10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                  

Commission file number: 001-34852

RARE ELEMENT RESOURCES LTD.

 (Exact Name of Registrant as Specified in its Charter)

BRITISH COLUMBIA	N/A
(State of other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
225 Union Blvd., Suite 250
Lakewood, Colorado	80228
(Address of Principal Executive Offices)	(Zip Code)

(720) 278-2460

(Registrant’s Telephone Number, including Area Code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   

x   Yes  o  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x   Yes  o  No

Indicate by check mark whether the Registrant is  o  a large accelerated filer, x   an accelerated filer, o  a non-accelerated filer, or   o   a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act)

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

 o  Yes  x   No

Number of shares of issuer’s common stock outstanding as of November 8, 2012:  44,824,245

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TABLE OF CONTENTS

 Page

2

Reporting Currency, Financial and Other Information

All amounts in this report are expressed in United States (“U.S.”) dollars, unless otherwise indicated.  

Financial information is presented in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).  

References to “Rare Element,” the “Company,” “we,” “our,” and “us” mean Rare Element Resources Ltd., its predecessors and consolidated subsidiaries, or any one or more of them, as the context requires.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking information” within the meaning of Canadian securities legislation and “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995 (collectively, “forward-looking statements”). Such forward-looking statements concern our anticipated results and developments in our operation in future periods, planned exploration and development of our properties, timing for completion of a definitive feasibility study for the Bear Lodge Rare Earth Element (“REE”) Project, our future capital needs and our ability to meet these needs, our ability to obtain additional financing and plans related to our business and other matters that may occur in the future.  These statements relate to analyses and other information that are based on forecasts of future results, estimates of amounts not yet determinable and the reasonable assumptions of management.  

Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections, objectives, assumptions or future events or performance (often, but not always, using words or phrases such as “expects” or “does not expect”, “is expected”, “anticipates” or “does not anticipate”, “plans”, “estimates” or “intends”, or stating that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved) are not statements of historical fact and may be forward-looking statements.  

Forward-looking statements are subject to a variety of known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from our expectations and include, among others, the factors referenced in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended June 30, 2012, including, without limitation, risks associated with:

·

our history of losses and need for additional financing;

·

our lack of history of producing metals from our mineral properties;

·

numerous uncertainties that could affect the profitability or feasibility of the Bear Lodge REE Project;

·

the exploration, development, permitting and operations of our Bear Lodge REE Project;

·

increased costs affecting financial condition;

·

fluctuations in demand for, and price of, rare earth products;

·

an extremely volatile rare earth industry;

·

an increase in global supply or predatory pricing and dumping by our competitors;

·

the establishment of new uses and markets of rare earth products;

·

a shortage of equipment and supplies;

·

mining and resource exploration being an inherently dangerous activity;

·

operating in the resource industry, which is highly speculative;

·

resource estimates;

·

our lack of insurance for our operations;

·

mineral operations being subject to market forces outside of our control;

·

the permitting, licensing and approval processes for our operations;

·

the governmental and environmental regulations;

·

future legislation regarding the mining industry and climate change;

·

our land reclamation requirements;

·

proposed legislation;

·

competition in the mining and rare earth elements industries;

·

foreign currency fluctuations;

·

our dependence on key personnel;

·

the potential difficulty of attracting and retaining qualified personnel;

·

our executive officers and directors being engaged in other businesses;

·

title in our properties;

·

enforcement of civil liabilities in the United States;

3

·

our securities; and

·

tax consequences to U.S. shareholders.

This list is not exhaustive of the factors that may affect our forward-looking statements. Although we have attempted to identify important factors that could cause actual results to differ materially from those described in forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated or intended. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, believed, estimated or expected. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Except as required by law, we disclaim any obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. We qualify all the forward-looking statements contained in this Quarterly Report by the foregoing cautionary statements. We advise you to carefully review the reports and documents we file from time to time with the United States Securities and Exchange Commission (the “SEC”), particularly our Annual Report on Form 10-K. The reports and documents filed by us with the SEC are available at www.sec.gov.   

4

PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

RARE ELEMENT RESOURCES LTD. (an exploration stage company) CONSOLIDATED BALANCE SHEETS (Expressed in thousands of U.S. dollars, except shares outstanding)
	September 30, 2012	June 30, 2012
ASSETS:
CURRENT ASSETS
Cash and cash equivalents	$                      32,069	$                      37,030
Short-term investments	15,254	14,633
Interest receivable	230	175
Prepaid expenses	202	240
Marketable securities	34	74
Accounts receivable	271	23
Total Current Assets	48,060	52,175
Equipment	551	608
Mineral properties	27	27
Restricted cash	-	422
Total assets	$                      48,638	$                      53,232
LIABILITIES:
CURRENT LIABILITIES
Accounts payable and accrued liabilities	$                        1,967	$                        2,055
Total Current Liabilities	1,967	2,055
Asset retirement obligation	435	435
Total liabilities	2,402	2,490
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Common shares, no par value - unlimited shares authorized; shares outstanding September 30, 2012 - 44,769,245, June 30, 2012 - 44,364,245	93,142	92,500
Additional paid in capital	20,759	20,052
Accumulated other comprehensive loss	(42)	(45)
Accumulated deficit during exploration stage	(67,623)	(61,765)
Total shareholders' equity	46,236	50,742
Total liabilities and shareholders' equity	$                      48,638	$                      53,232

See accompanying notes to consolidated interim financial statements

5

RARE ELEMENT RESOURCES LTD. (an exploration stage company) CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Expressed in thousands of U.S. dollars, except share and per share amounts)
	For the three month periods ended September 30,		Cumulative during exploration
	2012	2011	stage
Operating income and (expenses):
Exploration	$            (5,382)	$         (3,847)	$         (33,522)
Corporate administration	(2,393)	(3,942)	(33,821)
Depreciation	(46)	(20)	(218)
Gain/(loss) on currency translation	1,802	(3,497)	1,975
Write-down of mineral property	-	-	(2,924)
Total operating expenses	(6,019)	(11,306)	(68,510)
Non-operating income and (expenses):
Interest income	168	286	1,843
Other income	-	-	10
Loss on sale of marketable securities	(7)	-	(18)
Unrealized gain/(loss) on derivatives	-	86	(948)
Total non-operating income	161	372	887
Net loss	$            (5,858)	$       (10,934)	$         (67,623)
Other comprehensive loss
Realized loss on available-for-sale securities	$                     7	$                -	$                  18
Unrealized loss on available-for-sale securities	(4)	(96)	(60)
COMPREHENSIVE LOSS	$            (5,855)	$       (11,030)	$         (67,665)
LOSS PER SHARE - BASIC AND DILUTED	$              (0.13)	$           (0.25)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING	44,391,636	44,096,015

