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REE > SEC Filings for REE > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for RARE ELEMENT RESOURCES LTD

Form 10-Q for RARE ELEMENT RESOURCES LTD


9-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management's discussion and analysis of the consolidated financial results and condition of Rare Element Resources Ltd. (collectively, "we," "us," "our," "Rare Element" or the "Company") for the six-month period ended June 30, 2013 has been prepared based on information available to us as of August 9, 2013. This discussion should be read in conjunction with the unaudited Consolidated Financial Statements and notes thereto included herewith and the audited Consolidated Financial Statements of Rare Element for the period ended December 31, 2012 and the related notes thereto filed with our Transition Report on Form 10-K, which have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"). All amounts stated herein are in U.S. dollars, unless otherwise noted. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those set forth elsewhere in this report. See "Cautionary Note Regarding Forward-Looking Statements."

All currency amounts are expressed in thousands of U.S. dollars, unless otherwise noted.

Introduction

Presently, we are focused on exploring and evaluating the Bear Lodge Rare Earth Element ("REE") Project located near Sundance, Wyoming. We plan to develop and produce rare earth elements from the Bear Lodge REE Project, subject to obtaining, among other things, a positive feasibility study, the necessary mining permits and the necessary financing to construct the mine and processing facilities. We also, in the future, may potentially acquire advanced stage REE projects. As of June 30, 2013, we were considered an exploration stage entity under U.S. GAAP due to the lack of reserves reported under SEC Industry Guide 7.
However, we have updated and reported mineral resources that are National Instrument 43-101 compliant. These resources will be incorporated into our planned feasibility study on the Bear Lodge REE Project.

Outlook

We have sufficient cash on hand to conduct our exploration and evaluation plans through 2014. Our plans for Bear Lodge REE Project over the next twelve months include the following activities:

Begin a feasibility study in 2013 that is expected to be complete during 2014.

Build and run a pilot plant during the second half of 2013 to test the updated metallurgical process consisting of hydrochloric acid leaching at moderate temperatures, selective precipitation of REEs with oxalic acid, and calcination of REE oxalates at elevated temperature to produce a high-purity (over 90 percent) mixed rare earth oxide ("REO") powder.

Drill targeted at the zones of heavy rare earth element ("HREE") enrichment to upgrade and expand the Whitetail Ridge resource area. Additional infill drilling to expand the high-grade core of the Bull Hill deposit in support of the feasibility study is currently being evaluated.

Continue geological mapping, geochemical sampling and geophysical surveys over selected areas in order to better delineate current target areas and identify new targets for economic HREE-enriched mineralization.

Continue to advance discussions with potential customers and technology partners to further our understanding of the forms of rare earth products with the highest demand and value.

Conduct engineering trade-off studies to optimize production rates and maximize profitability and efficiencies of the project. One of the models under review is an evaluation of an initial high-grade, lower ore production scenario that would expand plant capacity after several years when demand is projected to be sufficient to support the additional supply. This would reduce upfront capital costs and boost early economic returns on the project.

Advance permitting by entering into the formal National Environmental Policy Act Environmental Impact Study process as soon as possible within the framework processes of the U.S. Forest Service.


Start the formal permitting process with both the Land Quality Division and the Industrial Siting Division of the Wyoming Department of Environmental Quality as soon as possible within the framework of the process.

Extend the option on the purchase of up to 840 acres of private land in Upton, Wyoming, where we intend to build the hydromet facilities.

Results of Operations

Summary

Our consolidated net loss for the three-month period ended June 30, 2013 was $5,257 or $0.12 per share compared with our consolidated net loss of $8,615 or $0.19 per share for the same period in 2012, which is a decrease of $3,358. Our consolidated net loss for the six-month period ended June 30, 2013 was $9,652 or $0.21 per share compared with our consolidated net loss of $13,932 or $0.31 per share for the same period in 2012, which is a decrease of $4,280.

