$UURAF : Ucore Rare Metals — Independent Economic Analysis

Dear Bob,

Thank you!

For our basic economic analysis, we used a simple, conservative (albeit unlikely) penetration pricing model which took cues from Chinese benchmark prices.

It is hard to guess what type of premium REOs will fetch under a North American pricing regime, but I think it is safe to say that there will indeed be one, though it may be regulated by long-term contracting prices negotiated by strategic supply chain partners with defense contractors.

Is the lifetime value of Ucore’s REO inventory high? Not particularly as a go-alone enterprise, but certainly in partnership with Materion, as Materion has sufficient market share to elevate Ucore’s lifetime value by forcing a small N. American REO re-rating that will boost Ucore’s margins without sacrificing a portion of its market share to competitors.

Ucore may also prove capable of operating in a multiple-price system environment, with an equilibrium fraction of production free to transact on the spot market in combination with majority fixed contract pricing.

In a word, we think this is the eventual probable model in N. America once pricing flexibility in industrial defense REO markets are better understood: the coexistence of long-term contracts and spot transactions. But right now, no one really has a well-developed demand-management policy hammered out, as we haven’t yet had direct experience of market-clearing mechanics following a long-term supply shock. Defense in the aggregate will want assurances of some price inelasticity for a handful of REOs including Neodymium, Praseodymium, Dysprosium, and Yttrium, while other h- and lREEs may be freer to transact in a multiple-pricing ecosystem, with a spot skew.

I am of the personal belief that the Walrasian model could annihilate the burgeoning N. American hREE market before it is properly established, so am a staunch proponent of a multiple-pricing model in which private forward-contracting takes center stage.

We also think a small fraction of initial N. American output will be purchased by industries with high tolerances for auction pricing, with the balance — Defense — being risk averse, with the auction-tolerant insuring Defense through the spot market by addressing unexpected income variances associated with the seller (Ucore).

In closing, Bob, we think Ucore will be subject to two prices: contract and spot. And we have no idea what those prices will look like.

Have a wonderful afternoon.

Tom

P.S.

THE FUTURE

We don’t think the assumption that the hREE market will be oligopolistic, vertical and risk-averse while immature, and horizontal with shared risk when mature is a realistic one. Much as has been observed in the uranium market, where a thin residual spot market is maintained to equilibrate shocks, we think rare earths, too, will experience a successional pricing scheme wherein spot transactions grow thinner and thinner, taking an eventual back seat to vertical, risk-averse, long-term contracting, wherein primary shocks reside with the seller, who will counter with variable producer prices.

These producer prices will likely stem from oligopolistic cartelization, the framework of which we can already see shaping up under IBAS and NTIB. Cartel prices will likely positively diverge from spot prices to the extent that a two-price system becomes untenable. This will have the effect of driving down producer prices to a bit above cost, at which point insurance against unexpected income variances at the level of the producer diminishes, followed by an abandonment of cartel pricing and a return to a spot regime, completing the cycle.

Uranium is one stage away* from completing the described cycle, and can be illustrative of the N. American pricing schema that rare earths generally, and HREEs in particular, will experience.

*As an aside, this bodes well for primary uranium producers, though the why of it is little discussed and remains poorly understood. Buyers, unaccustomed to supply shocks, have been unwilling to pay an implicit security premium to primary producers outside of the state-owned secondary market, and as a consequence seller profits have become very vulnerable. Consequently, buyers no longer have deep insurance against shocks originating with the seller through incentive spot pricing (which heals seller income variances), which necessitates a rapid reinsurance program through spot appreciation and an implicit reinstatement of long-term contract security premiums.