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11 August 2011 Tantalus Rare Earths AG

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FIRST BERLIN Equity Research

TANTALUS RARE EARTHS AG

– OVERVIEW

11 August 2011

RATING: Buy

PRICE TARGET: €95.00

RETURN POTENTIAL: 212.7%

RISK RATING: Speculative

TANTALUS RARE EARTHS AG GERMANY / MINING

Primary Exchange: Frankfurt

Bloomberg symbol: TAE

ISIN: DE000A0SMSL4

COMPANY PROFILE

Tantalus Rare Earths AG, headquartered in Düsseldorf, is a junior German mining company advancing a 300 square kilometre rare earth and special metals exploration project in northwestern Madagascar. The property hosts heavy and light rare earths, tantalum, niobium, zirconium, gallium and hafnium.

TRADING DATA

Closing price (10.08.11) €30.38

Shares outstanding 2.35m

Market capitalisation €71.42m

52-week range €11.90/50.00

Av. vol. (12 months) 1,492

STOCK OVERVIEW

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COMPANY DATA (as of 31 December 2010)

Liquid assets €0.09m

Current assets €0.27m

Intangible assets €0.00m

Total assets €1.56m

Current liabilities €0.03m

Shareholders’ equity €1.49m

SHAREHOLDERS

A NEW PLAYER IN RARE EARTHS EXPLORATION

Tantalus Rare Earths (TRE) is due to present resource estimates on four of its six exploration targets as well as an extraction concept before the end of this year. We believe this newsflow could substantially narrow the gap between the current valuation and our price target. We initiate coverage with a Buy recommendation and a price target of €95.00.

Looking for western champions Chinese producers have secured a near-monopoly position in rare earths in recent years by undercutting western suppliers. A 40% reduction in the Chinese export quota in 2010 sparked an explosion in rare earth prices and has created a clear need for new suppliers. Drilling and pitting results released so far suggest TRE may have the potential to become one of those suppliers.

Resource estimate/extraction concept expected this autumn The company has completed over 13,300 metres of diamond drilling on its hard rock targets and dug 246 pits into the argillaceous laterite (clay) targets. Exploration work is proceeding apace and is expected to suffice for the completion of N1-43-101-compliant resource estimates this autumn. We also expect TRE to present extraction concepts for both the hard rock and argillaceous laterite-hosted resource by the end of the year.

TRE has high tonnage, low grade resource Exploration results recently published by the company indicate that over half the 300km2 concession is covered by rare earth-bearing argillaceous laterites. These results, combined with hard rock drilling numbers published in April and June, suggest a high tonnage, low grade resource.

Radioactivity is low Thorium and uranium content of the resource on the TRE concession is low. TRE should be able to avoid the environmental problems which currently bedevil the Lynas project and afflicted Molycorp’s Mountain Pass property in the past.

Emphasis on more valuable, heavy rare earth elements Exploration results so far have consistently shown that more valuable heavy rare earth oxides account for around 20% of total rare earth oxides on the TRE property. Near-term capacity additions from both Lynas and Molycorp are orientated towards light rare earths.

Fully funded until early 2012/TSX listing planned TRE raised €7.1m in new equity capital during H1 2011 and is fully funded until early 2012. TRE plans a listing on the TSX Venture Exchange in early 2012 with a view to financing a planned processing plant.

Our recommendation is Buy with a price target of €95.00 In our view, lack of both a resource estimate and an extraction concept account for most of the gap between TRE’s current valuation and our price target of €95. We believe that as these issues are addressed over the next four months, the share price will converge on our price target.

Aston Nash/Master Synergy 55.3%

BlueGold Capital Management LLP 11.3%

Other/free float 33.4%

Analyst: Simon Scholes, Tel. +49 (0)30 - 91 68 41 05

INITIATING

COVERAGE


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CONTENTS PAGE

Tantalus Rare Earths AG – overview ......................................................................................................................1

Investment Case............................................................................................................................................................3

Valuation..........................................................................................................................................................................5

SWOT analysis ..............................................................................................................................................................7

Company profile............................................................................................................................................................9

Geology ........................................................................................................................................................................ 10

Historic and current exploration........................................................................................................................... 12

Scheduled presentation of resource estimates .................................................................................................. 15

Accessibility and infrastructure .............................................................................................................................. 15

The world market for rare earths......................................................................................................................... 16

Malagasy politics and mining code ......................................................................................................................... 20

Financial position........................................................................................................................................................ 20

Management ................................................................................................................................................................ 21

Income statement ...................................................................................................................................................... 24

Balance sheet............................................................................................................................................................... 25

First Berlin disclaimer ............................................................................................................................................... 26