See accompanying notes to consolidated interim financial statements

6

RARE ELEMENT RESOURCES LTD. (an exploration stage company) CONSOLIDATED STATEMENTS OF CASH FLOWS (Expressed in thousands of U.S. dollars)
	For the three month periods ended September 30,		Cumulative during exploration
	2012	2011	stage
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss for the period	$        (5,858)	$      (10,934)	$         (67,623)
Adjustments to reconcile loss for the period to net cash and cash equivalents used in operations:
Depreciation	46	20	218
Asset retirement obligation	-	-	435
Fair value of warrants received pursuant to the sale of mineral properties	-	-	(15)
Unrealized (gain)/loss on derivatives	-	(86)	948
Write-down of mineral property	-	-	1,891
Loss on currency translation	7	9	(26)
Loss on disposal of marketable securities	7	-	18
Loss on disposal of equipment	(3)	-	(3)
Stock-based compensation	984	3,312	20,890
Changes in non-cash working capital
Accounts receivable	21	(104)	(143)
Interest receivable	(55)	(129)	(238)
Prepaid expenses	38	(49)	(214)
Accounts payable and accrued liabilities	(88)	3	1,748
Due to related party	-	(31)	(28)
Net cash and cash equivalents used in operating activities	(4,901)	(7,989)	(42,142)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities	-	-	(207)
Purchases of short-term investments	(621)	-	(15,254)
Additions to mineral properties, net of cost recoveries	-	-	(29)
Release of restricted cash	422	-	-
Purchases of equipment	-	(208)	(769)
Proceeds from the sale of equipment	14		14
Proceeds from sale of marketable securities	36	-	150
Payments received for sale/option of mineral properties	-	-	279
Net cash and cash equivalents used in investing activities	(149)	(208)	(15,816)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advance of promissory note	-	-	111
Repayment of promissory note	-	-	(129)
Cash received for common shares, net of share issuance costs	89	55	94,615
Shares subscribed	-	-	(4,788)
Net cash and cash equivalents provided by financing activities	89	55	89,808
Cash acquired in capital transaction	-	-	219
Increase/(decrease) in cash and cash equivalents	(4,961)	(8,142)	32,069
Cash and cash equivalents - beginning of the period	37,030	72,312	-
Cash and cash equivalents - end of the period	$        32,069	$        64,170	$           32,069
Supplemental disclosure with respect to cash flows - Note 15

See accompanying notes to consolidated interim financial statements

7

RARE ELEMENT RESOURCES LTD.

(An Exploration Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of U.S. dollars, except share and per share amounts, unless otherwise noted)

1.

NATURE OF OPERATIONS

Rare Element Resources Ltd. (collectively, “we,” “us,” “our,” “Rare Element” or the “Company”) was incorporated under the laws of the Province of British Columbia on June 3, 1999.

We are currently in the process of exploring and evaluating the Bear Lodge Rare Earth Element (“REE”) Project in Wyoming.  The Bear Lodge REE Project is located within our Bear Lodge Property which also includes the Sundance Gold Project.  In accordance with U.S. GAAP we are an exploration stage entity.  However we have completed a pre-feasibility study on the Bear Lodge REE Project and have begun compiling data for the preparation of a definitive feasibility study. To date, we have no revenue and have an accumulated operating deficit of $67,623 of which $33,522 is attributable to the exploration of our mineral interests.

Our continuing operations and the recoverability of the carrying values of our mineral property interests are dependent upon economic reserves being discovered and developed at the Bear Lodge REE Project, our ability to obtain the necessary permits to mine the Bear Lodge REE Project and on future profitable production or proceeds from the disposition of any of our mineral property interests.  Development and/or start-up of the Bear Lodge REE Project is dependent upon our ability to obtain the necessary financing to complete the exploration, development and/or start-up of the Bear Lodge REE Project.  Although we have been successful in raising such capital in the past, there can be no assurance that we will be able to do so in the future.

A write down in the carrying values of one or more of our mineral properties may be required in the future as a result of events and circumstances, such as our inability to obtain all the necessary permits, changes in the legal status of our mineral properties, government actions, the results of technical evaluation and changes in economic conditions, including the price of rare-earth oxide (“REO”) concentrate and other commodities or input prices.  We regularly evaluate the carrying value of our mineral properties to determine if impairment is required in view of such factors.

2.

BASIS OF PRESENTATION

In accordance with U.S. GAAP for interim financial statements, these consolidated financial statements do not include certain information and note disclosures that are normally included in annual financial statements prepared in conformity with U.S. GAAP.  Accordingly, these unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements as of June 30, 2012, which were included in our Annual Report on Form 10-K for the year ended June 30, 2012.  In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (which are of a normal, recurring nature) necessary to present fairly in all material respects our financial position as of September 30, 2012 and the results of our operations and cash flows for the three months ended September 30, 2012 and 2011 in conformity with U.S. GAAP.  Interim results of operations for the three months ended September 30, 2012 may not be indicative of results that will be realized for the full year ending June 30, 2013.

3.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Our financial instruments consist of cash and cash equivalents, marketable securities, accounts receivable, restricted cash, accounts payable and accrued liabilities.  Included within cash and cash equivalents is an enhanced yield deposit account that contains an embedded derivative in the form of a foreign currency option.  Due to the short-term nature of the option contract and the low volatility between the U.S. dollar and Canadian dollar, the liability portion of the derivative instrument is de minimis. U.S. GAAP defines “fair value” as the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price) and establishes a fair-value hierarchy that prioritizes the inputs used to measure fair value using the following definitions (from highest to lowest priority):

·

Level 1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

·

Level 2 — Observable inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data by correlation or other means.

8

RARE ELEMENT RESOURCES LTD.

(An Exploration Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of U.S. dollars, except share and per share amounts, unless otherwise noted)

·

Level 3 — Prices or valuation techniques requiring inputs that are both significant to the fair-value measurement and unobservable.

The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents.  The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests.  Periodically throughout the year, the Company has maintained balances in various U.S. operating accounts in excess of U.S. federally insured limits.  

The following table presents information about financial instruments recognized at fair value on a recurring basis as of September 30, 2012 and June 30, 2012, and indicates the fair value hierarchy:

	September 30, 2012			June 30, 2012
	Level 1	Level 2	Total	Level 1	Level 2	Total
Assets
Cash and cash equivalents	$ 32,069	$           -	$ 32,069	$ 37,030	$           -	$ 37,030
Short-term investments	-	15,254	15,254	-	14,633	14,633
Marketable securities	34	-	34	74	-	74
Total financial assets	$ 32,103	$ 15,254	$ 47,357	$ 37,104	$ 14,633	$ 51,737
Liabilities
Accounts payable and other accrued liabilities	$   1,967	$ -	$   1,967	$   2,055	$ -	$   2,055
Total financial assets and liabilities	$ 34,070	$ 15,254	$ 49,324	$ 39,159	$ 14,633	$ 53,792

4.

EQUIPMENT

	September 30, 2012			June 30, 2012
	Cost	Accumulated depreciation	Net book value	Cost	Accumulated depreciation	Net book value
Computer equipment	$           160	$               58	$           102	$          160	$              46	$           114
Furniture	98	23	75	98	19	79
Geological equipment	343	88	255	359	70	289
Vehicles	144	25	119	144	18	126
	$           745	$             194	$           551	$          761	$            153	$           608

5.

COMMON SHARES

	Number of shares issued	Common shares
As of June 30, 2012	44,364,245	$               92,500
Exercise of stock options - cash	405,000	357
Exercise of stock options - fair value	-	285
Issued during the three months ended September 30, 2012	405,000	642
As of September 30, 2012	44,769,245	$               93,142

9

RARE ELEMENT RESOURCES LTD.

(An Exploration Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of U.S. dollars, except share and per share amounts, unless otherwise noted)

6.

ADDITIONAL PAID-IN CAPITAL

Stock-based compensation

We have two stock option plans under which options are outstanding and exercisable, namely the Fixed Stock Option Plan and the 10% Rolling Stock Option Plan. The Fixed Stock Option Plan was originally approved by shareholders on December 11, 2002 and subsequently approved by shareholders on December 7, 2009 following certain amendments to the Fixed Stock Option Plan. The Fixed Stock Option Plan expired upon the adoption of the 10% Rolling Stock Option Plan which was approved by shareholders on December 2, 2011, and as such, we may no longer grant options under the Fixed Stock Option Plan. However, the terms of the Fixed Stock Option Plan continue to govern all prior awards granted under such plan until such awards have been cancelled, forfeited or exercised in accordance with the terms thereof.  As of September 30, 2012, we had 2,770,000 options outstanding under our Fixed Stock Option Plan, as amended, and 1,306,000 options outstanding under our 10% Rolling Stock Option Plan.

