Very Rare

Very Rare

Rising demand for rare earths bodes well for Quest's landmark Strange Lake project

Booth # 3008 • questrareminerals.com • 416.916.0777

Peter Cashin
President & CEO

Quest Rare Minerals' (TSXV: QRM) discovery of one of the world's most significant rare earth deposits in 2009 has put the spotlight on this three-year-old Quebec-based company. Backed by an award-winning operations and technical team and rapidly growing awareness and demand for rare earths, Quest Rare Minerals' outlook is rosy, to say the least. President and CEO Peter Cashin shares his enthusiasm for this young kid on the block and why going to production as early as 2014 is not out of the question.

Resource Intelligence: Congratulations. Quest was awarded the Prospector of the Year award. How did that come to be?

Peter Cashin: We accepted the award not just on the fact that it was a large and significant discovery, but also on the basis of all the associated activity following the discovery's announcement. Our discovery generated quite a bit of exploration activity by a number of companies around our Strange Lake property and that is one of the provisos for the award. I am very proud of Quest and the Quest team for what they have accomplished. We've done that in short order. We launched only in January 2008 and now we're developing probably one of the world's most significant rare earth deposits.

RI: How much of the global demand for rare earths could Strange Lake satisfy?

PC: Strange Lake would feed out about 6% to 10% of the world demand, which is not enough to flood the market and depress the prices, but certainly enough to feed into a very important aspect of the rare earth element sector that the Chinese don't deliver out to.

RI: What does your PEA suggest as an annual output in rare earths?

PC: The PEA is based on a portion of what we believe is there and we are looking at a production of about 4,000 tonnes of open-pitable material a day and we would deliver out from our assumptions about 12,500 tonnes of rare element oxides per year.

RI: American demand according to USGS is about 10,000 tonnes per year. Your mine, when built, could satisfy the entire US need for rare earths.

PC: That is correct. But the 10,000 tonnes is for the full spectrum of rare earths. Because of the high proportion of heavies at Strange Lake it obviously feeds into a specific sector within that 10,000 tonnes. A lot of the new technology that is being developed now, especially for military applications and some of the new high-tech electronics are showing a preference for the use of heavies. But up to this point there has not been a primary source of the heavy rare earths. Strange Lake will be able to deliver on that to the markets.

RI: For somebody who doesn't understand the importance of rare earths and possibly more importantly heavy rare earths, explain what is going on.

PC: Rare earths are feeding into what I would consider to be the technological economy, in other words, those sectors of the economy that are fairly recent developments. I would say that for the past 20 to 25 years these things have come to be: wind turbines and hybrid automotive, cells phones and flat screens. Rare earths are a small percentage contribution in terms of the cost of the item but they are critically important and they can't be replaced. There are no substitutes for their contribution to the miniaturization of today's electronics or use in industrial applications. Without them those applications just won't work. I think the big issue related to the nature of these metals is the fact that they are very heat-tolerant. Heavies of course are atomically heavier but they are much rarer. What they impart is even further heat tolerance to those same applications.

RI: When did your PEA come out and why did you focus on the B zone specifically?

PC: We delivered the PEA in September of 2010. What we liked about the B zone is that it was fully in Quebec and, so far, the only known deposit is the historical IOC or what we called the Main zone, which straddles a provincial boundary that has not been surveyed yet. So there will potentially be issues related to the true position of the boundary and not really knowing what percentage of the deposit would be available to us. The B Zone on the other hand is well away from the border; it is in a positive jurisdiction, is open-pitable and sufficiently large to give us an indication of the commercial viability of Strange Lake as a whole. We've done metallurgy on that and we can apply conventional acid leach to the ore with very good recovery. It's a much better deposit.

RI: How many mineral phases are there?

PC: The elemental suite is gadolinite, gerenite and kainosite. Those are calcium bearing heavy rare earth element silicate and carbonate minerals. They have been re-crystallized so they are very amenable to acid leach. It's almost like Mother Nature did a lot of the pre-cracking to this deposit, thereby facilitating recovery of the valuable rare earth components.

RI: That led you to a very low operating cost. About $100 per tonne; you're estimating?

PC: Yes. $102 to $105. That is due to the fact that the resource can be a mine via open-pit methods so our cost is $5 a tonne vs. mining costs related to a typical underground operation which is in the order of $50-$60 a tonne.

Mining analysts visit the Strange Lake Project, Québec, July 2010

RI: The ore value you're looking at is great as well. Last year when I spoke to John Kaiser he had done an evaluation on each of the elements and came up with a value of $304 per tonne. What is that now?

