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Monday, January 30, 2012

Hallgarten & Company 60 Madison Ave New York, NY 10010 T 973-889-1136

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CompanyCompanyCompanyCompany Initiating Coverage

Christopher Ecclestone [email protected]

Northern Minerals (NTU.ax) Strategy: Long

FY10 FY11e FY12e

Price (AUD) 0.49$ Consensus EPS n/a n/a

12-Month Target Price (AUD) 1.00$ Hallgarten EPS (0.03)$ (0.03)$

Upside to Target 104.1% Actual EPS ($0.036)

12mth hi-low AUD $0.36 -$1.08 P/E n/a n/a n/a

Market Cap (AUD mn) 86.0$

Shares Outstanding (mns) 175.5 Dividend 0.00 0.00 0.00

Fully diluted (mns) 205.0 Yield 0.0% 0.0% 0.0%

Key Metrics


Portfolio Investment Strategy 6

Northern Minerals Xenotime – A Better Class of REE Mineralisation

+ Northern Minerals is the prime point of exposure to the Medium and Heavy REE-rich

mineralization Xenotime

+ Largely Xenotime mineralisation – rich in yttrium (60-65%) and dysprosium (8-12%)

+ Straightforward metallurgy – >40% concentrate via simple processing; crush, grind,

magnetic separation and flotation

+ The company has two projects in the far north of Western Australia

+ Provisional capex for the processing costs are less than US$90mn

+ Lynas is a notable shareholder with a 7.6% stake

+ Upcoming option expiries should bring some capital to maintain program for 2012

The Rare Earth boom has ended - making financing much tougher and leaving investors

somewhat shell-shocked

The largest output will be Yttrium, which has had excellent prices since the Chinese price

squeeze but has not been a “big ticket” REE in the past

Rare Earths – the soufflé breathes it last

The Rare Earths space has had more revivals than the Sound of Music. Over the last 18 months this “go-

go” corner of the mining world has had it’s ups and downs with several of the downtrends tempted

ourselves and others to call an end to the boom. This process was aided by the Chinese providing a

consistent stream of bad (which means good) news on the intentions and machinations in the Rare

Earth markets. The soufflé now though has failed to rise for the umpteenth time. Partly this is due to

the Chinese staging a retreat from their hard-line on REE exports though partly it was a result of the

sheer over-promotion of the space.

The bulk of REE investors could not remain rubes indefinitely. We had thought though that the REE

space would deflate in isolation but unfortunately for the players the sub-sector has gone into eclipse at

exactly the same time as the broader mining market has entered a vale of misery. This means that the

good and the bad have been flattened by the retreat in sentiment. If the financing environment for the

mining space is poor then for REE it borders on the diabolical.

Our focus has narrowed even further from the “might survive” category to the “will survive” category

which consists for us of a mere five stocks out of the over 200 contenders. We count Northern Minerals

as one of the survivors. Its mineralization, Xenotime, is the “thinking man’s REE mineralization”.

Xenotime

In the film, “The Graduate”, the unworldly character Benjamin (played by Dustin Hoffman) is told at the

cocktail party that there is one word that he should know and that word is “plastics”. We are not sure in



light of plastic’s progress over the last 40 years whether that would have been the best of tips. However

in the Rare Earth space we have been convinced for some time that the word is “Xenotime” and this is

what arouses our interest in Northern Minerals, the only Xenotime player of substance in the heavily

overcrowded REE space.

The mineral in question is a REE phosphate mineral, whose major component is yttrium orthophosphate

(YPO4). The rare earths dysprosium, erbium, terbium, and ytterbium, and metal elements like thorium

and uranium (all replacing yttrium) are the expressive secondary components of xenotime. Due to

uranium and thorium impurities, some xenotime specimens may be weakly to strongly radioactive.

Xenotime is used chiefly as a source of yttrium and heavy lanthanide metals (dysprosium, ytterbium,

erbium, and gadolinium). Occasionally, gemstones are also cut from the finer xenotime crystals.

The etymology of the name xenotime is from the Greek words "κευός vain and τιμή honor because the

yttrium contained within it was first thought to be a new element. In some versions, the original name

of the mineral was "kenotime", but due to a misprint, the "k" became an "x", and the change stuck.

“Xeno” means strange or foreign in Greek, so the error was somewhat fortuitous as well.

Xenotime is typically translucent to opaque (rarely transparent) in shades of brown to brownish yellow

(most common), but also reddish to greenish brown and gray. Its crystal system, may lead to some

confusion with zircon (ZrSiO4), that a similar crystal structure and with which xenotime may sometimes

occur.

