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Bottom-Fish Action
 Tue Oct 5, 2010
Bottom-Fish Action Report for September 12 to October 2, 2010
    Publisher: Kaiser Research Online
    Author: Copyright 2010 John A Kaiser


Bottom-Fish Action Report for September 12, 2010 to October 1, 2010

Out with the Bear and in with the Bull

Rather than write a lot of words, I have decided simply to point KBFO members at the TSXV charts above, the Rare Earth Index and Bottom-Fish 2009 Edition Index charts below, and then below the precious and base metal charts. You will note that uptrends are present everywhere, and that I have finally swapped the bear icon out for a bull icon above after my newsletter peers refused to pay me to keep them there so that I would not jinx the uptrend. At the Cambridge conference in Toronto on September 25 I gave a keynote speech in which I argued that it is time to prick the Doom & Gloom Bubble in which so many observers of the junior resource sector are trapped and pay attention to the chalk marks which are telling us that we have launched into one hell of a bull market for the resource sector. We spoke to audiences at 75% capacity, which means that we are nowhere near a top by traditional measures. There will likely be market turbulence during the final quarter of 2010, but I am placing a bet that the resource sector will greet 2011 with its uptrend intact, and with gold pushing into new high territory, it is only a matter of time before institutional and retail money floods into resource sector equities in what will be a continuation of the secular bull market for raw materials that was interrupted by the Crash of 2008.

Above Bottom-Fish Range Within Bottom-Fish Range Below Bottom-Fish Range Recently Closed Out
Updated this Week New 2 Year High New 2 Year Low New Bottom-Fish High New Bottom-Fish Low

Bottom-Fish Recommendations made from September 12, 2010 to October 1, 2010
Company Date
Price Recommendation Action Net
Gain New Status
Beaufield Resources Inc 9/30/2010 $0.68 BF Cycle Closeout Sell 100% Sell 5,263 @ $0.68 $3,579 0 258% Closeout Hold 0%

New Comments
Volume High Low Close Chg Status
Avalon Rare Metals Inc (AVL-T)
11,617,000 $4.210 $3.120 $3.600 ($0.020) Good Absolute Spec Value Buy
Beaufield Resources Inc (BFD-V) 67,786,600 $0.680 $0.140 $0.450 $0.300 New BF LP Buy $0.10-$0.19
Commerce Resources Corp (CCE-V) 8,544,500 $0.540 $0.380 $0.510 $0.140 New BF Spec Cycle Hold 100%
First Point Minerals Corp (FPX-V)
6,698,700 $0.890 $0.590 $0.770 $0.070 Good Relative Spec Value Buy
Peregrine Diamonds Ltd (PGD-T)
5,081,800 $2.740 $2.250 $2.520 $0.060 Good Absolute Spec Value Buy
Quest Rare Minerals Ltd (QRM-V)
6,751,900 $5.570 $3.290 $4.590 $0.670 Good Relative Spec Value Buy
Rare Element Resources Ltd (RES-V)
5,244,700 $9.900 $5.200 $8.900 $3.150 Good Relative Spec Value Buy
Spanish Mountain Gold Ltd (SPA-V) 6,557,600 $0.640 $0.400 $0.620 $0.140 New BF Spec Cycle Hold 100%

Index Member Quick Notes

Argus Metals Corp (AML-V: $0.18)

September 21, 2010: Argus Metals Ltd reported disappointing results from its recent 4 hole drill program on the Hyland gold project in the Yukon on September 20, 2010. The 2 holes into the Main Zone underneath the oxide resource yielded so-so results, the best of which was 9.18 m of 2.08 g/t gold and 34.74 m of 1.1 g/t gold. The stepout holes to the north which tested the "Feeder Zone" and intersected massive sulphides yielded only 4.3 m of 0.14 g/t gold and 4.6 m of 0.13 g/t gold. The project is not entirely a bust because it did generate geological data that has Paul Gray and Mike Collins conjuring up new targets. Argus is heading back into the field to conduct a geophysical survey in preparation for further work next summer when presumably the Yukon regional play will be heating up again after enduring the seasonal downturn created by winter when no work gets done. Meanwhile Argus has slumped back into its $0.10-$0.19 bottom-fishing range where I am content to maintain the medium priority buy recommendation. Argus hopes to see a court date set within a month for its disputed Kaituma uranium/gold project in Guyana, with a decision expected by year end. The junior has something in the works in Peru about which we will soon hear something, but since this involves a grassroots gold prospect the company will have to do some work before the market cares.

Great Western Minerals Group Ltd (GWG-V: $0.35)


September 21, 2010: Great Western Minerals Group Ltd filed a preliminary short form prospectus on September 21, 2010 for a unit offering (1 share plus 1/2 warrant) that will raise $35 million. The lead agents are Byron Securities and Salman Partners, which may explain why Byron's analyst Doctor Jon Hykawy in a recent research report that surveyed the rare earth sector fabricated wildly off the mark cash flow models which justified sell recommendations at $3.14 for Avalon and $3.61 for Quest, owners of major Canadian rare earth deposits. The preliminary prospectus is devoid of content, and refers to the 2009 annual information form, which in turn provides no new detail about Rare Earth Extraction Company (Rareco), owner of the Steenkampskraal thorium/rare earth deposit in South Africa. The proceeds will be used to repay $5 million in secured debentures issued during the past month for which the lenders will receive 2.5 million Great Western shares worth $875,000 at $0.35 which translates into a 17.5% return on the one month loan, or 210% on an annualized basis. Of the loan $3 million was used to purchase a 20.8% stake in Rareco, a corporate entity about which Great Western has disclosed nothing other than that it owns a former South African thorium mine with associated non 43-101 compliant historic rare earth resources. Byron and Salman will receive $2.1 million as an agent's fee. What is interesting is that this prospectus may and will only be delivered to "qualified investors" in the United Kingdom, which means that the Great Western units will not be sold to Canadian institutional or retail investors. Given the feebleness of Great Western's agreements with Rareco, and the assumption that these days the UK is not overflowing with stupid high net worth investors, it is not a stretch to speculate that the money is coming from a group associated with the principals behind Rareco who have recognized the need to consolidate the two entities into one package. Great Western currently does not own any rare earth deposits that have any chance of being put into production during the next five years, but it does own Less Common Metals, the UK based downstream fabricator of samarium-cobalt magnets. LCM, unfortunately, is caught in the Chinese rare earth export quota squeeze play, which has caused the FOB price of samarium and gadolinium to skyrocket. Great Western has been very silent on the issue of how much samarium and gadolinium LCM has stockpiled in its warehouse so that it does not have to pay the $33/kg FOB price for samarium oxide compared to the $2.68/kg China based fabricators of samarium-cobalt magnets must pay for their samarium inputs. Unless China takes measures which collapse the FOB prices of the cheaper rare earth oxides, LCM will be out of business within a year. However, if Great Western gets properly financed and all those slippery terms in its agreements with Rareco get ironed out, keeping LCM alive will be worthwhile. There is, of course, no Great Western disclosure supporting such optimistic speculations. It may simply be the case that Byron has lucked into a sack of British hammers who have no special knowledge about behind the scene machinations and have done little more than read Hykawy's flawed analysis of Great Western. If this financing gets done at $0.35, Great Western will have about 444 million shares fully diluted, all of it free trading.

Mountain Province Diamonds Inc (MPV-T: $4.30)

September 14, 2010: Mountain Province Diamonds Inc announced on September 14, 2010 that it has received the final draft of the feasibility study for the Gahcho Kue diamond project in the Northwest Territories from an independent engineering team led by JDS Energy and Mining. Partner De Beers has invoked its right to conduct a detailed internal review over a 90 day period, though Mountain Province will have to file the study on SEDAR within 45 days. The news release is skimpy on disclosing parameters. All it says is that the project has cleared the 15% internal rate of return threshold for an automatic goahead for mine development, the capex is $550-$650 million, and operating costs are CAD $48-$60 per tonne. Several brokerage firms have published DCF based research reports. While we wait for the actual numbers we will create a cash flow model for the 11 year mine which we will soon publish.

Bottom-Fish Action Report for September 12, 2010 to October 1, 2010
Quest Rare Minerals Ltd (QRM-V: $3.68)

Spec Value Hunter Comment - September 17, 2010: Initial 2010 infill holes double thickness of Quest's BZone

Quest Rare Metals Inc published the first batch of 2010 infill holes for the BZone on September 16 which double the maximum thickness of the 1,100 m by 600 m zone to at least 309.9 metres. As the drill plan below indicates (see Quest's Sept 16 News Release for a high resolution version of the drill plan and the BL2+100 and +200 sections), a north trending pegmatite zone within the east-west striking BZone is starting to take shape. While the holes are yielding overall intervals such as 309.9 m of 1.0% TREO in hole #27 and 211.9 m of 1.02% TREO in hole #23, which will contribute to doubling the overall inferred resource into the order of 200 million tonnes, the important news is the higher grade pegmatite intervals within these holes such as 112.65 m of 1.3% in hole #27 and 67.81 m of 1.28% in hole #23. These results support the expectation that Quest will be able to boost the 1.161% TREO grade used in its September 9, 2010 PEA to 1.3% TREO or better. The drill plan includes 2010 drill collars up to #82, which means that Quest has drilled at least 63 infill holes into the BZone which will result in an updated 43-101 resource estimate in early 2011. The goal is to convert the 40.4 million tonne inferred resource of 1.161% at a 1.0% cutoff into an indicated resource at a 1.25% cutoff with a higher resulting grade which will form the basis of a prefeasibility study to be completed by the end of 2011. Quest is also collecting a 50 tonne bulk sample for a pilot plant study that will form part of the PFS.