PC: It's gone up in leaps and bounds with the Chinese cutbacks on their export quotas. I can't even estimate what it is. I think it is in the order of about $700 per tonne. It's just gone through the roof.

RI: What is your NPV and what are your revenues expected to be?

PC: The IRR on the 115 million tonnes used in the PEA is a very robust 36%. The NPV is a 12% discount rate because it is still high risk and it still came out to be over $1.4 billion over a minimum 25-year production period.

RI: You say that you have a mine life of about 25 years but actually you've got enough tonnage for 65 years. Why the discrepancy?

PC: The thing is once you go past the 25-year window the rest is all gravy. To be honest with you we just wanted to show and establish the economic model in a reasonable operating time frame. That was based on last year's resource estimate. We've done subsequent work now and we know that we are going to be well past that time line once we deliver our revised resource estimate of the deposit.

RI: What prices did you use then? You say a payback of three to four years, which is incredible. Are those recent prices?

PC: We used as the base case a trailing three-year average from 2007 to 2010, and then grew that number over the life of the project. Since the price scenario was set in September, the prices have moved up materially due to the China quotas and export tariffs. So it is actually a fairly discounted price. The price assumption we used on Strange Lake is conservative: about a half to a third of the current market prices.

RI: Geographically, you don't have any First Nations issues, and Quebec is mining-friendly. What about infrastructure? Have you had issues there?

PC: I've had to answer a lot of shareholders about the concern for lack of infrastructure. If Strange Lake were a small deposit I would be very concerned. If infrastructure difficulties would have been an issue for such mines as Voisey's Bay copper/nickel deposit or the Raglan nickel deposit or the Echo Bay gold deposit or Red Dog lead/zinc deposit they would never have happened. What made those projects work is that fact that they were very large and very rich, which, for investors, mitigates the potential risk of opening an operation. So I don't think from an infrastructure standpoint that it's unattainable.

RI: When do you foresee going into production by?

PC: I've got a model of a startup about 2015/16, which is much in keeping with my philosophy of under-promising and over-performing in what we deliver out. What is nice about an open-pit opportunity is that it's more easily scalable if you want to fast track it and it's looking very good. The economics also continue to be very positive and you've got indications from end users for wanting the material you can deliver out then you can probably accelerate that in the order of 2014.

RI: Is it important for you to beat competitors to
the market?

PC: We are really talking to a different sector of the rare elements base because of the heavies. Strange Lake stands alone with that fact of the extreme enrichment, the size of the deposit, the amenability to open-pit mining and conventional metallurgy.

RI: Based on all of these green lights you seem to be getting is this a fait du compli?

PC: No. There could be bumps in the road all the way through development. But I think the project and the deposit is such that a lot of our concerns and risks have been mitigated by the nature of the deposit itself.

RI: I think the market speaks a great deal as well. When you look at how you're trading and how quickly your price has escalated and has managed to hold the course so far.

PC: I think that the deposit speaks and I think that the last time you and I spoke I did say that the true success of a junior exploration company is to first and foremost ensure the technical integrity of the program and bring those along and develop your resources first before you go out and promote them. We've done that and the proof is in the pudding.

RI: You've had a lot happen in the last year. What will happen between now and next year when we next speak?

PC: We're going to get our revised resource estimate that gives us the measured and indicated grade that we need for commencing a pre-feasibility study. We're pretty confident because of the nature of the PEA that we will make that decision to go into pre-feasibility soon after receipt of the resource estimate. We'll be continuing our exploration and definition program throughout 2011. There are indications of further resources on the property that we have yet to drill define. My hope is that we can deliver out a pre-feasibility before the end of the calendar year.

Investor Highlights:

• Stage: Preliminary resource estimate, awaiting a revised resource estimate at the indicated/measured category, likely to launch pre-feasibility study by end of q1 2011
• Market cap: $363 million as of February 11, 2011
• Share price: 187% in 12 months; 11,660% in 24 months
• Share price: $6.24 as of February 11, 2011
• Commodity: Rare earth metals
• Production planned: Late 2015
• Mine life: 25 years, minimum
• Cash: $50 million as of January 31, 2011

Highlights:

• Strange Lake is a world-class resource and one of only two known primary heavy REE resources in the world
• Rare earths are critical and irreplaceable components in military applications and high-tech electronics. Quest's Strange Lake property would deliver the highly heat-tolerant heavy rare earth minerals much-needed in such applications
• Misery Lake and newly discovered targets south of the property add further upside
• Experienced and respected management and technical team

About the Author

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