Occurring as a minor accessory mineral, xenotime is found in pegmatites and other igneous rocks, as

well as gneisses rich in mica and quartz.

Prior to Northern Mineral’s discovery at Brown’s Range, the main occurrences of note of Xenotime were

at Hidra (Hitterø), Flekkefjord, Vest-Agder, Norway (the mineral first being described in 1832 from an

occurrence at the latter location). Other notable localities include Arendal and Tvedestrand in Norway,

in Brazil at Novo Horizonte, São Paulo, Novo Horizonte, Bahia, and Minas Gerais and in Madagascar. In

the US, California, Colorado, Georgia, North Carolina and New Hampshire have occurences.

The beauty of Xenotime is the mix of REE in the mineral. The lanthanide content is typical of "yttrium

earth" minerals, and runs about two-thirds yttrium, with the remainder being mostly the heavy and

medium lanthanides, where the even-numbered lanthanides (such as Gd, Dy, Er, or Yb) each being

present at about the 5% level, and the odd-numbered lanthanides (such as Tb, Ho, Tm, Lu) each being

present at about the 1% level. Dysprosium is usually the most abundant of the even numbered heavies,

and holmium is the most abundant of the odd numbered heavies.

The relevance of this…

As is starting to become well-known, with most rare earth mineralisations one must take on a

preponderance of the abundant REEs (Cerium and Lanthanum) to get to the more valuable rarer Rare

Earths that appear in much smaller proportions. In the case of YPO4, instead one is encountering

phosphate (which has a market in fertilizers), Yttrium (a rare earth not always found in standard REE

depsoits because it lies outside the Lanthanide series) and then a preponderance of the more attractive

Heavy Rare Earths and obscurer Light Rare Earths.



As is also (now) well known there are no shortcuts in treating the REE minerals that the bulk of

companies have so far discovered. One cannot “send the Cerium to the tails”. One must process out

each REE in sequence in a very elaborate and costly process. Not having the “rubbish” REEs of Cerium

and Lanthanum to an appreciable level makes Xenotime more valuable and with less processing cost per

tonne of rock.

Again the old adage that a picture tells a thousand words comes into play. Above can be seen the REE

breakdown of NTU’s Brown’s Range deposit against Lynas’ Mt Weld (which could be regarded as broadly

similar to Molycorp’s Mountain Pass). As can be seen

the Xenotime at Brown’s Range is largely the heavy

Rare Earths, a wedge of the seldom spoken of

medium REE (Samarium and Gadolinium) and a

smattering of LREE. Mt Weld is almost exclusively

LREE and like Molycorp’s mine, has a small amount of

the medium REE, Europium.

Current production is largely the small tonnages of

xenotime sand that are recovered, in association with

tin mining in Malaysia. It is also mined in Guangdong

province in China. The metal mix of these two

sources in shown in that table at the right:

As can be noted, the low value Light Rare Earths,

Lanthanum and Cerium appear in minimal amounts

in Xenotime production.

Probing the Far North-West

The two main REE prospects of Northern Minerals are in the far north of Australia’s largest state,

Western Australia. The map on the previous page shows their location. The Kimberley district of

Western Australia has primarily been known for diamond mining in recent times.

Metal Mix - Current Xenotime Producers

Lahat Perak Guangdong

Malaysia China

La2O3 1.20% 1.20%

CeO2 3.10% 3%

Pr6O11 0.50% 0.60%

Nd2O3 1.60% 3.50%

Sm2O3 1.10% 2.20%

Eu2O3 trace 0.20%

Gd2O3 3.50% 5%

Tb4O7 0.90% 1.20%

Dy2O3 8.30% 9.10%

Y2O3 61% 59.30%

Total 81.20% 85.30%

Source: IMCOA



The Browns Range project

This 100%-owned property formerly was part of the Gardiner-Tanami Project (which was the focus when

NTU was a uranium explorer), but since 2009 has become a focus for its HREE exploration program. The

project consists of four granted exploration licences E80/3547, E80/3548, E80/4393 and E80/4479,

covering an area of 400km2, located adjacent to the WA/Northern Territory border in the Tanami

Desert, approximately 150km south-east of Halls Creek. The company also has permit applications for

most of the rest of the Brown’s Range Dome in its larger manifestation across the border in the

Northern Territory. In December 2011, it signed a JV with Toro Energy for the non-uranium rights over

several very large concessions (1,403 sq kms) on the Dome.

Source: Northern Minerals

The hydrothermal xenotime mineralisation targets at Browns Range are shown on the map on the

preceding page. They sit on the Western extremities of a geological formation known as the Brown’s

Range Dome, a Paleoproterozoic dome formed by a granitic core intruding the Paleoproterozoic

“Browns Range Metamorphics” (meta-arkoses, feldspathic metasandstones and schists). Xenotime was

first identified in the Browns Range area in the 1980s by PNC Exploration while exploring for uranium.

