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China Export Controls Highlight Importance of Western Rare Earth Projects

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This Canadian rare earth elements (REEs) company is watching China's decisions involving critical mineral exporting with interest. Officials say time is running out for new mines.

China's recent decision to restrict the export of two metals critical to superconductor production could be a boon for North American rare and critical elements companies.

Defense Metals Corp.'s (DEFN:TSX.V; DFMTF:OTCQB; 35D:FSE) Wicheeda project is not looking for the gallium or germanium affected by the Chinese decision, but the light rare earth elements (REEs) the company is seeking for green technologies like wind turbines and electric vehicles (EVs) are not safe from future targeting by Chinese authorities.

China accounts for about 60% of REE mine production and over 85% of the refined output of REEs, Defense Metals noted. The company would like to reduce North America's dependence on those elements and produce as much as 10% of them. But time on the clock is running since it can take years to develop a mine into production.

DEFN's stock rose more than 16% last week after the news of the China restrictions as it prepares to update its resource estimate at Wicheeda.

"This geopolitical conflict . . .  related to semiconductors that are essential for military, AI, telecommunications, and transportation technologies raises the emergency for the West to develop critical materials and supply chains," Defense Metals President Luisa Moreno told Streetwise Reports. "China is the largest producer of rare earths, and it can at any time impose broad 'export restrictions' in the same fashion is now imposing on gallium and germanium."

"The Wicheeda deposit is one of the more advanced light rare earth element (LREE) projects in North America," said David Davidson of Paradigm Capital.

Technical Analyst Clive Maund wrote on July 11 that after it had opened flat the day after the news, he gave the stock further consideration when it broke higher later and realized "that given geopolitical realities, this is a stock that will probably go much, much higher."

"It is believed that a major new uptrend in Defense Metals has just been birthed, so we stay long, and it is rated an Immediate Strong Buy," Maund wrote.

DEFN, which is working on completing a pre-feasibility study (PFS) for the project in British Columbia, offers high volume for Canadian traders wanting REE exposure, with the stock reaching 1.1 million trades on July 11.

The Wicheeda rare earths project in British Columbia has the "excellent infrastructure and a large, growing resource" to take on China, Paradigm Capital senior analyst David Davidson wrote in an April research note.

"The Wicheeda deposit is one of the more advanced light rare earth element (LREE) projects in North America," wrote Davidson, who initiated coverage with a Speculative Buy rating and a CA$1.25 per share price target. "With the push to source more critical elements domestically, Defense Metals is well positioned to take advantage of this opportunity."

The Catalyst: Time Running Out

Canada's government introduced its Critical Minerals Strategy, backed by nearly CA$4 billion, late last year.

The government promised to review the permitting process to cut the time required to bring new mines online by avoiding duplication and ensuring early First Nations engagement.

Companies will get help applying for permits and federal support through the Critical Minerals Centre of Excellence, which is already operating with a team of about 15 people.

"With its vast resources and manufacturing capacity, Canada is well positioned to become a secure and reliable supplier of critical minerals and value-added products for global markets," said Keean Nembhard, press secretary for Canada's Office of the Minister of Natural Resources. "But efforts must be consistent with Canada's priorities and objectives, including environmental protection and conservation, safe and responsible labor practices, and respect for the rights of Indigenous Peoples."

Technical Analyst Clive Maund wrote that after it had opened flat the day after the news, he gave the stock further consideration when it broke higher later and realized "that given geopolitical realities, this is a stock that will probably go much, much higher."

The company entered into a Mineral Exploration Agreement with the McLeod Lake Indian Band for the project last fall.

The agreement "addresses the interests of both parties," Noble Capital Markets analyst Mark Reichman said in a research note.

“In addition to providing the McLeod Lake Indian Band with input into how exploration activities proceed, the agreement provides economic opportunities for the First Nations community and establishes a path for potential future commercial involvement,” Reichman wrote.

Defense Metals Chief Executive Officer Craig Taylor said that under the Critical Metals Strategy, the McLeod Lake Indian Band's involvement would speed up the permitting process for Wicheeda, but there is "no way to tell by how much."

Time is of the essence. The Critical Minerals Strategy points out it can take anywhere from five to 25 years for a mining project to become operational.

"Now more than ever, it is important for Canada and the U.S. to help fast-track the development of Wicheeda," Moreno said. "That can be achieved by shortening or prioritizing the mining permitting process and offering favorable financing."  

Analyst Expects 'Positive Surprises' From Resource Estimate

Defense Metals recently updated Wicheeda's 3D geological model with 10,000 meters of new drilling from 47 holes completed in 2021 and 2022, which the company called a "significant milestone."

It next plans to update its resource estimate and complete the PFS.

Early successes of the testing process and the results of drilling in 2021 and 2022 point to the possibility of a "compelling" PFS, Noble Capital Markets analyst Mark Reichman wrote in April. He rated the stock Outperform with a CA$0.90 target price.

Davidson with Paradigm Capital wrote that he expected "positive surprises" in the upcoming mineral resource estimate from the company.

"We expect to see the total resource increased by at least another 10–15% and a modest improvement in overall grade," he wrote. "In addition to the drilling, considerable metallurgical work has also been undertaken, particularly regarding assessing acid bake technology opportunities, which should provide a higher degree of confidence in eventual REE recoveries."

Elements in High Demand

REEs are in high demand as the economy shifts into greener territory. They are used for purifying water, MRIs, fertilizers, weapons, scientific research, wind turbines, computers, and permanent magnet motors for electric vehicles (EVs).

The global market for the elements is expected to grow from US$2.6 billion in 2020 to US$5.5 billion in 2028, according to a report by Fortune Business Insights.

"The rising demand for consumer durables such as tablets, laptops, and smartphones is one of the factors driving the consumption of rare earth elements," the report said. "The demand for these elements in developing economies is estimated to expand rapidly."

Streetwise Ownership Overview*

Defense Metals Corp. (DEFN:TSX.V; DFMTF:OTCQB; 35D:FSE)

*Share Structure as of 7/14/2023

Davidson noted the only current REE mine in North America is in California and ships its concentrate to China for further processing. 

"While there are several early-stage projects in North America, none are as advanced or as well located as Wicheeda," he wrote. "We expect that several downstream players in the space are watching developments closely."

Ownership and Share Structure

About 5% of the company's stock is owned by insiders, including Director Andrew S. Burgess with 1.63% or 4.18 million shares, and CEO Taylor with 0.98% or 2.5 million shares, according to Reuters.

About 11% of the company is owned by institutional entities, including RCF Opportunities Fund II LP, with 10%, the company said. The rest, 84%, is retail.

Defense Metals has a market cap of CA$45.69 million with 255.78 million shares outstanding, 212.98 million of them free floating. It trades in a 52-week range of CA$0.39 and CA$0.165.

Watch Defense Metals President Luisa Moreno's interview with CNBC here.

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Important Disclosures:

  1.  Defense Metals Corp. is a billboard sponsor of Streetwise Reports and pays SWR a monthly sponsorship fee between US$4,000 and US$5,000.
  2. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Defense Metals Corp.
  3. Steve Sobek wrote this article for Streetwise Reports LLC and provides services to Streetwise Reports as an employee. 
  4. The article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.

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