The fair value of each employee stock option award is estimated at the grant date using the Black-Scholes option pricing model and our common shares price on the date of grant. The significant assumptions used to estimate the fair value of stock options awarded during the three months ended September 30, 2012 and 2011 using the Black-Scholes model are as follows:

	September 30,
	2012	2011
Risk-free interest rate	0.35%  - 0.39%	2.00%
Expected volatility	80%	108%
Expected dividend yield	Nil	Nil
Expected term in years	3	5

The compensation expense recognized in our consolidated financial statements for the three months ended September 30, 2012 and 2011 for stock option awards was $984 and $3,312, respectively.  As of September 30, 2012, there was $1,147 of total unrecognized compensation cost related to unvested stock options which is expected to be recognized over a weighted-average remaining vesting period of 0.3 years.

The following table summarizes our stock option activity for the three-month period ended September 30, 2012:

	For the three-month periods ended September 30,
	2012		2011
	Number of Stock Options	Weighted Average Exercise Price	Number of Stock Options	Weighted Average Exercise Price
Outstanding, beginning of period	4,331,000	$      5.84	3,136,500	$        6.16
Granted	150,000	5.01	410,000	9.05
Exercised	(405,000)	0.87	(20,000)	2.77
Outstanding, end of period	4,076,000	$      6.50	3,526,500	$        6.77
Exercisable, end of period	3,023,400	$      6.77	1,898,700	$        3.73
Weighted-average fair value per share of options granted during period	$                2.57		$               7.09

10

RARE ELEMENT RESOURCES LTD.

(An Exploration Stage Company)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Expressed in thousands of U.S. dollars, except share and per share amounts, unless otherwise noted)

7.

RELATED PARTY TRANSACTIONS

During the three-month periods ended September 30, 2012 and 2011:

·

$17 and nil, respectively, was charged for consulting fees by Donald E. Ranta who serves as our Chairman of the Board of Directors of Rare Element. As at September 30 2012, there was $6 outstanding amounts owed to Donald E. Ranta.

Related party expenses are included in our corporate general and administrative and investor relations amount on our Consolidated Statements of Operations and Comprehensive Loss.  Related party transactions were in the normal course of operations and are measured at fair value. The amounts owed bear no interest and are unsecured with no repayment terms.

8.

COMMITMENTS AND CONTINGENCIES

Our commitments and contingencies include the following items:

Restricted cash

On August 28, 2012, we received notification from the Wyoming Department of Environmental Quality (“WDEQ”) that they had accepted a surety bond in the amount of $430 for our required reclamation program for land disturbances that occur during our exploration programs at the Bear Lodge REE Project.  Upon acceptance, the WDEQ released the previously restricted funds back to Rare Element. The surety bond requires no cash backing from the Company.  As such, the amount previously recorded as restricted cash of $422 was reclassified to cash and cash equivalents during the three-month period ended September 30, 2012.

Potential environmental contingency

Our mining and exploration activities are subject to various federal and state laws and regulations governing the protection of the environment.  These laws and regulations are continually changing and generally becoming more restrictive.  We conduct our operations so as to protect public health and the environment, and believe our operations are materially in compliance with all applicable laws and regulations.  We have made, and expect to make in the future, expenditures to comply with such laws and regulations.  The ultimate amount of reclamation and other future site-restoration costs to be incurred for existing mining interests is uncertain.

9.

SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS

For the three-month period ended September 30, 2012 non-cash items consisted of interest received of $121 and an accounts receivable amount of $269 for common shares issued upon option exercises in which the cash was not received prior to the end of the quarter.  For the three-month period ended September 30, 2011 the only supplemental cash flow item was interest received of $157.

11

ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management’s discussion and analysis of the consolidated financial results and condition of Rare Element Resources Ltd. (collectively, “we,” “us,” “our,” “Rare Element” or the “Company”) for the three-month period ended September 30, 2012 has been prepared based on information available to us as of November 5, 2012. This discussion should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and notes thereto included herewith and the audited Consolidated Financial Statements of Rare Element for the year ended June 30, 2012 and the related notes thereto filed with our annual report on Form 10-K, which have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). All amounts stated herein are in U.S. dollars, unless otherwise noted. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions.   Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those set forth elsewhere in this report. See “Cautionary Note Regarding Forward-Looking Statements.”

All currency amounts are expressed in thousands of U.S. dollars, unless otherwise noted.  

Introduction

Presently, we are focused on exploring and evaluating the Bear Lodge rare earth element (“REE”) Project located near Sundance, Wyoming. We plan to develop and produce from the Bear Lodge REE Project subject to obtaining, among other things, a positive definitive feasibility study, the necessary mining permits and secure the necessary financing to construct the mine.    We also, in the future, may potentially acquire advanced stage REE projects.  As of September 30, 2012, we were considered an exploration stage entity under U.S. GAAP due to the lack of reserves reported under SEC Industry Guide 7.  However, we have reported mineral reserves that are National Instrument 43-101 compliant and are contained within a prefeasibility study completed on our Bear Lodge REE Project which shows positive economic results.  We have also begun the process of compiling data for the preparation of a definitive feasibility study on the Bear Lodge REE Project.

Outlook

We have sufficient cash on hand to conduct our exploration and development plans through 2014. Our plans for Bear Lodge REE Project include the following activities:

·

Additional resource definition drilling to expand and upgrade the mineral reserve and mineral resources at the Bull Hill, Whitetail Ridge, and Bull Hill NW deposits.

·

Exploration drilling at the Bull Hill West, Whitetail Ridge, Carbon REE, Taylor REE, and other prospective REE and heavy rare earth element (“HREE”) targets identified during the 2010 and 2011 exploration programs.

·

Geological mapping, geochemical sampling, and geophysical surveys over selected areas in order to better delineate current target areas and identify new targets for economic REE mineralization.

·

Collection of additional bulk sample mineralized material for continued pilot plant testing from a second large diameter core drilling program in select, well-mineralized areas throughout the Bull Hill and Whitetail Ridge resource areas.

·

A condemnation drilling program to ensure that the proposed physical upgrade plant, low-grade stockpile and waste facility will not cover ground that is prospective for REE and/or gold mineralization; continued metallurgical testing of the oxide and oxide-carbonate for optimization of mineral concentration and chemical concentration processes.

·

Initial metallurgical testing of HREEs enriched oxide material at the Whitetail Ridge, Carbon REE and East Taylor REE deposits.

·

Perform market testing from product produced by the pilot plant.

12

·

Completion of a definitive feasibility study, which is anticipated by the end of calendar year 2013.

·

Start of the formal National Environmental Policy Act Environmental Impact Study process during the first quarter of calendar 2013.

·

Start of the formal Land Quality Division of the Wyoming Department of Environmental Quality permitting process in the fourth quarter of calendar 2013.

·

Continue to add key personnel to develop the corporate infrastructure to support the current project development and future planned production operation.