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INVESTMENT CASE

Rare earths are strategically important and often have no substitute The world market for rare earth metals is relatively small (market value of US$8bn in 2010), but fast growing and strategically important. There is often no substitute for rare earths in applications in such diverse areas as electric vehicles, wind turbines, consumer electronics, glass, ceramics and metal alloys. Chinese control of the rare earth market (its producers currently cater to over 95% of world demand) has created a need for new suppliers. Tantalus Rare Earths (TRE) has not yet presented a resource estimate or an extraction concept, but drilling and pitting results released so far suggest the company has the potential to become one of those suppliers. Growing demand, shrinking supply Worldwide demand for rare earths in 2010 was approximately 135,000 tonnes split roughly 85:15 between light rare earths and more valuable heavy rare earths which are the focus of TRE’s project. Demand is expected to grow to 215,000 tonnes by 2015. Chinese producers have been able to achieve a dominant position in the rare earths market by undercutting western producers through a combination of lower wage costs and less stringent environmental standards. Since 2005 the Chinese export quota has more than halved from 66,000 tonnes to 28,000 tonnes this year. The reduction in the Chinese export quota has caused rare earth prices to explode. Since 2009 the prices of important heavy rare earths such as terbium oxide and dysprosium oxide have risen by 1,150% and 2,140% respectively. The Chinese export quota was put in place primarily to ensure coverage of growing domestic demand. Given that Chinese rare earth usage continues to grow, relaxation of the Chinese export quota is unlikely. Commodity price moderation likely from mid-decade but decline to 2009 levels unlikely With Chinese supply restrictive and prices high, western producers are bringing on new rare earths capacity. The two largest near-term capacity additions are the Lynas and Molycorp projects detailed in figure 10 which are scheduled to come onstream in 2012. However, both these projects emphasise light rare earths rather than Tantalus’ heavy rare earths specialty. A list of the most advanced heavy rare earths projects is shown in figure 11. Most of these projects are due to come onstream in 2014/2015. High levels of radioactivity place a question mark against the largest of these projects - Greenland Minerals’ Kvanefjeld mine. But it seems likely that new western capacity will cause heavy rare earth prices to decline from 2015. The possibility of a return to 2009 price levels however looks very remote given the likelihood of continued robust demand, restrictions on Chinese supply, rising Chinese wage costs and environmental constraints in the west. High tonnage/low radioactivity resource emphasising heavy rare earths TRE has not yet presented a resource estimate. First resource estimates (for four of the company’s six exploration targets) are scheduled for this autumn. However, conservative interpretation of drilling and pitting results released so far suggest 675m tonnes of rare earth-bearing clays (argillaceous laterites) hosting 135,000 tonnes of heavy rare earths. Significant additional light rare earth and rare metals resources, some of which are hosted in hard rock, are also likely. However, we have not taken these into account in our valuation which is based exclusively on the heavy rare earth resource. We estimate that heavy rare earths account for over 75% of the value of the resources on the TRE concession. The ore on the TRE concession is characterised by low levels of uranium and thorium. This means that TRE is unlikely to encounter the environmental problems currently being faced by Lynas. Low grade offset by easier mining and processing of clays We have modelled an average grade of 0.1% TREO (total rare earth oxides) with HREOs (heavy rare earth oxides) accounting for 20% of TREO. The overall TREO grade is low relative to the other western projects (see figure 11). However, it compares well with the average grades (0.05-0.2% TREO) of the ionic adsorption clay-type rare earth deposits in China. These ionic adsorption clays are currently the second largest source of rare earths in China. Easier mining (the clays are a


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surface resource) and processing offset the low ore grade in China and we expect that this will also be the case on the TRE concession. Resource estimates, extraction concept to push share price to our €95 target. We initiate coverage with a Buy recommendation In our view the gap between the current share price and our price target is primarily attributable to the lack of a NI-43-101-compliant resource estimate and an extraction concept. TRE is scheduled to present first resource estimates (for four of the company’s six exploration targets) as well as an extraction concept by the end of this year. Providing that the resource estimates are at least in line with our assumptions and that the extraction concept is viable, we believe that this newsflow will push the share price towards our price target. Our recommendation is Buy with a price target of €95.


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VALUATION

Lack of resource estimate, extraction concept explain gap between current valuation and potential TRE’s Malagasy project is still at an early stage. Substantial progress has been made in exploration but first resource estimates (for four of the company’s six exploration targets) will not be available until this autumn. In addition the company still needs to present the market with a viable extraction concept. These deficiencies coupled with the current out-of-favour status of junior mining companies have in our view produced a large gap between the current market capitalisation of TRE stock and the potential value of the TRE concession as a producing mine. Near term newsflow will be crucial Figure 1 below shows our enterprise valuation of €219.7m for TRE based on what we believe are conservative assumptions. TRE intends to present resource estimates for four of its six exploration targets as well as an extraction concept by the end of this year. Positive news on these topics could push the stock beyond our price target. Valuation based solely on HREEs within the argillaceous laterites Our valuation concentrates exclusively on the heavy rare earth elements within the argillaceous laterites. We have not considered the light rare earth elements, the rare metals or the hard rock resource. We have taken this approach for several reasons:

1. Accumulated geological information and drilling and pitting results make possible a reasonably well-founded valuation of the rare earth-bearing argillaceous laterite resource even in the absence of an officially sanctioned resource estimate. This is not the case for the hard rock resource.

2. The potential value of an operation mining purely the argillaceous laterites is in our

view well above the market’s current valuation of the firm. Because the argillaceous laterites are a surface resource and therefore easy to mine, any initial production would be likely to focus on them.

3. On the basis of information provided by SRK Exploration Services Ltd. at the end of

2010, we estimate that at current prices heavy rare earths comprise over 75% of the value of the resources on the TRE concession. Given that slated near-term capacity additions from Lynas and Molycorp both emphasise light rare earths, we expect this figure to increase over the next two years. Production from a future TRE mine is likely to emphasise heavy rare earths.

We assume 150km2 of argillaceous laterites….Recently released exploration results (26 July) suggest that over half the concession is covered by rare earth bearing argillaceous laterites. The area of the TRE concession is 300km2. We have assumed an area of 150km2

overlain by argillaceous laterites. …at average 3 metre thickness TRE has so far explored the argillaceous laterites on targets 1, 3 and 4. We estimate the weighted average thickness of the argillaceous laterites for which pitting results have been produced so far is 4 metres. In the absence of a resource estimate we base our valuation on an average thickness of 3 metres. This implies a total volume for the argillaceous laterites of 450 millon metres3. Assuming an average weight per cubic metre of 1.5 tonnes, this implies 675 million tonnes of ore.


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Our valuation based on basket value of US$280/tonne vs. current US$500/tonne We calculate a basket value for TRE’s in situ heavy rare earths based on current commodity prices of US$500 per tonne of ore. We assume that TRE will begin mining in 2015. Over the long term, heavy rare earth prices are likely to be supported by robust demand growth, restrictions on Chinese imports, rising Chinese wages and environmental issues. However, by 2015 at least some of the heavy rare earth projects shown in figure 11 should have started producing and commodity prices are likely to decline. We have used a price of US$280 per tonne of ore throughout an assumed 15 year life for the TRE mine (2015-2030). The US$280 per tonne of ore assumption produces a total value of metal in the ground of US$189bn (€132bn). Valuation based on farm-out agreement and current capital structure Moves by TRE to mine and extract the resource on its concession would require additional financing. As we indicate under the financial position section of our report, we expect TRE to make a capital increase next year in order to finance additional mining equipment and an extraction plant. However, for the sake of simplicity we base our valuation on the assumption that TRE concludes a farm-out agreement. This assumption allows us to base our valuation on the current capital structure. Our valuation is €95 per share We assume that a farm-out agreement would entail royalty payments of 1% of ore value. On the basis of our US$280/tonne ore assumption, this would imply cashflows to TRE over the life of the mine of US$1.89bn. Our enterprise valuation of TRE of US$314.1m is based on discounting this figure by 83% to take account of the following:

1. assumed mine start January 2015 2. assumed 15 year mine life 3. 20% discount rate (reflecting uncertainty as to the whether resource estimates

forthcoming this autumn will support our tonnage and grade assumptions and the validity of our commodity price assumptions).