PNC tested one of the larger quartz-xenotime veins (10-30cm wide, 15m long) by costeaning and

shallow drilling and obtained results up to 16% Yttrium, 0.2% Uranium, 0.5% light REE (LREE) and 12%

HREE.



Since changing tack to the pursuit of Rare Earths, Northern Minerals has conducted a sizeable

exploration program at Browns Range in 2011, including a 166 hole RC drilling campaign. To date, four

rare earth prospects with xenotime mineralisation have been identified within the project area -

Wolverine, Gambit, Area 5 and Area 5 North prospects – all shown on the preceding map. The

mineralisation at Browns Range is characterised by a dominance of Heavy Rare Earths (>80% HREE) as

well as low levels of Uranium and Thorium.

The drilling in 2011 showed high-grade HREE mineralisation at all four prospects, with significant widths.

Examples of some intersections at the Wolverine prospect included:

• 33m @ 1.53% TREO (1,470ppm Dy2O3) from 54m depth

• 41m @ 1.01% TREO (881ppm Dy2O3) from 24m depth

• 11m @ 1.89% TREO (1,806ppm Dy2O3) from 50m depth

The metallurgical test work was conducted in 2010, by the Perth-based metallurgical consultants

Nagrom, on surface samples. The results from a floatation test have reported an 89.5% recovery of

Yttrium (Y2O3). The test work completed to date indicates the ore is amenable to floatation beneficiation

techniques, which would represent a considerably lower cost of extraction than most other projects

currently being touted around the markets.

Northern Minerals has a diamond drilling program planned for the second half of 2011. The proposed

1500 metre program will help determine the orientations of mineralised geological structures,

facilitating the definition of mineralised zones and their geometries. It will also include a number of

deeper holes, to test the depth extent of mineralisation at the Gambit and Wolverine prospects.

The diamond drill program will also include sampling of mineralised zones to be used for metallurgical

test work. Previous metallurgical testing has indicated the mineralisation will be relatively easy to

process, and is capable of producing a low cost, high grade concentrate.

Metallurgical beneficiation studies were completed by Nagrom with surface rock chip samples from

Wolverine, Gambit and Area 5 North. These have reported a maximum Yttrium recovery of 89.5% and a

maximum concentration of 42%

In November of 2011 a bulk sample of three tonnes (comprised of nine composite RC samples) from

Brown’s Range was submitted to Nagrom for metallurgical testing, essentially to determine the

economic cut-off grade. The nine samples comprise of three samples from each of the main Browns

Range prospects - Wolverine, Gambit and Area 5 at cut-off grades of 0.25%, 0.50% and 1.0%. These

results should be with the company in the next six weeks.

John Galt

The John Galt prospect is located within tenement E80/4298 which covers an area of 65 km². The

project area is situated in the East Kimberley region of Western Australia, approximately 200 km south

of Kununurra (28 km south of Warmun) and 35 km from the Great Northern Highway.



John Galt mineralisation is hosted by quartz sandstone of the Lower Proterozoic Red Rock Beds, which

outcrop as a wedge between two major regional faults, the NNE-trending Halls Creek Fault and the NE-

trending Osmond Fault. The target here is hydrothermal xenotime mineralisation similar to that

discovered at the Browns Range Project.

Heavy Rare Earth Element (HREE) mineralisation was first discovered at the John Galt Project in 1971

following an airborne gamma spectrometer survey. Follow-up ground radiometric surveys, sampling and

trenching identified xenotime-hosted mineralisation at three different zones, (Main Zone, Gadolin and

Ytterby – shown in the map on the following page) located approximately 600m apart, with rock chip

sampling returning assays up to 53.5% Total Rare Earth Oxides (TREO).


Historical sampling and metallurgical studies identified the John Galt mineralisation as having significant

concentrations of dysprosium, erbium and gadolinium, as well as other heavy rare earths from terbium

through to lutetium.

The Main Zone was partially tested with nine diamond holes (503m) back in 1973. These returned four

intercepts of greater than 15% TREO. Significant historic drilling results include:

• 2.05m @ 5.98% TREO from 6.50m in DH1

• 3.90m @ 6.30% TREO from 9.10m in DH2

• 3.48m @ 3.48% TREO from 102.60m in DH8



• 9.80m @ 1.58% TREO from 6.35m in DH9

No further drilling or significant field work has been carried out on the project since the drilling

programme was completed in 1973.

