Interview with Quest CEO Peter Cashin

Quest Rare Minerals (QRM-T, QRM-X) is advancing its Strange Lake rare earth element deposit in northern Quebec and expects to deliver a prefeasibility study on the project by year-end or early January, followed by a feasibility study in the second half of next year. The Northern Miner caught up with the company’s president and CEO Peter Cashin at the Quebec Mining Exploration Convention at the Chateau Frontenac in Quebec City to learn more about the company’s project and plans.

The Northern Miner: Given there are several rare earth projects in Quebec, can you describe what makes Strange Lake unique?

Peter Cashin: All the rare earths have specific distributions, and some have more of an emphasis on the lights. The rare ones tend to be the heavies. The metal distribution for the Strange Lake deposit is particularly enriched in those elements that are perceived as the critical rare earths, which are going to drive rare earth supply and demand in the future. That just happens to be the nature of the deposit.

TNM: The deposit is a mixture of heavies and lights?

PC: It’s mixed with heavies and lights — on average it is 40% to 45% heavies — and most of the value is really derived from those critical rare earths. I would say that between the six criticals [or high-demand products], plus by-products zirconium and niobium, it constitutes 92% of the intrinsic value of the material. That is what really makes it unusual.

The industry is looking for a long-term solution. The deficit in the rare earths spectrum is always coming from the heavies. Although the Chinese produce heavies, it is a fairly finite resource, and they’ve projected as their high-tech industry grows, which is really where their emphasis is going to be in the future. That’s really what’s led to their decision to cut back on exports.

TNM: There’s a predicted increase in demand in the coming years, but in terms of stock prices, a lot of rare earth juniors have been declining. Would you say investors are more cautious, or is this part of a cycle?  

PC: I think this is all part of a cycle. I was happy to see a $9 share price in Quest. But that was unrealistic. I said that before the crash in prices in early 2011. Just take a look at the price increase profiles in all of the rare earths. When you see a stock price that is going up exponentially that to me is not sustainable, and sure enough it came down, because there was a lot of hoarding and speculation on prices.

I still think that it’s a more difficult sector for an investor to understand than most common commodities like copper and zinc, which are single commodities — they are market traded. They have a trading history, whereas rare earths have always been opaque in terms of their trading characteristics. It has always been by contracts and some by offtake agreements, and others by secret agreements, and it’s not market traded.

I don’t think analysts, investors, or the investment sector have a good handle on pricing. If you take a look at different companies that have advanced studies in their deposits, their assumptions of what long-term pricing is going to be is all over the map. I think it’s because we don’t have a good fix on price expectations for these projects.

TNM: So what would you suggest investors look at when they are investing in a rare earth company?

PC: Well, obviously you would look at the [management] team. And it’s all about the property. It’s all about having the disclosure documents that allow them and analysts to make a valued decision on a different investment.

I guess part of my issue is that people say: ‘How come your share price is impacted a little bit more when there’s a downturn in the market?’ And I say, I’ve always been a realist. I’d rather under-promise and overperform on what I can deliver on a project. I don’t ever want to be caught making unqualified statements about my project.

In other words, maybe I’m not as promotional as I can be. But I just let the development of the project and achieving my milestones be an indication of how I want to drive this project forward.

TNM: So the next major milestone should be the prefeasibility study?

PC: Yes, that should be coming either by year-end or early January, at the very latest. A preliminary cash flow model should be presented soon.

TNM: In terms of financing, how does the company plan to fund the project?

PC: Well, there are multiple means by which to do it. Our capital structure is nice and tight. We only have 67.5 million shares issued and fully diluted. As a straight exploration junior, the 100-million-share level is an important threshold. But I think that generally, investors give you a little bit more latitude to advance the share level when you are applying an advanced development and driving towards production start-up. So I have room there to do some equity.

I think an important aspect of the project is our intention to find a strategic partner. We advanced the metallurgy to a point where we are just about to turn over our pilot plant. That’s important, as we are scaling up our metallurgy process. We have done it through trial and error, because it is not exactly off-the-shelf engineering.

So you go through those various processes and accumulate the necessary capital going forward, trying to mitigate the debt load that you have to assume on the project. So whatever we have to make up will have to be debt. The Quebec government is interested. It’s the type of project they want to invest in.

The way I’m portraying it is that it’s not just a mine development, it’s an industrial development. It’s a mine and mill complex. It’s bringing concentrate down to separation facilities somewhere in southern Quebec, where you have access to electricity, rail lines and road infrastructure. And all a sudden it’s a value-add proposition. Given the recent provincial budget, they are encouraging companies to keep downstream processing in the province, so the province can take advantage of the value-added aspects of refining and separation. I want to do that.

TNM: There are a lot of benefits that the Quebec government provides to mining companies, such as tax breaks and cheap hydroelectricity. But what would you say are some of the drawbacks?  

PC: I don’t think there are any. The nominal tax rate is a little higher, but that is more than counteracted by some of the fiscal benefits and the support system they provide to the mineral industry. We haven’t seen the evolution of Plan Nord. But Plan Nord is a good example of how they take a much longer-term view of providing infrastructure support for developing northern projects.  

TNM: Is there anything else you would like to add about Strange Lake and the company’s goals?

PC: The project is advancing. The resource estimate we tabled at the end of October, we doubled. We enhanced the size of the [near-] surface high-grade zone, which we call the enriched zone. This is important from our prospective, because it’s going to provide us a much stronger cash flow in the early years of production to mitigate a lot of the debt overhang we have to assume in the initial start-up [targeted for 2017].