Our price target of €95 per share is based on adding the current cash balance of €3.5m to our

enterprise valuation of €219.7m.

1.TRE concession area 300,000,000m2

2. Area of concession overlain by rare-earth bearing argillaceous laterities 150,000,000m2

3. Average depth of argillaceous laterites (1. X 2.) 3m4. Volume of argillaceous laterites (2.X 3.) 450,000,000m3

5. Tonne:m3 1.506. Tonnage of argillaceous laterites (4. x 5.) 675,000,0007. Rare earth value per tonne US$2808. In situ rare earth value (6.x 7.) US$189bn9. Aggregate value of 1% royalty stream (1% X 8.) US$1.89bn10. Enterprise valuation derived from 1% royalty st ream discounted US$314.1m/€219.7mby 83% based on following assumptions: a) assumed mine start January 2015b) assumed 15 year mine lifec) 20% discount rated) US$:€ exchange rate: 1.4311. Cash balance August 2011 (€m) €3.5m12. Equity value €223.2m12. Fair value per share (€) 95.0 Figure 1: TRE valuation summary Source: First Berlin


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SWOT ANALYSIS

STRENGTHS

• Current supply shortfall likely to widen further between now and 2013 World

demand for rare earth elements is currently growing at 20,000 tonnes (c. 10%) annually.

Capacity additions are unlikely to match this growth until 2013 at the earliest.

• Project orientated towards more valuable heavy rare earth elements TRE’s project is

orientated towards more valuable heavy rare earth oxides (HREOs). Drilling and pitting results

released so far indicate that HREOs account for around 20% of total rare earth oxides (TREOs).

Comparable figures for the large near-term capacity additions from Lynas and Molycorp are 2%

and 0.5% respectively.

• Very high tonnage, low grade ore body TRE is not scheduled to release an NI 43-101

compliant resource estimate until the autumn. However, recent exploration results indicate that

over half the 300km2 concession is covered by rare earth-bearing argillaceous (clay) laterites.

These results combined with hard rock drilling numbers published in April and June suggest a

very high tonnage, low grade ore body.

• Low radioactivity In keeping with the low grade of the ore body, the presence of radioactive

uranium and thorium is low. This suggests that environmental hurdles will be much lower for

TRE than they are currently for Lynas or were historically at Molycorp’s Mountain Pass site.

WEAKNESSES

• Project is still early stage The TRE project is still at an early stage. The resource estimate

scheduled for the autumn and the presentation of a viable extraction process should raise

confidence in the project and ease future financing.

• Unconventional management structure TRE’s management team consists of eight

persons, COO, Wolfgang Hampel; Chief Administrative Officer, André Klupsch; Executive

Directors Philip Gray, Lee Goldsmith, Paul Loudon, Ivan Murphy, Paul Richards and David Rigoll

(the majority shareholder). There is no named CEO.

OPPORTUNITIES

• Heavy rare earth element deficit may persist for some time The two largest near-

term non-Chinese capacity additions (Lynas and Molycorp) are both orientated towards

generally more abundant, less valuable light rare earth elements. This suggests that the current

deficit in heavy rare earth metals may prove persistent, thereby raising the strategic value of

TRE’s project.

• Memorandum of Understanding with China Non-Ferrous Metals (CNF) could lead

to off-take agreement The Chinese authorities are known to be concerned about a possible

future rare earth supply shortfall to their domestic industry. In order to secure supplies, the

Chinese authorities made an abortive attempt to acquire a majority in Lynas. They later

succeeded in taking a 25% stake in Arafura. CNF signed a MOU with TRE In April. Providing

that REE extraction from TRE’s ore body proves viable, we believe an off-take agreement with

CNF is possible.


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THREATS

• Economic extraction may prove difficult TRE has not yet presented a viable extraction

process. Given the low grade of the ore, development of such a process may prove difficult.

• Malagasy politics are periodically turbulent but current authorities support mining

Malagasy politics since independence from France in 1960 have featured disputed elections and

two coups. The current Head of State, Andry Rajoelina, assumed the title President of the High

Transitional Authority of Madagascar following a military-backed coup in March 2009. A

presidential election was scheduled for 4 May 2011 but has been postponed until the end of the

year. Notwithstanding these irregularities, the current situation is tense but stable. The

authorities are supportive of international mining companies. Besides TRE, Rio Tinto Zinc,

Sherritt International, Diamond Fields International and Jubilee Platinum all have significant

producing mines or exploration projects on Madagascar.


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COMPANY PROFILE

Low grade but high HREO ratio, low radioactivity, high tonnage TRE AG’s head

office is located in Düsseldorf, Germany. The company is listed on the open market segment

of the Frankfurt Stock Exchange. TRE’s main asset is a 300km2 rare earths-tantalum-niobium-

zirconium exploration project located in northwest Madagascar. TRE has identified six initial

targets to be explored. The exploration license is valid for ten years until April 2013 and is

extendable by two three-year periods. The annual cost of the license is US$45,000. The

license was originally acquired by Calibra Resources and Engineers and then transferred to

Zebu Metals in January 2008. TRE acquired the license from Zebu Metals in October 2009.

On the basis of preliminary estimates made by the consultant, SRK Exploration Services Ltd.,

at the end of 2010, we estimate that rare earth oxides would account for around three

quarters of any revenue from the project with the next most significant products - niobium

and tantalum - accounting for 10% and 7% respectively. Drilling results produced so far

suggest the rare earth ore at the Tantalus project is low grade. We estimate an overall figure

of around 0.13% of total rare earth oxides (TREOs). However, this is compensated by a

relatively high ratio of more valuable heavy rare earth oxides (HREOs) to light rare earth

oxides (LREOs) at 20:80, by low levels of radioactive uranium and thorium and also probably

by very high tonnage.

