Good News From Stans Energy

Position Sold 2/5/2011

As you know, I have owned Stans Energy since June 2010, and so far the investment has done well. Today we got some more good news from the company. Stans announced that it has optioned the chemical processing facility for $5,500,000. This represents a critical step for the company because the hardest part of mining rare earth elements is extracting the minerals from the ore. It can take a company years to solve all of the problems and refine the technique. Furthermore, the company also acquired a rail terminal which will allow it to ship the finished products to Asia. Stans made a point in the press release of mentioning South Korea and Japan as potential destinations for the final product. 

This follows recent news reports that South Korea is interested looking to invest in rare earth mines in Kyrgyzstan. I expect news of a financing agreement to be announced in the next few months, which should elevate Stans Energy into the top-tier of rare earth companies. No other company (except Molycorp) can boast having a past producing mine and a rare earth processing facility where the metallurgy has already been solved. More importantly, Stans Energy is a HREE play compared to Molycorp, which is heavily reliant on LREEs (low value). If you look at the pricing of rare earth elements you will know that HREEs is where the big money will be made.

Regarding the processing facility, it was used previously to process output from Stans' Kutessay II mine back in the days when the Soviets were still around. According to a independent study, most of the equipment (97%) is in either good or satisfactory condition. This means that Stans should be able to keep capital expenditures relatively low (always good for shareholders). However, Stans will need additional capital to get the processing facility ready for operations, especially because they intend to increase capacity.

The only knock against Stans Energy right now is that it still trades on the American pink sheets, which keeps US institutions away from the stock. I would encourage the company to try to get a listing on a US exchange such as the American stock exchange. In fact, I have looked at the listing requirements, and Stans is eligible, so it definitely could be done. This is the only way to open up Stans Energy to large US investors, which would further support the stock price. Currently, US investors only consider Molycorp, Rare earth elements, and Avalon. No one outside of Canada has even heard of Stans Energy, and this needs to change, considering the company's attractive fundamentals and promising future. The cost of listing on an exchange would be minimal compared to the increase in market cap achieved through greater exposure to the investment community. A higher market cap will also allow the company to finance operations while minimizing dilution to shareholders.

Overall, I still like Stans Energy and have no intention of selling my shares.

Black Swan Insights

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My Investment in Stans Energy

Update on Stans Energy

Another Update On Stans Energy

China's Plan To Use Rare Earths As A Weapon

Full Disclosure: I own stock in Stans Energy and am naturally talking my book.

Legal Disclaimer:

I am not an investment advisor and nothing on this site should be interpreted as investment advice. Please consult with your own financial advisor before investing in the stock market or any financial asset. This blog and its author are not responsible or liable for any misstatements and/or losses you might sustain from the content provided. (I know this is a stupid statement, but for legal purposes I have to say it. Thanks)

  

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Good News From Stans Energy

My investment in Stans Energy

UPDATE: Position Sold 2/5/2011

Click Link for Update On Stans Energy Oct. 25, 2010

About Stans Energy

Stans Energy Corp is a Toronto based company focused on developing properties containing Rare Earth Elements (REEs), Uranium, and Associated Metals. Stans owns five mineral properties in Kyrgyzstan, of which Kutessay II is most advanced.

Company Website: StansEnergy.com

Symbol: RUU.V on the Toronto Exchange and STZYF.PK on the american pinksheets.

Investment Thesis

Before I go into the investment reasons for Stans I think I should first discuss the rare earths industry in general. Overall the rare earths industry is in somewhat of a mania thanks to James Dines (major investment newsletter) who pumped the stocks in May 2009. This had the effect of propelling many of these nothing companies 8-10 fold in under 9 months , leaving many of them egregiously overvalued. However, Stans Energy has escaped this mania because the company only acquired their rare earth property in Dec 2009 which benefits investors looking for exposure to rare earths.

