

5.53

6.26

6.99

7.73

8.46

9.19

9.93

22.5%

3.62

4.23

4.83

5.43

6.04

6.64

7.25

7.85

8.45

Source: JSI

If the long-term forecast prices fall within the -40% to 40% our base price forecast, at a 15% discount rate, Frontier‘s NAVPS would be C$8.93 and C$23.85, corresponding to a target price of between C$5.36 and C$14.31 assuming a conservative 0.6x multiple. If in the long-term rare earth oxide prices revert to the average historical prices (2007 and 2010), Frontier‘s basket price would be C$17.00 (which is 90% below the company‘s basket price based on current prices and 65% below our average forecast basket price for the company) and NAVPS would be C$4.20. Assuming a P/NAV multiple of 0.6x, the target price would be C$2.53, which is close to the current stock price. Thus, the market is pricing Frontier based on average historical prices, which Jacob Securities Inc., 199 Bay Street, Suite 2901, Toronto, ON M5L 1G1 +1-416-866-8300 www.jacobsecurities.com

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we do not think are sustainable as it would not be feasible for the development of certain key heavy rare earth projects outside of China, some of which are discussed in this report. Market We expect cerium to account for 44% of the total production and 20% of the total revenue. Neodymium is expected to account for 16% of the total production but have the largest contribution to sales at 30%. Despite the small 10% contribution to total production, the HREE are expected to account for 31% of Frontier‘s total sales. Important markets for the company would be the metal alloys and polishing markets. Cerium oxide is usually used as a polishing agent, and the sector is expected to grow at 8-12% per year in the near term. However, it should be noted that if cerium prices continue to grow it may not be economic to use cerium, as other polishing materials may become more price competitive. Given the exposure to neodymium and dysprosium sales the magnet market is also of relevance to Frontier. The magnet market is forecast to grow at 10– 15% in the next five years.

Exhibit 40: Product per Element Y Dy 4% 1%

Eu 1%

Other REEs 4%

La 26%

Nd 16%

Pr 4% Ce 44%

Source: JSI

Exhibit 41: Revenue per Element Y 3%

Other REEs 4%

La 12%

Dy 13%

Ce 20% Eu 11%

Nd 30%

Pr 7%

Source: JSI

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Justification of Target price We used the DCF NAV calculation, which is a common valuation methodology for development properties and producing mines. Our target price of C$9.83 for Frontier is based on a P/NAV multiple of 0.6x applied to our NAVPS of C$16.39. Given the emerging nature of the sector, we used a 15% discount rate which is in general higher than what is used in PEAs. Key Risks to Price Target The rare earth mining sector is fairly new and in addition to the common inherent risk of a mining business there are sector specific risks. The list of risks are presented below and explained in the section ―Rare Earth Elements Investment Risk‖. • • • • • • • •

Exploration Risk Financing Risk Geopolitical Risk Rare Earth Distribution Risk Price Risk Metallurgical Process Risk Currency Risk Acquisition Risk

Officers and Directors James Kenny, Director and CEO

James Kenny holds a Bachelor of Commerce (Honours) and a Master‘s degree in finance (MBS) from University College, Dublin. He has over 20 years of experience in the natural resources sector as a banker, broker and executive of various listed and private companies. Mr. Kenny is Chief Executive Officer of Frontier and has played a key role in the company‘s development to date. Mr. Kenny‘s investment banking experience included senior roles with ABN AMRO Bank, ABN AMRO Rothschild, NatWest, Collins Stewart and Evolution Securities. Between 2003 and 2006, Mr. Kenny was Chief Executive of Frontier Capital Limited, a private financial advisory firm focused on the natural resources and other sectors. Since mid-2006, he has been Chief Executive Officer of Frontier Advisers Limited, a private company that has provided management, financing and other services to the company since it commenced its operational activities and until the appointment of Mr. Kenny as Chief Executive Officer.

Paul McGuinness, Director and CFO

Paul McGuinness holds a Bachelor of Commerce and a Masters‘ degree in accounting from University College, Dublin. Mr. McGuinness is a chartered accountant and qualified with Arthur Andersen in 1999, where he gained experience predominantly in the financial services, oil and gas and logistics sectors. Mr. McGuinness also has extensive experience in finance and investment banking, having worked with a number of international firms, including Schroders, Collins Stewart and Salomon Smith Barney, where he worked as a corporate adviser to various financial institutions in the United Kingdom, and in Australia to various energy, mining and infrastructure companies. Since 2006, Mr. McGuinness has been Chief Executive of MG Capital Limited, a private consulting firm that provided advisory and financial control services to a number of clients, including Frontier. Mr. McGuinness was appointed Chief Financial Officer in November 2010.

Stuart Smith, VP Exploration

Dr. Smith has a Bachelor of Science (Geochemistry, First Class Honours) and a Ph.D in geology from the University of Cape Town and has over 30 years‘ experience in the minerals exploration with particular experience in rare earths, base metals, uranium and diamonds. Dr. Smith held a number of

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senior positions in the Geochemistry Research Unit of the University of Cape Town over a 13-year period and then worked for 10 years as an exploration manager and operations director extensively across Southern Africa. Prior to joining Frontier, Dr. Smith worked as an independent consulting geologist since 2000, principally contracted to Fugro Survey, the international consulting group. Since joining the company in 2007, Dr. Smith has managed the company‘s exploration activities at Zandkopsdrift and elsewhere. Derick DeWit, VP Project Development

Mr de Wit is a chemical engineer with considerable experience in the minerals industry, gained with GRD Minproc, Bateman Projects, De Beers Consolidated Mines and Venmyn Rand, and has been responsible for managing due diligence, scoping, prefeasibility and feasibility studies, mineral asset valuations and independent technical reports for listed and private companies in accordance with NI 43‐101, SAMREC and JORC reporting codes. Over the past 15 years Mr de Wit has been involved in the preparation and/or management of more than 30 independent review, scoping, prefeasibility and feasibility studies for minerals projects, both in Africa and Canada.

Phillip Kenny, Non-executive Director and Chairman

Philip Kenny is a graduate in mechanical engineering from University College, Dublin, and holds post-graduate qualifications in engineering from Trinity College, Dublin, and a Master of Business Administration in finance from Boston College, Massachusetts. He has over 25 years of experience in the mining and oil and gas sectors in Southern Africa, Europe and the United States. Since 1998, Mr. Kenny has been the Chief Executive Officer of Firestone Diamonds plc, an emerging junior diamond mining and exploration company focused on South Africa and listed on the AIM market of the London Stock Exchange. Firestone Diamonds plc is the only listed diamond company outside of the majors to have discovered, developed and brought into production a kimberlite diamond mine.