According to Peter Cashin Quest should be able to file its PEA with SEDAR by the end of next week, which will put Quest into a position to produce an offering document for a substantial financing later this year. The pressure on Quest to do a major financing sooner than later has lightened in the wake of Avalon's successful $30 million bought deal on September 15 which now assigns an implied project value of $347 million to Nechalacho. The financing, led by CIBC with Laurentian Bank, Canaccord and Stonecap, was a significant milestone for the Canadian rare earth juniors because it demonstrated the willingness of the capital markets to finance a rare earth project despite weak PFS numbers based on a mixed oxide price that is higher than historical averages but lower than what one would expect in light of recent astronomically high FOB spot prices. It signals that institutional money is starting to understand the strategic security of supply aspect of the rare earth sector and is developing a willingness to suspend trailing commodity price based economic logic. Quest's final PEA document will include details on how Wardrop derived the REO prices it used in its study of the BZone which, despite the impression created by Quest's PEA news release, were not separated REO prices. Neither the Avalon PFS nor the Quest PEA includes a separation stage in their flow sheets, so it is inappropriate to apply separated REO prices to the content of the mine concentrates. Avalon made clear it was using some sort of derivative price for a mixed oxide product, but Quest failed to make this clear, which prompted the market to question the credibility of Wardrop's PEA. Once investors have perused the formal PEA and satisfied themselves that the pricing used by Wardrop was not a mistaken application of separated rare earth prices, but in fact a derivative price similar to that used by Avalon, they can plug in whatever prices they might think are appropriate, and focus their attention on the credibility of Wardrop's cost assumptions. One analyst who works for a small Toronto brokerage firm buried in lithium paper and who has a history of inventing price targets on the basis of projects his recommended companies do not own has already declared that he does not believe Wardrop's cost assumptions and has urged his firm's clients to sell Quest. Perhaps that explains all those 100 share sales every other minute by anonymous on Friday. Once Quest's PEA is filed Bay Street's real mining analysts will dissect the details and come to their own conclusions as to who is incompetent, the mine engineering firm Wardrop or a PhD and MBA decorated technology analyst.

At Friday's closing price of $3.68 Quest's Strange Lake project is carrying an implied project value of $183 million which is very cheap in view of the scale of the Strange Lake project and the robust economics implied by Wardrop's PEA. In Tracker 2010-08 published on September 9 I suggested that bottom-fishers and spec value hunters not expect significant upside until after we see a financing of $20-$40 million which takes care of delivering a prefeasibility and pilot plant study by the end of 2011. One reason for my caution was that I had not received a plausible explanation of the REO pricing used in the Strange Lake PEA. While I have not seen the details in print, I am less worried today than I was a week ago. Another reason was my uncertainty that Bay Street understood the rare earth sector, and, in so far that it was willing to finance Quest, would only do so by pre-selling the stock and then knocking the price down for the actual financing, similar to what happened last year. However, the success of the Avalon financing, which was apparently double over-subscribed, tells me that Bay Street is starting to understand the rare earth space. Once its analysts have digested the formal PEA document, and have realized that Avalon and Quest are peer companies rather than mutually exclusive competitors, with the difference that Avalon is one year ahead of Quest in the mine development cycle, their appetite for a Quest financing will grow, especially if non-institutional parties who have done their own homework come knocking on Quest's door with financing proposals that completely bypass Bay Street. Finally, it is one thing to hear geologists talk about how definition drilling will boost the grade of a resource, but a much better thing is to see results start demonstrating such expectations. With a lot more news to flow during the rest of the year, and Quest in no need to finance before Q1 of 2011 thanks to the SIDEX debenture with those annoying warrants, there is no reason for Quest's stock price to stay below $4 in order to coax out a major financing. Leaders in the field such as Lynas and Molycorp are at or near the price targets set by Wall Street; the natural progression from these levels onward is aggregation, and Strange Lake has the heavy rare earths both of these companies need in order to establish themselves as the non-Chinese world's full spectrum source of rare earth oxides and related downstream products.

Commerce Resources Corp (CCE-V: $0.51)

Bottom-Fish Comment - September 17, 2010: Commerce plans more drilling for Eldor rare earth discovery

Commerce Resources Corp released results for the second hole into the 100% owned Eldor carbonatite complex in northern Quebec on September 15 which confirm speculation that the junior has made a major rare earth discovery. Drilled 50 m northwest of hole #27 (all earlier holes were drilled on niobium-tantalum targets) which yielded 215.3 m of 1.72% TREO (see Bottom-Fish Comment August 20, 2010 for more details and a drill plan), hole #28 yielded 243.84 m of 1.95% TREO with a similar lithogical sequence as hole #27. This included two higher grade intervals of 29.99 m of 2.4% and 28.32 m of 2.41% TREO. The cross section below reflects the interpretation of the carbonatite zonation and also gives a good visual image of the consistency of the TREO grade throughout the hole. The average grade (1.75% TREO) and the REO distribution for the A and B zones in hole #27 are similar, except the heavies are 5.8% of the A zone and 3.7% of the B Zone. The BD Zone is lower grade at 0.9% TREO and has 7.36% heavies. According to Jody Dahrouge the occasional "blanks" are due to country rock xenoliths or later stage dyke or breccia intrusions. The Ashram Zone is shaping up as a consistently mineralized light rare earth system with significant tonnage potential. The latest news release continues to caution that "true thicknesses" are not yet known, but the geological context suggests that management's interpretation of a layered cone sheet with the A Zone making up the center is plausible. Dahrouge does caution that hole #39, which was drilled on the other side of Center Lake in the same southwest direction as the other holes and mainly intersected A Zone material, is likely a down structure hole. Commerce expects assays for the rest of the holes in two weeks, but apparently a decision has been made to immediately mobilize a follow up drill program of 6 holes representing 1,500 m that will take place over the next 3 weeks. The goal is to achieve sufficient density to facilitate an initial 43-101 inferred resource estimate for the Ashram Zone plus provide support for a larger conceptual tonnage target. Key to the latter will be 2 holes at the southeastern end of the Ashram Peninsula, one to extend the strike of the zone on the western side of Center Lake, and the other drilled northeast toward #39 in an effort to scissor that hole and confirm that Zone A persists in the middle of the magnetic low anomaly which seems to conform with the interpretation of the cone sheet model. The additional drilling will also furnish material to allow bench scale metallurgical studies. Although the location is remote, the Eldor discovery intrigues me because of the target's large size and consistent mineralization. It remains to be seen if delineation drilling will identify higher grade sweet spots within the Ashram Zone. Management's decision to squeeze in another round of drilling before winter freezeup puts Commerce and its Eldor project into that class of rare earth juniors that deserves to be closely watched during the next 12 months. Bottom-fishers should continue to hold their Commerce positions in anticipation of higher prices as additional drilling provides support for the inferred geometry of the Ashram Zone and possibly delivers higher grade sweet spots.

Peregrine Diamonds Ltd (PGD-T: $2.54)

Spec Value Hunter Comment - September 17, 2010: Peregrine wraps up 2010 season with 50 kimberlites at Chidliak and 2 at Qilaq

Peregrine Diamonds Ltd has finished its 2010 exploration season on Baffin Island with a tally of 50 kimberlites at 49% owned Chidliak and 2 at 100% owned Qilaq. A September 16 news release reported 12 additional kimberlites, 8 of them intersected by a lightweight RC drill rig, 1 by a core rig, and 3 found by prospecting. The RC rig tested 32 targets, delivering an astonishing 25% success rate. The RC kimberlites will be drilled with a core rig next year if micro diamond results are promising. Since my visit to the property in late August Peregrine has also drilled core holes into the CH7 pipe (see diagram below) which will allow interpretation of the macro diamond results from the 50 tonne mini bulk sample excavated from an outcropping portion of CH7. Peregrine has also revisited CH1, CH9, CH12 and CH16, kimberlites discovered last year, with additional core and RC holes. The big surprise of the season is CH31, discovered this summer by prospecting, and now confirmed as a substantial pipe with a width of at least 300 metres (see diagram below) by an angled core hole that delivered a 410 m kimberlite intersection. CH31 is unusual in that the geophysical target consisted of a strong EM anomaly associated with a subtle magnetic low that was interpreted to have a surface expression of 5 hectares. A pipe this size has tonnage potential in the range of 30-50 million tonnes to a depth of 300 metres, depending on the pipe wall angles. The intersected material was described as volcaniclastic kimberlite with carbonate xenoliths, as is evident in the diagram below which highlights a couple mantle xenoliths which offer hope that this pipe is diamondiferous. The micro diamond results for CH31 will be an important event because a pipe this size does not need a grade above 50 cpht to have economic potential. It is located within 4 km of CH7. Management will now have to take a closer look at this type of anomaly which was not high on the priority list, especially when the implication was a large target. This development puts additional pressure on BHP Billiton, which must make a decision after it vests for 51% whether or not it wants to go to 58% by funding all future costs related to delivering a feasibility study. Peregrine expects to notify BHP at the end of September that the $22.3 million required to vest has been spent. BHP has indicated that a decision will be made by late November. In the meantime we will start getting a flow of micro diamond results for the new kimberlites, with macro diamond results for CH7 by late October and CH6 by late November. Micro diamond results for CH28 in the northern part of Chidliak, CH31 in the central part, and Qilaq 1&2 on 100% owned ground are potential game changers. A coarse distribution for a diamondiferous CH28 would turn the northern part, which includes CH17 and its undrilled neighbor, into a new hotspot which will likely be serviced by its own camp in 2011. A coarse distrbution for a diamondiferous CH31 would signal that large tonnage kimberlites which sampled a diamond friendly mantle are present. And diamondiferous pipes on Qilaq would keep Perergrine engaged with a major exploration program in 2011 if BHP should elect to go to 58% and take over operatorship of Chidliak's exploration. Then there is the element of surprise regarding the other 32 new Chidliak kimberlites. Has the market responded positively to this news? No, the recent price jump was due to the addition of Peregrine to the S&P/TSX SmallCap Index, which forced index tracking funds to buy Peregrine in the open market. Peregrine's smorgasbord of upcoming results has the capacity to push the stock into the $5-$10 trading range by the end of 2010. Bottom-fishers and spec value hunters should continue to hold their positions, and because Chidliak is a unique diamond play with world class potential, be prepared to buy more if we get a market hurricane this fall, for Peregrine is a reed that would merely bend in the wind before snapping back and sprouting taller.

