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 and nine months ended September 30, 2022, has been prepared based on information available to us as of November 9, 2022. 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 December 31, 2021, and the related notes thereto filed with our Annual Report on Form 10-K, which have been prepared in accordance with U.S. GAAP. This discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results, performance, or achievements 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.

Outlook

During the nine months ended September 30, 2022, the Company continued its work on the demonstration plant (the "Demonstration Plant") project, and this work is expected to continue over the remainder of 2022 and through the project's expected completion date in the early part of 2025. As of September 30, 2022, the Demonstration Plant project had achieved the 60% plant design milestone. The Demonstration plant project is now advancing toward final detailed engineering due for completion later this year. Key Demonstration Plant project activities over the next three months are expected to include completion of final plant design, continuation of licensing and permitting efforts, and procurement of long lead-time equipment. Originally scheduled for later in the Demonstration Plant project's timeline, the procurement of certain long-lead equipment has been moved earlier in the schedule due to price inflation and supply chain concerns. This scheduling change, in turn, necessitated a contract modification with the DoE. This modification, which was negotiated between General Atomics and the DoE, was completed during September 2022. While not impacting the Demonstration Plant project's overall timeline of 40 months, the modification changed the DoE's first project continuation decision point from October 2022 to December 2022 upon final engineering and design. A second continuation decision point was moved to May 2023 to coincide with the completion of the U.S. Nuclear Regulatory Commission and the DoE National Environmental Policy Act licensing and approval processes. Over the next three months, the Company also plans to continue with the update to its baseline environmental data for the Bear Lodge REE Project.

Longer term, the Company does not have sufficient funds to progress with development activities beyond the Demonstration Plant project, including feasibility studies, permitting and licensing, and development and construction related to its Bear Lodge REE Project. Therefore, the achievement of these longer-term activities will be dependent upon securing additional funds through financings, off-take agreements, joint ventures, strategic transactions, or sales of various assets. There is no assurance, however, that the Company will be successful in completing any such other financings or transactions. Ultimately, in the event the Company cannot secure additional financial resources, or complete a strategic transaction in the longer term, it may need to suspend its operational plans or potentially liquidate its business interests, and investors may lose all or part of their investment.

External Factors Impact on Business

In response to the COVID-19 pandemic, the Company implemented travel restrictions, both domestically and internationally, and its employees and consultants abided by government guidance and orders. As a result, the Company saw delays in the metallurgical studies conducted by Umwelt-und Ingenieurtechnik GmbH Dresden ("UIT") that slowed the progression of the prior test work. Any continued pandemic impact or similar impacts from other external influences (such as the Russia/Ukraine war) could be material to the completion of the Demonstration Plant and could have a material adverse impact on our future activities, cash flows and liquidity. As a result of one or more of these factors, the Company has seen and continues to see higher prices for the equipment and raw materials needed for the Demonstration Plant due to shortages, commodity inflation and supply chain issues. Further, it is unknown what, if any, impact these external influences and any resulting economic effects will have on rare earth prices and market supply and demand fundamentals. For further discussion of this matter, refer to "Item 1A. Risk Factors" in Part II of the Company's Annual Report on Form 10-K as filed on March 23, 2022.



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Results of Operations

Summary

For the three-and nine-month periods ended September 30, 2022, we experienced net losses of $1,705 ($0.01 per share) and $6,527 ($0.03 per share), respectively, compared with net losses of $1,234 ($0.01 per share) and $3,548 ($0.02 per share) for the three-and nine-month periods ended September 30, 2021, respectively. See our discussion below for the primary drivers of these changes.

Exploration and evaluation

Our exploration and evaluation costs increased by $387 over the comparative three-month period, rising from $383 for the three months ended September 30, 2021 to $770 for the three months ended September 30, 2022, and by $960 over the comparative nine-month period, rising from $1,307 for the nine months ended September 30, 2021 to $2,267 for nine months ended September 30, 2022. These increases were largely attributable to the activities associated with our Bear Lodge REE Project and the Demonstration Plant as work progressed under the Cost Share Agreement. See Note 4 to the Condensed Consolidated Financial Statements for a more complete discussion of this Cost Share Agreement.