The presence of mineralised xenotime

veins at the base of the cliff (shown in

the cross-section at the left) beneath

the John Galt Main Zone mineralised

zone, together with the lower drill

intercept in DH8, lead NTU’s geologist

to believe in the extension of

mineralisation below the cliff/scree

contact. John Galt would appear to

represent a good opportunity to fast-

track production of a mineral

concentrate on the basis of the volume

of scree material available that could

easily be loaded by basic mining

techniques and transported to a

concentrator close by.

Northern Minerals has completed an

in-depth analysis of historical data

from the John Galt Project.

Assessment of assay data from both

rock chip and drill core samples which

were assayed for a suite of REE shows

the presence of high value HREE

(average of 94% of TREO is HREE),

including on average 67% Yttrium and

9% Dysprosium of TREO.


Work at John Galt was temporarily suspended last year due to flooding earlier in the year resulting in

the Warmun aboriginal community being washed out and having their community rebuilt. Heritage

approvals were granted in late November and within two days the company’s geologists were on the

ground. Two 30kg samples were sent to Nagrom for analysis, giving strong results with over 90%

recovery. In some of the samples the xenotime mineralisation is visible to the eye.




Northern Minerals has completed a high resolution airborne magnetic and radiometric survey over the

entire project area. This was followed by reconnaissance geological mapping and rock chip sampling in

late 2011. The company has a significant exploration program planned for John Galt in 2012 including a

first phase drilling program planned for the second half of 2012. This will be preceded by geological

mapping, geochemical soil sampling, ground radiometric surveys and ranking of drill targets.

Northern Minerals has an option agreement with private company, Arnhem Resources Pty Ltd, giving

NTU the exclusive right to purchase 100% of the project.

Processing – in the realms of the possible

The severe credibility gap in the REE space over the last year has opened up over three issues:

• Accessibility – basically some of the Canadian projects are so isolated that they cannot be viable

under even the most rosy price scenarios

• Financing – capex numbers that drift from the low hundreds of millions of dollars into the

billions

• Processing – that plausible and cost-effective processing exists for some of the complex

mineralisations with which the REEs are associated.

While some companies can point to good access, a few can also claim to have ways to raise the money

required, there remain very few that can talk a cogent gathering of sentences about how they intend to

process their minerals AND do it profitably. The usual glib response to this question is that the

technologies exist. The speaker then glazes over, looks into the distance and says that they are not

metallurgists. With that, the conversation and questioning ends.



While the audience initially knew nothing about even the REE basics, the basics are now taken as a given

and the corporate presentations have run to the end of the rails on processing platitudes. As we have

said ad nauseam before, REE are about “chemistry, chemistry and chemistry”. That is all one needs to

know and if one doesn’t have the chemistry right then grade, sheer quantity, a nearby highway or a

friendly Japanese offtaker won’t save a project from an ignominious fate.

When we first stumbled upon Xenotime it wasn’t via any company’s presentation it was rather through

some reading on exotic REE mineralizations. How could it be that there was a REE mineralization not

massively overweighted to Lanthanum and Cerium? Quite straightforward indeed. If all one hears is that

the world is flat and one does not travel then it is easy to believe what one is told. All the REE companies

had deposits that were LREE-heavy (to mix a metaphor) and thus they would have it that La and Ce were

necessary evils (but then make an aside that they had less of them than the next presenter). With

Xenotime one scarcely has these “necessary evils”, indeed they represent the type of percentages in a

Xenotime material that Samarium might represent in a monazite or bastnasite.



As mentioned earlier metallurgical beneficiation studies were completed by Nagrom with surface rock

chip samples from Wolverine, Gambit and Area 5 North which reported a maximum Yttrium recovery of

89.5% and a maximum concentration of 42%

Test work has focused to date on recovery and concentrate grade utilising a simple flow sheet, which

has yet to be optimized, and thus remains a work in progress. The consulting firm, Bateman, have

supplied capital estimates based on the flowsheet developed by Nagrom. This comes out at US$88.4

million to produce 3,000 tpa REO in a mineral concentrate of 30%-40% TREO. This capex includes

upgrade of infrastructure (roads to Wyndham), power and water. Power will be the most significant

input and a 5MW power generation facility is included in the capex. With respect to mining, this will be

contracted out so the removal of overburden is covered by the mining contractor, essentially covered by

OPEX.

With the return of the bulk sample results from Nagrom in the next two months, the company shall have

samples available for assessment by potential offtakers at this point. The company contends that there

is substantial interest and the challenge will be who to share the sample with.

It is also useful to address the question of radioactivity which has been queried by numerous parties.

The company claims that, from preliminary work, it won't be an issue and NTU have engaged a company

to assess radioactivity issues and develop the internal expertise to monitor this metric.

