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REE > SEC Filings for REE > Form 10-K on 17-Mar-2014All Recent SEC Filings

Show all filings for RARE ELEMENT RESOURCES LTD

Form 10-K for RARE ELEMENT RESOURCES LTD


17-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes appearing elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. See "Cautionary Note Regarding Forward-Looking Statements." 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 under "Risk Factors and Uncertainties" and elsewhere in this Annual Report.

On September 7, 2012, our Board of Directors approved a change in our fiscal year-end from June 30 to December 31, with the change to the calendar year reporting cycle beginning January 1, 2013. Consequently, on March 18, 2013, we filed a Transition Report on Form 10-K for the six-month transition period ended December 31, 2012. The intent of the change was to align the reporting of our financial results more closely with our peers.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and accompanying notes included in Item 8 of this Annual Report on Form 10-K. References in this report to fiscal 2012 and fiscal 2011 indicate the twelve-month periods ended June 30, 2012 and 2011, respectively. Financial information with respect to the year ended December 31, 2012 is unaudited.
Management's Discussion and Analysis ("MD&A") has been prepared based on information known to management as of March 14, 2014. This MD&A is intended to help the reader understand the consolidated audited financial statements of Rare Element.

INTRODUCTION

We are focused on advancing the Bear Lodge REE Project in Wyoming and plan to develop and put it into production. As of December 31, 2013, we were considered to be an exploration stage entity as defined by U.S. GAAP. We completed a PFS on our Bear Lodge REE Project in 2012, expect to report an updated PFS in the first half of 2014 and have begun compiling data for the preparation of a DFS that is expected to begin in the second half of 2014 and be completed by mid-2015.

In July 2011, we became a domestic issuer in the United States and transitioned from reporting according to Canadian regulations with U.S. secondary filings, to reporting according to the U.S. regulations with Canadian secondary filings. We also adopted U.S. GAAP as required under SEC rules (see "Future Accounting Pronouncements" of this MD&A). This MD&A should be read in conjunction with the consolidated financial statements for the year ended December 31, 2013 and supporting notes thereto.

U.S. GAAP is similar to generally accepted accounting principles in Canada, in which Rare Element reported up to June 30, 2010, with one material change being the accounting for mineral property expenditures. Under U.S. GAAP, these expenditures are expensed in the income statement instead of being capitalized (unless acquired through a merger or acquisition in certain circumstances).

All currency amounts are expressed in thousands of U.S. dollars, except per share and common share amounts, unless otherwise noted.

OUTLOOK

We have sufficient cash on hand to conduct our current exploration and development plans through 2014. We plan to continue to advance the Bear Lodge REE Project during 2014, including the following:

Complete an updated PFS in the first half of 2014 and file an updated NI 43-101 Technical Report addressing project economics and incorporating updated Mineral Resource information and process innovations;

Finalize the processing flowsheet after completion of additional bench and pilot plant test work for the DFS, planned to start in the second half of 2014 and be completed by mid-2015;


Achieve key environmental permitting milestones including (i) EIS Notice of Intent publication, public involvement plan development and scoping completion,
(ii) Wyoming Department of Environmental Quality license application filing, and
(iii) U.S. Nuclear Regulatory Commission possession licensing application filing;

Support the permitting process by continuing to communicate and build stakeholder support for the project at the federal, state, and local levels

Produce enough sample product material for testing and analysis by potential customers to allow the Company to advance one or more offtake and/or strategic partner relationship agreements;

Evaluate the technical and economic merits of downstream separation of our high-purity, hydrometallurgical REO concentrate output;

Raise additional funding to support the above activities and continue to advance the project in a timely fashion; and

Complete a limited drilling program and combine district-wide geological/geochemical/ geophysical/mineralogical data to optimize future exploration and exploitation of the district.

RISKS AND UNCERTAINTIES

Our activities are subject to certain risks and uncertainties that might impact our financial results. For a more detailed list of such risks and uncertainties, please see "Item 1A. Risk Factors" of this Annual Report.