Corporate administration

Our corporate administrative costs increased by $96 over the comparative three-month period rising from $829 for the three months ended September 30, 2021 to $925 for the three months ended September 30, 2022, and by $1,895 over the comparative nine-month period rising from $2,177 for nine months ended September 30, 2021 to $4,072 for nine months ended September 30, 2022. This increase over the nine-month comparative period was largely driven by an increase in our stock-based compensation of $1,420 and our accrual for Mr. Scott's severance payment of $242 during the nine months ended September 30, 2022.

Interest Income

For the three and nine months ended September 30, 2022, the Company generated interest income of $78 and $100, respectively, from investments of the remaining net proceeds from its December 2021 rights offering. During the comparative three and nine months ended September 30, 2021, there were no such proceeds available for investment.

Accretion expense

The Company's accretion expense increased by $51 over the comparative three-month period, rising from $20 for the three months ended September 30, 2021 to $71 for the three months ended September 30, 2022, and by $153 over the comparative nine-month period, rising from $60 for the nine months ended September 30, 2021 to $213 for the nine months ended September 30, 2022. This accretion expense is related to the Company's option to repurchase approximately 640 acres of non-core real property in Wyoming for not less than $1,200 or greater than $1,850 in the form of cash, common shares of the Company, or a combination of cash and common shares of the Company. Accretion expense is recorded each reporting period to increase the repurchase option liability to the maximum exercise price of $1,850, less any annual option payments of $25. See Note 7 to the Condensed Consolidated Financial Statements for a more complete discussion of the repurchase option.

Cash Flows, Financial Position, Liquidity and Capital Resources

Cash Flows from Operating Activities

Net cash used in operating activities was $6,142 for the nine months ended September 30, 2022, compared with $2,269 for the same period in 2021. This increase of $3,873 was mostly driven by an increase in prepaid expenses of $1,565 related to the Company's prepayment of funds to General Atomics under the Cost Share Agreement, a decrease in accounts payable and accrued liabilities of $865 largely stemming from the payment of a $712 amount owing to General Atomics, a related party, and an overall increase in the Company's expenses paid for work on the Demonstration Plant.


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Financial Position, Liquidity and Capital Resources

At September 30, 2022, we had a working capital balance of $20,039 which represented a decrease of $3,846 from our December 31, 2021 working capital balance of $23,885. This decrease was largely the result of amounts paid by the Company during the nine months ended September 30, 2022 under the Cost Share Agreement.

Inclusive of amounts already advanced, the Company's share of the total cost under the Cost Share Agreement are expected to equal or exceed $22,000 over the life of the Demonstration Plant project. As a result, the Company will not have sufficient funds to progress with longer-term activities, including feasibility studies, permitting, development and construction related to the Bear Lodge REE Project. Therefore, the achievement of these longer-term activities will be dependent upon additional financings, off-take agreements, joint ventures, strategic transactions, or sales of various assets. There is no assurance, however, that the Company will be successful in completing any such financings or other transactions. Ultimately, in the event the Company cannot secure additional financial resources, or complete a strategic transaction in the longer term, it may need to suspend its operational plans or potentially liquidate its business interests, and investors may lose all or part of their investment.

Contractual Obligations

During the nine months ended September 30, 2022, the Company entered into an amendment to its employment agreement with Randall J. Scott, the Company's former Chief Executive Officer. See Note 7 to the condensed consolidated financial statements for the period ended September 30, 2022 for a complete discussion.

During the nine months ended September 30, 2022, General Atomics and the DoE agreed to a contract modification regarding certain decision points in the Demonstration Plant project's timeline. See Note 1 to the condensed consolidated financial statements for the period ended September 30, 2022 for a complete discussion

There were no other material changes to the contractual obligations disclosed in Item 8 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2021.

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