One of the more questionable claims we noted in the company’s material was the use of Xenotime as a

potential additive to standard bastnasite/monazite feed as a sweetener to ‘heavies’. To which our

response was “why bother?”.

Yttrium and the REE Space

When the investment community first got wind of China’s shutdown of REE exports there was a mad

rush to become

informed on metals

that were definitely not

a well-known subject

even in geological

circles. Most mineral

testing didn’t bother to

measure these grades,

except in the case of

some uranium

operators who saw it as

a potential by-product.

The Rare Earth

elements (or rare earth

metals) are a collection

of seventeen chemical

elements in the periodic



table, namely Scandium, Yttrium, and the fifteen lanthanoids. Scandium and Yttrium are often

considered to also be Rare Earths since they tend to occur in the same ore deposits as the lanthanoids

and exhibit similar chemical properties.

The term "rare earth" arises from the rare earth minerals from which they were first isolated, which

were uncommon oxide-type minerals (earths) found in Gadolinite extracted from one mine in the village

of Ytterby, Sweden. The first REE were identified in the late 18th century. The expansion of science and

enquiry during the Industrial Revolution filled out the range of metals that were categorized as Rarre

Earths.

In general the properties of the group are:

� Silvery-white metals that tarnish when exposed to air, thereby forming their oxides

� Burns easily in air; at elevated temperatures many rare earths ignite and burn vigorously

� Relatively soft metals; hardness increases with higher atomic numbers

� Many REE compounds fluoresce strongly under ultraviolet light

� Reacts with water to liberate hydrogen gas, slowly in cold/quickly upon heating

� Reacts with dilute acid to release hydrogen gas rapidly at room temperature

� Most REE compounds are strongly paramagnetic

� High melting and boiling points

The table below shows the Lathanide metals and their prime applications at the current time (those

shaded in blue being the most prevalent in Xenotime minerlaisations).

Symbol Name Usage

57 La Lanthanum High refractive index glass, flint, hydrogen storage, battery-

electrode, camera lens

58 Ce Cerium chemical oxidising agent, polishing powder, yellow colors in glass

and ceramics, catalyst for Self-cleaning oven etc.

59 Pr Praseodymium Rare-earth magnets, laser, green colors in glass and ceramics, flint

60 Nd Neodymium Rare-earth magnets, laser, violet colors in glass and ceramics,

ceramic capacitor

61 Pm Promethium Nuclear battery

62 Sm Samarium Rare-earth magnets, Laser, neutron capture, maser

63 Eu Europium Red and blue phosphors, laser, mercury-vapor lamp

64 Gd Gadolinium Rare-earth magnets, high refractive index glass or garnets, laser, x-

ray tube, computer memory, neutron capture

65 Tb Terbium Green phosphors, laser, fluorescent lamp

66 Dy Dysprosium Rare-earth magnets, laser,

67 Ho Holmium Laser

68 Er Erbium Laser, vanadium steel

69 Tm Thulium

70 Yb Ytterbium Infrared Laser, chemical reducing agent

71 Lu Lutetium



Yttrium is not shown in the table above as it does not figure in the Lanthanide series (nor does

Scandium). The most important use of Yttrium is in making phosphors, such as the red ones used in

television set cathode ray tube (CRT) displays and in LEDs. Other uses include the production of

electrodes, electrolytes, electronic filters, lasers and superconductors; various medical applications; and

as traces in various materials to enhance their properties. According to IMCOA, Yttrium is the fourth

most used REE (after, in order, Lanthanum, Cerium and Neodymium) with a share of around 7.5% of

total REE demand.

The Light Rare Earths have been largely referred to as those from Lanthanum to Samarium, with the

Heavy Rare Earths being the rest. However, we have seen Europium classified as a LREE. This reminds us

of two shoppers in a tug of war over a sweater they want to buy in a bargain basement sale. Everyone

wants Europium in their camp due to its “big-ticket” price irrespective of whether it ever makes up a

meaningful part of a revenue stream from a REE mine. Historically however REEs were divided into three

groups and NTU prefers to use this breakdown as it has largely Medium and Heavy REE in its suite of

metals.

The principal sources of rare earth elements being touted by the bulk of REE companies are the minerals

bastnäsite and monazite. Loparite is the source (from Russian mines) for the Silmet plant and the

lateritic ion-adsorption clays from China are the virtual magic elixir of the industry being seemingly

“easy” both on the mining and processing front. Scant mention is made of Xenotime except amongst the

cognoscenti. This is not surprising as NTU is the only company we know that has it.