For the three-month period ended June 30, 2013 as compared with the same period in 2012, the decrease in consolidated net loss was primarily the result of a decrease in stock based compensation of $1,510, a decrease in the write-down of mineral properties of $943 and a decrease in the loss on currency translation of $700.

For the six-month period ended June 30, 2013 as compared to the same period in 2012, the decrease in consolidated net loss was primarily the result of a decrease in corporate administration costs of $4,341 (of which $3,762 related to stock based compensation), a decrease in the write-down of mineral properties of $943 and a decrease in exploration and evaluation expense of $519. These decreases were partially offset by an increase in the loss on currency translation of $1,573.

Exploration and evaluation

Exploration costs were $2,917 for the three-month period ended June 30, 2013 as compared with $2,776 for the same period in 2012, which is an increase of $141.
The increase was primarily the result of metallurgical costs in 2013 not incurred during 2012 offset by decreased exploration costs within the respective periods. Metallurgical costs include those costs associated with studying our proprietary oxalate process, ore recoveries, characterization, and separation.

Exploration costs were $4,856 for the six-month period ended June 30, 2013 as compared with $5,375 for the same period in 2012, which is a decrease of $519. The decrease was mostly the result of spending on the pre-feasibility study completed during 2012. Similar costs were not incurred during the six-month period in 2013.

Corporate administration

Corporate administration costs decreased to $1,721 for the three-month period ended June 30, 2013, as compared with $3,652 for the same period in 2012, a decrease of $1,931. The decrease from the prior period was primarily due to a decrease in stock-based compensation expense. The decrease in stock-based compensation expense of $1,510 was primarily the result of historically declining stock prices, which determine the strike price of the grant and are a significant driver of the expense to be incurred (as measured on the grant date).

Corporate administration costs decreased to $3,415 for the six-month period ended June 30, 2013, as compared with $7,756 for the same period in 2012, a decrease of $4,341. The decrease from the prior period was primarily due to a decrease in stock-based compensation expense. The decrease in stock-based compensation expense of $3,762 was primarily the result of historically declining stock prices, which determine the strike price of the grant and are a significant driver of the expense to be incurred (as measured on the grant date).

Non-operating income and expenses

Interest income

Interest income decreased to $78 for the three-month period ended June 30, 2013 as compared with $175 for the same period in 2012, a decrease of $97. Interest income decreased to $175 for the six-month period ended June 30, 2013 as compared with $326 for the same period in 2012, a decrease of $151. The decreases in interest income from the prior period is attributable to decreased average cash balances held in interest bearing accounts during the periods as compared with the prior year.


Gain/(loss) on currency translation

We report our financial statements in U.S. dollars. Therefore, any foreign currencies owned are converted to U.S. dollars at the current exchange rate. We hold a significant amount of Canadian dollars in Canadian and U.S. banks as a result of past financings that were denominated in Canadian dollars. We continue to hold Canadian dollars due to higher investment returns and as a hedge against Canadian dollar spending. As the majority of our expenses are in U.S. dollars, we have converted Canadian dollars to U.S. dollars during the past quarter and will continue to do so as market opportunities present more favorable conversion rates. A strengthening Canadian dollar will result in gains and a weakening Canadian dollar will result in losses as long as we continue to hold Canadian dollars.

The loss on currency translation was $684 for the three-month period ended June 30, 2013 as compared with a loss of $1,384 for the same period in 2012, a decrease in loss of $700. The difference is primarily caused by a change in cash balances held in Canadian dollars at the respective period ends. The translated cash balance at June 30, 2013 was approximately $18,481 CAD as compared with $43,681 CAD as of June 30, 2012. The Canadian dollar weakened by 3.3% against the U.S. dollar over the three-month period ended June 30, 2013 as compared to a 2.5% weakening during the same period in 2012.