Avalon Rare Metals Inc (AVL-T: $3.45)

Spec Value Hunter Comment - September 20, 2010: Avalon secures $30 million bought deal

Avalon Rare Metals Inc secured a bought deal on September 15, 2010 consisting of 9,240,000 units at $3.25 from a syndicate of underwriters led by CIBC, Laurentian Bank, Stonecap and Canaccord that has raised $30 million for the Nechalacho rare earth project. Each unit consists of 1 share plus a half warrant exercisable at $3.60 for one year. This financing boosts Avalon's fully diluted to 102.3 million shares which at a $3.45 stock price implies a value of $353 million for the Nechalacho project. On June 21, 2010 Avalon published a prefeasibility study for a 1,000 tpd underground mine ramping up to 2,000 tpd over a four year period which yielded a rather dismal 11.8% after tax internal rate of return and a net present value of $97 million using a 10% discount rate. Key factors behind these poor numbers were the high $900 million capital cost, the political necessity of basing the hydrometallurgical facility in the Northwest Territories at the old Pine Point zinc mine site, a very conservative operational scale relative to the size of the deposit, and what appears to have been conservative pricing for rare earth oxides which was initially criticized as unorthodox because it utilized prices higher than trailing averages. Avalon's PFS was also criticized for not including a separation facility for Nechalacho's output of a mixed oxide product, in effect "kicking the can down the road" as IncaKola's Mark Turner put it. In Tracker 2010-05 published on June 25, 2010 I argued that despite the weak numbers Avalon's PFS was a major milestone because it articulated what it would take to establish non-Chinese rare earth supply through Nechalacho and that end users seeking to reduce significantly higher opportunity costs caused by lack of rare earth supply security would be wise to take over Avalon and develop Nechalacho as an in house source of rare earths. Needless to say the market was unimpressed and knocked Avalon back to the $2.00 level, but that was just before China released its export quotas for the second half of 2010 which rudely awakened end users and sent the prices for the cheaper rare earth oxides soaring. A resurgence of interest in the rare earth sector during the summer pushed Avalon's stock price back in an uptrend that accelerated when on August 18 the junior announced that it had engaged SNC-Lavalin to conduct a scoping study on the development of a rare earth oxide separation facility in North America. This study is expected by the end of September 2010 and will fully quantify what it will cost for Avalon to deliver separated rare earth oxides to end users unwilling to base their manufacturing operations in China which, in the name of environmental cleanup and a desire to conserve a strategic resource, has in effect created a squeeze play to force manufacturers to locate in China or give up manufacturing anything that requires rare earths as a critical input. As the chart below shows, the result of the export quota reduction has been a sharp divergence between FOB and domestic rare earth oxide prices beyond the 31% to 41% premium FOB prices should have to reflect the fact that VAT is not refunded on exported rare earths and a 15% export duty is applied to light rare earths and 25% to heavy rare earths. Details about the pricing Avalon used in its cash flow model are now available through the technical report filed on SEDAR on July 29, 2010. My analysis indicates that Avalon's pricing assumptions are very conservative compared to those of some peers and those used by Wall Street in setting stock price targets for Lynas and Molycorp that assign valuations in excess of $2 billion to Mt Weld and Mountain Pass, small scale mines which will predominantly produce light rare earths.

The table below presents spot and trailing average prices for FOB and domestic rare earth oxides as reported by Metal-Pages. The domestic prices only have 3 year rather than 4 year averages because Metal-Pages only provides price ranges from November 15, 2007 onwards. Prices for holmium, erbium, thulium, ytterbium and lutetium are not regularly reported. For its PFS Avalon identified base case prices as of late 2009 and escalated them annually on a 20% compounded basis from 2010 to 2014, when it hopes to have Nechalacho in production. Avalon did not do this for lanthanum and cerium oxide for which it used prices below the 4 year FOB average which in turn are drastically below the FOB spot prices that have risen exponentially since the export quota reduction. Avalon did this because its consultants believe cerium and lanthanum will be in surplus by 2014 thanks to Mt Weld and Mountain Pass coming on stream successfully (to whom those consultants did provide consulting services), and apparently because Avalon believes Molycorp's claims about the potential of its cerium based water filters are little more than promotional hype. Avalon insiders, who make no secret about being climate change skeptics, also do not place much hope in Toyota scaling up marketing plans for its current NiMH battery based Prius hybrid in response to any surge in lanthanum supply, currently the bottleneck for such plans. This pessimism is clearly not shared by the Wall Street giants JP Morgan and Morgan Stanley who financed Lynas and Molycorp, and on September 7 and 8 respectively published research reports that based $26.50 and $27.00 price targets for Molycorp on cerium and lanthanum oxide prices EIGHT and FOUR times higher than assumed by Avalon.

Rare Earth Oxide Prices US $/kg
Rare Earth OxideFOB 4 Year
FOB SpotDomestic 3
Year Average
JP MorganMorgan
Lanthanum Oxide$6.69$37.00$3.87$4.46$4.06$16.98$17.92
Cerium Oxide$4.86$36.00$2.24$3.87$2.08$16.07$16.53
Praseodymium Oxide$25.16$59.50$18.91$32.78$43.87$46.45
Neodymium Oxide$25.71$62.50$19.48$34.12$46.06$47.00
Samarium Oxide$5.04$33.00$2.21$2.68$5.58$9.96
Europium Oxide$428.76$595.00$372.90$443.05$1,086.10$567.78$549.25
Gadolinium Oxide$9.66$40.00$5.66$9.52$13.70

Terbium Oxide$518.80$595.00$394.06$431.16$1,166.09

Dysprosium Oxide$118.67$288.00$102.54$204.43$254.59

Holmium Oxide$25.50


Erbium Oxide$55.00$46.32


Thulium Oxide$90.00

Ytterbium Oxide$25.00

Lutetium Oxide$500.00$345.00


Yttrium Oxide$12.30$34.50$7.53$7.21$23.22

Avalon Recovered
Rock Value $/t ore
Avalon Recovered
Value $/kg REO
1) FOB and Domestic average and spot prices as of Sept 17, 2010 - Metal-Pages
2) Avalon 2014 prices used in June 2010 PFS based on 20% annual escalation of 2009 FOB prices, except cerium and lanthanum
3) JP Morgan prices used in Sept 7, 2010 research report as basis for DCF valuation that set $26.50 price target for Molycorp
4) Morgan Stanley prices used in Sept 8, 2010 research report as base case for DCF valuation that set $27.00 price target for Molycorp
5) In assessing the recovered rock value and REO $/kg where no prices are listed we applied the 4 year FOB prices.
6) The Avalon 2014 PFS prices were used where the JP Morgan and Morgan Stanley base cases lacked REO prices.

Avalon's success in raising $30 million from Bay Street, Canada's miniature version of Wall Street, surprised me because it suggested that the Canadian capital markets are letting "strategic logic" displace the trailing commodity price based "economic logic" that normally guides their decision making except when the investment target is exhibiting bubble-like behaviour. (I continue to contend that while the conditions for formation of a rare earth bubble are present, we are at best still at the earliest stages of bubble formation.) It seems, however, that Bay Street analysts have been massaging the data and came to the conclusion that Avalon is being ridiculously conservative in its rare earth output pricing assumptions. The technical report contained more detail than the PFS news release, which enabled me to crunch the numbers and come to some interesting conclusions. First of all I applied the average 1.75% TREO grade indicated by the updated 43-101 resource estimate published on September 8, 2010 to the known REO distribution of the Basal Zone and then applied the 77% recovery Avalon expects its flow sheet to achieve. The 17.5 kg of contained TREO reduces to 13.5 kg of recovered TREO. In the table above I then applied the various price sets to the recovered REO distribution to establish two sets of values: 1) the recovered value of REO per tonne of ore, 2) the value per kg of recovered REO. It should be noted that the latter figure will reflect the unique recovered distribution for a deposit. In its PFS Avalon used a value of $21.94/kg to generate the rare earth oxide portion of its revenue stream. This has generated criticism that Avalon is applying separated oxide prices when in fact there is no separation stage in its cash flow model. However, what Avalon has actually done is apply a sharp discount to the separated oxide value of its output using the projected 2014 REO prices listed in the table above. In other words, if Avalon's mixed oxide concentrates underwent separation, the resulting separated oxides would be worth $35.04 per kg. The $21.94 per kg price used by Avalon is thus discounted 37% from the value of separated oxides. According to Avalon's Pierre Neatby separation facilities typically operate at a margin of 20%-25%, which means that Avalon should really be using a price of $26.28 to 28.02 per kg in its cash flow model, if its 2014 rare earth oxide prices are judged plausible. The appropriate prices to use is, of course, extremely controversial, as we can see by the fact that JP Morgan and Morgan Stanley are willing to use prices for cerium and lanthanum that are below FOB spot prices but far above the 4 year FOB averages. Bay Street's mining analysts have recognized that the rare earth game is all about the future prices of rare earth oxides, and, given the complexity of this sector where surplus supply is capable of begetting offsetting demand, they are realizing that there are no hard and fast numbers. Although Avalon's PFS numbers for Nechalacho do not look good, they are due to very conservative price assumptions which Wall Street's finest have already demonstrated a willingness to discard in favor of much more aggressive numbers.