Our failure to successfully address these risks and uncertainties could have a material adverse effect on our business, financial condition and/or results of operations. Consequently, the trading price of our common shares may decline and investors may lose all or part of their investment in the Company. We cannot assure you that we will successfully address these risks and uncertainties or other unknown risks and uncertainties that may affect our business.

RESULTS OF OPERATIONS

As noted above, with the change in fiscal year beginning January 1, 2013, the Company filed a Transition Report on Form 10-K covering the six-month period ended December 31, 2012. Therefore, comparative financial statements for the twelve-months ended December 31, 2012 have not been audited. However, in order to provide more meaningful comparative financial information and management's analysis thereon, we have included unaudited financial information within the financial statements for the year ended December 31, 2012, to compare with the most recent audited year ended December 31, 2013.

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
(unaudited)

Summary

Our consolidated net loss for the year ended December 31, 2013 was $22,246, or $0.48 per share, compared with our consolidated net loss of $29,352 or $0.66 per share, for the same period in 2012. For the year ended December 31, 2013, the decrease in consolidated net loss was primarily the result of a decrease in corporate administration costs of $5,298 (of which $4,981 related to stock based compensation), a decrease in exploration and evaluation expense of $4,188, a decrease in the write-down of mineral properties of $943 and a positive variance in the unrealized loss on derivatives of $223. These decreases were partially offset by a negative variance in the loss on currency translation of $3,056 as well as a decrease in interest income of $395.

Exploration and evaluation

Exploration costs were $14,126 for the year ended December 31, 2013, compared with $18,314 for the same period in 2012. The decrease of $4,188 from the prior period was primarily due to decreased drilling and evaluation activities as well as decreased environmental monitoring costs. These decreases were partially offset by increases in metallurgical testing and research and development work.


Corporate administration

Corporate administration costs decreased to $6,616 for year ended December 31, 2013, compared with $11,914 for the same period in 2012, a decrease of $5,298. The decrease from the prior period was primarily due to a decrease in stock-based compensation expense of $4,981. The decrease in stock-based compensation was mostly 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 $317 was the result of more direct costs assigned to exploration and evaluation expense in 2013 as compared with 2012.

Non-operating income and expenses

Interest income

Interest income decreased to $232 for the year ended December 31, 2013, compared with $627 for the same period in 2012. The decrease in interest income from the prior period is attributable to lesser average cash balances held in interest bearing accounts during 2013 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 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 loss on currency translation was $1,531 for the year ended December 31, 2013, compared with a gain of $1,525 for the same period in 2012, a negative variance of $3,056. The difference is caused by a decrease in cash balances held in Canadian dollars at the end of the respective periods as well as depreciation of the Canadian dollar. The translated Canadian dollar cash balance at December 31, 2013 included approximately $10,233 CAD, compared with $33,287 CAD as of December 31, 2012. The Canadian dollar weakened by 7.0% against the U.S. dollar during 2013, compared with a 2.6% strengthening during 2012.

Six-Months Ended December 31, 2013 Compared to Six-Months Ended December 31, 2012 (unaudited)

Summary

Our consolidated net loss for the year ended December 31, 2013 was $22,246, or $0.48 per share, compared with our consolidated net loss of $29,362, or $0.66 per share, for the same period in 2012. For the year ended December 31, 2013, the decrease in consolidated net loss was primarily the result of a decrease in corporate administration costs of $5,298 (of which $4,981 related to stock based compensation), a decrease in exploration and evaluation expense of $4,188, a decrease in the write-down of mineral properties of $943 and a positive variance in the unrealized loss on derivatives of $223. These decreases were partially offset by a negative variance in the loss on currency translation of $3,056 as well as a decrease in interest income of $395.