Anu Dhir, Non-executive Director, Chairman of the Audit Committee

Anu Dhir holds a Bachelor of Arts degree from the University of Toronto and a law degree (Juris Doctor) from Quinnipiac University, Connecticut. Ms. Dhir has extensive experience in international business, operations and legal affairs in private equity and publicly held companies in the mining, oil and gas and technology sectors. From January 2006 to October 2009, Ms. Dhir served as Vice President, Corporate Development, and Company Secretary at Katanga Mining Limited, a TSX-listed company, and is currently Managing Director of Miniqs Limited, a private group primarily interested in resource projects that have the capability to grow into major producing operations. Ms. Dhir is a non-executive director of Anooraq Resources Corporation, a South African platinum group metals producer listed on the TSX, NYSE Amex Equities and the Johannesburg Stock Exchange and also serves as a nonexecutive director of Compass Asset Management headquartered in Almaty, Kazakhstan.

Eamonn Grennan, Non-Executive Director

Eamonn Grennan has over 40 years of experience as an exploration manager, geologist, consultant and senior lecturer. Mr. Grennan has worked on and managed exploration programs on four continents for a range of international clients and his experience covers industrial minerals, aggregates, precious metals and base metals. His academic experience includes lecturing in a number of leading Irish third-level institutions in applied geochemistry, mining engineering, economic geology and environmental science, including at the Institute of Technology, Sligo, from 1995 to 2010. Mr. Grennan is a former president of the Irish Association for Economic Geology and a former member of the Consultative Committee of Irish Geological Survey and is currently an independent consultant geologist.

Crispin Sonn, Non-Executive

Crispin Sonn has a Bachelor of Arts from the University of Cape Town and an Honours degree in Business and Administration from the University of

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Director

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Stellenbosch. Since 2003, he has held various positions at Old Mutual South Africa, a subsidiary of Old Mutual plc, the London-listed and largest integrated financial services company in South Africa. Currently, Mr. Sonn is an executive director of Old Mutual South Africa with responsibility for corporate affairs, marketing and communications and is the Chairman of the Old Mutual Foundation, the philanthropic arm of the Old Mutual Group. Mr. Sonn was the founding Chairman of FoodBank South Africa, a founding member of the FoodBank Foundation and also currently acts as a nonexecutive Director of CapeSpan (Pty) Ltd., the largest fresh produce sourcing and distribution company in South Africa, and Old Mutual Kotak-Mahindra, a joint venture in India. Mr. Sonn is a member of the Board of Advisers for the Graduate School of Business at the University of Cape Town and served on the Council of the University of Cape Town for eight years.

Shareholders Top Institutional Shareholders Shares

% Ownership

First Canadian Mutual

1,211,600

1.35%

MFC Global Investment Management

1,116,211

1.25%

Front Street Capital

405,203

0.45%

CIBC Global Asset Management

359,792

0.40%

IG Investment Management

300,600

0.34%

James Kenny

2,152,527

2.40%

Phillips Kenny

210,000

0.23%

Anu Dhir

98,069

0.11%

Crispin Franklyn Sonn

24,569

0.03%

Kensington Nominees Limited

24,486,000

27.34%

Lambeth Nominees Limited

15,120,000

16.88%

Westminster Nominees Limited

14,294,000

15.96%

Blenheim Management Services

13,790,000

15.40%

Officers and Directors

Others

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Avalon Rare Metals Inc. (TSX:AVL; C$6.96) Avalon Rare Metals Inc. engages in the development and exploration Rating: Speculative Buy of rare metals and minerals in Canada. The company primarily explores for lithium, tantalum and niobium, indium, gallium and rare Price Target: C$11.28 earth elements, such as neodymium and terbium, and rare minerals, Risk: High including calcium feldspar. It holds interests primarily in the Thor Lake rare metals project located in the Mackenzie mining district of the Northwest Territories; the Separation Rapids lithium project, the Ticker Lilypads Lakes tantalum project and the Warren Township Calcium Date Share Price Feldspar project, both in Ontario; and the East Kemptville tin-indium- 52 Week High 52 Week Low gallium-germanium project in Nova Scotia. 

Avalon owns 100% of the Nechalacho rare earth element deposit located at Thor Lake, Northwest Territories, one of the largest rare earth (plus zirconium, niobium, tantalum) deposits in the world.



In the high grade Basal zone part of the deposit, indicated mineral resources were estimated at 57.49 million tonnes with 1.56% TREO and a 0.21 HREO/TREO ratio; inferred mineral resources were estimated at 107.59 million tonnes with 1.35% TREO and a 0.19 HREO/TREO ratio (January 27, 2011). Avalon has good yttrium grades and the rare earths distribution favours the HREE. In our model, we assume a 0.3 HREO/TREO ratio in the first few years, based on recent drilling results



Avalon was the first Canadian-listed rare earth company to publish a PFS for a rare earth project. Based on the report, there is the potential to develop an underground mine with an 18-year mine life. Our model uses the production parameters defined in the PFS and incorporates a refinery facility to separate and refine the individual elements.



We estimated a capital cost of C$1.22 billion, which on a percontained resource basis, is actually lower than most of Avalon‘s peers.



Avalon expects to produce tantalum, niobium and zirconium as by-products. We estimate that by-product revenue would account for approximately 20% of sales, covering a significant percentage of the costs.

TSX:AVL June 7, 2011 $6.96 $9.65 $1.92 $94.06 $654.6 (37.00) $37.00 $0.0 $617.62 $12.53 0.55x US$210

Shares Outstanding Market Cap Net Debt Cash & Short Term Investments Debt Total Enterprise Value NAVPS P/NAV EV/Resource Contained Price/Volume Chart $10.00

6.0

$8.00

5.0 4.0

$6.00

3.0

$4.00

2.0

$2.00 $0.00 Jun-10

1.0 0.0 Sep-10

Dec-10

Volume

Mar-11 Price

Project Details Name Location

Thor Lake (Nechalacho) Thor Lake, NW Territories, Canada Stage of Production: Feasibility Size of Property 4,250 ha Type of Ore Syenite NI 43-101 (or equivalent) Yes Average TREO or TREE 1.43% TREO Resource's Principal REEs 15.2% La, 34.2% Ce, 4.3% Pr, 17.1% Nd, 3.8% Sm, 3.2% Dy Average Grade of Other Principal Nb2O5, ZrO2 By-products Off take agreement n/a Target Production (year)

2015

Target Production (tonnage)

15,000 tpa TREO

Resource



Avalon is currently priced at 0.55x P/NAV, and an EV/contained resource of US$210 which is significantly less than its peers. We initiate coverage of Avalon with a Buy recommendation and target price of C$11.28. Our target price is based on a NAVPS of $12.53 applied to 0.9x P/NAV multiple. The development stage of the project and the resource size should grant the company a higher valuation.