With the completion of this financing Avalon will have over $40 million working capital with which to conduct its pilot plant study during 2011 and deliver a feasibility study by early 2012. Because of the uncertainty surrounding China's strategy with regard to rare earth export quotas, the growth in demand for products that require rare earths, and the ability of the main rare earth mine contenders to deliver as projected, it is hard to come up with well constrained price targets for advanced juniors such as Avalon. There is little left to discover about Nechalacho's potential during the next 12 months other than through observation of the general rare earth market and the performance of peer companies in their race to deliver a solution to the rare earth supply problem. In terms of relative pricing Avalon has potential to achieve an implied project value in the $500 million to $1 billion level, which is 25%-50% below that already achieved by Lynas and Molycorp. My recommendation is to hold both the bottom-fish and spec value hunter positions for further price appreciation into the $5-$10 range, which we can expect because Avalon is the most advanced Canadian rare earth junior and thus the most obvious target for institutional capital seeking an alternative to the advanced Australian rare earth juniors.

Rare Element Resources Ltd (RES-V: $6.29)

Spec Value Hunter Comment - September 21, 2010: Rare Element PEA imminent

Rare Element Resources Ltd has attracted considerable market attention since obtaining its AMEX listing on August 18, 2010, a development that prompted economist/newsletter writer Mark Skousen to pick up the rare earth story and recommend Rare Element as the preferred way to particpate in it. The dual TSXV (RES)/AMEX (REE) listing has, of course, also attracted traders who perceive Rare Element as a more volatile clone of Molycorp. The two companies bear some similarity in that both own high grade light rare earth dominated deposits in the United States. Molycorp's Mountain Pass deposit in southern California is larger and higher grade, but Rare Element's Bear Lodge deposit in Wyoming may eventually rival Mountain Pass as an American based source of rare earth oxides. For now Molycorp's Mountain Pass deposit is carrying an implied value of $2 billion compared to only $235 million for Rare Element's Bear Lodge. Rare Element is in the midst of a 30,000 ft drilling program which will infill the Bull Hill SW FMR oxide zone to upgrade the existing inferred resource of 7,257,440 tonnes of 3.62% TREO, expand it by stepout drilling, and investigate the potential for additional significant zones in the Bull Hill NW and Whitetail Ridge areas. On September 15, 2010 Rare Element released assays for the first ten holes which included the highest grade intervals (9%-12%) so far reported for the Bear Lodge project. In fact, Rare Element has had to send core to Australia for over-limit assays, that is, material grading in excess of 12% for which North American labs are not set up. On August 18 Rare Element released a detailed report on bench scale metallurgical studies on the FMR Oxide zone which suggest that an 80% recovery is achievable with a flow-sheet that first produces a 20% concentrate through scrubbing, attritioning and gravity separation, followed by acid leaching using a 20% hydrochloric acid solution. Rare Element expects to publish a preliminary economic assessment (PEA) by the end of September which will quantify the capital and operating costs associated with delivering a mixed rare earth oxide concentrate.

The PEA will be based on an open pit mine with an operational scale similar to that of Mountain Pass which plans to process 1,200 tpd of 7.9% TREO ore. The Mountain Pass head grade is more than double that of Bear Lodge's initial FMR oxide resource, but Molycorp is only able to recover 59% of what is largely bastnaesite ore. In contrast, Rare Element hopes to recover 80% of the FMR Oxide zone material which is dominated in order of descending abundance by synchysite, parisite and bastnaesite, all carbonatite associated minerals that host light rare earths plus europium. The FMR Oxide zone also contains monazite and apatite which have a greater propensity to include the heavy rare earth elements, plus very fine grained manganese-iron oxides dominated by cerium which is not recoverable. It remains to be seen if the 80% recovery achieved by Rare Element's flow-sheet will extract any of the heavy rare earth oxides. In economic terms this will not matter much because the heavy rare earths excluding europium represent less than 10% of the contained value of the FMR rare earth oxides. For now spec value hunters need to be focused on three key uncertainties: 1) what is the cost structure associated with an optimal flow-sheet, 2) will the high grade intersections boost the grade when an updated resource estimate converts the Bull Hill SW FMR inferred resource into an indicated resource, and, 3) will scaled up metallurgical studies confirm the 80% recovery without raising the costs identified by the PEA?

Within a week or so we should see the results of the PEA and what pricing assumptions Rare Element has used for the revenue side of its DCF model. As far as I can tell the PEA will not include a separation facility, which means that Rare Element will be subject to the same criticisms lodged against Avalon and Quest for not including separation in their flow-sheets. Molycorp's Mountain Pass operation will include a separation facility, which is one reason that project can command a higher valuation than other projects for whom this stage is still missing. However, given that projects such as Bear Lodge, Nechalacho and Strange Lake will not be in production before 2015, there is plenty of time for centrally located separation facilities to be developed either by a consortium of North American rare earth producers or a third party which has become confident in the availability of North American concentrates. Avalon has in fact commissioned SNC-Lavalin to do a scoping study for a separation facility which should be out by the end of September. Because such a facility will have a capacity in excess of what Nechalacho or Bear Lodge are likely to supply individually from their mines, and thus be able to process concentrates from multiple sources, the details spelled out in the SNC-Lavalin scoping study will help companies like Avalon and Rare Element fine tune the prices they are using for their mixed oxide concentrates which appear to be quite conservative compared to what the Australians and Wall Street analysts are willing to use in their valuations. As far as an updated resource estimate is concerned, we will likely have to wait until late Q1 of 2011. The drill program will carry on until December when the arrival of winter will shut it down. Final assays will not arrive until late January, giving Rare Element two months to update the resource estimate. If the PEA is positive Rare Element will need to initiate a prefeasibility study (PFS), part of which will be scaled up metallurgical studies. Rare Element is currently assembling a 7-10 tonne bulk sample from PQ core and surface trenches from various locations within the Bull Hill SW zone. Because the prior metallurgical studies were based on samples excavated from trenches, there is a risk that the metallurgy is not representative of the FMR resource which the next stage will address. This material would feed a pilot plant study during 2011 as part of a PFS whose outcome should be available in H1 of 2012. Confirming the recovery and associated costs will be a key milestone for Bear Lodge, because in terms of recovered rock value the Bear Lodge deposit is very similar to Mountain Pass no matter whether one uses FOB or China domestic spot and trailing average rare earth oxide prices, for the REO distribution of these two deposits are similar.

Comparison of Recoverable Rock Value
ProjectGrade TREORecoveryFOB 4 Year
FOB SpotDomestic 3
Year Average
2014 PFS
JP Morgan
Molycorp - Mountain Pass7.90%59%$431/t$1,906/t$286/t$447/t$536/t$1,029/t
Rare Element - Bear Lodge3.62%80%$385/t$1,337/t$276/t$412/t$616/t$771/t
1) FOB and Domestic average and spot prices as of Sept 17, 2010 - Metal-Pages
2) Avalon 2014 prices used in June 2010 PFS based on 20% annual escalation of 2009 FOB prices, except cerium and lanthanum
3) JP Morgan prices used in Sept 7, 2010 research report as basis for DCF valuation that set $26.50 price target for Molycorp, 4 yr FOB average used for missing REO prices

The similarity between the Mountain Pass and Bear Lodge projects in terms of rare earth output potential is important in so far that the American government is serious about providing support for the "restart" of the rare earth supply chain in the United States. It is politically much more acceptable to provide government support when the beneficiaries are competing entities, in this case Molycorp and Rare Element. It is my expectation that once Rare Element has published its PEA in a form that passes muster, this junior priced at a tenth of the valuation commanded by Molycorp, will attract the attention of the capital markets, with the result being a potential doubling of the stock price into the $10-$12 range. Although Rare Element has achieved the short term $6 target set when I issued a Good Relative Spec Value Buy at $2.98 with a $3.50 buy limit on May 12, 2010, I think the stock still has upside during the coming months after the PEA has been released.

