TGR: The entire market?

JK: Yes. So that's not very interesting and the prices had already gone up a fair bit at that stage. What becomes interesting is that this market could become $5 to $10 billion due to demand growth arising precisely because end-users are guaranteed an unending supply at these prices.

There are deposits out there where they could be profitable. They have rock values of $300 to $1,000 a ton, but nobody had dreamed of developing them during the last 30 years because the size of the market wasn't large enough to absorb the supply of this raw material.

In fact, eight years ago, the Chinese did glut the market with rare earth oxides before all this hybrid stuff really started taking off. And it's only recently that they realized they were depleting their own internal resources and decided to put export quotas in place. And now that we have these application scenarios where you can scale the demand 10, 100, 1,000 times bigger and you suddenly say, "uh-oh, where are we going to get this raw material?" Well, this is where, again, I see the strategic logic come into play—where the end users, who can make a lot of money selling hybrid cars if they have these raw materials in place, will actually pay a premium to control these pounds in the ground and see them developed (even if it is at a break-even basis after it's in production).

TGR: Are there some specific rare earth or minor metals that investors should be aware of and, if so, what companies should they be looking at?

JK: There are very few companies that have any sort of meaningful resources that you can buy in the market. One that I follow is Avalon Rare Metals, Inc., which has the Thor Lake deposit in the Northwest Territories.

They don't mine anything yet. They're doing all the pre-feasibility work to establish where the highest-grade zones of these rare earth oxides are in the system, and then they'll start a mining scenario where they'll initially produce enough to feed expected demand in the market. But the total resources are large enough so that this thing could operate for 50 years. So these types of projects with the very large resources are of enormous interest to the end users because, once these things get going, they'll operate forever.

Another company, Rare Element Resources Ltd. has its Bear Lodge deposit in Wyoming. The deposit, on the one hand, is farmed out to Newmont Mining Corp. for its Gold potential and Newmont has been waiting for two years to get a full-blown environmental assessment done so that when it starts drilling, the 5 million-plus ounce target that it's seeking doesn't get stalled by having to reapply for permits. At the same time, the company has just published a 43-101 resource estimate outlining the rare earth resources that they have on the project.

So it's a nice company in that you get two completely unrelated stories for the price of one, and it doesn't have a lot of stock outstanding either; so while it would net only 20% of any multi-million ounce Gold deposit that Newmont finds, it has 100% of the rare earth deposits there.

And one other one that I recently discovered because it was disguised as a uranium company is Quest Uranium Corporation. It turns out that they own part of the Strange Lake deposit that straddles the border between Quebec and Labrador. This was found during the '80s and it's lower grade than some of these other deposits. They did the pre-feasibility work and then shelved it and eventually abandoned it. Then Quest staked it and they found other showings suggesting similar grade.

The interesting thing about that deposit is it seems to have an unusual percentage of the heavier rare earth elements, which there was no market for back in the '80s. So these metals may have had a high price, but it was simply high because the stuff was rare and scientists would pay whatever it took to get these metals. Well, here you have an interesting situation where Quest may have an unusual abundance of the heavier rare earth elements that could become commercialized thanks to new applications that were not around during the '80s. Quest was trading at just a Nickel a couple months ago and is now at $0.20 as the market discovers its rare earth story. We're seeing stocks like this start to attract market attention.

TGR: This has been very educational. Are there any other parting thoughts you'd like to give our readers who are investing in mining stocks?

JK: Yes, I would say when you're looking at these juniors, you've always got to figure out what is it that's going to change with regard to the company. Is it going to be a discovery? Is it going to be some breakthrough in metallurgy or on the cost side of the project? Or is it going to be a change in the price of the commodity that suddenly completely changes the value potential of the company's project and results in it being re-priced upwards?

You have to assume that the market is reasonably efficient in pricing these companies at the current price and you need to identify what it is that needs to change to justify a significantly higher price. And, also, on the downside, what is your downside risk? What negative potential changes are there associated with this company and its projects that could make your investment go down significantly? The lesson learned in the last 10 years is if you want significant upside potential, it only comes with significant downside potential. So you have to understand that risk-reward balance. At least with these companies, you have your 1,000% upside balancing your 90% downside, as opposed to owning a bank stock with 10% upside delivering you 90% downside.

TGR: This has been great. John, we appreciate your time.

By arrangement with: http://www.theaureport.com

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