Results of Operations

Summary

Our consolidated net loss for the three-month period ended September 30, 2012 was $5,858 or $0.13 per share, compared to our consolidated net loss of $10,934 or $0.25 per share for the same period in 2011. For the three-month period ended September 30, 2012, the decrease in consolidated net loss of $5,076 from the respective prior period was primarily the result of an increase in the gain on foreign currency translation of $5,299 and a decrease in stock-based compensation expense of $2,328, which were partially offset by an increase in exploration costs of $1,535 and an increase in corporate administration and investor relations costs of $779.

Exploration

Exploration costs were $5,382 for the three month period ended September 30, 2012 as compared with $3,847 for the same period in 2011.  The increase of $1,535 from the prior period was mostly the result of increased spending on our Bear Lodge Property.  For the three-month period ended September 30, 2012, this increase was largely due to an increase in exploration activities as well as in environmental monitoring and programs as we begin the permitting process to move the project into the development stage.  

Corporate administration and investor relations

Corporate administration and investor relations costs decreased to $2,393 for the three-month period ended September 30, 2012, as compared to $3,942 for the same period in 2011. The decrease of $1,549 from the prior period was primarily due to a decrease in stock-based compensation expense. The decrease in stock-based compensation expense was primarily the result of a large number of stock options that vested during the three-month period ended September 30, 2012. Offsetting the decrease in costs was an increase in employee compensation and benefits expenses.  During the fiscal year ended June 30, 2012, we established a corporate office in Lakewood, CO, hired key personnel and set up benefits for our employees.

Gain/(loss) on currency translation

We report our financial statements in U.S. dollars. Therefore, any foreign currencies owned are converted to U.S. dollars at the current exchange rate. We hold a significant amount of Canadian dollars in Canadian and U.S. banks as a result of past financings that were denominated in Canadian dollars. We continue to hold Canadian dollars due to higher investment returns and due to the relative strength of the Canadian dollar versus the U.S. dollar. When the Canadian dollar to U.S. dollar exchange rate changes from one reporting period to another, we report gains and losses on currency translations. A strengthening Canadian dollar will result in gains and a weakening Canadian dollar will result in losses as long as we continue to hold Canadian dollars for investment purposes.  

The gain on currency translation was $1,802 for the three-month period ended September 30, 2012 as compared with a loss of $3,497 for the same period in 2011.  The Canadian dollar strengthened by 3.6% against the U.S. dollar over the three-month period ended September 30, 2012 which resulted in a gain, whereas the Canadian dollar weakened by 7.2% against the U.S. dollar over the three-month period ended September 30, 2011 which resulted in a loss.

13

Non-operating income and expenses

Interest income

Interest income decreased to $168 for the three-month period ended September 30, 2012 as compared with $286 for the same period in 2011.  The decrease in interest income from the prior period is attributable to decreased average cash balances held in interest bearing accounts during the period as compared with the prior year.  

Financial Position, Liquidity and Capital Resources

Operating Activities

Net cash used in operating activities was $4,904 for the three-month period ended September 30, 2012 as compared to $7,989 for the same period in 2011. The decrease of $3,085 in cash used is mostly the result of foreign currency fluctuations on our bank accounts held in Canadian dollars.  We recorded a gain on currency translation for the three-month period ended September 30, 2012 as compared to a loss for the same period in 2011.

Investing Activities

Net cash used in investing activities was $146 for the three-month period ended September 30, 2012 as compared to $208 for the same period in 2011. The decrease in cash used in investing activities of $62 is primarily due to the release of the restricted cash as a result of a surety bond that was put in place during the quarter.  This was offset by an increase of $621 for purchases of short-term investments.  We also received net proceeds of $39 from the sale of marketable securities during the 2012 period as well as proceeds of $14 from the disposal of equipment.  

Financing Activities

Net cash provided by financing activities was $89 and $55 for the three-month periods ended September 30, 2012 and 2011, respectively.  For both the 2012 and 2011 periods, the cash received was the result of employee stock option exercises.

Liquidity and Capital Resources

At September 30, 2012, our total current assets were $48,060 compared to $52,175 as of June 30, 2012, which is a decrease of $4,115. The decrease in total current assets is primarily due to a decrease in cash and cash equivalents of $4,961.

Our working capital as at September 30, 2012 was $46,093 as compared with $50,120 at June 30, 2012.  Management estimates that the current cash position and future cash flows from the potential exercise of warrants and options and other potential equity financings will be sufficient for us to carry out our anticipated exploration and development plans through 2014.

Our plans for the remainder of calendar year 2012 and through 2013 is to continue those programs necessary to advance the Bear Lodge REE Project definitive feasibility study, to continue exploration drilling programs, to identify and establish a HREE mineral resource estimate, to increase our mineral reserves at the Bull Hill mine deposit and to continue moving forward with the Environmental Impact Statement and permitting process, while minimizing expenditures in other areas. The budget contemplates that additional financing would be required by the end of calendar year 2014 to have sufficient working capital to fund the further development and construction of the Bear Lodge REE Project.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Contractual Obligations

There were no material changes to the contractual obligations disclosed in Item 7 of Part II in our Form 10-K for the fiscal year ended June 30, 2012.

14

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCUSSION ABOUT MARKET RISK

Market risk. Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: interest rate risk, foreign currency risk, and other price risk.

Interest rate risk. Our cash and cash equivalents consist of cash held in bank accounts and guaranteed investment certificates that earn interest at variable interest rates. Due to the short-term nature of these financial instruments, fluctuations in market rates do not have a significant impact on estimated fair values as of September 30, 2012. Future cash flows from interest income on cash and cash equivalents will be affected by interest rate fluctuations. We manage interest rate risk by maintaining an investment policy that focuses primarily on preservation of capital and liquidity.

Foreign currency risk. We are exposed to foreign currency risk as monetary financial instruments are primarily denominated in Canadian dollars. We have not entered into any foreign currency contracts to mitigate this risk.  We attempt to mitigate this risk by holding six to twelve months of U.S.-based spending in U.S. dollars as a natural hedge against currency fluctuations.  At September 30, 2012, a 1% fluctuation in the Canadian dollar to U.S. dollar exchange rate would have impacted our consolidated net loss by $321.

Other price risk. Other price risk is the risk that the fair or future cash flows of a financial instrument will fluctuate because of changes in market prices, other than those arising from interest rate risk or foreign exchange risk. We are not exposed to significant other price risk.

ITEM 4.  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q for the quarter ended September 30, 2012, an evaluation was carried out under the supervision of and with the participation of our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operations of our disclosure controls and procedures (as defined in Rule 13(a)-15(e) and Rule 15(d)-15(e) under the Exchange Act, as amended (the “Exchange Act”). Based on that evaluation, the CEO and the CFO have concluded that as of the end of the period covered by this quarterly report, our disclosure controls and procedures were effective in ensuring that: (i) information required to be disclosed by us in reports that we file or submit to the Securities and Exchange Commission (the “SEC”) under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and (ii) material information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow for accurate and timely decisions regarding required disclosure.

Changes in Internal Controls

There has been no change in our internal control over financial reporting during the quarter ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

We are not aware of any material pending or threatened litigation or of any proceedings known to be contemplated by governmental authorities that are, or would be, likely to have a material adverse effect upon us or our operations, taken as a whole.

ITEM 1A.   RISK FACTORS

There were no material changes to the risk factors disclosed in Item 1A of Part I in our Form 10-K for the fiscal year ended June 30, 2012.

15

ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.   MINE SAFETY DISCLOSURES

We consider health, safety and environmental stewardship to be a core value for Rare Element.