With that said lets get to why Stans Energy makes a compelling investment. Instead of going out and exploring for rare earths Stans simply bought an existing mine in Kyrgyzstan called Kutessay II for $855,000 (pretty good deal). This previously producing mine was operated by the Soviet Union between 1960-1991 and made up 80% of total rare earth output. After the fall of the Soviet Union the mine was placed on care and maintenance. It is estimated that the mine was only 1/3rd mined and has potential for expansion through further drilling. The mine produced all 15 rare earth elements (at 65% recovery rate-good for rare earths) and included a good mix of 50% Heavy rare earths (HREE) which are the most economically profitable. Because this was a previously producing mine, there is excellent infrastructure which minimizes the cost to Stans Energy. All necessary roads are there along with a power source and a railway. More importantly Stans has purchased an option to buy the processing mill which was previously used for Kutessay II. This is a major plus for Stans because processing mills are extremely expensive to build from scratch. Stans management has indicated that 3 of the 4 required processing plants are there and in adequate condition. Obviously they will have to spend money to upgrade and enhance some of the facilities but this gives Stans a real advantage over its rare earth competitors.

One major concern regarding Stans Energy is the political turmoil and violence in Kyrgyzstan which does not seem to be going away any time soon. However I do not think this is a major problem for Stans considering the current government is supportive of opening the mine and has not shown any interest in expropriating privately owned assets. Also the violence you hear about on TV is not located anywhere near the mine so the reduces the chances of the mine or processing facility being vandalized. Finally, many members of Stans board and management have important political ties and contacts in Kyrgyzstan which should help them get this mine back into production.

Timeline

For a company which only acquired their property 6 months ago I must say management has been very quick to get the ball moving. The company recently outlined the plan for the next few months which includes completing a JORC resource estimate, underground drift resampling, complete a comprehensive study to discern what it will take to get the mill processing plant up and running, and identify future drilling sites to potentially expand the official resource estimate. Once this is completed the company will go ahead with a feasibility study. Stans goal is to become the first rare earths producer outside of China and because they are only redeveloping an existing mine I think they have a good chance of accomplishing this. As to when the mine will be back into production I do not for sure as the company has not disclosed this fact. However, I would estimate that we could see this mine back into production by the end of 2012.

Management

From what I have observed so far the management team under CEO Robert Mackay is pretty business savvy. After all they were able to get a proven rare earth mine for $855,000.  No doubt the boards extensive Kyrgyzstan political contacts helped the process but it was a great move for shareholders. Furthermore, the company has done an excellent job of recruiting knowledgeable experts in the rare earths sector which should help provide the technical know-how to get this mine back into production. My only complaint is the high share count which is always a problem for junior resource companies (currently 141 million).

Financial Position

There is no question that Stans will need to raise more money which of course means future dilution to shareholders. However this is what happens with junior resource companies and is necessary in order to get the mine into production. The company should not have a problem raising the money the only question is on what terms. The company has approx. 23 million warrants outstanding which should also be a potential source of funding assuming there in the money. My hope when it comes to future capital raising is that the company waits until they complete the JORC estimate in October 2010, which should provide a nice bounce for the stock.

Because of the strategic nature of the deposit I believe the company will be able to arrange an off-take/financing agreement with a user of rare earths. This will dramatically reduce dilution to shareholders and raise the company's profile within the investment community.

Major Investors

For some reason I have not been able to find an ownership list for Stans Energy. However, management has a strong interest in the stock and owns 23% fully diluted. Also, Pinetree Capital owns aprox. 9% of the company.


Summary

Overall Stans Energy represents an attractive investment for investors interested in the rare earths sector but do not want to buy into the high flying stocks. Stans is in my opinion a much lower risk than the other companies because they are not blindly exploring for rare earths but already have a proven mine which requires much less capital to put into production than building a mine from scratch. There is also an upcoming catalyst (approx Sept 2010) when the company will announce their JORC estimate which should confirm historical estimates. While Stans has a lot in its favor there are always potential risks and in small junior resource companies there are in more risks to evaluate. Most people will point to the political problems in Kyrgyzstan but my greatest are of concern is with future dilution and how the company is going to raise all of the money necessary to get the mine into production. However I believe in this case the potential reward greatly out ways the risks and provides investors with an excellent opportunity.

If you want some more information on the company you can check out a presentation by the CEO at an investment conference by clicking here.

Black Swan Insights

Disclosure: 2% of my portfolio is invested in Stans Energy. My basis in the stock is .30 cents.

Legal Disclaimer: I am not an investment advisor and nothing on this site should be interpreted as investment advice. Please consult with your own financial advisor before investing in the stock market or any financial asset. (I know this is a stupid statement but for legal purposes I have to say it. Thanks)

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My investment in Stans Energy