First Point Minerals Corp (FPX-V: $0.59)

Spec Value Hunter Comment - September 22, 2010: First Point's Decar has the required nickel alloy grade

First Point Minerals Corp released assays for the first two drill holes into the Baptiste Zone of the Decar project on September 22, 2010 and the market reacted with disappointment despite the results meeting expectations. This is not surprising because the market is not attuned to viewing long intervals of 0.14% nickel as having economic potential when nickel laterite and sulphide deposits require grades of 2%-4% to be regarded as interesting. One has to understand the special context of First Point's nickel story and be willing to crunch some numbers to be in a position to recognize that today's news is hugely significant for First Point. I have an open Good Relative Spec Value Buy recommendation on First Point to a $0.75 limit initiated at $0.55 on April 12, 2010 and confirmed several times since then. My analysis of the initial drill results leads me to confirm the open Spec Value Buy recommendation and emphasize that bottom-fishers should hold their positions in anticipation of much bigger gains over the next year while spec value hunters should make a point of owning First Point. My recommendation is based on the speculation that First Point's innovative focus on the nickel-iron alloy content of a special style of very low nickel grade ultramafic rocks will revolutionize the nickel mining industry over the next two decades and First Point will be a massive beneficiary of this revolution. I am thinking in terms of a junior worth $1-$2 billion if the next key milestone is successful and the company executes on its strategy of tying up similar deposits around the world that are well located in terms of infrastructure and development potential. With 99 million shares fully diluted and the company sufficiently financed to deliver proof of concept, such a valuation translates into a $10-$20 ultimate price target for First Point. If I have not already made myself perfectly clear, First Point is a "pounding the table" must-own stock in the style of flagship KBFO picks since 2008 such as Peregrine Diamonds Ltd and Quest Rare Metals Ltd.

The First Point story is not a "schnapps-idee" dreamed up last week in a bar. First Point's management spent a decade of stealth research investigating a type of natural stainless steel called awaruite created under certain metamorphic conditions associated with the obduction of oceanic basalts which naturally grade 0.15%-0.25% nickel. There are a gazillion tonnes of such low grade nickel bearing ultramafic rocks on planet earth, and if it were economic to extract that nickel, which at $10/lb has a rock value ranging $33-$55 per tonne, the world would be awash with nickel. But that nickel is generally tied up in a silicate lattice from which to extract the nickel requires enormous inputs of energy and reagents. These nickel bearing rocks are thus worthless. But the type of ultramafics First Point is targeting has undergone enormous metamorphic pressures which have squeezed the nickel out of the olivine lattice and combined it with iron to form grains of a pure nickel-iron alloy equivalent to stainless steel. This nickel-iron alloy does not rust, which is why these rocks look identical to the black-green ultramafics where all the nickel has remained in the olivine lattice. There are no visual signposts such as color anomalies which can guide prospectors to those rocks which host awaruite rather than just olivine. It is impossible to recognize the presence of nickel-iron alloy unless one has polished a sawn section of the rock to reveal the glistening grains, a much more expensive and tedious process than knocking off a sample and submitting it to an assay lab. Something like this can only emerge as a result of old-fashioned academics such as Peter Bradshaw and Ron Britten who are too interested in rocks and science to let their curiosity .be squelched by mainstream dogma.

Ultimately mad scientists do need a patron in order to flourish. Last year in November First Point coaxed Cliffs Natural Resources Inc into purchasing a 15% equity stake and optioning 70% of the Decar project in central British Columbia. Cliffs is an unusual company which specializes in mining and supplying the American steel industry with inputs such as iron ore pellets and coking coal, which in itself would classify Cliffs as a boring and perhaps misguided mining company. After all, who in their right mind would bank on an old school industry such as steel-making in a post-industrial society such as America, whose submission to western requirements regarding minimum wages, safety standards, and emission controls renders this industry hopelessly uncompetitive relative to the Chinese steel industry? Cliffs, which has made some out-of-the-box moves such as consolidating control of the "inferior" chromite deposits in the McFauld's Lake region of northern Quebec, is not the favorite pick of Doom & Gloomers and other transnationals who cynically pipe the tune of America's unavoidable descent into a pot of tepid tea. But the stock chart suggests that there is a market appreciative of Cliffs' approach, and, I have to admit, it is one thing for somebody like myself to find interesting bottom-fish in the dustbin of the Canadian stock exchanges, but it is very impressive when an outsider from the NYSE also takes notice and acts very early in the game.

Decar was one of seven nickel-iron alloy prospects First Point had identified in British Columbia as being prospective for large tonnages of coarse grained nickel-iron alloy bearing rock. Plenty of outcrop and easy road access enabled First Point to reduce the scale of its mapping and sampling activity from 200-300 metre spacing to 50 metres at Decar, with the result that the Baptiste and Sydney zones emerged as drill ready bulk tonnage targets. Ron Britten admits that Decar is not necessarily the best "nickel alloy" prospect in First Point's portfolio; ease of access was a guiding principle during the days before the Cliffs deal when the stock traded below a dime and the treasury was being topped up to $100,000 with "charity" private placements (yes, I admit it, I listened sympathetically to the story but neither bought the stock as an extreme risk bet nor recommended it until I saw the Cliffs deal). In August 2010 First Point initiated a 10 hole drill program, 7 holes into Baptiste and 3 holes into Sydney, whose objective is to establish the distribution of coarse grained nickel-iron alloy and the consistency of the nickel alloy portion of the total nickel grade. By late August First Point had eliminated a major concern through visual inspection of the core, namely that the grain size and grade of the awaruite mineralization in the samples from surface were the result of surface weathering processes. Visual examination of the core and thin section work confirmed that the nickel alloy content of the fresh rock was identical to that of the weathered rock at surface, and that coarse grain sizes ranging from 50 to 400 microns persisted over long intervals.

Although First Point management knew what percentage of the total nickel content of the rocks at surface represented the nickel-iron alloy content, it had not published any numbers because it did not have a certified method for analyzing the nickel alloy content. In the September 22 news release First Point published both total nickel and nickel alloy grades, which came out to an average of 0.22% total nickel for both holes #1 and #2, and 0.14% and 0.11% nickel alloy respectively. The total nickel grade is based on standard four-acid digestion analysis which measures the presence of all nickel, be it locked up in silicates or readily available in sulphides. No evidence of sulphide nickel was observed through thin section work on the Decar core. The nickel alloy grade has been measured by an "alloy-selective analytical method" developed by First Point and now commercially certified by Dr Barry Smee. It does not measure the silicate nickel but does measure nickel in other minerals such as the sulphide pentlandite, so it is critical to establish through thin section work that such non-nickel alloy minerals are not present. Examples of other prominent low grade nickel projects where sulphides are the target nickel mineral are the Dumont project of Royal Nickel Corp in Ontario and the Turnagain project of Hard Creek Nickel Corp in northern British Columbia. These deposits have enormous low grade nickel resources which should appeal to security of supply agenda, but they must be exploited as sulphide ore, and in this respect they are in a different class from the style of low grade nickel deposit First Point is targeting. The nickel alloy "measurement" milestone is critical because without it First Point and Cliffs have no way to quantify the economic potential of nickel-iron alloy mineralized deposits. This measurement technique is proprietary and cannot be used by Acme labs to test samples from other parties without First Point's permission. Cynics can scoff that this is thus nothing more than a black-box assaying method of the sort utilized by "prairie gold" delusionaries or "desert dirt" fraudsters, but in doing so they will have to call into question the credibility of an international expert in assay quality control procedures.

First Point Assay Results for Baptiste Zone at Decar
Ni Alloy
Ni Alloy
Rock Value
Average $/t
Rock Value
High $/t
Rock Value
Low $/t
#131824420550°NNW50-3000.22%0.14%0.17%0.09%$30.86$37.48$19.483 narrow dykes excluded
#229922929250°NNW50-2000.22%0.11%0.17%0.035%$24.25$37.48$7.7210.7 m dyke excluded


Stopped in fault

Drops below 100 microns after 151 m


Stopped in fault
1) Rock Value based on $10/kb nickel and nickel-iron alloy grade and assumes 100% recovery
2) Total nickel grade determined by four-acid digestion which assays all nickel
3) Nickel alloy grade analyzed by alloy-selective analytical method certified by Barry Smee
4) Difference between total nickel and nickel alloy grade is attributable to nickel in silicate lattice deemed not recoverable

I have assembled the table above to assist in putting the initial drill results into a quantitative context. First Point has stated that there is a strong correlation between nickel alloy grade and grain size. Hole #1 is important because the nickel alloy grain size was observed to range from 50-300 microns throughout the hole. I have not seen the assay spreadsheet which details the grades of assay intervals myself, but First Point does state that the interval grades ranged from 0.09% to 0.17% for hole #1 and 0.035% to 0.17% for hole #2 which had a smaller grain size range of 50-200 microns. The 50 micron size is deemed by management to be a cutoff for economic recovery, though this will have to be confirmed through formal studies. In general when larger grains were present the nickel alloy grade was higher. Holes #3 and #4 have been described as similar to holes #1 and #2, with the bonus that grains up to 400 microns were observed. It is my expectation that these holes will grade similar to hole #1. I have added the approximate horizontal extent of the 7 Baptiste drill holes to the drill plan in order to facilitate a crude tonnage footprint estimate. The vertical extent of the holes which were not stopped due to faulting ranged from 181 m to 261 m. The surface area covered by the first four holes is about 1,000 m by 500 m (the blue reactangle). According to Ron Britten the specific gravity of the Decar rock is about 2.65. If we take the surface area to a depth of 225 m, which is conservative because the topography slopes uphill in a northwesterly direction, we end up with a tonnage block just short of 300 million tonnes. We can double that potential if hole #6, which shows a similar grain size distribution, also delivers nickel alloy grades in the 0.1-0.14% range.