Measured

n/a

Indicated

88.13 Mt at 1.53% TREO

Inferred

226.88 Mt at 1.30% TREO

Ownership

100.0%

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Key Asset(s) Avalon‘s main project is Canada. The property is Hearne Channel on the infrastructure, and is the the NWT and Nunavut.

the Nechalacho Project located in the Northwest Territories (NWT), in located 100 km from Yellowknife, the capital city, and 5 km north of the East Arm of Great Slave Lake. Yellowknife has very good supporting main transit city for mining and mineral exploration activities throughout

Avalon owns 100% of the Nechalacho property, which is tied to two royalty agreements: the Murphy royalty agreement, which entitles the holder to a 2.5% Net Smelter Return (NSR) payment, and the Calabras/Lutoda royalty agreement, with a cumulative 3% NSR payment. Thor Lake property has been extensively explored for over 60 years.

The Nechalacho property has limited surrounding infrastructure.

Water will be available year-round.

Diesel generators will likely be the main source of energy at the Nechalacho site.

The Nechalacho property was first mapped by Geological Survey of Canada (GSC) in 1937. In 1970, the GSC commissioned an airborne radiometric survey over Yellowknife, which outlined a radioactive anomaly in the Thor Lake area, and was later found to be associated with elevated thorium levels. In 1976, Highwood Resources Ltd., during its uranium exploration program, discovered niobium and tantalum. In 1980, Placer Development Ltd. optioned the property from Highwood to further investigate the tantalum and related mineralization. Placer conducted mineralogical and metallurgical work, but discontinued the project 1982 when the mineralization did not prove amenable to then conventional metallurgical extraction processes. Unocal Canada performed additional work, mainly in the T-Zone area, to further investigate the tantalum and niobium potential of the region and to evaluate the existence of high yttrium and REE values. From 1986 to 1988, Hecla Mining Company of Canada Ltd in a joint venture with Unocal, conducted additional drilling and metallurgical work with a focus on yttrium and the rare earths. Many other companies, including Navigator Exploration Corp. and Beta Minerals Inc., have prospected the area for tantalum, beryllium, niobium and rare earths; however, a combination of tough metallurgical processes and weak markets has impeded the various projects to advance toward commercialization. In 2005, Avalon purchased 100% interest and full title, subject to royalties, to the Thor Lake property from Beta Minerals Inc. Since then, the company has conducted extensive exploration of the Nechalacho Project, to further assess the yttrium and HREE resources of the property. Temperatures in the area are usually between -50°C and +30°C. The historical average annual snowfall in the region is 152 cm. During seasonal transition periods to either winter or spring, access to the area is difficult and a helicopter is the easiest way to the project site. Without a road link, the mining operation at Thor Lake will require a suitably sized permanent airstrip to accommodate a Dash 8 or Buffalo-type aircraft. At the moment, the present airstrip can only accommodate Twin Otter aircraft and larger Buffalo-type aircraft land on the surface of the frozen lakes. During the summer, the Nechalacho Project is accessible by boat and by unpaved roads from the lakeshore. Equipment, supplies or concentrate material can be barged on the Hearne Channel on Great Slave Lake, and there are plans to build docks to facilitate loading and off-loading of cargo going to or coming from various sites. From the Great Slave Lake to the site, there is an existing 8- km access road that Avalon plans to upgrade. Water will be available year-round from the surrounding lakes in the area as most don‘t fully freeze to the bottom during the winter. Freeze-up lasts from late October to late May. Great Slave Lake‘s freezing period is shorter than the smaller lakes. Water tanks will be used to store water and pipes will be insulated. Power in the Nechalacho deposit area is limited; diesel generators will likely be the main source of power during mining operations, possibly supplemented by wind and solar energy.

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Geopolitics: The Nechalacho deposit is situated in the Akaitcho Territory, an area that is subject to a comprehensive land claim negotiation involving communities belonging to the Yellowknives Dene, Lutsel k‘e Dene and the Deninu Kue First Nations. Avalon has now been able to enter into preliminary negotiation agreements with all three of these First Nations groups, and expects to formalize comprehensive participation agreements with them by the end of 2011. Other Properties The company‘s other assets include the tin and rare metals project in East Kemptville in Nova Scotia. In Ontario, Avalon owns the lithium minerals deposit on the Separation Rapids property, the Warren Township Calcium Feldspar Project situated near the Village of Foleyet, 100 km west of Timmins. The Company also owns one other early stage project in Ontario, the Lilypad Lakes tantalum-cesium project and reportedly has several other early stage rare metals projects under development in North America. Mineralogy and Resources The Nechalacho deposit is hosted by a layered magmatic peralkaline intrusion of aegirine syenites, nepheline syenites and related cumulates. REE-bearing minerals were originally deposited in situ as disseminated grains, during cooling and as cyclic cumulate layers. Hydrothermal alteration of these original cumulate minerals seems to have partially remobilized the rare earths, and concentrated the heavy rare earths in the Basal Zone, in two minerals (zircon and fergusonite) believed to have formed as replacements of primary eudialyte. Mineralization in the Basal Zone of the Nechalacho deposit includes LREE found principally in allanite, monazite, bastnasite and synchysite; HREE, yttrium and tantalum found in fergusonite; niobium in ferro-columbite; HREE and zirconium in zircon; and gallium in biotite, chlorite and feldspar in albitized feldspathic rocks. The percentage of REE-bearing minerals as a proportion of the rock is shown in Exhibit 42. Exhibit 42: Percentage of REE-bearing Minerals All Rock

Upper Zone

Basal Zone

Concentrate

Zircon

65.3%

62.8%

66.2%

63.0%

Fergusonite

3.7%

2.6%

4.3%

5.4%

Bastnaesite

3.8%

4.0%

3.4%

0.7%

Synchysite

4.1%

4.4%

3.8%

1.5%

Monazite

6.4%

9.4%

5.2%

5.5%

Allanite

12.3%

12.0%

13.3%

19.6%

Other REE

0.1%

0.0%

0.1%

Columbite

4.3%

4.5%

3.8%

4.1%

100.0%

Total

Source: Company reports; JSI

The Nechalacho deposit alteration system starts near surface and varies between 80 m and 190 m in depth. Two principal subzones or layers are recognized, the Upper LREE Zone and the Jacob Securities Inc., 199 Bay Street, Suite 2901, Toronto, ON M5L 1G1 +1-416-866-8300 www.jacobsecurities.com

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Basal HREE Zone. Overall, the HREO proportion of the TREO is typically between 7% and 15%. However, within the Basal Zone, HREO/TREO can exceed 30%. Results have shown a distinct vertical zonation with increasing HREE to depth. This pattern is of economic importance for the potential development of an underground mine, given that the HREE attract higher prices. Avalon completed a pre-feasibility study in 2010, in which the resource estimates were based on a monetary cut-off grade, i.e. Net Metal Returns (NMR), instead of grades (e.g. 1.6% TREO). The company has chosen this method in order to incorporate the processing costs and revenue contribution of the by-products zirconium, niobium and tantalum. We expect that by-products will represent approximately 20% of the company‘s total revenue. Avalon has recently updated its resource estimates to incorporate all 2010 drilling results; the new NI 43-101 report was filled on March 15. Based on a cut-off grade of $260 Net Metal Return (NMR), Avalon‘s indicated resources for both the Basal and Upper zones combined are estimated at 88.13 million tonnes with an average grade of 1.53% TREO, and inferred resources of 226.88 million tonnes with an average grade of 1.30% TREO. The new estimates highlighted the presence of significantly higher grade (indicated resources) in the Basal zone, by applying higher NMR cut-offs. Exhibit 43, shows estimated indicated resources and grades at various NMR cutoffs for the Basal Zone alone. Exhibit 43: Basal Zone Indicated Resources at Various NMR Cut-offs