Figure 2: Project location map Source: SRK Exploration Services Ltd.


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MOU with China Non Ferrous Metals The rare earth mineralisation is hosted in both

hard rock and clay (argillaceous laterites). In April TRE signed a memorandum of

understanding with the Chinese company, China Non Ferrous Metals (CNF). CNF controls

China’s second largest rare earth mine complex - the ionic clay deposit in south eastern

China. This property is the world’s largest source of heavy rare earths. CNF has visited the

Tantalus property and is currently analysing samples at its laboratories in China. CNF recently

stated that Tantalus’ rare earth-bearing clays are potentially comparable to the ionic clays in

China.

13,000 metres drilled, 200 pits dug TRE has so far completed around 13,000 metres of

diamond drilling into the hard rock rare earth targets and dug over 200 pits into the

argillaceous laterite (clay) rare earth targets. A N1-43-101 resource estimate is expected to

be ready by this autumn. Beside the work being carried out by CNF, TRE has submitted

samples to further laboratories in Germany. The German laboratories are conducting

testwork with a view to developing an extraction process for the hard rock ore and the

argillaceous laterites based on either leaching or combined gravity separation. The goal is to

recover not only the rare earth phases but also the tantalum, niobium, zirconium and gallium

phases.

GEOLOGY

Alkaline intrusions The TRE property is underlain by unmetamorphosed or weakly

metamorphosed Jurassic sandstones, dolomites and marls of the Isalo Group with a total

thickness of 2,500 metres. Tertiary aged syenites, granites and volcanic rocks of the

Ambohimirahavavy Alkaline Complex (AAC) have intruded into these host rocks in the form

of two ring complexes each of which are roughly 7km in diameter (see figure 3 below). The

two ring complexes are respectively known as the south eastern Ampasibitika Intrusion and

the north-western Tsarabariabe Intrusion and together cover an oval-shaped area of 110km2.

The intrusions are often surrounded by sheeted dykes and sills of granitic composition known

as fasibitikites. The fasibitikites and their surrounding skarns host rare earth elements (REE),

tantalum, niobium, zirconium as well as small amounts of hafnium, tin and uranium

mineralisation.

Mineralisation Styles The two main styles of REE-Tantalum-Niobium-Zirconium-Hafnium

mineralisation on the project are the fasibitikites (sheeted alkaline granitic dykes and sills) and

the argillaceous laterites (REE-bearing clays).


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Figure 3: The Ampasibitika Intrusion and the Tsarabariabe Intrusion Source: SRK Exploration Services Ltd.

Fasibitikites All explorers prior to TRE concentrated on the fasibitikite mineralisation

style. This is primarily documented at the Ampasibitika target but has also been observed and

sampled at the Ambaliha and Befitina East targets (see exploration targets below).The main

REE-bearing minerals are calcium-REE-fluorocarbonates. Calcium-REE-fluorocarbonates are

an important part of the REE-fluorocarbonate family comprising 34 known mineral species

which are the major economic sources of REE. Figure 4 below lists the ore minerals identified

by TRE and previous explorers. Niobium and tantalum mineralisation occurs mainly within the

pyroclore and columbite. Uranium and thorium content of the mineralisation is relatively low

at 44ppm U3O8 and 90ppm Th02.

Figure 4: List of minerals discovered by TRE and previous explorers

Microlite (Ca,Na2Ta2O6(O,OH,F)

Gagarinite NaCaY(F,Cl)6

Pyrochlore (Ca,Na)2Nb2O6(O,OH,F)

Monazite (Ce,La,Nd,Th)PO4

Columbite FeNb2O6

Zircon (Zr,Hf)SiO4

Baddeleyite ZrO2

Bastnaesite (Ce,La)F/CO3

Xenotime YPO4

Source: SRK Exploration Services Ltd.


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Argillaceous laterites REE-bearing argillaceous laterites were discovered on the Befitina

prospect during the 2009 sampling campaign. Then during the bedrock drilling in Target 1

TRE ascertained that the argillaceous laterites overlaying the bedrock, which were on average

7.6m in depth, were also mineralised. In 2011 TRE began pitting work on Target 4, the centre

of the intrusion and 31 km2 in size, and has found that the pits so far tested are all mineralised

as well. Mineralogical chemical tests have shown the presence of discrete secondary REE-

bearing mineral phases formed by intense tropical weathering. These new mineral phases

include REE hydroxides, oxides and baddeleyite (Zr02).

HISTORIC AND CURRENT EXPLORATION

French/Soviet exploration “Peculiar” granitic dykes were first noted near the village of

Ampasibitika in the late 19th century by French geologists. The French mineralogist Lacroix

was the first to describe the niobium-tantalum-zirconium mineralisation in the area in 1922.

Between the 1920’s and 1970’s scientific work was mainly academically motivated. A Soviet

geological mission visited the area during 1988-91. The Soviet team mapped the mineralised

dykes around Ampasibitika which now form target 1 on the TRE concession. It also explored

an additional 10km2 adjacent to this area. Political instability in Madagascar meant that no

exploration work was carried out during the 1990s and early 2000s.

Fugro Airborne Survey In 2008 the then-owners of the property, Zebu Metals Ltd.,

commissioned Fugro Airborne Surveys (FAS) to carry out a helicopter-borne magnetic and

radiometric survey in July. 2,935 line kilometres were flown over four days at a line spacing of

100 metres. A gamma ray spectrometer was used to acquire the radiometric data. This

separately records the amount of radioactivity derived from uranium, thorium and potassium.

Fasibitikite dykes and sills generate distinct radiometric anomalies due to their content of

these radioactive minerals. Radiometric data can therefore be used to locate their

occurrence. The survey identified three main prospects for bedrock mineralisation which

form the first three of the six targets described below and shown in figure 5.

• Target 1- Ampasibitika This target is around 6km long and is located on the

coast to the north east of the Ampasibitika intrusion.

• Target 2 - Ambaliha This target is around 3km long featuring 3 parallel

anomalous strips to the north west of Ampasibitika.