Pursuant to Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), issuers that are operators, or that have a subsidiary that is an operator, of a coal or other mine in the United States are required to disclose in their periodic reports filed with the SEC information regarding specified health and safety violations, orders and citations, related assessments and legal actions, and mining-related fatalities under the regulation of the Federal Mine Safety and Health Administration (“MSHA”) under the Federal Mine Safety and Health Act of 1977 (the “Mine Act”). During the period ended September 30, 2012, the Bear Lodge REE Project was not yet in production and as such, was not subject to regulation by the MSHA under the Mine Act.

ITEM 5.   OTHER INFORMATION

None.

ITEM 6.   EXHIBITS

Exhibit Number	Description of Exhibits
4.1	Rare Element Resources Ltd. Amendment to the Incentive Share Option Plan, dated October 18, 2012
31.1	Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
32.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
101.INS(1)	XBRL Instance Document
101.SCH(1)	XBRL Taxonomy Extension Schema Document
101.CAL(1)	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF(1)	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB(1)	XBRL Taxonomy Extension Label Linkbase Document
101.PRE(1)	XBRL Taxonomy Extension Presentation Linkbase Document

(1) Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Act of 1934 and otherwise are not subject to liability.

16

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	RARE ELEMENT RESOURCES LTD.
By:	/s/ Randall J. Scott
	Randall J. Scott
	President, Chief Executive Officer and Director
	(Principal Executive Officer )
Date:	November 5, 2012

	RARE ELEMENT RESOURCES LTD.
By:	/s/ David P. Suleski
	David P. Suleski
	Chief Financial Officer
	(Principal Financial Officer
	and Principal Accounting Officer)
Date:	November 5, 2012

17

EX-4

Exhibit 4.1

RARE ELEMENT RESOURCES LTD

AMENDMENT TO THE

INCENTIVE SHARE OPTION PLAN

October 18, 2012

Rare Element Resources Ltd. (the “Corporation”) hereby adopts this Amendment to the Incentive Share Option Plan, effective as of September 21, 2012, which amends that certain Incentive Share Option Plan, dated December 11, 2002, as amended (the “Plan”).

Section 1.1 of the Plan shall be amended by adding to the definitions under the Plan the following Section 1.1(g.1)

“(g.1)

 “Fair Market Value” means the closing market price for a Common Share on the date of exercise as furnished by NYSE MKT LLC (“NYSE MKT”), the Toronto Stock Exchange (“TSX”) or other principal stock exchange on which the Common Shares are then primarily traded as of such date or, if no sales of Common Shares were reported by the NYSE MKT, the TSX or other such exchange on that date, the last price for a share of Common Shares as furnished by the NYSE MKT, the TSX or other such exchange for the next preceding day on which sales of Common Shares were reported by the NYSE MKT, the TSX or such other stock exchange, as applicable. If the Common Shares are no longer listed or is no longer actively traded on the NYSE MKT, the TSX or other stock exchange as of the exercise date, the Fair Market Value of the Common Shares shall be the value as reasonably determined by the Board or a committee of the Board duly appointed for the purpose of administration of the Plan in accordance with applicable law.”

Section 2.4(f) of the Plan is hereby deleted in its entirety and replaced with the following so that it shall read as follows:

“(f)

The purchase price of each Common Share purchased under an Option may be paid by any of the following means, subject to compliance with applicable laws, including, without limitation, one or a combination of the following methods:

(1)

services rendered by the recipient of such award, if authorized by the Board or a committee of the Board duly appointed by the Board for the purpose of administration of the Plan;

(2)

cash, check payable to the order of the Corporation, or electronic funds transfer;

(3)

notice and third party payment in such manner as may be authorized by the Board or a committee of the Board duly appointed by the Board for the purpose of administration of the Plan;

(4)

the delivery of previously owned Common Shares that are fully vested and unencumbered;

(5)

by a reduction in the number of shares otherwise deliverable pursuant to the award; or

(6)

subject to such procedures as the Board or a committee of the Board duly appointed by the Board for the purpose of administration of the Plan may adopt, pursuant to a “cashless exercise” with a third party who provides financing for the purposes of (or who otherwise facilitates) the purchase or exercise of awards.

In the event that the Board or a committee of the Board duly appointed by the Board for the purpose of administration of the Plan allows a participant to exercise an Option by delivering Common Shares previously owned by such participant and unless otherwise expressly provided by the Board or a committee of the Board duly appointed by the Board for the purpose of administration of the Plan, any Common Shares delivered which were initially acquired by the participant from the Corporation (upon exercise of an Option or otherwise) must have been owned by the participant at least six months as of the date of delivery (or such other period as may be required by the Board or a committee of the Board duly appointed by the Board for the purpose of administration of the Plan in order to avoid adverse accounting treatment). Common Shares used to satisfy the exercise price of an Option shall be valued at their Fair Market Value on the date of exercise. The Corporation will not be obligated to deliver any Common Shares unless and until any other conditions to exercise or purchase, as may have been established by the Board or a committee of the Board duly appointed by the Board for the purpose of administration of the Plan, have been satisfied.”

EX-31

EXHIBIT 31.1

CERTIFICATIONS

I, Randall J. Scott, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Rare Element Resources Ltd.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report.

4.

The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)

Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and

5.

The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors:

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting.

Date:  November 5, 2012

By:      /s/ Randall J. Scott                            

Randall J. Scott

President, Chief Executive Officer and Director

(Principal Executive Officer)

EX-31

EXHIBIT 31.2

CERTIFICATIONS

I, David P. Suleski, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Rare Element Resources Ltd.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report.

4.

The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)

Evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)

Disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter (fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and

5.

The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors:

a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and

b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting.

Date:  November 5, 2012

By:      /s/ David P. Suleski              

David P. Suleski

Chief Financial Officer

(Principal Accounting and Financial Officer)

EX-32

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Rare Element Resources Ltd.. (the “Company”) on Form 10-Q for the period ended September 30, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Randall J. Scott, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  November 5, 2012

By:      /s/ Randall J. Scott                            

Randall J. Scott

President, Chief Executive Officer and Director

(Principal Executive Officer)

A signed original of this written statement required by Section 906 has been provided to Rare Element Resources Ltd. and will be retained by Rare Element Resources Ltd. to be furnished to the Securities and Exchange Commission or its staff upon request.

EX-32

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Rare Element Resources Ltd.. (the “Company”) on Form 10-Q for the period ended September 30, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David P. Suleski, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:  November 5, 2012

By:     /s/ David P. Suleski  

       David P. Suleski

       Chief Financial Officer

       (Principal Accounting and Financial Officer)

A signed original of this written statement required by Section 906 has been provided to Rare Element Resources Ltd. and will be retained by Rare Element Resources Ltd. to be furnished to the Securities and Exchange Commission or its staff upon request.   