Source: Company reports;JSI

In addition to the Nechalacho deposit, the Thor Lake property contains a number of other, smaller, mineralized zones that are not part of the current resource estimate. Metallurgy Numerous metallurgical tests on samples from the Thor Lake deposit have been conducted over the years with the intent to extract some of the many valuable elements in the deposit. However, the minerals of interest are found to be typically fine-grained with sizes ranging from 5 μm to 25 μm and in intimate admixtures form, which historically have presented metallurgical challenges. In the last three years, Avalon has conducted extensive metallurgical tests on samples from the Nechalacho deposit to determine the most economical way to extract the rare earths, in particular the heavy rare earths that are found in situ, as well as zirconium, tantalum and niobium. These efforts have resulted in an extensive process that includes: grinding, froth flotation, decomposition of the refractory elements, and recovery of the various elements from solution by precipitation methods and solvent extraction.

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The flotation process has resulted in an 18% mass pull to a final mineral concentrate, and yielded a 90% recovery of zirconium, a 69% recovery of niobium, a 63% recovery of tantalum, and an 80% recovery of the rare earths and yttrium. The hydrometallurgical process that follows is the most challenging step. Some of the Nechalacho minerals are chemically refractory (i.e. maintain strength at high temperatures). Zircon is one of these minerals and is usually decomposed (cracked) using fused sodium hydroxide. SGS Mineral Services has been successfully using this method on Nechalacho samples, and has been able to decompose not only the zircon but also all other value-bearing minerals. In a typical test, the concentrate is treated with sodium hydroxide at 600°C for three hours, cooled, and then washed with water to remove excess sodium hydroxide, as well as the phosphates and silicates that form during the cracking process. The solids are then leached with hydrochloric acid. Results have yielded 96% zirconium extraction and more than 96% solubilization of the rare earths. Different caustic cracking processes have also been investigated. Another common approach to cracking refractory minerals is acid baking, which is widely used in China. In this process, the feed material is mixed with concentrated sulphuric acid and held at a temperature of 200°C or higher for a few hours. SGS Mineral Services investigated the use of acid baking, as well as ammonium sulphate and ammonium chloride as alternative acid-baking reagents. The best results were obtained from a combination of caustic cracking and acid baking, in which sulphuric acid bake is used to break down the light rare earth (i.e. lanthanum to neodymium) minerals and fergusonite, and caustic crack of the residue is used to break down the zircon and columbite. Lab work has resulted in recoveries of 99% for zirconium, 98% for the light rare earths (lanthanum, cerium and neodymium), 99% of the heavy rare earths and yttrium, and 83% for niobium. Avalon has recently extended the proposed hydrometallurgical pilot plant test program by an additional four months to further improve techniques and optimize the processes, with the aim to achieve better operating and capital costs. Exhibit 44: Flow Sheet of the Hydrometallurgical Process

Acid (H2SO4) bake (~200°C)

REE Solution

Precipitate bulk LREE +50% HREE

Combined REE product

Rare Earth Separation Plant

Residue (zircon, columbite, gangue)

Caustic (NaOH) crack (~600°C)

Acid (HCl) solution 50% HREE, Nb, Ta, Zr

Separate HREE

Nb-Ta

Source: Company reports; JSI

Once the individual elements are in solution, the next step is to separately recover each of them. Ongoing tests involve recovering the light rare earths through double salt precipitation, and then using sequential solvent extraction steps to isolate the rare earths, zirconium, niobium and Jacob Securities Inc., 199 Bay Street, Suite 2901, Toronto, ON M5L 1G1 +1-416-866-8300 www.jacobsecurities.com

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tantalum (Exhibit 44). Test work is continuing at SGS at a pilot scale to improve processes and achieve better overall recovery rates at lower costs. Currently net (total) recovery rates are 74% for the rare earths, 81% for zirconium, 55% for niobium and 32% for tantalum (Exhibit 45). The proposed site for the hydrometallurgical plant is located in the south of Great Lake Slave, in Pine Point, close to a previous tailing disposal area and with reasonably good infrastructure. Exhibit 45: Overall Recovery Rate From Ore to Concentrate

Concentrate to Product

Net Recovery

ZrO2

89.7%

90.9%

80.7%

TREO

79.5%

93.0%

73.9%

HREO

79.5%

93.0%

73.9%

Nb2O5

68.9%

80.0%

55.1%

Ta2O5

63.0%

50.0%

31.5%

Source: Company reports; JSI

Avalon is currently assessing where the separation plant should be located, to be incorporated in the BFS. The company seems willing to position the separation plant anywhere in the world, other than China. Avalonâ&#x20AC;&#x2DC;s criteria include proximity to reagents (e.g. hydrochloric acid and caustic soda), lower power costs and proximity to transportation infrastructure (goods roads, international ports, etc.). Once the site location is determined, a pre-feasibility study on the separation plant will be completed as the next step. Project Development Strategy Avalon expects to complete an updated version of the prefeasibility study economic analysis by June 30, 2011, mainly to reflect the new higher grade Indicated resources and the significant increases in REE prices over the past 12 months. Work on the Bankable Feasibility Study is ongoing and is expected to be completed by Q3 or Q4 2012. The detailed schedule for the project is shown in Exhibit 46. The company expects to reach full production by 2016.

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Exhibit 46: Project Schedule Project Schedule Aboriginal Engagement

2011 Q1

2012 Q4

2013 Q4

2014

2015 Q4

2016 Q4

Environmental Permits Flotation Plant Pilot Testing HydroMet Plant Pilot Testing Bankable Feasibility Final Designs & Financing Mine & Mill Construction, Start

Construction

Commission & Operations

HydroMet Plant Construction, Start Separation Plant Construction, Start Sales and Marketing

Source: Company reports; JSI

Financials The net loss for the first six months of fiscal 2011 was C$3.9 million. As at the end of the second quarter (February 28, 2011), the company had cash on hand of C$37 million and working capital of C$35 million. Avalonâ&#x20AC;&#x2DC;s current cash burn rate for administrative expenses is about C$400,000/month while project expenditures in 2011 have averaged $1.35 million/ month. The combined burn rate will likely increase to over $2 million/month once pilot plant work commences, but the company believes the current cash position is sufficient to meet all the contractual obligations and planned exploration work for at least 15 months. As at end of the second fiscal quarter, February 28, 2011, Avalon had 4,577,182 warrants outstanding. Of these warrants, 4,508,332 each entitle the holder to purchase one additional common share of the company, at a price of C$3.60 per common share, to expire on September 30, 2011. The remaining 68,850 warrants each entitle the holder to purchase one additional common share of the company, at a price of C$3.00 per common share, to expire on September 17, 2011. As at February 28, 2011, Avalon had 5,300,250 incentive stock options outstanding with a weighted average exercise price of C$2.00 (of which 2,050,250 were vested and 3,250,000 were unvested).

