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REE > SEC Filings for REE > Form 10-Q on 12-Nov-2013All Recent SEC Filings

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Form 10-Q for RARE ELEMENT RESOURCES LTD


12-Nov-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 nine-month period ended September 30, 2013 has been prepared based on information available to us as of November 11, 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"). 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 evaluating and permitting 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.

As of September 30, 2013, we were considered an exploration stage entity under U.S. GAAP due to the lack of mineral reserves reported under SEC Industry Guide
7. However, we have updated and reported mineral resources that are National Instrument 43-101 compliant, a Canadian standard. 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. We believe that the following plans are important in the evaluation and development of the Bear Lodge Project; however, there can be no assurances that we will be successful in accomplishing these plans in the next twelve months or at all. Our plans for Bear Lodge REE Project over the next twelve or more months include the following activities:

Begin the detailed design and economic analysis portion of the feasibility study in the first half of 2014 that is expected to be complete in approximately twelve months from the start date.

Expand on staged development pilot plant testing during 2014 to continue to optimize the metallurgical process consisting of hydrochloric acid leaching at moderate temperatures, selective precipitation of REEs with oxalic acid, and reagent optimization and recycle to produce a high-purity (over 90 percent) mixed REE concentrate product.

Consider targeted drilling to upgrade and continue to expand the Whitetail Ridge resource area, as well as define other target zones of heavy rare earth element ("HREE") enrichment, including the Carbon and Taylor target areas.

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.

Advance 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 mining rate scenario that includes an expandable capacity plant allowing for increased production after several years when demand is projected to be sufficient to support the additional supply.

Continue to advance permitting under the formal National Environmental Policy Act process, including development of the Environmental Impact Statement as directed by the U.S. Forest Service. The Company has proposed a 24-month permitting timeframe. Selection of the Project Manager and Third-Party Contractor is currently underway with expectation for a detailed timeline from these entities in the first quarter of 2014.


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

Continue to advance discussions with potential off-take and joint venture partners.

Responsibly manage our cash resources as we advance the project through permitting and feasibility. The Company may pursue potential financings from time-to-time to support cash balances.

On an ongoing basis, review and evaluate advanced-stage REE and critical metals projects that, if combined with us, may create additional competitive and financial advantages to both entities.

Results of Operations

Summary

Our consolidated net loss for the three-month period ended September 30, 2013 was $6,855, or $0.15 per share, compared with our consolidated net loss of $5,858, or $0.13 per share, for the same period in 2012, which was an increase of $997. Our consolidated net loss for the nine-month period ended September 30, 2013 was $16,507, or $0.36 per share, compared with our consolidated net loss of $19,790, or $0.45 per share, for the same period in 2012, which was a decrease of $3,283.

For the three-month period ended September 30, 2013, compared with the same period in 2012, the increase in consolidated net loss was primarily the result of a decrease in the gain on currency translation of $1,535, an increase in exploration and evaluation expense of $183, and a decrease in interest income of $136. These changes were partially offset by a decrease in stock based compensation of $765.

For the nine-month period ended September 30, 2013 as compared with the same period in 2012, the decrease in consolidated net loss was primarily the result of a decrease in corporate administration costs of $5,233 (of which $4,527 related to stock based compensation), a decrease in the write-down of mineral properties of $943, a decrease in exploration and evaluation expense of $336, and a decrease in the unrealized loss on derivatives of $234. These decreases were partially offset by an increase in the loss on currency translation of $3,108 as well as a decrease in interest income of $287.

Exploration and evaluation

Exploration and evaluation expense was $5,565 for the three-month period ended September 30, 2013, compared with $5,382 for the same period in 2012, which was an increase of $183. The increase was primarily the result of higher environmental and metallurgical expenses in 2013, offset by decreased exploration expenses within the respective periods. Environmental expenses include those expenses associated with data gathering in support of preparation of an Environmental Impact Statement. Metallurgical costs include those costs associated with studying our proprietary oxalate process including pilot plant testing, ore recoveries, and ore characterization.

Exploration and evaluation expense was $10,421 for the nine-month period ended September 30, 2013, compared with $10,757 for the same period in 2012, which was a decrease of $336. Expenses incurred during 2012 were primarily associated with exploration and completion of the pre-feasibility study. Similar expenses decreased during the nine-month period in 2013. This decrease was partially offset by increases in environmental and metallurgical costs as noted in the third quarter analysis above.

Corporate administration

Corporate administration costs decreased to $1,501 for the three-month period ended September 30, 2013, as compared with $2,393 for the same period in 2012, a decrease of $892. The decrease from the prior period was primarily due to a decrease in stock-based compensation expense of $765. This 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 $4,916 for the nine-month period ended September 30, 2013, as compared with $10,149 for the same period in 2012, a decrease of $5,233. The decrease from the prior period was primarily due to a decrease in stock-based compensation expense of $4,527. This 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). The remaining decrease of $706 was the result of more direct costs assigned to exploration and evaluation expense during the nine month period in 2013 as compared to 2012.