Superficially these numbers should not impress anybody, but let's take the reasoning another step, namely by calculating the in situ value of the nickel alloy content using a $10/lb nickel price. The average for hole #1 comes in at $30.86 per tonne, with a low-high range of $19.48 to $37.48 per tonne. If this were a gold deposit it would be equivalent to a grade of 0.5-1.0 g/t at $1290 per oz gold, with the 300 million tonne Baptiste footprint representing the Hammond Reef deposit of Brett Resources Inc which Osisko acquired earlier this year at a valuation of about $545 million when the merger closed. It is also equivalent to a copper deposit grading 0.3%-0.5% using a $3.50 per lb copper price, which is not quite as sexy a comparison. What we are looking at is a conceptual target with a potential in situ nickel value of $6-$12 billion.

While such numbers readily start gold investors salivating, the rock and in situ values of the Baptiste zone pale in comparison to what we are seeing in the rare earth sector, whose numbers the market is cautiously circling these days. However, compared to the rare earth sector, the annual market for nickel is very deep at $21 billion for 2009 ($73 billion for gold in 2009), which becomes important when you consider that First Point may have several more such deposits in British Columbia, and perhaps even more when it completes its survey of ultramafic bodies around the world. First Point's story is not vulnerable to the complaint, "by golly, if you are right, your stock is worthless". The geological context of the Decar project and the initial assays remove considerable uncertainty about converting a conceptual target of 300-600 million tonnes into an open-pittable resource grading 0.1%-0.15% nickel alloy. Still unresolved, and I must stress that everybody keep this in mind to keep them from getting carried away, is the cost of extracting nickel alloy. What does it cost to extract the nickel alloy from this rock? This is the next critical milestone for First Point, and if it passes this milestone, the stock will be a huge winner.

First Point management is approaching Decar in the same manner as it would approach a copper porphyry deposit, namely as a large body of consistent mineralization that can be open-pit mined and processed with large economies of scale. Copper deposits, however, tend to consist of sulphides which must undergo grinding and flotation to produce a concentrate that must be shipped to a smelter to produce refined copper bars. First Point and Cliffs believe that it is possible to produce a nickel-iron alloy product that can be shipped directly to steel mills. All that is required is to mine and grind the ore, and then use gravity and magnetic techniques to separate the nickel-iron alloy grains from an extremely benign residue which poses none of the acid drainage headaches associated with waste rock from sulphide deposits. Key to their optimism is that the nickel-iron alloy is very dense and magnetic relative to the host rock minerals.

The next step will be for First Point and Cliffs to take material from the recent drill program and conduct "mechanical mineral process" testwork which is expected to be completed by late March 2011. How fine does the material need to be ground to achieve what recovery? Will the sub 50 micron material represent no more than 5% of the nickel alloy content so that a 95% recovery is possible? Can the mining and separation costs be kept below $10 per tonne? Can capex be kept below $10 per tonne? First Point and Cliffs cannot produce a PEA because the drill spacing is insufficient to support an inferred 43-101 resource estimate, so what we will get is something much more informal whose significance will be evident in the body language of Cliffs and First Point. In the case of Decar, a green light on the recovery process and associated cost structure will result in a delineation drill program commencing at Decar in June of 2011 in conjunction with large bulk samples to fine tune the engineering of the recovery process. For Cliffs it is a question of whether or not Decar has what it takes to be a porphyry copper style open pit nickel mine. For First Point it is a question of whether or not it has sufficient proof of concept to justify aggressively exploiting the three year lead it has over any competition in assessing and acquiring similar "deposits" around the world.

Let me pre-empt once again the criticism that the First Point story is so good it is self-defeating. As an example of how difficult the "discovery" process can be, during 2010 First Point conducted mapping and sampling of the six other BC prospects it has staked in prior years, several of which look interesting enough to justify follow up sampling on 50 metre spacing next year to bring the prospects to the stage where Baptiste and Sydney were at the start of 2010. With luck First Point will be drilling one or two of its 100% owned BC nickel prospects late next summer, with assay confirmation happening in late Q3 of 2011. This is after field checking numerous "ultramafic" bodies! Well before we know whether or not First Point's 100% owned BC prospects are standalone nickel mine development candidates, which would surely prompt a buyout offer from Cliffs before First Point's valuation gets out of hand (too bad for Cliffs the Decar option included a three year standstill agreement), the company will have announced acquisitions elsewhere in the world, and if by Q2 2011 the testwork on the Decar nickel alloy ore has confirmed low cost recovery potential, First Point will have a much higher price tag as big nickel mining companies come knocking on the door with the goal of eliminating a serious threat to their existing nickel mining model which is very much tied to energy and reagent costs. Given the Chinese aversion to being at the mercy of western mining giants such as Rio Tinto, BHP and Vale, it is not unreasonable to speculate that there will be competition from partly state owned Chinese entities.

Peregrine Diamonds Ltd (PGD-T: $2.40)

Spec Value Hunter Comment - September 23, 2010: Peregrine's CH28 pipe in northern part of Chidliak is diamondiferous

Peregrine Diamonds Ltd published significant micro diamond results on September 23, 2010 for the CH28 kimberlite discovered this summer in the northern part of the Chidliak project on south Baffin Island where BHP Billiton is close to vesting for a 51% interest. The market reacted somewhat negatively to the news, in part because most investors do not know how to interpret micro diamond results, and in part because those who do will not be inclined to be happy about any new results unless they match or exceed the off the scale results reported last year for the CH6 discovery. This news is important not because of the details of the results, but because of the implications for the pipe's location. CH28 is the first new 2010 kimberlite for which micro diamond results have been reported because Peregrine pushed its samples to the front of the processing queue. A normalized size distribution plot for the CH28 kimberlite reveals a coarse distribution suggestive of a macro grade in the 30-50 cpht range based on the similarity to the curve for the Knife pipe in the NWT which never underwent advanced exploration because it was isolated in a remote area and with a possible payload of only 10 million carats of uncertain quality lacked critical mass. Peregrine has published a photo of the circular CH28 pipe whose diameter has now been estimated at 160 metres using GPS techniques (2 hectare surface expression). Assuming near vertical pipe walls this kimberlite has a tonnage footprint in the 10-15 million tonne range to a depth of 300 metres. The 238.9 kg sample collected from surface yielded 174 diamonds, of which 5 caught by a 0.85 mm mesh or larger weighed 0.196 carats. The largest stone, an off-white transparent tetrahexahedroid, weighted 0.11 carats, a decent sized stone to recover from such a small sample with a modest 30-50 cpht macro grade suggested by the micro diamond curve. Simple arithmetic would convert the 0.85 mm plus diamonds into a calculated grade of 82 cpht, though this should not be done because at this stage the large stone qualifies as an outlier. CH28 will be core drilled during the summer of 2011.

The CH28 results are important because they are the first evidence that the kimberlites in the northern part of the Chidliak project are not just diamondiferous, but also have macro grade potential. CH28 is located near the CH17 kimberlite, one of two anomalies near the shore of a lake which is much larger than the surface expressions of the anomalies. During Q2 of 2010 Peregrine attempted to drill these two targets, but was plagued by drilling and weather problems which resulted in the recovery of only a couple metres of core from the CH17 target before the drill had to be pulled off the ice because of deteriorating safety conditions. The CH17 core is being analyzed for indicator minerals but will not be tested for micro diamonds because the sample is too small to deliver meaningful results. This outcome was a bummer because it postponed until Q2 of 2011 confirmation that the CH17 and adjacent target had meaningful diamond content. The discovery of CH28 involved a bit of luck because it was found by field crews checking out a magnetic high anomaly. Peregrine has identified ten high priority anomalies in the northern part of Chidliak, most of which are either in larger lakes or covered by small lakes. CH28 proved to be lucky because although it is a topographical depression with fairly steep walls, it contained only a small pond thanks to a break in the "wall" in the northern part through which any accumulated water exits the depression. The fact that a surface geology quirk facilitated the discovery of exposed kimberlite boulders in the CH28 depression which turn out to have a meaningful diamond content is a random development, not the result of indicator mineral train guided source tracking. Starting in March 2011 Peregrine will have a camp in the northern part of Chidliak to support a winter drilling program to test the CH17 targets and other lake covered high priority targets. By the end of 2011 the Chidliak project could have two distinct major kimberlite "clusters" about 30-40 km apart.

While talking to Brooke Clements I gleaned a tidbit about the large CH31 kimberlite drilled late during the 2010 season. According to Clements all the kimberlites discovered at Chidiliak except CH31 are associated with prominent magnetic low or high anomalies. CH31 is associated with a very subtle magnetic low anomaly whose large size inclined management to dismiss it as caused by something other than kimberlite. However, there was a large EM anomaly associated with the target, and because an EM anomaly is typically caused by weathering of surface rock into clay like material which tends to be conductive when covered by water or swamp, and kimberlites tend to induce such recessive weathering, Peregrine sent field crews to investigate the target. A decision was made to drill the target after field crews discovered kimberlite float near the edges of the swamp covered anomaly, the result of which Peregrine and BHP will now have to take seriously a large batch of hitherto low priority subtle magnetic anomalies during 2011, especially if CH31 proves to be diamondiferous and in doing so eliminates concern that these larger pipes are part of a later generation of kimberlites that sampled a mantle that was no longer fertile with diamonds, as turned out to be the case in the Churchill area where all pipes younger than 225 million years are barren. Bottom-fishers and spec value hunters should continue to hold their positions as we await micro diamond results for other kimberlites discovered during 2010 and, of course, the mini bulk sample results for CH6 and CH7 in late October through November which are the real milestone needed to kick Peregrine's stock price above last year's $4.65 high.