Despite their high relative abundance, rare earth minerals are more difficult to extract from the host

mineralisations and then process into concentrates/oxides than equivalent sources of transition metals,

making the rare earth elements relatively expensive. Their industrial use was very limited until efficient

separation techniques were developed, such as ion exchange, fractional crystallization and liquid-liquid

extraction during the late 1950s and early 1960s.

Evolution of dominance

The chart on the following page pretty much tells the history of REE mining in recent times. As the REE

metals did not have much commercial application until recent decades the mining was sporadic and

scarcely profitable. From the late 19th century until the rise of the US as a producer the main source of

those REE in greatest use was Brazil where monazite sands were the source from which it was extracted.

To show how low-tech REE applications were for a long time the main use of the elements was

employing them mainly in refractory materials of which the main one was ceramic “candles/mantles”

for old-fashioned gas heating devices. Most of the other REE had little work done on them until the

rising wave of new technologies started to appear in recent decades.

The era of US dominance is described as the Mountain Pass era that pretty much sums up the total

dominance that this mine had over US production. While the chart shows this mine starting up in the

mid-1960s, it actually came into production in 1952. It is clear that it also made up to 40% of global

production during that period. It was owned for much of that time by Union Oil Co (later Unocal) and

this eventually was taken over by Chevron.



Source: USGS

The eclipse began from the mid-1980s when China effectively undercut the prices of most other

producers and sent production spiraling down around the world to the current state of affairs. The

important Steenkampskraal mine in South Africa was shut down decades ago and the Mountain Pass

operation was mothballed in 2002. Ex-CIS mines mainly in Kyrgyzistan, Estonia and the Kola Peninsula in

Russia shut after the breakdown of the old Soviet empire, with one Loparite mine surviving in Russia.

The ongoing non-Chinese output was from sands in India, as a tin-mining by-product in Malaysia and

some desultory production from the Brazilian national nuclear authority. At times in the more distant

past, Sweden and Finland had been small producers. Most reports put the Chinese market share in REE

at 93% at the current time but we have seen some reports of 97%.

Home Truths

The already well-documented fact is that Rare Earths aren’t rare, or at least Cerium the main

component of the Lathanide Series is not rare. With the exception of the highly-unstable promethium,

rare earth elements are found in relatively high concentrations in the earth's crust, with cerium being

the 25th most abundant element in the earth's crust at 68 parts per million. In fact there is more Cerium

in the Earth’s crust than there is copper. We would concede though that it does not appear in the same

concentrations as copper does.

Once one gets beyond the basic reality check comes the more nuanced complications of REE. Chief

amongst these are that:

� Heavy rare earths (HREE) may attract a better price than most of the other metals in the group

but they appear in such small quantities that the amount extracted is very small for the amount

mined.

� The real business is in the downstream processing

� Many of the new up-and-comers in the industry in the REE space have uranium and/or thorium

to deal with in their mix

� Many of the projects are years away from production



Dealing with each of these issues we would note that the Light vs Heavy issue is a serious one. Even the

best of REE prospects consist of deposits where the sexiest REE (Europium and Lutetium) appear in such

small quantities (measured in double digit parts per million – ppm) in the metal mix that the amount

extracted is very small for the amount mined. Obviously processing costs are much higher per ounce of

Europium than per ounce of Cerium. Some marketers have led with their price tables and left

commercial reality behind. They see a flat-screen TV and start salivating because they claim that

Europium is a component and that it sells currently for $830 per kg Indubitably true, but the Eu input to

any television is minimal, or else recycling of old cathode ray tubes for their Eu content would be a

viable enterprise.

Thus some Heavy and Medium REE prices are good but the grades, even in the best of prospects, are so

low for the highest priced REE elements that no-one could even vaguely hope to start a mine based

upon Europium grades alone. It is the total mix that matters. The attraction of Xenotime is its

preponderance of Medium and Heavy REE.

This leads us then to the processing. Interestingly the miners (or wannabes) would argue that the prices

are going much higher at some point though they attribute weakness to lower demand due to high

prices. We are more inclined to see the Chinese moving to “discipline the market” by slapping around

the upcoming producers with their recent quota relaxations.

At the moment ore is mined and concentrated at or near the mines but the biggest value-added in the

process is at the quasi-manufacturing phase. This is a phase which Neometals, Molycorp (in a fashion

with Silmet) and Great Western are exposed to but which the other explorers are not. Most of the

budgets we have seen talk of US$200mn plus CAPEX costs for the concentrating and separating process,

largely at the mine. This leaves us wondering whether if prices go up significantly then miners might be

best to get their mines going and sell ore to on-processors who would bear (or have borne already) the

heaviest part of the capex.