XML

1. NATURE OF OPERATIONS (Details Narrative) (USD $) In Thousands, unless otherwise specified	3 Months Ended		160 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012
Nature Of Operations Details Narrative
Accumulated Operating Deficit	$ (5,858)	$ (10,934)	$ (67,623)

XML

4. EQUIPMENT

3 Months Ended

Sep. 30, 2012

Notes to Financial Statements

EQUIPMENT

	September 30, 2012						June 30, 2012
	Cost		Accumulated depreciation		Net book value		Cost		Accumulated depreciation		Net book value
Computer equipment	$	160	$	58	$	102	$	160	$	46	$	114
Furniture		98		23		75		98		19		79
Geological equipment		343		88		255		359		70		289
Vehicles		144		25		119		144		18		126
	$	745	$	194	$	551	$	761	$	153	$	608

XML

9. SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS (Details Narrative) (USD $)	3 Months Ended
	Sep. 30, 2012
Supplemental Disclosure With Respect To Cash Flows Details Narrative
Accounts receivable amount for common shares issued upon option exercises in which the cash was not received prior to the end of the quarter	$ 269
Supplemental cash flow interest received	157
Non-cash interest received	$ 121

XML

3. FAIR VALUE OF INSTRUMENTS

3 Months Ended

Sep. 30, 2012

Property, Plant and Equipment [Abstract]

FAIR VALUE OF INSTRUMENTS

Our financial instruments consist of cash and cash equivalents, marketable securities, accounts receivable, restricted cash, accounts payable and accrued liabilities. Included within cash and cash equivalents is an enhanced yield deposit account that contains an embedded derivative in the form of a foreign currency option. Due to the short-term nature of the option contract and the low volatility between the U.S. dollar and Canadian dollar, the liability portion of the derivative instrument is de minimis. U.S. GAAP defines “fair value” as the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price) and establishes a fair-value hierarchy that prioritizes the inputs used to measure fair value using the following definitions (from highest to lowest priority):

· Level 1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

· Level 2 — Observable inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data by correlation or other means.

· Level 3 — Prices or valuation techniques requiring inputs that are both significant to the fair-value measurement and unobservable.

The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents.  The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests.  Periodically throughout the year, the Company has maintained balances in various U.S. operating accounts in excess of U.S. federally insured limits.  

The following table presents information about financial instruments recognized at fair value on a recurring basis as of September 30, 2012 and June 30, 2012, and indicates the fair value hierarchy:

	September 30, 2012			June 30, 2012
	Level 1	Level 2	Total	Level 1	Level 2	Total
Assets
Cash and cash equivalents	$     32,069	$               -	$     32,069	$     37,030	$               -	$     37,030
Short-term investments	-	15,254	15,254	-	14,633	14,633
Marketable securities	34	-	34	74	-	74
Total financial assets	$     32,103	$     15,254	$     47,357	$     37,104	$     14,633	$     51,737
Liabilities
Accounts payable and other accrued liabilities	$       1,967	$       -	$       1,967	$       2,055	$       -	$       2,055
Total financial assets and liabilities	$     34,070	$     15,254	$     49,324	$     39,159	$     14,633	$     53,792

XML

Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Jun. 30, 2012
Current Assets
Cash and cash equivalents	$ 32,069	$ 37,030
Short-term investments	15,254	14,633
Interest receivable	230	175
Prepaid expenses	202	240
Marketable securities	34	74
Accounts receivable	271	23
Total Current Assets	48,060	52,175
Equipment	551	608
Mineral properties	27	27
Restricted cash		422
Total assets	48,638	53,232
Current Liabilities
Accounts payable and accrued liabilities	1,967	2,055
Total Current Liabilities	1,967	2,055
Asset retirement obligation	435	435
Total liabilities	2,402	2,490
Commitments and contingencies
SHAREHOLDERS' EQUITY
Common shares, no par value - unlimited shares authorized; shares outstanding September 30, 2012 - 44,769,245 June 30, 2012 - 44,364,245	93,142	92,500
Additional paid in capital	20,759	20,052
Accumulated other comprehensive loss	(42)	(45)
Accumulated deficit during exploration stage	(67,623)	(61,765)
Total shareholders' equity	46,236	50,742
Total liabilities and shareholders' equity	$ 48,638	$ 53,232

XML

1. NATURE OF OPERATIONS

3 Months Ended

Sep. 30, 2012

Organization, Consolidation and Presentation of Financial Statements [Abstract]

NATURE OF OPERATIONS

Rare Element Resources Ltd. (collectively, “we,” “us,” “our”, “Rare Element” or “the Company”) was incorporated under the laws of the Province of British Columbia on June 3, 1999.

We are currently in the process of exploring, evaluating and developing the Bear Lodge Rare Earth Element (“REE”) Project (the “Project”) in Wyoming. In accordance with U.S. GAAP we are an exploration stage entity. However we have completed a pre-feasibility study on the Project and have begun compiling data for the preparation of a feasibility study. To date, we have no revenue and have an accumulated operating deficit of $67,623 of which $33,522 is attributable to the exploration of our mineral interests.

Our continuing operations and the recoverability of the carrying values of our mineral property interests are dependent upon economic reserves being discovered and developed at the Project, our ability to obtain the necessary permits to mine the Project and on future profitable production or proceeds from the disposition of any of our mineral property interests. Development and/or start-up of the Project is dependent upon our ability to obtain the necessary financing to complete the exploration, development and/or start-up of the Project. Although we have been successful in raising such capital in the past, there can be no assurance that we will be able to do so in the future.

A write down in the carrying values of one or more of our mineral properties may be required in the future as a result of events and circumstances, such as our inability to obtain all the necessary permits, changes in the legal status of our mineral properties, government actions, the results of technical evaluation and changes in economic conditions, including the price of rare-earth oxide (“REO”) concentrate and other commodities or input prices.  We regularly evaluate the carrying value of our mineral properties to determine if impairment is required in view of such factors.

XML

5. COMMON SHARES (Details) (Common Stock, USD $)	3 Months Ended
	Sep. 30, 2012
Common Stock
Balance at June 30, 2012 (date of inception), shares	44,364,245
Balance at June 30, 2012 (date of inception), amount	$ 92,500
Excercise of stock options-cash, Shares	405,000
Exercise of stock options-cash, amount	357
Exercise of stock options-fair value, shares
Exercise of stock options-fair value, amount	285
Shares issued, shares	405,000
Shares issued, amount	642
Balance at September 30, 2012, shares	44,769,245
Balance at September 30, 2012, amount	$ 93,142

XML

6. ADDITIONAL PAID-IN CAPITAL (Details 1) (USD $)	3 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Additional Paid-In Capital Details
Number of Options Outstanding, Beginning	4,331,000	3,136,500
Number of Options Granted	150,000	410,000
Number of Options Exercised	(405,000)	(20,000)
Number of Options Outstanding, Ending	4,076,000	3,526,500
Number of Options Exercisable	3,023,400	1,898,700
Weighted Average Exercise Price Outstanding, Beginning	$ 5.84	$ 6.16
Weighted Average Exercise Price Granted	$ 5.01	$ 9.05
Weighted Average Exercise Price Exercised	$ 0.87	$ 2.77
Weighted Average Exercise Price Outstanding, Ending	$ 6.5	$ 6.77
Weighted Average Exercise Price Exercisable	$ 6.77	$ 3.73
Weighted-average fair value per share of options granted during the period	$ 2.57	$ 7.09

XML

2. BASIS OF PRESENTATION

3 Months Ended

Sep. 30, 2012

Basis Of Presentation

BASIS OF PRESENTATION

In accordance with US GAAP for interim financial statements, these consolidated financial statements do not include certain information and note disclosures that are normally included in annual financial statements prepared in conformity with US GAAP.  Accordingly, these unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements as of June 30, 2012, which were included in our Annual Report on Form 10-K for the year ended June 30, 2012. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (which are of a normal, recurring nature) necessary to present fairly in all material respects our financial position as of September 30, 2012, and the results of our operations and cash flows for the three months ended September 30, 2012 and 2011 in conformity with U.S. GAAP. Interim results of operations for the three months ended September 30, 2012 may not be indicative of results that will be realized for the full year ending June 30, 2013.

