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A financing journey

November 9, 2012
A financing journey
Nochane Rousseau & Peter Cashin

Quest Rare Minerals Ltd. is a Canadian-based, exploration company focused on the identification and discovery of new world class rare earth deposit opportunities. Quest is currently advancing several rare earth projects in Canada’s premier rare earth exploration areas in the north-eastern part of Quebec.

In an interview with Peter Cashin, CEO of Quest Rare Minerals, Nochane Rousseau, PwC’s Montreal Mining and Plan Nord Initiative Leader, discusses Quest’s financing journey, as Peter seeks to move the company from exploration to development.

Nochane: In 2011, Quest Rare Minerals successfully listed on the NYSE MKT. What spurred this decision?

Peter: We are defining an asset - we wanted to expand our investor asset base and knew many of our initial seed investors were American. We had to satisfy and cater to a much larger market, because I was looking past the current window and saying we will need American investors and investment houses down the road once we start getting into project financing. A lot of US money managers - big money managers - won’t touch a foreign issuer.

Nochane: What advice do you have for junior mining companies looking to pursue a dual listing?

Peter: If you go to the US markets you have to make darn sure the asset you bring to bear is solid and it has appeal to US investors. Quest Rare Minerals’ differentiator is our exposure to heavy rare earths. Our property is world class and in a low geo-political risk region.

You have to balance costs and governance considerations with what you know will have a physical impact on liquidity. There is a lot of due diligence requirements in the listing process, and that provides the additional level of satisfaction and comfort to American investors. As a result, we decided [a dual listing] was a reasonable move on the part of the corporation.

I think most companies make the decision to list on a foreign exchange on the basis of liquidity, and broadening their scope and exposure. Certainly from our perspective, the United States market has a vested interest in rare earth opportunities, because their high tech industries and military are extremely dependent on rare earths.

Nochane: You made the decision in 2012, to move Quest Rare Minerals to the main board – TSX – before you were in the development stage. What was the motivator behind this decision?

Peter: After having listed on the NYSE MKT, it was natural to evolve and graduate from the Venture to the major board. Even Canadian money managers, as well as international investors, view very favourably the graduation effort required by companies who list on the main board, such as the additional corporate governance requirements and due diligence expectations.

Liquidity was important, the expansion of our shareholder base and the additional support we have from the principal markets were important drivers behind our decision to graduate.

Nochane: Have you been able to observe those benefits?

Peter: It is a double-edge sword, in that in good times when you have got a very broad investor base it is beneficial. On the positive side it provides you with lots ofliquidity. When the markets dry up, there is the discomfort of seeing people saying, “I am up on the equity position it’s time to sell”. The human reaction is to sell the things that you are ahead on, and hold on to your bad performing stocks. So you see a lot of selling pressure, but then you have liquidity on the sell side, which is not discomforting.

What I think happened in our case is the fact we had a significant amount of capital on our balance sheet. Our working capital position was very strong. It allowed me the comfort that we could take the long-term view of developing the asset without having to go to the equity markets.

Nochane: What about strategic partnerships? Do they factor into your strategy for acquiring the financing needed to develop your project?

Peter: We are open to strategic partners, but looking still for independence to add value. Higher purities are where a lot of the value lies, in terms of our project.

In Quest’s situation, we have to go and market a commodity that is not traded transparently. Rare earths are non-market tradable. This means we have to break in through the marketing network to try to sell our product. We can either do it ourselves and assume all the risks along the way or we can partially de-risk the project by getting a strategic partner. The strategic partner would have separation technology in their business model and have their marketing networks well established.

Ultimately, a strategic partner would be able to enhance our efforts, accelerate it, and optimize what we are currently trying to do on the basis of their experience.

Nochane: The Canadian mining industry has seen an increased interest from foreign investors, specifically Chinese investors. What’s your advice for juniors looking to strike a financing arrangement with Chinese investors?

Peter: China is a very old, mature, well developed society. You have to be patient. They don’t operate in the same fashion as North Americans, in that deals have to happen quickly. You have to take a much different approach when working with Asian partners. Just take your time, and be prepared to invest heavily. It is expensive to go over there and market. I find that they are very honest business people and I would look forward to have Asian investors associated with this project.

Nochane: With the caveat that the new Quebec government will not substantially change the terms of Plan Nord, do you see this initiative significantly benefiting the development of your project?

Peter: As you stated, it all depends what the new government will do with Plan Nord. When it was originally presented to us, I questioned if it would have a role in our development. However, that being said, I distinctly remember John Charest, during PDAC (Prospectors and Developers Association of Canada) last March saying, Plan Nord is for opportunities North of the 49th parallel but there will be some value shared in the south.

We would be interested in the shared value in the south if we were to develop a separation facility. Location is an important consideration for any separation facility. Separation facilities are run by highly technical staff – scientists, PhDs, technicians – it would be very difficult attracting that type of person into the far north of Quebec.

A separation facility and associated spin-off business would generate many more jobs than the mine itself –it would be advantageous for the Quebec government to have the separation facility located in Quebec. My sales pitch to Quebec would be, “I can give you 200 jobs at the mine site or we can develop a processing plant, which could stimulate manufacturing and new expertise that would lead to many, many more jobs in Quebec”.

Quebec sees the value of the mining industry and that mining contributes to 20% of Canada’s GDP – do you really want to push that investment away with stricter guidelines or by not listening to the needs of miners interested in investing in Quebec?

Nochane: Is there anything else that you would like to share about your company’s growth story or the rare earths sector?

Peter: Rare earths is a brand new sector. It’s all new and very complex. I think the complexity of the sector makes it that much more exciting than convention metals. I truly believe everything that we are doing ourselves and that the rest of the players in the rare earths sector is – well – we are all trail blazers. We are creating a brand new economic sector and that is exciting.

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