• Target 3 - Befitina features two parallel approximately 3km long zones of minor

dykes and REE mineralised argillaceous laterites to the west and south west of the

Ampasibitika intrusion.

TRE believes that most of the AAC is overlain by REE-bearing argillaceous laterites. The

company therefore views the whole of the area (150-170km2) underlain by the AAC as

prospective for secondary REE mineralisation in the weathering crust. As a first step it has

identified the following target zones.


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• Target 4 – Caldera This is the centre of the Ampasibitika intrusion with a

diameter of approximately 7km and a surface area of around 31km2.

• Target 5 - Ampasibitika South This is the southern 6km long extension of target

1. It may hold primary i.e. bedrock-hosted REE mineralisation as well as REE bearing

argillaceous laterites.

• Target 6 – Antsirabe North This is the area south of the main intrusion with a

surface area of approximately 8.5km2.

Figure 5: TRE’s six exploration targets Source: TRE AG


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40,000 metre drilling program announced in 2010 In the first half of 2010 TRE

announced a 40,000 metre drilling program on the hard rock and argillaceous laterite targets

described above to be completed by the end of 2011. The program comprises 20,000 metres

on target 1 and 10,000 metres on both target 2 and target 3. This program remains in place

but its completion has been put back until the end of 2012 due to delays in 2010 and

enlargement of exploration activity to encompass the argillaceous laterites.

Delays to 2010 drilling program The 2010 drilling program was originally scheduled to

start in April but this was postponed to July due to a longer and stronger rainy season than

usual. This made access to drilling sites difficult. Late deployment of drilling equipment created

further problems. There were delays in obtaining customs clearance for the rigs, some of

which became damaged and had to be repaired. By mid-December 2010 TRE had completed

4,000m of drilling on target 1.

Drilling on target 1 accelerates in 2011 By the end of July 2011 TRE had completed

over 13,300 metres of diamond drilling at target 1 (160 drill cores at 60-130 metres in

length). Results have so far been received for 119 of these drill cores. 72 (61%) of the drill

cores showed significant rare earth mineralisation in the hard rock and 91 (76%) of the cores

showed significant rare earth mineralisation in the overlying argillaceous laterites. TRE plan to

complete up to 7,000 metres of further drilling at target 1 by the end of this year.

Pitting on target 2 has started Pitting at target 2 began in late July. TRE is using man-

portable drill rigs known as window samplers to speed up this process (see figure 6 below).

Figure 6: Use of window sampler on the TRE concession

Source: Simon Scholes; TRE AG


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Results from target 3 clays the best on the concession Results published in April

from two channel-sampled pits revealed that the REE-bearing argillaceous laterites at target 3

contain the highest grade mineralisation of this type on the concession area (an average of

1945 ppm TREO and HREO at 25% of TREO). At the end of June TRE started further pitting

work on the site in order to evaluate the economic potential of this mineralisation. By the last

week of July 79 pits had been completed and work was progressing on a further 22. A total of

450 pits are planned.

First assay results from pitting on target 4 a reconnaissance geochemical soil sampling

survey has indicated that there are REE-bearing argillaceous laterites at target 4. The large

surface area of target 4 (31 km2) means that it has the potential to become one of the

concession’s most important prospects. TRE began a pitting programme on this site in April

2011. By the last week of July 155 pits had been excavated down to maximum depths of 10m.

Another 11 pits are in progress. A total of 365 pits are planned. In late July TRE published

first assay results from target 4 based on samples from 4 pits. These showed an average of

804 ppm TREO and HREO at 20.0% of TREO.

Pitting has just started on target 5 12 pits have been completed on target 5 and 5 are

currently in progress.

Use of window samplers/new hires to speed exploration TRE took delivery of five

man-portable window samplers in early July 2011. The window samplers allow shallow drilling

to a maximum depth of 20 metres. The new devices have been ordered so as to accelerate

exploration of the argillaceous laterites as window sampling will replace pitting in some

instances. TRE hired an additional six junior geologists to assist with this work in early July.

The Group currently employs two senior geologists and twelve junior geologists.

SCHEDULED PRESENTATION OF RESOURCE ESTIMATES

TRE plan to present NI 43-101-compliant resource estimates for four of its six exploration

targets later this year. These are scheduled in the following order: target 1 (argillaceous

laterites), target 4 (argillaceous laterites), target 3 (argillaceous laterites), target 2 (argillaceous

laterites), target 1 (hard rock).

ACCESSIBILITY AND INFRASTRUCTURE

Mine camp at Ankatafa The nearest international airport to the property is on the island

of Nosy Bé. The 40 kilometre strait between Nosy Bé and the property can be crossed by

small boat in about an hour. TRE has constructed a semi-permanent camp on the property

near the village of Ankatafa. This includes tents, kitchens, generators, bathrooms and a small

workshop. There was no pre-existing infrastructure on the property and internet and mobile


16

phone services are intermittent. Movement around the property is either by foot or by 4-4

vehicle over dirt tracks. Vehicular travel along the dirt tracks is very difficult outside of the

dry season. TRE built a track up to the village of Ampasibitika on the north eastern edge of

exploration target 1 in 2010. The group is currently working to improve the track which runs

from the national highway to Antsirabe and on to the camp at Ankatafa. This work is

expected to be completed this Summer.

Lab and sample repository at Ambanja The project’s laboratory and sample repository

is located in a small warehouse in the town of Ambanja. Ambanja is the administrative centre

of the region and has a hospital, banks, restaurants and courier services. Ambanja can be

reached from the camp at Ankatafa either by boat or by 4x4 vehicle. TRE also has an

administrative office in Madagascar’s capital, Antananarivo.

THE WORLD MARKET FOR RARE EARTHS

Small but strategically important and expanding fast The world market for rare

earth elements was worth around US$8bn in 2010 and so is relatively small. However, the

industry is strategically important and expanding fast as REEs are used in several fast growing

high technology applications. In many of these applications there is no substitute for the rare

earth input. Worldwide demand was 135,000 tonnes in 2010, but is expected to climb to

215,000 tonnes by 2015.