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Consolidated Balance Sheets (Parenthetical) (USD $)	Sep. 30, 2012	Jun. 30, 2012
Statement of Financial Position [Abstract]
Common Stock, Par Value
Common Stock, Shares Authorized
Common Stock, Shares Issued	44,769,245	44,364,245
Common Stock, Shares Outstanding	44,769,245	44,364,245

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4. EQUIPMENT (Tables)

3 Months Ended

Sep. 30, 2012

Notes to Financial Statements

SCHEDULE OF EQUIPMENT

	September 30, 2012						June 30, 2012
	Cost		Accumulated depreciation		Net book value		Cost		Accumulated depreciation		Net book value
Computer equipment	$	160	$	58	$	102	$	160	$	46	$	114
Furniture		98		23		75		98		19		79
Geological equipment		343		88		255		359		70		289
Vehicles		144		25		119		144		18		126
	$	745	$	194	$	551	$	761	$	153	$	608

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Document and Entity Information	3 Months Ended
	Sep. 30, 2012	Nov. 08, 2012
Document And Entity Information
Entity Registrant Name	Rare Element Resources Ltd
Entity Central Index Key	0001419806
Document Type	10-Q
Document Period End Date	Sep. 30, 2012
Amendment Flag	false
Current Fiscal Year End Date	--06-30
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		44,824,245
Document Fiscal Period Focus	Q1
Document Fiscal Year Focus	2013

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5. CAPITAL STOCK (Tables)

3 Months Ended

Sep. 30, 2012

Equity [Abstract]

SCHEDULE OF CAPITAL STOCK

	Number of shares issued		Common shares
As of June 30, 2012		44,364,245		92,501
Exercise of stock options - cash		405,000		357
Exercise of stock options - fair value		—		284
Issued during the three months ended September 30, 2012		405,000		641
As of September 30, 2012		44,769,245		93,142

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Consolidated Statements of Operations and Comprehensive Loss (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		160 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012
Operating income and (expenses):
Exploration	$ (5,382)	$ (3,847)	$ (33,522)
Corporate administration	(2,393)	(3,942)	(33,821)
Depreciation	(46)	(20)	(218)
Gain/(loss) on currency translation	1,802	(3,497)	1,975
Write-down of mineral property			(2,924)
Total operating expenses	(6,019)	(11,306)	(68,510)
Non-operating income and (expenses):
Interest income	168	286	1,843
Other income			10
Loss on sale of marketable securities	(7)		(18)
Unrealized gain/(loss) on derivatives		86	(948)
Total non-operating income	161	372	887
Net loss	(5,858)	(10,934)	(67,623)
Other comprehensive loss
Realized loss on available-for-sale securities	7		18
Unrealized gain/(loss) on available-for-sale securities	(4)	(96)	(60)
COMPREHENSIVE LOSS	$ (5,855)	$ (11,030)	$ (67,665)
LOSS PER SHARE - BASIC AND DILUTED	$ (0.13)	$ (0.25)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING	44,391,636	44,096,015

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7. RELATED PARTY TRANSACTIONS

3 Months Ended

Sep. 30, 2012

Related Party Transactions [Abstract]

RELATED PARTY TRANSACTIONS

During the three-month periods ended September 30, 2012 and 2011:

· $17 and nil, respectively, was charged for consulting fees by Donald E. Ranta who serves as our Chairman of the Board of Directors of Rare Element. As at September 30 2012, there was $6 outstanding amounts owed to Donald E. Ranta.

Related party expenses are included in our corporate general and administrative and investor relations amount on our Consolidated Statements of Operations and Comprehensive Loss. Related party transactions were in the normal course of operations and are measured at fair value. The amounts owed bear no interest and are unsecured with no repayment terms.

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6. ADDITIONAL PAID IN CAPITAL

3 Months Ended

Sep. 30, 2012

Equity [Abstract]

7. ADDITIONAL PAID IN CAPITAL

Stock-based compensation

We have two stock option plans under which options are outstanding and exercisable, namely the Fixed Stock Option Plan and the 10% Rolling Stock Option Plan. The Fixed Stock Option Plan was originally approved by shareholders on December 11, 2002 and subsequently approved by shareholders on December 7, 2009 following certain amendments to the Fixed Stock Option Plan. The Fixed Stock Option Plan expired upon the adoption of the 10% Rolling Stock Option Plan which was approved by shareholders on December 2, 2011, and as such, we may no longer grant options under the Fixed Stock Option Plan. However, the terms of the Fixed Stock Option Plan continue to govern all prior awards granted under such plan until such awards have been cancelled, forfeited or exercised in accordance with the terms thereof. As of September 30, 2012, we had 2,770,000 options outstanding under our Fixed Stock Option Plan, as amended, and 1,306,000 options outstanding under our 10% Rolling Stock Option Plan.

The fair value of each employee stock option award is estimated at the grant date using the Black-Scholes option pricing model and our common shares price on the date of grant. The significant assumptions used to estimate the fair value of stock options awarded during the three months ended September 30, 2012 and 2011 using the Black-Scholes model are as follows:

	September 30,
	2012			2011
Risk-free interest rate		0.35%  - 0.39%			2.00	%
Expected volatility		80	%		108	%
Expected dividend yield		Nil			Nil
Expected term in years		3			5

The compensation expense recognized in our consolidated financial statements for the three months ended September 30, 2012 and 2011 for stock option awards was $984 and $3,312, respectively. As of September 30, 2012, there was $1,147 of total unrecognized compensation cost related to unvested stock options which is expected to be recognized over a weighted-average remaining vesting period of 0.3 years.

The following table summarizes our stock option activity for the three-month period ended September 30, 2012:

	2012		2011
	Number of Stock Options	Weighted Average Exercise Price	Number of Stock Options	Weighted Average Exercise Price
Outstanding, beginning of period	4,331,000	$          5.84	3,136,500	$            6.16
Granted	150,000	5.01	410,000	9.05
Exercised	(405,000)	0.87	(20,000)	2.77
Outstanding, end of period	4,076,000	$          6.50	3,526,500	$            6.77
Exercisable, end of period	3,023,400	$          6.77	1,898,700	$            3.73
Weighted-average fair value per share of options granted during period	$                    2.57		$                   7.09

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6. ADDITIONAL PAID-IN CAPITAL (Details)	3 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Additional Paid-In Capital Details
Risk free interest rate, minimum	0.35%	0.20%
Risk free interest rate, maximum	0.39%
Expected volatiility	80.00%	108.00%
Expected term in years	3 years	5 years

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6. ADDITIONAL PAID-IN CAPITAL (Tables)

3 Months Ended

Sep. 30, 2012

Additional Paid-In Capital Tables

Fair value assumptions

	September 30,
	2012			2011
Risk-free interest rate		0.35%  - 0.39%			2.00	%
Expected volatility		80	%		108	%
Expected dividend yield		Nil			Nil
Expected term in years		3			5

SCHEDULE OF ADDITIONAL PAID IN CAPITAL

	For the three-month periods ended September 30,
	2012					2011
	Number of Stock Options			Weighted Average Exercise Price		Number of Stock Options			Weighted Average Exercise Price
Outstanding, beginning of period		4,331,000		$	5.84		3,136,500		$	6.16
Granted		150,000			5.01		410,000			9.05
Exercised		(405,000	)		0.87		(20,000	)		2.77
Outstanding, end of period		4,076,000		$	6.50		3,526,500		$	6.77
Exercisable, end of period		3,023,400		$	6.77		1,898,700		$	3.73
Weighted-average fair value per share of options granted during period	$	2.57				$	7.09

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ACCOUNTING POLICIES

3 Months Ended

Sep. 30, 2012

Accounting Policies

Fair value policy

Our financial instruments consist of cash and cash equivalents, marketable securities, accounts receivable, restricted cash, accounts payable and accrued liabilities. Included within cash and cash equivalents is an enhanced yield deposit account that contains an embedded derivative in the form of a foreign currency option. Due to the short-term nature of the option contract and the low volatility between the U.S. dollar and Canadian dollar, the liability portion of the derivative instrument is de minimis. U.S. GAAP defines “fair value” as the price that would be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price) and establishes a fair-value hierarchy that prioritizes the inputs used to measure fair value using the following definitions (from highest to lowest priority):

· Level 1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

· Level 2 — Observable inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data by correlation or other means.