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Valuation Resources (tonnes)

226,880,000

Average Grade (%)

1.71

Target Production Date

2016

Mill Processing (tpd)

2,000

Mine Life (years)

Long Term Average Basket Price (US$/kg)

Average Operating Costs (US$/kg)

Capital Costs (C$ Millions)

1,220

Discount Rate

15%

Total Net Present Value (C$ Millions)

1,140

Cash and Cash Equivalents

Debt

Corporate Adjustments

Total Net asset Value

1,174

NAVPS (C$/share)

12.53

Current P/NAV

0..55x

Target P/NAV

0.9x

Target Price (C$)

11.28

Avalon is currently trading at a P/NAV multiple of 0.55x, which is above the selected peer group multiple of 0.39x. In terms of EV/tonne of contained resources, however, the company seems underpriced at US$210/tonne, especially when compared to other projects with high HREO/TREO ratio. Avalon‘s strength is its large resource size and rare earths distribution, which favours the heavy rare earth elements. The Nechalacho deposit also contains zirconium, tantalum and niobium, which Avalon plans to produce. The by-product contribution is expected to be about 20% of total revenue, and we believe it could cover most of the estimated total operating costs. Avalon‘s mine plan outlines an underground mine, which implies higher mining costs compared to an open-pit mine; however, mining costs for the rare earth producers are expected to be a small percentage (<8%) of the total costs. The metallurgy is also expected to be challenging, with an estimated net recovery rate of 74% based on the company‘s PFS. However, our estimates indicate that the on a cost per-kilo basis, the company‘s unit costs would be comparable to that of other heavy rare earth projects. Furthermore, it should be noted that the next important step for Avalon and all the other potential REE producers with significant HREE, is to prove that the metallurgical process can be reproduced on a commercial scale. The company has an estimated capital expenditure of about one billion dollars, which is higher than that of most of its peers. It should be noted however that on a Capex per kilo of resource basis, Avalon is better ranked than most of the other projects (Exhibit 12). Avalon was the first Canadian REE exploration company to complete a positive prefeasibility study, and we believe that at the moment it is one of the front runners in this race. Avalon appears to have a good understanding of the REE market, and is one of the few development stage

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companies (if not the only one) that has a dedicated marketing officer and is constantly interacting with potential future customers. The company has also reached out to some of the largest producers and potential customers of niobium and the other by-products, with the aim to not only better understand the market but also potentially to develop joint ventures and off-take agreements. Our target price of C$11.28 is based on the NAVPS of C$12.53 applied to a 0.9x multiple. We believe this valuation is appropriate as it leaves room for the remaining risks associated with financing and feasibility study. As Avalon‘s project achieves important milestones and financing is progressing, we expect the market to support a higher valuation for this project. All the warrants and stock options are currently in the money and the diluted NAVPS would be C$11.26. The company‘s cash position is relatively strong, given that it has enough cash to complete the BFS, which is a key step in the company‘s effort to raise funds. Although our model assumes 100% equity financing, we believe that Avalon will raise debt and equity based on an optimum capital structure to maximize shareholder value. Sensitivity Analysis Avalon‘s basket price, based on our base-case long-term average forecast price for the rare earth oxides, is US$78/kg; at the current price, the estimated basket price is US$185/kg. The difference between the forecast and current price is much higher for Avalon than it is for Ucore and Matamec as Avalon has a higher exposure to the light rare earth elements, which we estimate would have a steeper price fall. At a 15% discount rate, in a basket price range of -40% to +40% our baseforecast price (i.e. between US$47/kg and US$109/kg, for Avalon), the NAVPS is between C$2.68 and C$22.38, as shown in Exhibit 47. This would correspond to a target price range of C$2.41–C$20.14, assuming a 0.9x P/NAV multiple. If prices stay at current levels for the long term, for a basket price of US$185/kg, the NAVPS would be C$46.16 and the target price C$46.38 at 0.9x P/NAV. Based on our estimates, the project would not be feasible if long-term prices were to revert to the average four-year historical prices (2007–2010). The implied basket price for Avalon is currently US$55/kg.

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Exhibit 47: Avalon Resources Price Analysis NAVPS, C$

Discount Rate

P/NAV (x)