Figure 7: Rare earth supply and demand 2004-2014 Source: IMCOA


17

APPLICATIONS

Permanent magnets The largest single application for rare earths is in permanent

magnets. The light weight and strong magnetic force of rare earth permanent magnets have

facilitated the miniaturisation of a host of electronic components. Neodymium is vital to the

production of supermagnets used in hybrid/electric vehicles, wind turbines, industrial motors

and consumer electronics. The addition of terbium or dysprosium allows a neodymium

magnet to resist high temperatures, a key requirement for use in electric cars.

Phosphors for TVs and monitors The next largest application is in phosphors which are

used in all types of TV and monitor (cathode ray, plasma, LCD). Europium, for example is the

source of red phosphor for TVs and computer monitors and has no known substitute.

Metal alloys Rare earth oxides are also used in metal alloys in a variety of different

applications including aerospace, military hardware, hybrid cars, superconductors and

memory chips.

Glass and ceramics The last major application is in glass and ceramics where rare earth

elements are used in colouring and polishing. Cerium is essential in the glass-polishing

industry.

CHEMISTRY

There are 17 rare earth elements - the fifteen lanthanides with atomic numbers from 57

to 71 as well as Scandium and Yttrium. Scandium and Yttrium are also considered rare earth

elements because they have similar characteristics to the lanthanides and are often found in

the same ore deposits. Despite their name, rare earths are actually quite widespread in the

earth’s crust. Cerium for example is about as common as copper. What makes rare earths

elements “rare” is the difficulty of extracting them. Rare earth bearing minerals such as

monazite or bastaensite typically contain several different rare earth metals. The rare earth

elements are chemically very similar. This makes it very difficult to separate them from each

other. As figure 6 below shows, rare earth elements divide into two groups - light rare earths

and heavy rare earths. The heavies are less abundant than the lights and command much

higher prices. The presence of a relatively high proportion of heavy rare earth oxides (20%)

relative to total rare earth oxides on the TRE property is thus very significant.


18

Figure 8: The rare earth elements Source: Lynas Corporation Ltd.

CHINESE SECURE MONOPOLY…AND THEN CUT EXPORT QUOTAS

The Mountain Pass mine in California was the world’s dominant supplier of rare earths

elements from the 1960s until the 1980’s. From the early 1980s on, Chinese producers

started to export ever greater volumes of REE. The Chinese were able to undercut other

countries’ suppliers mainly as a consequence of lower environmental standards. Mountain

Pass shut in 2002 in response to low commodity prices and environmental restrictions. By

2009 over 95% of worldwide rare earth element supply originated in China. From 2005

onward, the Chinese authorities began to reduce REE export quotas. As figure 9 shows, at

first these reductions were fairly gradual, but in 2010 China reduced its export by 40%. This

led to an acute supply shortfall outside China and sparked the sharp rise in REE prices seen

over the past eighteen months. Besides reducing exports the Chinese authorities have also

shown interest in acquiring stakes in overseas producers. In 2009, China Non-Ferrous Metals

CNF), the same company with which TRE has a memorandum of understanding, attempted to

take a majority stake in the Australian REE producer, Lynas. CNF later terminated its

investment after the Australian Foreign Investment Review Board required it to reduce its

stake below 50%. After the approach to Lynas had been rebuffed, another Chinese entity, the

East China Mineral Exploration and Development Bureau, took a 25% stake in Arafura. Along

with Molycorp, Lynas and Arafura are expected to be the first three non-Chinese producers

to bring on new REE capacity.


19

Figure 9: Chinese rare earth export quota 2005-2011

Year RE Export Quota (t) % Change Demand outside Surplus/China (t) Shortfall (t)

2005 65,609 0.0% 48,000 17,6092006 61,821 -6.0% 53,000 8,8212007 59,643 -4.0% 55,000 4,6462008 56,939 -4.5% 54,000 2,939

2009 50,145 -12.0% 25,000 25,145

2010 30,259 -40.0% 53,000 -22,742

2011E 28,184 -6.9% Source: Lynas Corp. Ltd.

Figure 10: Known major non-Chinese rare earth capacity additions

Lynas Lynas Advanced Material Plant scheduled to come online in Q4 2011Full capacity of 11,000 tonnes p.a. rare earth oxides to be reached by end H1 2012

Phase 2 construction entailing further 11,000 tonnes p.a. rare earth oxide scheduled complete Q4 2011. Phase 2 full capacity end H1 2013?

MolycorpCapacity of 19,050 tonnes p.a. rare earth oxide on stream by end 2012Capacity to expand to 40,000 tonnes p.a. rare earth oxide by end 2013

ArafuraCapacity of 19,050 tonnes p.a. rare earth oxide on stream in 2013

Source: companies

Figure 10 above shows the capacity introduction plans of Lynas, Molycorp and Arafura. These

three companies plan to introduce aggregate new capacity of 80,000 tonnes REO during the

period 2012-2014. Figure 11below details eight advanced heavy rare earth projects which are

expected to begin producing during 2014-2015.

Figure 11: Major HREE projects scheduled to begin producing during 2014-2015

Contained ContainedConcession Company m tonnes ore TREO % HREO % TREO mt HREO mtKvanefjeld Greenland Minerals 457.00 1.07 11.20 4.89 0.55Nechalacho (Thor Lake) Avalon 315.00 1.36 15.40 4.28 0.66Dubbo Alkane 60.50 0.55 52.70 0.33 0.18Bokan Ucore 3.67 0.75 38.50 0.03 0.01Zeus Matamec 50.97 0.25 40.00 0.13 0.05Strange Lake Quest 114.82 1.01 43.60 1.16 0.51Kutessay Stans 18.00 0.33 48.50 0.06 0.03Norra Karr Tasman 60.50 0.55 52.70 0.33 0.18

Source: Tasman Metals

According to IMCOA (see figure 7) total worldwide demand is expected to rise from 135,000

tonnes in 2010 to 215,000 tonnes in 2015. Providing that there is no further large cut in the

Chinese export quota we expect the overall rare earths market to be in balance from 2013.

However, HREE capacity additions from Lynas and Molycorp are likely to be only minor.


20

A deficit in heavy rare earths may persist well beyond 2012. We expect the market for heavy

rare earths will not reach balance until 2014/2015 when the capacity additions detailed in

figure 11 above will start to come onstream.