Non-operating income and expenses

Interest income

Interest income decreased to $32 for the three-month period ended September 30, 2013, compared with $168 for the same period in 2012, a decrease of $136. Interest income decreased to $207 for the nine-month period ended September 30, 2013, compared with $494 for the same period in 2012, a decrease of $287. The decreases in interest income from the prior period is attributable to decreased average cash balances held in interest bearing accounts during the 2013 periods when 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. While the majority of our expenses are in U.S. dollars, we continue to hold Canadian dollars due to higher investment returns and as a hedge against expected Canadian dollar spending. 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 gain on currency translation was $267 for the three-month period ended September 30, 2013, compared with a gain of $1,802 for the same period in 2012, a negative variance of $1,535. The difference is primarily caused by a decrease in cash balances held in Canadian dollars at the end of the respective periods.
The translated cash balance at September 30, 2013 was approximately $11,754 CAD, compared with $35,127 CAD as of September 30, 2012. The Canadian dollar strengthened by 2.1% against the U.S. dollar over the three-month period ended September 30, 2013, compared to a 4.2% strengthening during the same period in 2012.

The loss on currency translation was $1,238 for the nine-month period ended September 30, 2013, compared with a gain of $1,870 for the same period in 2012, a negative variance of $3,108. The Canadian dollar weakened by 3.5% against the U.S. dollar over the nine-month period ended September 30, 2013, compared with a 3.9% strengthening during the same period in 2012.

Unrealized gain/(loss) on derivatives

For the three-month period ended September 30, 2013, unrealized loss on derivatives was $39, compared with no unrealized loss for the same period in 2012, an increase of $39. For the nine-month period ended September 30, 2013, unrealized gain on derivatives was $96, compared with an unrealized loss of $138 for the same period in 2012, an increase of $234. 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 nine-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 $15,616 for the nine-month period ended September 30, 2013, compared with $13,172 for the same period in 2012.
The increase of $2,444 in cash used was mostly the result of (a) foreign currency fluctuations on our bank accounts held in Canadian dollars, which accounted for an increased use of $3,108 and (b) timing in vendor payments affecting accounts payable, accounting for $472. The increased uses above were offset by decreased spending within exploration and corporate administration totaling $1,042.

Investing Activities

Net cash from investing activities was $13,982 for the nine-month period ended September 30, 2013, compared with net cash used of $15,043 for the same period in 2012. The decrease in cash used in investing activities of $29,025 is primarily due to the net increase in cash from the sale of short-term investments of $15,118 during the nine-month period ended


September 30, 2013, compared with the purchase of short-term investments amounting to $15,254 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 $7,518 and $807 for the nine-month periods ended September 30, 2013 and 2012, respectively. The cash received in the 2013 period was the result of the Company's registered direct offering, which closed on September 27, 2013. The cash received in the 2012 period was the result of employee stock option exercises.

September 27, 2013 Financing

On September 27, 2013, the Company closed its $8,000 offering of common shares and warrants in a registered direct offering in the United States resulting in net proceeds of $7,423, after expenses. The purchasers in the offering hold oversubscription rights for an additional $4,000 in common shares and warrants for 60 days.

The Company sold an aggregate of 2,677,376 common shares at a price of $2.988 per unit. The oversubscription rights are exercisable for up to a maximum of 1,606,426 additional common shares, depending on the market price at the time of exercise of the oversubscription rights.

The Company issued to investors 1,338,688 warrants, each exercisable for one common share of its common stock, in connection with the September 27, 2013 registered direct offering. The exercise price and exercise period of each warrant is $4.15 and three years, respectively. The warrants are not exercisable until six months after their issuance date.

The oversubscription rights are exercisable for up to a maximum of 803,213 of additional warrants, depending on the market price at the time of exercise of the oversubscription rights.

In addition, the Company issued to an agent in connection with the September 27, 2013 financing 133,869 warrants, under the same terms as those issued to investors.

Liquidity and Capital Resources

At September 30, 2013, our total current assets were $31,401, compared with $40,640 as of December 31, 2012, a decrease of $9,239. The decrease in total current assets was primarily due to a decrease in the combination of cash and cash equivalents and short-term investments of $9,234.

Our working capital as of September 30, 2013 was $28,129 as compared with $37,041 as of December 31, 2012. Management estimates that the current cash position will be sufficient for us to carry out our anticipated exploration, evaluation and permitting plans through 2014. The Company may pursue potential financings from time-to-time to support our cash position. However, there can be no assurance that financing will be available at all or on terms acceptable to us.

Our plan for the remainder of 2013 is to continue those programs necessary to advance the Bear Lodge REE Project feasibility study, to evaluate the results of our 2013 developmental drilling programs and potentially expand our HREE mineral resource and to continue moving forward with the Environmental Impact Study and permitting processes, while limiting expenditures in other areas. The budget contemplates that additional financing would be desired by late 2014 to support our balance sheet and further permitting, evaluation, development and construction of the Bear Lodge REE Project.

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

As of July 30, 2013, we had an effective shelf registration statement in the U.S. and Canada. On September 27, 2013, the Company closed its $8,000 offering of common shares and warrants in a registered direct offering in the United States resulting in net proceeds of $7,423, after expenses. The purchasers in the offering hold oversubscription rights for an additional $4,000 in common shares and warrants that expire 60 days after the closing date.

We expect that we will require between $25 million and $50 million of additional funding over the next two years to support the Environmental Impact Study and permitting processes, ongoing engineering, metallurgical test work and other corporate expenses. 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 as approved by the Company's Board of Directors.


The Company projects that it is possible to begin commissioning by the end of 2016, pending timely permitting. Currently, the Company requires significant additional financial resources to build the Bear Lodge REE Project.

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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