Discount Rate

Target Price @ P/NAV=0.90

Discount Rate

Basket Price % Changes

-40%

-30%

-20%

-10%

Base

10%

20%

30%

40%

7.5%

10.28

14.97

19.66

24.35

29.04

33.73

38.42

43.11

47.80

10.0%

6.92

10.66

14.39

18.13

21.86

25.60

29.33

33.07

36.80

12.5%

4.48

7.49

10.51

13.52

16.53

19.55

22.56

25.58

28.59

15.0%

2.68

5.14

7.60

10.07

12.53

14.99

17.46

19.92

22.38

17.5%

1.35

3.38

5.41

7.45

9.48

11.52

13.55

15.59

17.62

20.0%

0.35

2.05

3.75

5.44

7.14

8.84

10.53

12.23

13.93

22.5%

-0.39

1.04

2.47

3.89

5.32

6.75

8.18

9.61

11.03

-40%

-30%

-20%

-10%

Base

10%

20%

30%

40%

Basket Price % Changes 7.5%

0.68

0.46

0.35

0.29

0.24

0.21

0.18

0.16

0.15

10.0%

1.01

0.65

0.48

0.38

0.32

0.27

0.24

0.21

0.19

12.5%

1.55

0.93

0.66

0.51

0.42

0.36

0.31

0.27

0.24

15.0%

2.60

1.35

0.92

0.69

0.56

0.46

0.40

0.35

0.31

17.5%

5.17

2.06

1.29

0.93

0.73

0.60

0.51

0.45

0.39

20.0%

19.71

3.40

1.86

1.28

0.97

0.79

0.66

0.57

0.50

22.5%

-17.87

6.70

2.82

1.79

1.31

1.03

0.85

0.72

0.63

-40%

-30%

-20%

-10%

Base

10%

20%

30%

40%

Basket Price % Changes 7.5%

9.26

13.48

17.70

21.92

26.14

30.36

34.58

38.80

43.02

10.0%

6.23

9.59

12.95

16.31

19.68

23.04

26.40

29.76

33.12

12.5%

4.03

6.74

9.46

12.17

14.88

17.59

20.31

23.02

25.73

15.0%

2.41

4.63

6.84

9.06

11.28

13.49

15.71

17.93

20.14

17.5%

1.21

3.04

4.87

6.70

8.53

10.37

12.20

14.03

15.86

20.0%

0.32

1.84

3.37

4.90

6.43

7.95

9.48

11.01

12.53

22.5%

-0.35

0.93

2.22

3.50

4.79

6.07

7.36

8.64

9.93

Source: JSI

Market We estimate that 51% of the rare earth oxide produced by Avalon would be lanthanum and cerium and the third-largest product would be the critical material neodymium. Based on our forecast prices, lanthanum and cerium will make up 9% of total revenue, and neodymium 18%. Although we expect dysprosium volume to be only 3% of the total production, we estimate that dysprosium sales will be the largest percentage of sales at 33% of total revenue. In fact, we expect Avalon to be one of the top dysprosium producers outside of China, producing approximately 300 tonnes of dysprosium per annum. We estimate that by-product contribution would be about 20% of the total revenue; however, that could obviously change depending on the relative price difference of each by-product relative to the price of the individual rare earth oxides. Given the company‘s production profile, the most important market for Avalon will be the magnet market, which requires neodymium to build the neodymium-iron-boron magnets and where dysprosium is usually required as an additive to the magnets to improve their strength and corrosion resistance, which is especially relevant for applications related to motors for hybrid electric vehicles. The magnet market, according to IMCOA, is expected to grow at 10–15% per year in the next five years.

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Exhibit 48: Production per REE Element (Excludes By-Products) Other REEs 8%

La 16%

Y 15%

Dy 3% Tb 1%

Ce 35%

Nd 17% Pr 5%

Source: JSI

Exhibit 49: Revenue per Element By-products 18%

La 3%

Ce 6% Nd 18%

Other REEs 5%

Y 6%

Eu 5%

Dy 33%

Tb 6%

Source: JSI

Justification of Target price We used the DCF NAV calculation, which is a common valuation methodology for development properties and producing mines. Our target price of C$11.28 is based on the NAVPS of C$12.53 applied to a 0.9x multiple. Given the emerging nature of the sector, we used a 15% discount rate which is in general higher than what is used in PEAs. Key Risks to Price Target The rare earth mining sector is fairly new and in addition to the common inherent risk of a mining business there are sector specific risks. The list of risks are presented below and explained in the section ―Rare Earth Elements Investment Risk‖. • • • • • • • •

Exploration Risk Financing Risk Geopolitical Risk Rare Earth Distribution Risk Price Risk Metallurgical Process Risk Currency Risk Acquisition Risk

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Officers and Directors Donald S. Bubar, President and CEO

Mr. Bubar, P.Geo. is a geologist with over 30 yearsâ&#x20AC;&#x2DC; experience in mineral exploration in Canada. He is a graduate of McGill University (B.Sc., 1977) and Queen's University (M.Sc., 1981). From 1984 to 1994, he worked for Aur Resources Inc. as Exploration Manager, where he was involved with the discovery of the Louvicourt copper-zinc deposit, Val d'Or, Quebec, in 1989. Since 1995, Mr. Bubar has been President and CEO of Avalon. Mr. Bubar is also a Director of the Prospectors and Developers Association of Canada (PDAC) and was instrumental in the creation of its Aboriginal Affairs Committee in December 2004. He continues to Co-Chair the committee, which advocates for greater co-operation between exploration companies and aboriginal communities.

R.J. (Jim) Andersen, VP, Finance and CEO

Mr. Andersen is the Managing Director of the accounting firm Andersen & Company Professional Corporation, a boutique accounting firm in Toronto. He has over 15 years of experience in public practice, and has had a wide variety of experience in providing auditing, accounting and management consulting services to mining companies and large manufacturing firms in several different industries. He joined Avalon in 2000, and was in charge of the company's external audit for five years prior to that. Mr. Andersen earned his B.Com (with high distinction) from the University of Toronto in 1991, and began his career with the mining services team at Coopers & Lybrand. More recently, he has acted as a part-time professor in the MBA program at the Schulich School of Business at York University and is a trustee of the Gardiner Museum.

William Mercer, VP, Exploration

Dr. Mercer has been VP, Exploration with Avalon since 2007. A consulting geologist, Dr Mercer earned his BSc. in geology from Edinburgh University (1968) and a Ph.D. from McMaster University (1975). He enjoyed a 32-year career with the Noranda/Falconbridge group, holding a series of managerial positions, working on international projects in over 30 countries, ultimately serving as Director, Geology and Geochemistry. His responsibilities have ranged from management of large exploration groups based in Canada and overseas, to technical advice on advanced acquisitions as part of the Business Development Group, negotiating joint-venture agreements, reviewing resource reports, implementing quality control programs and implementing and auditing environment, health and safety programs. In January 2009, Dr. Mercer was the recipient of the David Barr Award from the Association for Mineral Exploration in British Columbia for excellence in leadership and innovation in mineral exploration health and safety. He also was honoured with the PDAC Distinguished Service Award in 2006.

David Swisher, VP, Operations

Mr. Swisher is a mining engineer with over 20 years of precious and industrial mineral operations both underground and on surface, including the study of underground and surface mining techniques in Sweden. He has held positions of increasing responsibility in all facets of mining at the mine manager and executive levels. His experience includes the evaluation and implementation of mining methods, environmental, health and safety processes, maintenance best practices, operations optimization as a Six Sigma Black Belt, feasibility assessment and advanced behavioural instruction. Mr. Swisher has also successfully led numerous labour union and Aboriginal negotiations to mutually agreeable results. From 2005 to 2008, Mr. Swisher worked for Tamerlane Ventures Inc. as Vice President and Senior Project Manager, where he planned, designed and drafted an independently verified NI 43-101 technical report and feasibility study, negotiated and executed comprehensive agreements with local aboriginal groups, directed and successfully completed diamond drilling programs, completed a full

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environmental assessment resulting in the receipt of all permits for project construction, and developed a bankable finance package for the project. Pierre Neatby, VP, Sales and Marketing

Mr. Neatby spent 19 years with the Noranda/Falconbridge group in various sales and marketing roles, including Managing Director of Noranda's London, U.K.-based sales company. Mr. Neatby brings leadership and international marketing, sales and trading experience in LME-traded metals, industrial chemicals and industrial minerals to Avalon. Mr. Neatby earned a BA in Economics from Queen's University and trained as a Black Belt in Six Sigma with Noranda.

Alan Ferry, Non-Executive Chairman

Mr. Ferry has been an independent businessperson since 2007, following a 28-year career in the investment industry as a mining analyst and mining corporate finance specialist. Mr. Ferry is a director of six listed junior mining companies, including Lead Director of Guyana Goldfields Inc. and Chairman of Macusani Yellowcake Inc. He holds a B.Sc. in Geological Sciences from Queen's University (1977) and holds a Chartered Financial Analyst designation. Mr. Ferry has been a director of Avalon since 2000.