We repeat our mantra that the race in REE will not go to the best grades it will go to the mines that are

up and running first. A few sizeable mines going around the world would make the going tougher for

latecomers. Some of the current players may be latecomers if they do not accelerate their mine-build

plans. Northern manages to have a shot in this race because it can fill the slot for Medium and Heavy

Rare Earths than neither Molycorp nor Lynas can do and moreover do it for an affordable capex.

Pricing- the Xenotime “Group”

The largest component in the Xenotime mix is Yttrium so its fortunes will dictate the viability of any

project using this mineral. The chart on the next page (compiled by us from information from IMCOA

and Metal Pages) shows the exponential growth in the Yttrium price in the last few years. In the middle

of the last decade the metal was almost a giveaway at a mere $4 per kg but at one point in 2011 the

oxide was going for $180 per kg. More than any other REE, we see the strongest potential in Y for the

Western producers to take significant market share away from the Chinese. This would be via a

combination of the existing “outside China” share of the Malaysians and the onset of serious volume

output from Northern Mineral’s properties.



IMCOA estimates that the annual demand for Yttrium Oxide in 2015 (with a 20% margin of error either

way) would be 12,750 tpa while the supply would be 11,200 tpa, implying a meaningful deficit.

As for the other REE metals that Xenotime contains (in the John Galt “mix”), the price trend of these has

been:

� Dysprosium Oxide - $50 per kg in 2005 to $980 per kg in 2Q11

� Samarium Oxide - $4.50 per kg in 2005 to $120 per kg in 2Q11

� Terbium Oxide - $325 per kg in 2005 to $1,750 per kg in 2Q11

The prices for Ytterbium and Erbium Oxides remain somewhat opaque to all except industry insiders.

The prices of all of these would have eased back in recent months those as has Yttrium oxide due to the

Chinese machinations with the export quotas.

Management

The company’s non-executive chairman is Kevin Schultz, a geologist and mining engineer from the

Western Australia School of Mines, and a Fellow of the Australasian Institute of Mining and Metallurgy,

has extensive experience in mining and mineral exploration management. His experience ranges across

a variety of mineral commodities including gold, iron ore and uranium.

As Director of Operations for the Uranium Branch exploration division of the Australian Atomic Energy

Commission from 1975-76, he was in charge of four teams of geoscientists involved in exploration in the

Alligator Rivers area in the Northern Territory. He was largely responsible for the discovery of the

Austatom prospect. From 1977-1982, he continued in uranium exploration as Exploration Manager for

Nord Resources Corporation, which had a number of uranium projects in northwest WA and the NT. He

was formerly the Managing Director of Polaris Metals NL, an iron ore explorer.



The Managing Director/CEO is George Bauk who has more than 20 years’ experience in the resources

sector, having worked in both mining operational and corporate roles globally with a variety of

companies including WMC Resources, Arafura Resources (in its uranium focused days) and most

recently, from 2006 to 2009, Indago Resources (formerly Western Metals) as Managing Director.

One of the prime foundations of this company’s credibility is the presence of Dudley Kingsnorth on the

board as a non-executive director. He has long been one of the foremost international experts in the

REE space, with more than 20 years’ experience in the development, evaluation and marketing of Rare

Earth Projects. Prior to his appointment as a Director, he had been consulting to Northern Minerals on

the development of its REE projects in northern Australia. He is the Managing Director of IMCOA (one of

the leading REE consultancies), and editor for the last three Roskill REE Reports.

He has also been involved at a Board and management level with a number of ASX-listed resource

exploration and development companies and during the past three years has also served as a director of

Amex Resources from April 2007 until the current time.

Adrian Griffin, another non-executive director, is an Australian-trained mining professional with

exposure to metal mining and processing throughout the world, he has been involved in the

development of extraction technology and was a pioneer of the lateritic nickel processing industry. He

specialises in mine management and production. He is the former Chief Executive Officer of Dwyka

Diamonds Limited, an AIM- and ASX-listed diamond producer and is currently an executive director of

ASX-listed Ferrum Crescent Limited and a non-executive director of Empire Resources Limited.

Colin McCavana, a non-executive director, has more than 30 years of management experience

worldwide in the earthworks, construction and mining industries. Much of this has been related to

acquisition, development and operation of mining and mineral recovery projects. He is a Fellow of the

Australian Institute of Company Directors and a Member of the Australasian Institute of Mining and

Metallurgy, was formerly the Managing Director of Haddington Resources Limited and a non-executive

director of Polaris Metals NL.

The exploration manager is Robin Wilson. He graduated as a geologist in 1987, and since that time has

held senior exploration positions at Polaris Metals, Tanganyika Gold, Troy Resources and CRA

Exploration. In addition, he spent five years working in oil and gas exploration for Woodside Energy. His

experience covers gold, nickel, copper, REE and uranium projects in Western Australia and Africa.