MALAGASY POLITICS AND MINING CODE

World’s fourth largest island Madagascar is the fourth largest island in the world with an

area of 587,000 km2 . The population in 2009 is estimated to have been 20.7million, around

7% of whom (1.4million) live in the capital Antananarivo. The economy is based mainly on

agriculture with coffee, vanilla and sugarcane, cocoa, rice and livestock products being among

the major exports. However, poverty is widespread with 85% of the population living on less

than two dollars per day.

Island politics are periodically turbulent Madagascar gained independence from French

rule in 1960. Malagasy politics since independence have featured disputed elections, two

coups and one assassination. The current Head of State, Andry Rajoelina, assumed the title

President of the High Transitional Authority of Madagascar following a military-backed coup

in March 2009. A presidential election was scheduled for 4 May 2011 but this has been

postponed until the end of the year. The reaction of the international community to the

events of March 2009 has been negative. Several countries have ceased aid to Madagascar in

protest. In addition the World Bank, which prior to 2009 made significant investments to

improve Madagascar’s mining sector, withdrew its support.

TRE is in good company on Madagascar Notwithstanding the events of 2009, the

Malagasy mining code is supportive of the industry in Madagascar. Madagascar’s mining code

grew out of the Mining Sector Reform Project (MSRP) which was initiated in 1998 by the then

Government with assistance from the World Bank. The aim of the MSRP was to change the

role of the State from operator to regulator and attract large-scale private sector mining

projects. The MSRP has been successful in achieving this. Besides TRE, Rio Tinto Zinc,

Sherritt International, Diamond Fields International and Jubilee Platinum all have significant

producing mines or exploration projects on Madagascar.

FINANCIAL POSITION

TRE AG’s parent company had €90,731 on its balance sheet at the end of 2010. The company

has since raised net proceeds of €7.1m in two capital increases. The current cash balance is

€3.5m. Cashburn is currently running at US$500,000 per month (€350,000). The biggest

items of expenditure are the three drilling rigs currently working on target 1. Management

believes that operations are fully financed until the end of the year. A listing on the TSX

Venture Exchange is planned for early 2012 in order to facilitate financing of a processing

plant.


21

MANAGEMENT

MANAGEMENT BOARD

David Rigoll - Executive Director

Mr Rigoll is TRE’s largest shareholder with a stake of 55.3% and was appointed an Executive

Director of the company on 20 April 2011. His background is in investment banking and

broking in Australia, Asian and London with a particular emphasis on mining. Realising in 2006

that a shortage of rare earth elements and rare metals was developing, he began to look for a

project which would supply these commodities. He located and began development work on

the TRE project in 2008.

Wolfgang Hampel - COO

After completing his degree in geology at the TU Munich in 1991, Mr Hampel worked as a

junior consultant on an exploration project in Niger, West Africa. Until 1999, he worked as a

consultant and technical director for various exploration and mining companies with a focus

on precious metals, base metals and rare metals (including REE) in West Africa. For the next

three years, Mr Hampel worked as an independent consultant in Germany where he

evaluated and managed investment possibilities, mainly in the gold mine sector. From mid-

2002 to early 2006, he was deputy manager of the Africa department at the Bundesanstalt für

Geowissenschaften und Rohstoffe (BGR, Federal Institute for Geosciences and Natural

Resources) in Hanover, Germany. Until October 2008, he was head of the department for

Mining, Infrastructure & Mineral Exploration at the internationally renowned Fugro Consult

GmbH, Berlin. In his many years’ experience, Mr Hampel assisted in the discovery of the

Samira gold deposit with 1.8 million ounces in Niger (1992/93); in 1998/99 he was able to

extend the “Samira Gold Horizon” by several kilometres. In 2001 he discovered a new

exploration target for rare earths in the Algeria-Niger border area. He speaks fluent French

and English and has worked in 15 different countries in Africa, America, Asia and Europe.

Since 2004 he has worked for several periods in Madagascar, most recently as Chief

Operating Officer of TRE AG and as a director of Tantalum Rare Earth (Malagasy) SARL, a

wholly owned subsidiary of TRE AG.

André Klupsch - Chief Administrative Officer

Mr. Klupsch graduated in law, with an emphasis on business law, at the University of

Osnabrück. His legal traineeship was at one of the leading Australian law firms, Corrs

Chambers Westgarth, in Perth, where he established initial connections to the mining

industry. Mr. Klupsch is a supervisory board member of various medium-sized companies and

has also served as legal advisor to a medium-sized stock exchange listed company.


22

Lee Goldsmith – Executive Director

Mr Goldsmith is a Solicitor of the Supreme Court in England and Wales and has been a

partner in two different legal practices, including in his own practice, Goldsmiths. He is

currently a consultant with Blake Lapthorn.

Philip Gray - Executive Director

Mr Gray has a Masters Degree from Lancaster University Business School and a Diploma in

Management Studies from the University of Westminster. He is a Member of the Society of

Trust & Estate Practitioners as well as a number of other professional bodies. Mr Gray is a

Fellow of the Institute of Directors and has been a director of various operating entities listed

on the UK, Zurich and Johannesburg stock exchanges and Chairman of companies listed on

the Mumbai, Australia and Botswana stock exchanges. He has over 30 years international

experience in investment banking focussing on investment management and stockbroking,

having been Managing Director of GT Management Asia, Executive Chairman of HSBC James

Capel Asia Limited and Chairman of Imara Holdings, a listed Pan African financial services

group. He has also been Chairman of several professional bodies such as the Hong Kong Unit

Trust Association, the Hong Kong Society of Investment Analysts and the Society of Technical

Analysts. Mr Gray was a member of the Unit Trust Committee and Takeover Panel of the

Hong Kong Securities and Futures Commission (“SFC”) and was a Hong Kong Government

Appointee to the SFC’s Advisory Committee. He is also Chairman of Hydrotech

International, an ASX listed industrial company, as well as several hedge funds and he also

runs a family office.

