peak is due for a re-rate

I don’t understand how PEK has hit 52 week lows (at 14.5 cents today) considering the following:

- Continued drilling success (even better grades than last year with grades peaking at 7.86% for a 42m intersection). PEK’s resource will last well over 25 years. They have the 5th largest rare earth resource in the world of 170Mt @ 2.28% REO (3.8Mt contained REO), that is as at 29 Feb 12. Remember, a JORC upgrade is due early next year. Their resource is the 3rd largest based on grade (only Lynas and Molycorp have higher graded deposits). Using a 3.0% cut-off grade, the resource is still massive at 40Mt @ 4.07% (1.6Mt contained REO).
- Scoping study has been completed with relatively conservative assumptions on the whole (e.g. assumed annual production of 10,000t of contained REE). Imagine what the valuation would be if 40,000t p.a. was required (note by 2020 global demand is forecast to be 215,000t p.a.). Despite conservative assumptions, the NPV is $1,571m and current market capitalisation is only $38m. That is more than a factor of 41 times. Surely management isn’t that far off in its calculations. Being very conservative, I will assume NPV is out by 30% (e.g. basket price doesn’t achieve $52 or capex is higher than $400m, opex is slightly higher), PEK is still valued at $1,100m, a factor of around 29 times the current market capitalisation.


PEK’s rare earth deposit will have significant benefits including:

- Compared to its peers (e.g. Lynas), the highest graded area (the SREZ weathered rock) is easier to refine into concentrate and oxide and compromises little acid consuming rock, no harmful minerals and low thorium and uranium. As a result, Peak has been able to achieve excellent metallurgical recoveries (87% overall and 50% for carbonate concentrate).
- Through a strategy of stripping out a large proportion of lower valued cerium early in the separation process by using sodium hydroxide and hydrochloric acid solutions and converting it into a separate 65% cerium oxide solution, management has improved basket price (due to less cerium being carried onto future processes) and lowered capital costs (since PEK only requires a smaller solvent extraction plant).
- Remember Ngualla is enriched with REO. Many intercepts are over 100m wide, some even over 150m and this is from the surface, which will enable open cut mining.


Near term announcements:

- Results of remaining 44 holes (we know they are likely to be excellent). 36 holes were completed and unreported (as at 5 Nov 12) with only 8 more holes to complete the program
- Updated JORC resource (grade could improve with extension to already massive resource)
- Construction of pilot plant
- Pre-feasibility study

Let’s hope for a re-rate in the near term. We all know it will happen when they find a funding partner and maiden customers. Considering the debacle Lynas is facing in Malaysia, I am surprised PEK hasn’t rallied.