Phil Fontaine, Director

Mr. Fontaine is the former National Chief of the Assembly of First Nations and is a Special Advisor to the Royal Bank of Canada. He is a proud member of the Sagkeeng First Nation in Manitoba and plays an active role in the support of his community. Mr. Fontaine earned his Bachelor of Arts degree in political studies from the University of Manitoba (1981) and has received numerous awards and honourary degrees for great work on behalf of his people and the country. Mr. Fontaine joined the Avalon Board of Directors in September 2009.

Brian D. MacEachen, Chairman of Audit Committee

Mr. MacEachen is currently President and CEO of Linear Metals Corporation, having served as Vice President and CFO of Linear Gold Corp. and Linear Metals Corporation since January 2004 and June 2006, respectively. A chartered accountant with more than 20 years of experience in overseeing the financial management of publicly traded companies, Mr. MacEachen's involvement in the mining industry has spanned over 23 years, including senior positions with Franco-Nevada Mining Corporation and Aur Resources Inc. He has been a director of Avalon since 1998. Mr. MacEachen earned his Bachelor of Business Administration from St. Francis Xavier University (1986).

Peter McCarter, Chairman of the Compensation, Governance and Nominating Committee

Mr. McCarter graduated from the University of Toronto with a BA in 1974 and from York University (Osgoode Hall) with an LL.B. and an MBA in 1978. Mr. McCarter practiced law at the Toronto law firm of Aird & Berlis during 19781989, specializing in corporate/securities/resource law. Mr. McCarter joined Aur Resources Inc. in 1989 and, prior to Aur being acquired by Teck Cominco Limited in August 2007, was the Executive Vice President, Corporate Affairs & Secretary and a director of Aur. Mr. McCarter also currently serves as a director of Thundermin Resources Inc., a TSX-listed junior resource company. Mr. McCarter has been a director of Avalon since 2007. He has served on a number of advisory committees for the Ontario Securities Commission (OSC), including being a member of the Securities Advisory Committee (1988-1989); a member of the Toronto Stock Exchange's Committee on Corporate Disclosure â&#x20AC;&#x201D; the Allen Committee (1994-1997); and a member of the Continuous Disclosure Advisory Committee of the OSC (2004-2006).

Hari Panday, Director

Mr. Panday has had a very successful career in international banking, including being the founding President and CEO of ICICI Bank Canada, where he defined and executed the entry strategy to launch ICICI in Canada. ICICI is the second-largest financial services company in India with $90 billion of global assets. Prior to founding ICICI Bank Canada, Mr. Panday

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held senior positions at HSBC Bank Canada and the Bank of Montreal. In 2009, Mr. Panday was awarded the Indo-Canadian Chamber of Commerce, Toronto, Corporate Executive of the Year and was selected to the "India Abroad 2008 — Power List" of prominent Indo-Canadians.

Shareholders Top Institutional Shareholders Shares

% Ownership

MFC Global Investment Management

9,539,319

10.19%

Van Eck Associates

2,649,432

2,83%

Global X Management

2,397,887

2.56%

Elliott & Page Ltd.

800,656

0.86%

Natcan Investment

645,001

0.69%

Donald Bubar

1,102,000

1.18%

R.J (Jim) Andersen

600,000

0.64%

David Connelly

305,500

0.33%

Brian D. MacEachen

305,000

0.33%

Alan Ferry

175,000

0.19%

Officers and Directors

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Mergers and Acquisitions We believe there is potential for some M&A activities in the rare earth space. Projects are usually separated between light rare earth projects (meaning the deposit has mostly light rare earth elements) and heavy rare earth projects (if the underling deposit contains high percentages of heavy rare earth). As mentioned above, the prices of HREE were historically higher than those of LREE, besides HREE are less common and more of them have been identified as critical (i.e. terbium, dysprosium and yttrium). Because most of the rare earth deposits have been identified as light rare earth deposits, more LREE are expected to be produced and their prices are most likely to fall and stay at lower levels. For the reasons mentioned above, projects with higher percentages of heavy elements usually receive higher valuations and investor interest. The most advanced REE projects at the moment are Lynas and Molycorp, they are well positioned to be the leaders in the industry; however, both have relatively low percentages of HREE. Thus, it is hard to imagine how they could be leaders if they could not provide sufficient amounts of some the most critical elements. Therefore, we strongly believe these two companies, as well as other companies with deposits of high LREE/TREE ratio; will be looking for opportunities to merge with companies that have high percentages of HREE. The best HREE company targets (i.e. companies with a high HREE/TREE ratio), in our opinion, are Ucore, Matamec and Tasman, given the size of their projects and the significant percentage of HREE in their deposits. Matamec, in particular, seems to be relatively underpriced. Rare Element Resources has a high percentage of some of the critical materials but a lower percentage of HREE. The company could merge with a HREE company to increase overall production and improve HREE distribution. Our preferred target for Rare Element Resources is Ucore, as both companies are in the United States and could benefit from future government‘s initiatives to develop the sector. The second best target for Rare Elements Resources is Matamec, which at the moment is significantly underpriced by the market. Ucore would also be a good target for Molycorp. The second best target for Molycorp would be Tasman in Europe, given the proximity of Tasman‘s deposit to Molycorp‘s Silmet Plant, also in Europe. Frontier's resource size and high target production level (20,000 tonnes) combined with its favourable rare earth distribution means that the company could produce more volume of certain critical elements (e.g. dysprosium) than some of the more advanced juniors with higher percentages of HREO/TREO but lower TREO production, therefore we think that is less significant for Frontier at the moment to acquire or merge with a HREE player. Avalon is probably too ―big‖ to be acquired by any of its peers. We believe that given the company‘s resource size and high percentage of heavy rare earths, it is set to be one of the leaders in the space without the need to merge or acquire other assets. It should be noted that because each deposit is different and processing methodologies vary between companies, economies of scale are hardly achievable. Also, it is possible, that new deposits may be discovered that could provide a better asset/business combination than those suggested here.

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Rare Earth Elements Investment Risk The most common investment risks associated with the companies in this report are listed below, some apply to all the companies in the mining sector and some risks are REE sector specific. Exploration Risk: The market may price in successful preliminary drilling or trenching results, which a comprehensive exploration work may not confirm. A company share may fall in these situations. Financing Risk: With many projects at similar levels of development, the competition for financing will likely rise in the coming years. Tight credit markets will make it difficult to raise funds and will most likely lead to project delays and cancelations. During the funding process, equity dilution may occur. Geopolitical Risk: Companies with assets in the developing countries are usually assumed riskier, given the often less stable political environments. However, companies in developed countries can also be affected by changes in governments and policies that may, for instance, affect tax and permitting laws. Some projects in North America are under the jurisdiction of First Nations groups, which often involve high levels of negotiations and approvals. Rare Earth Distribution Risk: The rare earths, which comprise 14 lanthanides plus yttrium and occasionally scandium, are usually found together. However, the percentage of each element is usually different in different minerals and deposits. During production, variations in the distribution of each element should be expected; however, significant changes may affect processing cost and revenue. Price Risk: Prices of individual rare earth elements would have a different effect on valuations of the individual projects given that they have different distribution of rare earth elements in their deposit. For example, changes in HREE prices would have a more significant effect on the valuation of companies that have deposits with higher percentages of HREE. Also, the relative difference in prices between the various elements could affect future revenue and valuations. Metallurgical Process Risk: Although there are over 200 minerals that host REE, only about five of them have been commercially processed. Many REE projects are dealing with minerals that were never before economically processed for REE production. Currency Risk: International REE prices are priced in U.S. dollars; as such, companies operating outside of the U.S. will be affected by changes in the exchange rate between the dollar and their functional currency. Acquisition Risk: We believe that consolidation of the industry is imminent. Also, some of the REE miners may attempt to acquire upstream players to vertically integrate. In a highly competitive market, some companies may overpay for assets.