Paul Loudon, Executive Director

Mr Loudon is a mining analyst with more than 25 years’ experience in stockbroking,

corporate finance and the management of junior mining and exploration companies. He has

been President of Battlefields Minerals Corporation of Toronto and President and Chief

Operating Officer of BDI Mining Corp. Paul has also been Head of Equities at Loeb Aron &

Company Limited, a London-based corporate finance house specialising in the mining sector,

where he was responsible for raising considerable sums of equity capital for resource

companies listed in the UK, Canada and Australia. Mr Loudon is currently Managing Director

and Chief Executive Officer of DiamondCorp Plc, an AIM-listed emerging diamond producer

with operations in South Africa and Botswana and Non-Executive Chairman of URU Minerals

Limited.

Ivan Murphy - Executive Director

Mr Murphy is a partner of Murphy Richards Capital LLP, a partnership with a focus on natural

resources, property and financial services. He gained an Economics Degree at University

College Cork, Ireland and has 15 years of capital markets experience. He started his career at

Aberdeen Asset Management PLC working in London, Miami and Singapore before returning

to Ireland to become Managing Director of Aberdeen Asset Management Ireland Limited


23

(“Aberdeen”). From 2003 he worked as a consultant to a number of Irish and UK public

companies assisting them in the disposal of asset management and life insurance assets. In

2005 he was one of the founders of Fairfax, a London based investment bank, where his role

was business origination and business development in the Far East. After leaving Fairfax in

2008, he worked for the Ireland-based property developer Shelbourne Developments LLC

and then Gazprombank-Invest before joining TRE in December 2010. Mr Murphy is currently

the non-executive chairman of Q Resources PLC.

Paul Richards - Executive Director

Mr Richards is a partner of Murphy Richards Capital LLP, a partnership with a focus on

natural resources, property and financial services. He qualified as a UK Solicitor in 1987 and

worked for Theodore Goddard specialising in English corporate and insolvency law. In 1996

he joined the corporate finance department of Hoare Govett. Further corporate finance roles

at Collins Stewart, Fairfax and Core Capital followed. Mr Richards has extensive corporate

finance experience and during his time at Collins Stewart Limited and Fairfax, he led over 75

IPOs and secondary fundraisings on both London’s Official List and AIM. He currently serves

on the board of Q Resources PLC as a non-executive director.

SUPERVISORY BOARD

Harald Ick - Chairman

Harald Ick is a qualified lawyer who has more than 12 years of experience in advising

companies on corporate and stock exchange law as well as M&A transactions.

Deputy Chairman of the Supervisory Board - Professor Dr Hans-J. Bocker

Professor Dr Bocker is a journalist, columnist, and author who holds several international

professorships. He is also a corporate consultant & commodity expert.

Jack Lifton - Member of the Supervisory Board

Mr Lifton is an expert on technology metals, including rare earths, lithium and most of the

rare metals. He has over 48 years experience in the field and is a well-known consultant,

lecturer and author of many articles on rare earths.

Ben Paton - Member of the Supervisory Board

Mr Paton worked for Fidelity Investments in London for 13 years where he specialised in

equity investment. Between 2004 and 2008 he was the lead fund manager for the Fidelity

International Smaller Companies Fund, a US mutual fund which significantly outperformed its

benchmark.

Benoit M. Violette - Member of the Supervisory Board

Benoit Violette is a professional geologist with extensive experience in generating, financing

and managing exploration projects for a wide range of mineral commodities worldwide,

including projects in Africa and Canada.


24

INCOME STATEMENT

All figures in € 2009 2010

Sales 0 100,000

Output 0 100,000

Other operating income

a) other ordinary opertaing income 8 3,500

Other operating expenses

a) ordinary operating expenses

aa) insurance and social security contributions 2,293

ab) vehicle costs 47

ac) marketing and travel costs 21,209

ad) various operating costs 642,460

b) other ordinary operating expenses 263

283,755 666,272

5. other interest and similar income 1,381 60,237

6. interest and other expenses 332 408

7. Result of ordinary activities -282,697 -502,943

8. Loss for the year -282,697 -502,943

Source: TRE AG


25

BALANCE SHEET

All figures in € 2009 2010

ASSETS

Current

Cash and liquid assets 2,108,218 90,731

Receivables from affiliates 0 130,237

Other receivables 0 148

Other current assets 20,152 47,973

2,128,370 269,089

Long-term

Shares in affiliataed companies 1 1,285,001

Loans to affiliated companies 0 0

1 1,285,001

Prepaid expenses 91,716 6,627

Total Assets 2,220,087 1,560,717

LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities

Convertible bond 0 8,800

Trade payables 206,603 28,083

- of which €28,083 due in under one year

Other liabilities 0 334

206,603 37,217

Provisions

Other provisions 25,000 37,959

Shareholders' Equity

Subscribed share capital 2,057,069 2,057,069

Capital reserves 239,079 239,079

Losses carried forward -24,967 -307,664

Loss for the year -282,697 -502,943

1,988,484 1,485,541

Total equity and liabilities 2,220,087 1,560,717

Source: TRE AG


26

FIRST BERLIN RECOMMENDATION & PRICE TARGET HISTORY

Report No.:

Date of publication

Previous day closing price

Recommen- dation

Price target

Initial

Report 11 August 2011 €30.38 Buy €95.00

2... ↓ ↓ ↓ ↓

!Unerwartetes

Today Buy €95.00

F

I

R

S

T

B

E

Simon Scholes

First Berlin

Equity Research GmbH

Mohrenstraße 34

10117 Berlin

Tel. +49 (0)30 - 91 68 41 05

Fax +49 (0)30 - 80 93 96 87

[email protected]

www.firstberlin.com

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First Berlin’s investment rating system is five tiered and includes an investment recommendation and a risk rating. Our recommendations,

which are a function of our expectation of total return (forecast price appreciation and dividend yield) in the year specified, are as follows:

STRONG BUY: Expected return greater than 50% and a high level of confidence in management’s financial guidance

BUY: Expected return greater than 25%

ADD: Expected return between 0% and 25%

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management strength, balance sheet and financing risk, competitive position, standard of financial disclosure, regulatory and political

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Up until 16 May 2008, First Berlin’s investment rating system was three tiered and was a function of our expectation of return (forecast

price appreciation and dividend yield) over the specified year. Our investment ratings were as follows: BUY: expected return greater

than 15%; HOLD: expected return between 0% and 15%; and SELL: expected negative return.

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