Spanish Mountain Gold Ltd (SPA-V: $0.49)

Bottom-Fish Comment - September 28, 2010: Spanish Mountain PEA getting closer

Spanish Mountain Gold Ltd announced on September 27, 2010 that flotation testwork results will justify using a 90% recovery for the upcoming preliminary economic assessment (PEA) of the Spanish Mountain Gold deposit in central British Columbia. The flow sheet will involve gravity concentration, flotation and cyanidation. CEO Brian Groves believes Spanish Mountain will be able to publish its PEA within a month or so. This delay is good news for bottom-fishers because the absence of cost structure information for Spanish Mountain is preventing the stock from tracking gold's recent price rise, which is now above $1,300 per oz. Spanish Mountain was adopted by Ian Watson's London based network late last year as an "option" on a higher gold price. Watson's arrival as a major shareholder was followed by the departure of the Pamicon management group and a new mandate for Groves to treat Spanish Mountain as a development play which suited his technical background. On July 30 I published a Bottom-Fish Comment in which I suggested that Spanish Mountain was an ideal bottom-fish replacement for Brett Resources Inc which was prematurely taken out by Osisko earlier this year. Although the stock was above the $0.20-$0.29 recommended bottom-fish range and officially a Spec Cycle Hold 100%, which normally means bottom-fishers should no longer be buying the stock, just holding it for bigger gains, the stock's lagging bottom-fish like performance despite progress on the PEA front and record high gold prices prompted me to purchase the stock in the $0.40-$0.50 range where it has been stuck. Spanish Mountain had a good reception at the Cambridge conference in Toronto last weekend, with investors warming up to the idea that higher prices await the stock once the PEA defines the cost structure and mining scenario. Groves indicates that the company is also close to securing a memorandum of understanding with local aboriginal groups, a necessity if Spanish Mountain is to switch from PEA to a full-blown prefeasibility study. The stock is also showing up on the radar of brokerage industry analysts, a batch of whom will be visiting the project this week. This site visit will be followed by a group of newsletter writers next week that will include me. Spanish Mountain is an obvious candidate for a Spec Value Hunter buy recommendation once we have the PEA in hand and see that the numbers reflect what the management body language is currently suggesting. We can only hope the stock is still at current levels.

Beaufield Resources Inc (BFD-V: $0.68)

Bottom-Fish Comment - September 30, 2010: Market goes gaga over Beaufield's down spine hole at Troilus-Tourtigny

Beaufield Resources Inc exploded on September 30, 2010 after the junior released what look like spectacular drill results for its 100% owned Troilus-Tortigny VMS project in the Matagami district of Quebec. Hole #19 yielded 332.15 metres of 4.2% zinc, 2.72% copper, 0.19% lead, 72.02 g/t silver and 0.53 g/t silver. The stock closed up $0.48 at $0.68 on 41.7 million share volume. If this were a discovery hole on a new target about whose geometry little is known the stock would be a screaming buy at current prices, for the market is assigning an implied project value of only $60 million based on 83.4 million fully diluted for what looks like a new Kidd Creek. Unfortunately, it is a downdip hole which tracks the known hinge of a 35 degree plunging V-shaped volcanogenic massive sulphide deposit for which Noranda calculated a historic resource estimate during the nineties of 489,900 tonnes 2.21% copper, 6.15% zinc, 0.24% lead, 0.31 g/t gold and 60.08 g/t silver. To visualize, imagine cracking a book open, dipping it away from you, and peering "through" its spine. Hole #18 drilled right through that spine. Beaufield's flabbergasted CEO, Jens Hansen, readily admitted to me that the recent holes reveal nothing new about the Tortigny deposit and thought he had made this clear in the earlier press release made on September 21 in which he gave visual descriptions of the mineralized intervals, and in the latest release. The problem is that the company has no graphics whatsoever on its web site or in any of its SEDAR filings, nor did Beaufield include any drill plan or sections in its news release which would have made clear that the market fuss is much ado about nothing. Hansen's description of hole #19 as "drilled parallel to the hinge of the folded deposit" is also not exactly clear except perhaps in specialized geology lingo, for a lay person could be excused for thinking that this hole was drilled outside the limits of the known deposit, especially since there rarely is a good reason to intentionally drill "down-dip" holes. Had Hansen said "drilled into and along the axis of the hinge of the folded deposit for the purpose of obtaining a sample for metallurgical studies", the market would have yawned and declared "too bad this is not a true width hole in a new zone".

Beaufield, which was recommended on December 31, 2009 as a low priority bottom-fish buy in the $0.10-$0.19 range as part of the Bottom-Fish 2010 Edition, is an immediate 100% Sell at the current market price of $0.68 because the stock will drop like a rock once the market figures out that this is not a new fundamental discovery and the shorts break the backs of the momentum traders. Beaufield was picked as a bottom-fish because it had over $6 million working capital and a management team with a track record of being quick to snag emerging area play projects. It was ranked low priority because Jens Hansen was focusing most of his attention on a sister company called Melkior Resources Inc and appeared to be content to let Beaufield flat-line until he had his fingers on a new rabbit in his hat. However, the rebound in base metal prices encouraged him to revisit the Troilus-Tortigny project, whose two base metal deposits, Tortigny and Moleon, had been discovered by Noranda and delineated during the nineties. The deposits proved too small to develop as standalone mines so Noranda (by then part of Falconbridge) optioned 50% to Beaufield on June 2, 2004 for a $2 million expenditure by Dec 1, 2006 while retaining the right to back-in for 65% by funding a feasibility study. Beaufield vested for 50% in 2006, but by August 2006 Falconbridge had been acquired by Xstrata for whom the project was too small. So on November 5, 2007 Beaufield, which had raised a pile of cash thanks to the proximity of its Opinaca claims to Virginia's Eleonore gold discovery in central Quebec, acquired Xstrata's 50% for $700,000, a 1% NSR, and Xstrata's right of first refusal on any concentrates Tortigny might generate. Beaufield has taken the approach that Tortigny could be developed as a contract milling mine if metal prices were strong, but felt that the best strategy resided in trying to discover additional zones in the surrounding area.

This year's program had three goals: 1) gather additional drill data to facilitate a 43-101 resource estimate that could be the basis for a PEA, 2) obtain a sample for metallurgical studies, and, 3) drill a deep hole through the deposit which will be used for downhole geophysical surveys. The second goal is being well served by hole #19, which has the added benefit, according to Hansen, of demonstrating a higher enrichment of gold and silver in the hinge of the deposit than in the limbs. The third goal was served by hole #18 which was drilled to a depth of 801 metres, 100 metres beyond the limit of the deposit and the fault that cuts it off. Hansen says that the downhole survey has identified some potentially interesting off hole targets, but he is awaiting a formal third party interpretation before getting excited. I don't know how much higher the momentum traders will take the stock before a trend reversal occurs, but once that happens, it will be with the understanding that this spectacular hole sheds no new meaningful light on Tortigny beyond what we already knew whent he stock was drifting in the $0.10-$0.19 bottom-fish range. The stock will probably not go back that low, because Hansen will find himself under pressure to use Beaufield's treasury to test the targets in the surrounding area. If there is anything good that can be inferred from today's market action, it is that it constitutes further confirmation of my view that a strong market appetite for exploration discovery plays is developing.

New Bottom-Fish Highs
Volume High Low Close Chg Status
Corona Gold Corp (CRG-T) 449,600 $0.840 $0.630 $0.800 $0.130 BF TP Buy $0.30-$0.49
Gold Port Resources Ltd (GPO-V) 1,582,000 $0.140 $0.105 $0.130 $0.015 New BF XP Buy below $0.10
Golden Queen Mining Co Ltd (GQM-T) 913,100 $2.060 $1.780 $2.020 $0.240 BF MP Buy $0.30-$0.49
Iron Creek Capital Corp (IRN-V) 1,217,700 $0.680 $0.370 $0.650 $0.280 New BF LP Buy $0.30-$0.49
Lexam Explorations Inc (LEX-V) 2,607,700 $1.040 $0.465 $1.030 $0.530 BF MP Buy $0.10-$0.19
Magellan Minerals Ltd (MNM-V) 1,788,500 $1.200 $1.070 $1.120 $0.010 BF Spec Cycle Hold 100%
Northern Superior Resources Inc (SUP-V) 15,720,000 $0.460 $0.350 $0.430 $0.050 BF XP Buy below $0.10
Orosur Mining Inc (OMI-V) 979,600 $0.590 $0.420 $0.520 $0.080 New BF MP Buy $0.50-$0.75
Pachamama Resources Ltd (PMA-V) 1,129,900 $0.570 $0.385 $0.570 $0.160 New BF MP Buy $0.20-$0.29
Polar Star Mining Corp (PSR-V) 6,573,000 $2.690 $1.100 $2.470 $1.400 BF MP Buy $0.20-$0.29
Riverside Resources Inc (RRI-V) 785,000 $0.940 $0.780 $0.930 $0.040 BF TP Buy $0.20-$0.29