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

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Acronyms

HREE

Heavy Rare Earth Element(s)

IMCOA

Industrial Minerals Company of Australia

JSI

Jacob Securities Inc

LREE

Light Rare Earth Element(s)

PEA

Preliminary economic Assessment

PFS

Pre-Feasibility Study

REE

Rare Earth Element(s)

REO

Rare Earth Oxide(s)

TREE

Total Rare Earth Element(s)

BFS

Bankable Feasibility Study

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

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Contact Info: Institutional Trading Brad Parkes, Head Sales &Trading Anne Brooks Joseph Thomson, Quantitative

416-866-8345 416-866-8317 416-866-8343

bparkes@jacobsecurities.com abrooks@jacobsecurities.com jthomson@jacobsecurities.com

416-866-8306 416-866-8362 416-866-8349

cbarnes@jacobsecurities.com jarmstrong@jacobsecurities.com sdmlow@jacobsecurities.com

416-866-8303 416-866-8356 416-866-8314 416-866-8380 416-866-8354 416-866-8374

jmcilveen@jacobsecurities.com bcabel@jacobsecurities.com kmalik@jacobsecurities.com lmoreno@jacobsecurities.com mjarvi@jacobsecurities.com mvalji@jacobsecurities.com

Institutional Sales Chris Barnes Jeff Armstrong Steven Low

Equity Research John McIlveen - Renewable Energy Bill Cabel – Power & Infrastructure Khurram Malik – Cleantech Luisa Moreno – Metals & Mining Mark Jarvi – Associate Moiz Valji – Associate

Jacob Securities Inc. 199 Bay Street, Suite 2901 Commerce Court West, PO Box 322 Toronto, ON M5L 1G1 Phone: (416) 866-8300 Fax: (416) 866-8333 www.jacobsecurities.com

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

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Important Disclosures Analyst Certification:

Each authoring research analyst and associate of Jacob Securities Inc. (―Jacob Securities‖) whose name appears on the front page of this investment research hereby certifies that (i) the recommendations and opinions expressed in this investment research accurately reflect the authoring analyst‘s personal, independent and objective views about any and all of the designated investments or relevant issuers discussed herein that are within such authoring analyst‘s coverage universe and (ii) no part of the authoring analyst‘s compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the authoring analyst in the investment research. The compensation of Research Analysts is intended to reflect the value of the services they provide to the clients of Jacob Securities. As with most other employees, the compensation of Research Analysts is impacted by the overall profitability of the firm, which may include revenues from investment banking activities of the firm's Corporate Finance department. Research Analysts' compensation is not, however, directly related to any specific corporate finance transactions.

Company Disclosures:

RES/REE:1; AVL:2; FRO:2; MAT:2 1. 2.

Ratings & Risk Rankings:

Within the last 12 months, Jacob Securities and/or its affiliates have undertaken an underwriting liability with respect to equity or debt securities of, or have provided advice for a fee with respect to, this issuer. The fundamental research analyst(s) and or associate(s) have visited material operation of this issuer.

Each analyst assigns a rating that is appropriate to the analyst`s view of how that stock will perform (total return basis) over the next 12 months on an absolute basis. At times the anticipated total returns may fall outside of the general ranges stated below due to near-term events, market conditions or stock volatility or, in some cases, company-specific corporate structures that result in consistently high yields. Ratings. Buy: Anticipate total return appreciation generally in excess of 15% over the next 12 months. Speculative Buy: Anticipate total return appreciation generally in excess of 25% over the next 12 months, however, the company is either pre-revenue, has negative cash flow, or a major unpredictable event may occur within 12 months. Hold: Anticipate limited total return (general appreciation less than 15% [or 25% for speculative rated stocks] or decline less than 10%) over the next 12 months. Reduce: Near term price outlook is for a negative return; however the long term outlook is for a positive return. Sell: Near term and long term return is expected to be negative. Risk Rankings. Low: Low financial and operations risk, high predictability of financial results, low stock volatility. Medium: Moderate financial and operations risk, moderate predictability of financial results, moderate stock volatility. High: High financial and or operation risk, low predictability of financial results, high stock volatility.

Research Distribution: Analyst Trading: Risk Qualifier:

Jacob Securities distributes research through Bloomberg, Thompson One, Capital IQ and client email lists. Jacob Securities does not permit analysts to own or trade securities of the companies they cover. The information contained in this investment research has been compiled by Jacob Securities from sources believed to be reliable, but no representation or warranty, express or implied, is made by Jacob Securities its affiliated companies or any other person as to its fairness, accuracy, completeness or correctness. Jacob has not independently verified the facts, assumptions, and estimates contained herein. All estimates, opinions and other information contained in this investment research constitute Jacob Securities‘ judgement as of the date of this investment research, are subject to change without notice and are provided in good faith but without legal responsibility or liability. This investment research is provided for information purposes only and does not constitute an offer or solicitation to buy or sell any designated investments discussed herein in any jurisdiction where such offer or solicitation would be prohibited. As a result, the designated investments discussed in this investment research may not be eligible for sale in some jurisdictions. This investment research, is not, and under no circumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. To the fullest extent permitted by law, none of Jacob Securities, its affiliated companies or any other person accepts any liability whatsoever for any direct or consequential loss arising from or relating to any use of the information contained in this investment research. Jacob Securities Inc. is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and Canadian Investor Protection Fund (CIPF).This research report is intended for Institutional and Accredited Investors. Please do not forward without the expressed written consent of Jacob Securities. Disclosure for Clients Outside of Canada. Jacob Securities is a registered entity in Canada only. As such, this research report was not prepared subject to any disclosure or disclaimer requirements outside of Canada. This material is not directed to, or intended for distribution to or use by, any person or entity if Jacob Securities is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to such person or entity. This report may not be reproduced, re-distributed or passed to any other person or published in whole or in part for any purpose without the prior consent of Jacob Securities. Additional information is available upon request.

Ratings Distributions:

Buy: Speculative Buy: Hold: Reduce: Sell: Restricted:

22% 33% 37% 0% 4% 4%

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

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