Dundee Securities: QRM is rated Neutral and the 12-month target price is C$1.10
February 12, 2013
NEUTRAL, Speculative Risk* (was Buy)
12-month target price: C$1.10 (was C$3.40)
February 12, 2013
PFS Delay Highlights Challenges; Downgrading to Neutral
We are reducing our rating to Neutral (was Buy) and reducing our target price to $1.10 (was $3.40) after Quest announced a delay in the delivery of its PFS. Quest has announced a 6 month extension for the delivery of its PFS work, which is expected to have significant capital cost escalation. Potential optimization of its PFS may yield positive benefits. However, higher capex and updated financing assumptions have negatively impacted our DCF and target price. We have revised our NAV to more accurately represent future operating cash flow, resulting in the elimination of our in-situ resource value and the inclusion of Zirconium and Niobium by-product production (refer to Exhibit 1 for a summary of these changes). We have rolled our model forward and incorporated the Q4 12 results and continue to model an open pit mine at Strange Lake starting in 2017, 70% payability on intermediate concentrate, 75% metal recovery on major REEs, 15% NPV discount rate and 0.5x DCF multiple to reflect the early stage of the project. We believe it is prudent to take a Neutral stance while we await the PFS. Rare earth prices have declined ~79% since the peak in August 2011, which has pressured rare earth sector valuations, including Quest. We believe prices will rebound once inventory has cleared and demand improves, although the timing of this remains uncertain. Current prices remain above our long term price deck.
PFS delayed until Q3/13. The PFS is to be delayed 6 months as Quest looks for alternative or 'potential refinements' to its Strange Lake Project that will lower costs (capex and opex) and allow for an earlier mine commissioning date. While the bulk of the engineering work has been completed, the mine plan, engineering work, metallurgical testwork/process plant design, supporting site infrastructure design, road and port will all be under review. The PFS was originally expected in late 2011/early 2012 but was pushed to H2/12 after a change in project scope (moved mill to mine site) and delayed metallurgy. We have been modeling a delayed start up in 2017 (target of 2016), which we are not adjusting at this time.
Costs expected to be 'significantly' greater than in the PEA - this was expected but we are increasing our capex estimate. The PEA was published in Sept 2010 with initial capex of $540mln (we were at $810mln, now at $1.0 bln). We have also increased our sustaining capex assumptions. Opex costs were $98/t ore milled (we are maintaining our $156/t). The increased capex assumption has impacted our financing assumptions (we are now accounting for more dilution).
Metallurgy has advanced - a positive in the heavy rare earth (HREE) sector, higher probability of by-product production. Quest has conducted bench scale tests of all parts of the flow sheet (Exhibit 2) and a mini pilot plant has been commissioned (80-100 kg/day of ore, has confirmed bench scale testing and the Zirconium SX circuit). Next step is commissioning of the Niobium and Rare Earth SX and precipitation circuits. The demonstration pilot plant is expected to start in Q2/13. We now include by-products in our model as the Zr and Nb are extracted before REE.
Maintaining our conservative price deck. We maintain our original long term price forecast, which is lower than current prices (Exhibit 3).
The bottom line is that Peter Cashin is a putz. I have been staying on top of this company for a long time and the song coming out of corporate is starting to sound like the three biggest lies in the junior resource sector...The check is in the mail, I gave at the office, and The PFS is coming soon.
I don't think I have ever seen such a level of buffonery in a company that was once touted as being staffed by top notch management. They did not just wake up yesterday and figure out that the PFS was going to be delayed, this should have been announced months ago.
And what kind of idiot engineer could so woefully underestimate capital costs like they have done.
I agree with you 100%. I left an email message to the PUTZ 3 months ago and no reply...left him another email yesterday. Am not holding my breath. I'm to blame for being a bigger PUTZ for not selling at $6 a share and holding like a putz until now. My bad.