Top 10 Bottom-Fish Volume Traders
Volume High Low Close Chg Status
Beaufield Resources Inc (BFD-V) 67,786,600 $0.680 $0.140 $0.450 $0.300 New BF LP Buy $0.10-$0.19
Nevsun Resources Ltd (NSU-T) 28,746,900 $5.280 $4.700 $5.010 ($0.190) BF Spec Cycle Hold 100%
B2Gold Corp (BTO-T) 24,804,300 $2.110 $1.750 $1.920 $0.120 BF TP Buy $0.30-$0.49
Realm Energy Intl Corp (RLM-V) 21,427,200 $0.630 $0.270 $0.580 $0.310 BF MP Buy $0.30-$0.49
Torex Gold Resources Inc (TXG-T) 18,566,500 $1.570 $1.310 $1.430 $0.040 BF Spec Cycle Hold 100%
Sabina Gold & Silver Corp (SBB-T) 16,012,000 $4.840 $4.080 $4.710 $0.500 BF TP Buy $0.30-$0.49
Northern Superior Resources Inc (SUP-V) 15,720,000 $0.460 $0.350 $0.430 $0.050 BF XP Buy below $0.10
Ucore Rare Metals Inc 14,523,900 $0.740 $0.510 $0.650 $0.060 New BF LP Buy $0.30-$0.49
Rye Patch Gold Corp (RPM-V) 14,168,700 $0.290 $0.165 $0.235 $0.060 New BF LP Buy $0.30-$0.49
Strategic Metals Ltd (SMD-V) 12,214,400 $1.650 $1.150 $1.600 $0.310 BF MP Buy $0.10-$0.19

Top 10 Bottom-Fish Value Traders
Value High Low Close Chg Status
Nevsun Resources Ltd (NSU-T) $143,027,324 $5.280 $4.700 $5.010 ($0.190) BF Spec Cycle Hold 100%
Sabina Gold & Silver Corp (SBB-T) $72,050,838 $4.840 $4.080 $4.710 $0.500 BF TP Buy $0.30-$0.49
B2Gold Corp (BTO-T) $47,620,039 $2.110 $1.750 $1.920 $0.120 BF TP Buy $0.30-$0.49
Avalon Rare Metals Inc (AVL-T)
$41,790,957 $4.210 $3.120 $3.600 ($0.020) Good Absolute Spec Value Buy
Rare Element Resources Ltd (RES-V)
$40,321,106 $9.900 $5.200 $8.900 $3.150 Good Relative Spec Value Buy
Quest Rare Minerals Ltd (QRM-V)
$30,196,132 $5.570 $3.290 $4.590 $0.670 Good Relative Spec Value Buy
Beaufield Resources Inc (BFD-V) $30,078,502 $0.680 $0.140 $0.450 $0.300 New BF LP Buy $0.10-$0.19
Torex Gold Resources Inc (TXG-T) $26,990,421 $1.570 $1.310 $1.430 $0.040 BF Spec Cycle Hold 100%
Lydian International Ltd (LYD-T) $24,154,570 $2.430 $2.070 $2.190 ($0.010) BF MP Buy $0.20-$0.29
Antares Minerals Inc (ANM-V)
$22,608,461 $4.710 $3.570 $4.670 $0.790 Good Absolute Spec Value Buy

Top 10 Bottom-Fish Price Gainers
Volume High Low Close Chg Status
Rare Element Resources Ltd (RES-V)
5,244,700 $9.900 $5.200 $8.900 $3.150 Good Relative Spec Value Buy
Polar Star Mining Corp (PSR-V) 6,573,000 $2.690 $1.100 $2.470 $1.400 BF MP Buy $0.20-$0.29
Antares Minerals Inc (ANM-V)
5,445,700 $4.710 $3.570 $4.670 $0.790 Good Absolute Spec Value Buy
Orvana Minerals Corp (ORV-T) 6,529,700 $2.790 $1.940 $2.600 $0.680 BF TP Buy $0.50-$0.75
Quest Rare Minerals Ltd (QRM-V)
6,751,900 $5.570 $3.290 $4.590 $0.670 Good Relative Spec Value Buy
African Aura Mining Inc (AUR-V) 200,600 $2.250 $1.300 $1.950 $0.650 New BF MP Buy $1.01-$1.25
Almaden Minerals Ltd (AMM-T) 3,283,300 $3.360 $2.560 $3.320 $0.640 New BF Spec Cycle Hold 100%
Lexam Explorations Inc (LEX-V) 2,607,700 $1.040 $0.465 $1.030 $0.530 BF MP Buy $0.10-$0.19
INV Metals Inc (INV-T) 2,743,600 $1.500 $0.840 $1.360 $0.510 BF MP Buy $0.10-$0.19
Sabina Gold & Silver Corp (SBB-T) 16,012,000 $4.840 $4.080 $4.710 $0.500 BF TP Buy $0.30-$0.49

Top 10 Bottom-Fish Price Percentage Gainers
Volume High Low Close Chg Status
Beaufield Resources Inc (BFD-V) 67,786,600 $0.680 $0.140 $0.450 200% New BF LP Buy $0.10-$0.19
Panorama Resources Ltd (PRA-V) 449,500 $0.240 $0.100 $0.240 182% New BF MP Buy $0.10-$0.19
Meritus Minerals Ltd (MER-V) 7,667,500 $0.350 $0.120 $0.340 152% New BF XP Buy below $0.10
Polar Star Mining Corp (PSR-V) 6,573,000 $2.690 $1.100 $2.470 131% BF MP Buy $0.20-$0.29
Realm Energy Intl Corp (RLM-V) 21,427,200 $0.630 $0.270 $0.580 115% BF MP Buy $0.30-$0.49
Lexam Explorations Inc (LEX-V) 2,607,700 $1.040 $0.465 $1.030 106% BF MP Buy $0.10-$0.19
Adventure Gold Inc (AGE-V) 9,491,600 $0.360 $0.180 $0.340 84% New BF LP Buy $0.10-$0.19
Wolverine Minerals Corp (WLV-V) 5,702,500 $0.495 $0.200 $0.420 83% New BF LP Buy $0.10-$0.19
Iron Creek Capital Corp (IRN-V) 1,217,700 $0.680 $0.370 $0.650 76% New BF LP Buy $0.30-$0.49
Tarsis Resources Ltd (TCC-V) 2,740,200 $0.710 $0.320 $0.590 74% BF XP Buy below $0.10

Top 10 Bottom-Fish Price Losers
Volume High Low Close Chg Status
Nevsun Resources Ltd (NSU-T) 28,746,900 $5.280 $4.700 $5.010 ($0.190) BF Spec Cycle Hold 100%
Africo Resources Ltd (ARL-T) 272,000 $0.900 $0.800 $0.800 ($0.140) New BF MP Buy $0.76-$1.00
Highbury Projects Inc (HPI-V) 8,500 $1.500 $1.400 $1.400 ($0.100) New BF LP Buy $1.01-$1.25
Olivut Resources Ltd (OLV-V) 1,157,500 $0.950 $0.780 $0.810 ($0.090) New BF Spec Cycle Hold 100%
Amazon Mining Holding Plc (AMZ-V)
1,709,700 $2.300 $2.070 $2.190 ($0.060) Good Absolute Spec Value Buy
Western Uranium Corp (WUC-V) 3,215,300 $0.920 $0.830 $0.840 ($0.050) BF MP Buy $0.50-$0.75
Brazilian Gold Corp (BGC-V) 1,232,800 $0.590 $0.430 $0.500 ($0.050) BF XP Buy below $0.10
Mega Precious Metals Inc (MGP-V) 1,793,400 $0.720 $0.530 $0.550 ($0.050) BF LP Buy $0.10-$0.19
Rugby Mining Ltd (RUG-V) 138,000 $0.800 $0.600 $0.650 ($0.050) New BF MP Buy $0.30-$0.49
Cons Westview Res Corp (CWS.H-V) 33,000 $0.250 $0.240 $0.240 ($0.040) BF MP Buy $0.10-$0.19

Top 10 Bottom-Fish Price Percentage Losers
Volume High Low Close Chg Status
Amanta Resources Ltd (AMH-V) 1,169,500 $0.215 $0.165 $0.165 -20% BF XP Buy below $0.10
Cedar Mountain Exploration Inc (CED-V) 435,500 $0.225 $0.160 $0.190 -16% New BF MP Buy $0.10-$0.19
Africo Resources Ltd (ARL-T) 272,000 $0.900 $0.800 $0.800 -15% New BF MP Buy $0.76-$1.00
Cons Westview Res Corp (CWS.H-V) 33,000 $0.250 $0.240 $0.240 -14% BF MP Buy $0.10-$0.19
Boss Power Corp (BPU-V) 259,000 $0.120 $0.100 $0.120 -14% BF XP Buy below $0.10
Moss Lake Gold Mines Ltd (MOK-V) 156,000 $0.270 $0.210 $0.215 -14% BF TP Buy $0.10-$0.19
Galena Capital Corp (FYI-V) 2,800,700 $0.050 $0.035 $0.040 -11% BF XP Buy below $0.10
Olivut Resources Ltd (OLV-V) 1,157,500 $0.950 $0.780 $0.810 -10% New BF Spec Cycle Hold 100%
Argus Metals Corp (AML-V) 6,209,700 $0.280 $0.135 $0.185 -10% New BF MP Buy $0.10-$0.19
Secova Metals Corp (SEK-V) 783,900 $0.105 $0.060 $0.095 -10% New BF LP Buy $0.10-$0.19

New Bottom-Fish Lows
Volume High Low Close Chg Status
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