Exploration and evaluation

Exploration costs were $12,938 for the six-month period ended December 31, 2012 as compared with $10,363 for the same period in 2011. The increase of $2,575 from the prior period was primarily due to an increase in drilling costs and environmental monitoring costs at our Bear Lodge REE Project as we continue to advance the project and further define the resource area.

Corporate administration

Corporate administration costs were $4,158 for the six-month period ended December 31, 2012 as compared with $7,791 for the same period in 2011. The decrease of $3,633 from the prior period was the result of a decrease in stock-based compensation expense of $4,404, which was partly offset by increased employee compensation and benefits costs of $842 and increased professional service fees of $211. Stock-based compensation expense


decreased due to the vesting of numerous grants issued in prior periods during the period ended December 31, 2012. Employee compensation and benefit costs increased during the 2012 period as we continued to establish our corporate offices and hire key personnel with specialized skills that will enable us to continue to advance the Bear Lodge REE Project. Lastly, professional service fees increased during the 2012 period as we incurred additional legal expenses for regulatory compliance as well as to assist us with the permitting process.

Non-operating income and expenses

Interest income

Interest income decreased to $301 for the six-month period ended December 31, 2012 as compared with $538 for the same period in 2011. The decrease in interest earned is a result of lower cash balances as compared with the prior year and lower interest rates in the market.

Gain/(loss) on currency translation

The gain on currency translation was $1,457 for the six-month period ended December 31, 2012 as compared with a loss of $2,686 for the same period in 2011.
The Canadian dollar strengthened by 2.4% against the U.S. dollar over the six-month period ended December 31, 2012 as compared with a weakening of the Canadian dollar against the U.S. dollar of 4.4% over the same period in 2011.

Year Ended June 30, 2012 Compared to Year Ended June 30, 2011

Summary

Our fiscal year ended June 30, 2012 consolidated net loss was $34,994 or $0.79 per share compared to our consolidated net loss of $16,657 or $0.43 per share for fiscal year 2011. The increase in consolidated net loss of $18,337 in fiscal 2012 was primarily the result of an increase in exploration costs of $6,656, an increase in corporate administration and investor relations costs of $6,638, an increase in the loss on currency translation of $5,695 and a write-down of mineral property of $1,874, which were offset by a decrease in the unrealized loss on derivatives of $2,380.

Exploration and evaluation

Exploration costs were $15,168 for the fiscal year ended June 30, 2012 as compared with $8,512 for the previous fiscal year. The increase of $6,656 from the prior period was mostly the result of increased spending on our Bear Lodge REE Project in Wyoming, USA. For the fiscal 2012 period, the increase in exploration costs was largely due to the undertaking and completion of a pre-feasibility study as well as an increase in environmental monitoring and programs as we begin the permitting process to move the project into the development stage.

Corporate administration

Corporate administration costs increased to $16,109 for the fiscal year ended June 30, 2012 as compared to $9,471 for fiscal year 2011. The increase of $6,638 from the prior period was primarily due to an increase in stock-based compensation expense. The increase in stock-based compensation expense was primarily the result of our issuance of 1,616,000 stock options during the fiscal 2012 period as compared to the issuance of 1,438,000 stock options during fiscal 2011. Also contributing to the increase in costs for fiscal 2012 was an increase in employee compensation and benefits expenses. During fiscal 2012, we established a corporate office in Lakewood, CO and hired key personnel and set up health and retirement benefits plans for our employees.

Non-operating income and expenses

Interest income

Interest income increased to $864 for the fiscal year ended June 30, 2012 as compared with $632 for the fiscal year ended June 30, 2011. The increase in interest income for fiscal 2012 is attributable to increased average cash balances held in interest-bearing accounts during the year when compared with the prior year.


Gain/(loss) on currency translation

The loss on currency translation was $2,618 for the fiscal year ended June 30, 2012 as compared with a gain of $3,077 for the fiscal year ended June 30, 2011. The Canadian dollar weakened by 5.7% against the U.S. dollar during the year ended June 30, 2012 as compared with a strengthening of the Canadian dollar against the U.S. dollar of 8.0% during the year ended June 30, 2011.

FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

Operating Activities

Net cash used in operating activities was $22,456 for the year ended December 31, 2013, as compared with $20,668 for the same period in 2012. The increase in cash used of $1,788 from the prior period is the result of (a) foreign currency fluctuations on our bank accounts held in Canadian dollars, which accounted for an increased use of $3,056; (b) timing in vendor payments affecting accounts payable, accounting for $2,488; and (c) timing in vendor prepayments affecting prepaid assets, accounting for $386. The increased uses above were partially offset by decreased spending within exploration and corporate administration totaling $4,505.

Net cash used in operating activities was $12,397 for the six-month period ended December 31, 2012 as compared with $12,690 for the same period in 2011. The decrease in cash used of $293 from the prior period is the result of a decrease in accounts payable outstanding at the end of each period, which was offset by a decrease in interest receivable at the end of each period.

Net cash used in operating activities was $20,961 for the fiscal year ended June 30, 2012 as compared to $6,680 for the fiscal year ended June 30, 2011. The increase of $14,281 in cash used is mostly the result of an increase in the net loss of $18,337, which was partially offset by an increase in non-cash items of $3,133.

Investing Activities

Net cash from investing activities was $13,973 for the year ended December 31, 2013, compared with net cash used of $14,932 for the same period in 2012. The decrease in cash used in investing activities of $28,905 is primarily due to the net increase in cash from the sale of short-term investments of $15,118 (net of reinvestment) during 2013, compared with the purchase of short-term investments amounting to $15,118 for the same period in 2012. The decrease was partially offset by the purchase of land for $980 during 2013.

Net cash used in investing activities was $38 for the six-month period ended December 31, 2012 as compared with $200 for the same period in 2011. The decrease in cash used of $162 from the prior period is the result of an increase in cash invested in guaranteed investment contracts of $485, a decrease in the restricted cash balance of $422 which was due to the replacement of our cash-funded reclamation bond with a surety bond that did not require cash collateral and a decrease of $259 for the purchase of equipment.

Net cash used in investing activities was $15,094 for the year ended June 30, 2012 as compared to net cash used of $664 for fiscal year ended June 30, 2011. The increase in cash used in investing activities of $14,430 is primarily due to our investment of $14,633 in guaranteed investment contracts with maturity dates greater than 90 days.

Financing Activities

Net cash provided by financing activities was $7,400 and $1,108 for the years ended December 31, 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.

Net cash provided by financing activities was $390 for the six-month period ended December 31, 2012, which was the result of cash received upon the exercise of stock options. Net cash provided by financing activities was $55 for the six-month period ended December 31, 2011, which was also the result of the exercise of stock options.


Net cash provided by financing activities was $773 for the fiscal year ended June 30, 2012, which was the result of $269 in cash received upon the exercise of stock options and $504 in cash received upon the exercise of warrants with an expiry date of April 13, 2012.

Net cash provided by financing activities was $68,196 for the fiscal year ended June 30, 2011, which was the result of $50,297 in cash received upon the completion of a short-form prospectus offering on December 22, 2010, $1,341 in cash received upon the exercise of stock options, $2,410 in cash received upon exercise of agents' options and warrants and $11,789 in cash received upon the exercise of warrants.

Liquidity and Capital Resources

At December 31, 2013, our total current assets were $24,337, compared with $40,640 at December 31, 2012. The decrease of $16,303 is primarily due to cash expenditures during the year which reduced our cash and cash equivalents and short-term investments by $1,083 and $15,118, respectively.

At June 30, 2012, our total current assets were $52,175, compared to $73,046 as of June 30, 2011, which is a decrease of $20,871. The decrease in total current assets is primarily due to a decrease in cash and cash equivalents of $35,282, which was partly offset by an increase in short-term investments of $14,633.