The loss on currency translation was $1,505 for the six-month period ended June 30, 2013 as compared with a gain of $68 for the same period in 2012, an increase in loss of $1,573. The Canadian dollar weakened by 5.5% against the U.S. dollar over the six-month period ended June 30, 2013 as compared with a 0.3% weakening during the same period in 2012.

Unrealized gain/(loss) on derivatives

For the three-month period ended June 30, 2013, unrealized gain on derivatives was $85 compared with an unrealized gain of $23 for the same period in 2012, an increase of $62. For the six-month period ended June 30, 2013, unrealized gain on derivatives was $135 compared with an unrealized loss of $138 for the same period in 2012, an increase of $273. The changes are attributable to differences in market conditions affecting the financial instruments as well as the types of instruments outstanding during the respective periods. The company's marketable securities, which were marked-to-market with changes affecting the loss/gain on derivatives, settled during the first quarter of 2013, whereas they were outstanding during the entire six-month period of 2012 accounting for much of the loss during that period.

Financial Position, Liquidity and Capital Resources

Operating Activities

Net cash used in operating activities was $10,014 for the six-month period ended June 30, 2013 as compared with $8,271 for the same period in 2012. The increase of $1,743 in cash used is mostly the result of (a) foreign currency fluctuations on our bank accounts held in Canadian dollars, which accounted for an increased use of $1,573 and (b) timing in vendor payments affecting accounts payable accounting for $855. The increased uses above were offset by decreased spending within exploration and corporate administration totaling $1,098.

Investing Activities

Net cash from investing activities was $14,083 for the six-month period ended June 30, 2013 as compared with net cash used of $14,894 for the same period in 2012. The decrease in cash used in investing activities of $28,977 is primarily due to the net increase in cash from the sale of short-term investments of $15,118 during the six-month period ended June 30, 2013 compared with the purchase of short-term investments amounting to $14,633 for the same period in 2012. The decrease was partially offset by the purchase of land for $980 during 2013.

Financing Activities

Net cash provided by financing activities was $nil and $718 for the six-month periods ended June 30, 2013 and 2012, respectively. The cash received in the 2012 period was the result of employee stock option exercises.


Liquidity and Capital Resources

At June 30, 2013, our total current assets were $29,317 compared with $40,640 as of December 31, 2012, which is a decrease of $11,323. The decrease in total current assets is primarily due to a decrease in the combination of cash and cash equivalents and short-term investments of $11,049.

Our working capital as at June 30, 2013 was $27,424 as compared with $37,041 at December 31, 2012. Management estimates that the current cash position and future cash flows from potential equity financings that we may pursue from time to time will be sufficient for us to carry out our anticipated exploration and evaluation plans through late 2014.

Our plan for the remainder of 2013 is to continue those programs necessary to advance the Bear Lodge REE Project feasibility study, to continue exploration drilling programs, to identify and establish a HREE mineral resource estimate, and to continue moving forward with the Environmental Impact Study and permitting processes, while minimizing expenditures in other areas. The budget contemplates that additional financing would be required by late 2014 to have sufficient working capital to fund the further permitting, evaluation, development and construction of the Bear Lodge REE Project.

We intend to exercise the option covering up to 840 acres of private land in Upton, Wyoming in the fourth quarter of 2014. The purchase price is the greater of $1 per acre or the appraised value at the time of exercise.

We have an effective shelf registration statement for $50 million in the U.S. and Canada as of July 30, 2013. We expect that we will need to obtain between $25 million and $50 million of additional funding during the Environmental Input Study and permitting processes in order to retain a reasonable amount of available cash. The amount of the funding required prior to receiving all of the necessary operating approvals will depend on the timing of such approvals as well as the level of expenditures for exploration, infrastructure and long-lead time equipment that is approved by the board of directors.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Contractual Obligations

There were no material changes to the contractual obligations disclosed in Item 7 of Part II in our Transition Report on Form 10-K for the period ended December 31, 2012.

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