· Level 3 — Prices or valuation techniques requiring inputs that are both significant to the fair-value measurement and unobservable.

The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents.  The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests.  Periodically throughout the year, the Company has maintained balances in various U.S. operating accounts in excess of U.S. federally insured limits.  

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8. COMMITMENTS AND CONTINGENCIES

3 Months Ended

Sep. 30, 2012

Commitments and Contingencies Disclosure [Abstract]

COMMITMENTS AND CONTINGENCIES

Our commitments and contingencies include the following items:

Restricted cash

On August 28, 2012, we received notification from the Wyoming Department of Environmental Quality (“WDEQ”) that they had accepted a surety bond in the amount of $430 for the Company’s required reclamation program for land disturbances during our exploration programs at the Bear Lodge Property. Upon acceptance, the WDEQ released the previously restricted funds back to the Company. The surety bond requires no cash backing from the Company. As such, the amount previously recorded as restricted cash of $422 was reclassified to cash and cash equivalents during the three-month period ended September 30, 2012.

Potential environmental contingency

Our mining and exploration activities are subject to various federal and state laws and regulations governing the protection of the environment. These laws and regulations are continually changing and generally becoming more restrictive. We conduct our operations so as to protect public health and the environment, and believe our operations are materially in compliance with all applicable laws and regulations. We have made, and expect to make in the future, expenditures to comply with such laws and regulations. The ultimate amount of reclamation and other future site-restoration costs to be incurred for existing mining interests is uncertain.

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9. SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS

3 Months Ended

Sep. 30, 2012

Supplemental Cash Flow Elements [Abstract]

SUPPLEMENTAL DISCLOSURE WITH RESPECT TO CASH FLOWS

For the three-month period ended September 30, 2012 non-cash item consisted of interest received of $121 and an accounts receivable amount of $269 for common shares issued upon option exercises in which the cash was not received prior to the end of the quarter. For the three-month period ended September 30, 2011 the only supplemental cash flow item was interest received of $157.

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3. FAIR VALUE OF INSTRUMENTS (Tables)

3 Months Ended

Sep. 30, 2012

Property, Plant and Equipment [Abstract]

SCHEDULE OF FAIR VALUE OF INSTRUMENTS

	Level 1		Level 2		Total
Assets
Cash and cash equivalents	$	32,069	$	—	$	32,069
Short-term investments		—		15,254		15,254
Marketable securities		34		—		34
Restricted cash		—		—		—
Total financial assets	$	32,103	$	15,254	$	47,357
Liabilities
Accounts payable and other accrued liabilities	$	1,967	$	—	$	1,967
Total financial assets and liabilities	$	34,070	$	15,254	$	49,324

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4. EQUIPMENT (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Jun. 30, 2012
Total Equipment	$ 551	$ 608
Cost
Computer equipment	160	160
Furniture	98	98
Geological equipment	343	359
Vehicles	144	144
Total Equipment	745	761
Accumulated depreciation
Computer equipment	58	46
Furniture	23	19
Geological equipment	88	70
Vehicles	25	18
Total Equipment	194	153
Net book value
Computer equipment	102	114
Furniture	75	79
Geological equipment	255	289
Vehicles	119	126
Total Equipment	$ 551	$ 608

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4. EQUIPMENT (Details Narrative) (USD $) In Thousands, unless otherwise specified	3 Months Ended		160 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012
Equipment Details Narrative
Depreciation expense	$ 46	$ 20	$ 218

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	3 Months Ended		160 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss for the period	$ (5,858)	$ (10,934)	$ (67,623)
Adjustments to reconcile loss for the period to net cash and cash equivalents used in operations:
Depreciation	46	20	218
Asset retirement obligation			435
Fair value of warrants received pursuant to the sale of mineral properties			(15)
Unrealized (gain)/loss on derivatives		(86)	948
Write-down of mineral property			1,891
Loss on currency translation	7	9	(26)
Loss on disposal of marketable securities	7		18
Loss on disposal of equipment	(3)		(3)
Stock-based compensation	984	3,312	20,890
Changes in non-cash working capital
Accounts receivable	21	(104)	(143)
Interest receivable	(55)	(129)	(238)
Prepaid expenses	38	(49)	(214)
Accounts payable and accrued liabilities	(88)	3	1,748
Due to related party		(31)	(28)
Net cash and cash equivalents used in operating activities	(4,901)	(7,989)	(42,142)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities			(207)
Purchases of short-term investments	(621)		(15,254)
Additions to mineral properties, net of cost recoveries			(29)
Release of restricted cash	422
Purchases of equipment		(208)	(769)
Proceeds from the sale of equipment	14		14
Proceeds from sale of marketable securities	36		150
Payments received for sale/option of mineral properties			279
Net cash and cash equivalents used in investing activities	(149)	(208)	(15,816)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advance of promissory note			111
Repayment of promissory note			(129)
Cash received for common shares, net of share issuance costs	89	55	94,615
Shares subscribed			(4,788)
Net cash and cash equivalents provided by financing activities	89	55	89,808
Cash acquired in capital transaction			219
Increase/(decrease) in cash and cash equivalents	(4,961)	(8,142)	32,069
Cash and cash equivalents - beginning of the period	37,030	72,312
Cash and cash equivalents - end of the period	$ 32,069	$ 64,170	$ 32,069

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5. CAPITAL STOCK

3 Months Ended

Sep. 30, 2012

Equity [Abstract]

CAPITAL STOCK

	Number of shares issued	Common shares
As of June 30, 2012	44,364,245	$                    92,500
Exercise of stock options - cash	405,000	357
Exercise of stock options - fair value	-	285
Issued during the three months ended September 30, 2012	405,000	642
As of September 30, 2012	44,769,245	$                    93,142

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6. ADDITIONAL PAID IN CAPITAL (Details Narrative) (USD $) In Thousands, unless otherwise specified	3 Months Ended		160 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012
Additional Paid In Capital Details Narrative
Compensation Expense	$ 984	$ 3,312	$ 20,890

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3. FAIR VALUE OF FINANCIAL INSTRUMENTS (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Jun. 30, 2012
Assets
Cash and cash equivalents	$ 32,069	$ 37,030
Short-term investments	15,254	14,633
Marketable securities	34	74
Total financial assets	47,357	51,737
Liabilities
Accounts payable and other accrued liabilities	1,967	2,055
Total financial assets and liabilities	49,324	53,792
Level 1
Assets
Cash and cash equivalents	32,069	37,030
Short-term investments
Marketable securities	34	74
Total financial assets	32,103	37,104
Liabilities
Accounts payable and other accrued liabilities	1,967	2,055
Total financial assets and liabilities	34,070	39,159
Level 2
Assets
Cash and cash equivalents
Short-term investments	15,254	14,633
Marketable securities
Total financial assets	15,254	14,633
Liabilities
Accounts payable and other accrued liabilities
Total financial assets and liabilities	$ 15,254	$ 14,633