Our working capital as at December 31, 2013 was $22,605, compared with working capital of $37,041 at December 31, 2012. Working capital was $50,120 at June 30, 2012 and $71,953 at June 30, 2011.

Our plans for 2014 are to continue those programs necessary to advance the Bear Lodge REE Project to a definitive feasibility study, to continue moving forward with the Environmental Impact Study and permitting processes, and to evaluate the feasibility of incorporating downstream separation of rare earths into our project, while limiting expenditures in other areas. The budget contemplates that additional financing would be desired by late 2014 to support our balance sheet and continue the current pace of project spending for 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 effective shelf registration statements in the U.S. and Canada, with a remaining capacity of $35.9 million in the U.S. and CAD $50.0 million in Canada.

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, advanced 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 Project commissioning by the end of 2016, pending timely permitting. The Company will require significant additional financial resources to build the Bear Lodge REE Project.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements required to be disclosed in this Annual Report.

Contractual Obligations

At December 31, 2013, our contractual obligations consisted of our operating lease obligation of $284 associated with our Lakewood, Colorado corporate office as well as facilities in Sundance, WY. The timing associated with these lease obligations is outlined below:


                             Due within:     Amount
                             2014          $      130
                             2015                  97
                             2016                  57
                             Total         $      284

We have no contractual obligations extending beyond three years.

CRITICAL ACCOUNTING ESTIMATES

Exploration and development costs

Exploration costs are expensed as incurred. When it is determined that a mining deposit can be economically and legally extracted or produced based on established proven and probable reserves, development costs related to such reserves incurred after such determination will be considered for capitalization. The establishment of proven and probable reserves is based on results of definitive feasibility studies that indicate whether a property is economically feasible. Upon commencement of commercial production, capitalized costs will be transferred to the appropriate asset category and amortized over their estimated useful lives. Capitalized costs, net of salvage values, relating to a deposit that is abandoned or considered uneconomic for the foreseeable future, will be written off.

Stock-based compensation

We account for share-based compensation under the provisions of ASC 718, "Compensation - Stock Compensation." Under the fair value recognition provisions, stock-based compensation expense is measured at the grant date for all stock-based awards to employees and directors and is recognized as an expense over the requisite service period, which is generally the vesting period. The Black-Scholes option valuation model is used to calculate fair value.

We account for stock compensation arrangements with non-employees in accordance with ASC 718 and ASC 505-15 which require that such equity instruments are recorded at their fair value on the measurement date. The measurement of stock-based compensation is subject to periodic adjustment as the underlying equity instruments vest. Non-employee stock-based compensation charges are amortized over the vesting period on a straight-line basis. For stock options granted to non-employees, the fair value of the stock options is also estimated using a Black-Scholes valuation model.

Asset retirement obligations

Our mining and exploration activities are subject to various laws and regulations, including legal and contractual obligations to reclaim, remediate, or otherwise restore properties at the time the property is removed from service. Asset retirement obligations are recognized when incurred and recorded as liabilities at fair value. The reclamation obligation is based on when spending for an existing disturbance will occur. We reclaim the disturbance from our exploration programs on an ongoing basis and, therefore, the portion of our asset retirement obligation corresponding to our exploration programs will be settled in the near term and is classified as a current liability. The remaining reclamation associated with environmental monitoring programs is classified as a long-term liability; however, because we have not declared proven and probable reserves the timing of these reclamation activities is uncertain. The estimated fair value of the outstanding liability at the end of the period approximates the cost of the asset retirement obligation. For exploration stage properties that do not qualify for asset capitalization, the costs associated with the obligation are charged to operations. For development and production stage properties, the costs will be added to the capitalized costs of the property and amortized using the units-of-production method. We review, on a quarterly basis, unless otherwise deemed necessary, the asset retirement obligation in regards to the Bear Lodge Property.

Asset retirement obligations are secured by surety bonds held for the benefit of the State of Wyoming in amounts determined by applicable federal and state regulatory agencies.


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