The commercial manager is Robert Sills, who we previously knew in a similar (sales and operational

planning manager) role at Arafura Resources, one of the other ASX-listed REE explorers. He has

experience in identifying and negotiating global business opportunities in Australia, Asia and Europe,

within the REE industry and other commodities. Through this he has a particularly strong commercial

understanding and business network in some of the key REE Asian markets. He also has experience in

the financial and commercial analysis of global commodity financial trends, supply chain dynamics and

market drivers.

Prior to Ararfura, he was employed in senior commercial roles with Rio Tinto Alcan Limited and Rio Tinto

Diamonds (Argyle Diamonds Limited).



Finances

The current cash position is around $2.6mn, so a financing would seem to be likely in the near future.

The company will be seeking financing from various sources including the equity markets, offtakers and

debt. This includes both up to the DTI to complete the BFS, and afterwards for construction.

The company also has two series of options, both of which are in the money:

• 8.5mn options exercisable at $0.20 expiring 30 Sept 2012

• 12.3mn options exercisable at $0.15 expiring 31 Mar 2012

The latter would bring in just under $2mn.

Risks

The potential risks are:

That the REE space goes into prolonged disinterest and stasis

That the resource does come in with a substantial amount of tonnage to justify the project

Funding difficulties in the short-term

The company being taken out by Lynas (or someone similar) before it gets a chance to maximize

its value

Environmental concerns raise their head (the uranium issue or concerns related to the unique

topographical features of the John Galt outcrop)

Conclusion

The Rare Earth space is not full of happy campers these days. The over-simplification of matters in the

early phases of the REE boom has come back to bit most of the players with the complexities of the

business (particularly the processing) coming back to bite promoters and the investors that followed

them in. In particular the Canadian tendency to have companies run by geologists served few well

because they were able to find deposits (too many in fact) but were unable to articulate the process by

which very complex mineralisations might be turned into a viable product for sale. Is it no coincidence

that the Australian market produced around four REE companies, the London and South African markets

produced none and the Canadian market produced over 200? When one went beyond the easy to find

aspect of “Rare” Earths then one came to the decidedly less easy aspect of what to do with them.

Size and grade became all. A veritable blizzard of conflicting TREOs, REEs, LREEs and HREEs were mixed

in with the individual chemical symbols in an alphabet soup that ultimately has proven inedible and

unpalatable. Xenotime was thus a welcome arrival on the scene, and that fact that only one company

had cottoned on to its attractions helped in blocking out the static from the heaving masses of other REE

wannabes. To mix a metaphor Molycorp and Lynas will be the massive textile mills of the REE space

churning out cotton sheeting by the mile, while Northern Minerals, Great Western and UCore are the

silk-weavers with a specialist output.



The shareholder mix is also worth mentioning as the Australian major in the REE space, Lynas is a

shareholder with 7.6%, while a Chinese group, Conglin Yue with 18% is bumping at the upper limits of

the potential holding without launching a full bid under Australian takeover rules. We also believe that a

major trading house in the REE space has a non-reportable stake.

Northern Minerals is, curiously, more advanced with a production plan than it is with a resource at this

point. It is this factor which seems to have attracted some strong shareholders, such as the Chinese

group and Lynas.

We added Northern Minerals as a Long position to the Model Mining Portfolio back in June of 2011. Our

12-month target price for the holding is AUD$1.00.



Important disclosures I, Christopher Ecclestone, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report. Hallgarten’s Equity Research rating system consists of LONG, SHORT and NEUTRAL recommendations. LONG suggests capital appreciation to our target price during the next twelve months, while SHORT suggests capital depreciation to our target price during the next twelve months. NEUTRAL denotes a stock that is not likely to provide outstanding performance in either direction during the next twelve months, or it is a stock that we do not wish to place a rating on at the present time. Information contained herein is based on sources that we believe to be reliable, but we do not guarantee their accuracy. Prices and opinions concerning the composition of market sectors included in this report reflect the judgments of this date and are subject to change without notice. This report is for information purposes only and is not intended as an offer to sell or as a solicitation to buy securities. Hallgarten & Company or persons associated do not own securities of the securities described herein and may not make purchases or sales within one month, before or after, the publication of this report. Hallgarten policy does not permit any analyst to own shares in any company that he/she covers. Additional information is available upon request. © 2012 Hallgarten & Company, LLC. All rights reserved. Reprints of Hallgarten reports are prohibited without permission. Web access at: Research: www.hallgartenco.com 60 Madison Ave, 6th Floor, New York, NY, 10010

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