| | Bottom-Fish Action Report for Week of April 25, 2010 to May 15, 2010
Flash Crashes and Berserk Trading Robots
During the three weeks since the last Bottom-Fish Action report the resource juniors have had to endure quite a few down days as the world worried about the disintegration of the Eurozone and had to endure a "flash crash" on May 6 created by an out of control order execution system. A "fat finger" trade has been ruled out as the culprit for the thousand point drop in the Dow Jones Index which cause some big name companies to trade at a penny as computer algorithms seeking bids found the market maker "stub" bid at rock bottoms. The latest explanation for the "flash crash" is a dull Kansas mutual fund called Waddell & Reed whose hedging activity in the market for an index future gave new meaning to the chaos theory concept of a butterfly flapping its wings in the Himalayas unleashing a hurricane in the Caribbean.
That this should happen points to the inherent instability of the current market system which 1) allows orders to be executed in parallel electronic execution systems whose order books and market activity are not consolidated, 2) allows computer programs driven only by their internal rule systems to interface directly with the order book at speeds which make any human oversight impossible, and, 3) allows securities to be sold short on a downtick. The emergence of this situation has been hailed as a fountain of liquidity which benefits everybody, but in reality it substitutes a predatory form of artificial intelligence for contextually sensitive human intelligence. The modern market has deteriorated into an online war game in which the combatants are not kids playing Halo on XBox, but software robots battling with each other for the privilege of pillaging other people's money.
There are two important issues as to why allowing this to continue is not a good thing. One issue is the moral one of whether or not it is a good thing to launch a trading robot into the market on behalf of mutual funds, pension plans, and even private trading accounts. Do we really want human judgement displaced by pre-programmed trading systems? The other issue is the technical one concerning the information overload that accelerating market activity creates for these trading robots. The software requires real-time market information which is crunched according to a rule system developed by the software's architect which generates orders that get automatically fired into the order book. Trouble arises because there are many such software warriors active in the market, with the result that information lag evolves and leaves the software robots battling blind. A close analogy is what I observe when my kids play Halo online and they start complaining about "lag" and "glitches" as the reason their team just got massacred. It is not so funny when a real market becomes chaotic and investors, be they individuals or funds, have stock loss orders triggered by the order flow emanating from berserk software robots trading on the basis of lagged information and rules not designed for chaotic conditions. And it is completely deadly for relatively illiquid markets such as the TSX and TSXV resource juniors where complex narratives and lengthy timelines for speculative outcomes cannot survive the onslaught of technical trading systems.
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The concern about the Euro has created a bullish case for gold where we now have a situation in which the US dollar is rising, oil and other commodities are falling, and gold is rising, making new all time highs last week. This is what we need for a bull market in the gold resource juniors, and the conditions supporting it, namely a significant boost in the real price of gold, are looking better all the time.
On May 14, 2010 the New York Times published the following Reuters Breaking Views blurb by Martin Hutchinson and Christopher Hughes. This train of thought is very much along the lines I have been proposing as a reason for being bullish about gold in a way that is beneficial to the resource juniors with ounces in the ground, as opposed to the apocalyptic vision of so many newsletter pundits whose actualization would be catastrophic to portfolios that hold resource juniors. Rather than bore you once again with my version, I present the comment from the New York Times in its entirety below.
"It sounds like a gold bug's dream. But looking back to the last inflation-adjusted peak price in 1980, it's far from impossible that the gold price could soon go above $5,000 an ounce. The potential level of a new high can be estimated in several ways. Based on consumer price inflation, the peak of $875 an ounce in 1980 is equivalent to about $2,300 today, almost twice the current gold price. But there's a case for taking account of economic expansion as well as price inflation. The world's economic output has increased about sixfold since 1980. Scale up the peak 30 years ago by that multiple, and the gold price could top out at around $5,300. Gold can also be regarded as an alternative to money. Broad global money supply, known as M3, is now in dollar terms about 10 times what it was in 1980. The total gold supply has also increased to some 170,000 metric tons, from 110,000 tons over the same period, as more has been mined. Scaling up by money supply and deflating by the gold supply, the 1980 peak price would be equivalent to about $5,700 an ounce today. Looking at money supply another way, today's potential gold price would be a bit lower than that. A narrower measure of global money, M1, is currently estimated at about $17 trillion. If the 170,000 tons of gold mined through history were to substitute for this, the gold would be worth about $3,100 an ounce. But that wouldn't account for the tendency of the thinly traded gold market to overshoot sometimes to the upside, as it did in 1980, and sometimes to the downside. Of course, there is a considerable chance that gold and other commodity prices will peak at a lower level. But if a fourfold increase over a couple of years from today's gold price to more than $5,000 an ounce seems impossibly extreme, that was the trajectory in 1978-80. If governments continue to print money, whether for economic stimulus or to stave off defaults by themselves or others, fear of widespread currency debasement and the consequent inflation could create the conditions for just such a spike."
This sort of price increase by gold which does not at all mean the collapse of fiat currencies and a return to a gold standard is what will create a monster bull market for the gold juniors. It is the reason I issued a new good absolute spec value buy for Chesapeake Gold Corp whose Metates gold project would benefit enormously from an upwards repricing of gold in a context where there is only modest cost structure inflation.
| Above Bottom-Fish Range |
Within Bottom-Fish Range |
Below Bottom-Fish Range |
Recently Closed Out |
| Updated this Week |
New 2 Year High |
New 2 Year Low |
New Bottom-Fish High |
New Bottom-Fish Low |
Bottom-Fish Recommendations made from April 25, 2010 to May 15, 2010
| Company |
Date |
|
Price |
Recommendation |
Action |
Net
Cash |
Net
Stock |
Gain |
New Status |
| Chesapeake Gold Corp |
4/28/2010 |
 |
$8.78 |
Good Absolute Spec Value Buy |
Buy 114 @ $8.78 |
$0 |
114 |
0% |
Good Absolute Spec Value @ $8.78 |
| Chesapeake Gold Corp |
4/28/2010 |
 |
$8.78 |
Closeout Relative Spec Value Buy Cycle |
Sell 145 @ $7.88 |
$1,273 |
0 |
27% |
Closeout Hold 0% |
| Dome Ventures Corporation |
5/3/2010 |
 |
$1.05 |
BF Cycle Closeout Sell 100% |
Sell 5,263 @ $1.05 |
$5,526 |
0 |
453% |
BF Closeout Hold 0% |
| Rare Element Resources Ltd |
5/12/2010 |
 |
$2.98 |
Good Relative Spec Value Buy @ $2.98 |
Buy 336 @ $2.98 |
$0 |
336 |
0% |
Good relative Spec Value Buy max $3.50 |
| Sennen Resources Inc |
5/14/2010 |
 |
$0.32 |
New BF Spec Cycle Hold 100% |
|
$0 |
5,263 |
68% |
BF Spec Cycle Hold 100% |
Bottom-Fish Quick Notes
During the New York Hard Assets show I talked briefly with Neil Pettigrew and Kevin Keough of PC Gold Inc, wondering in particular why we have not heard anything since the junior reported the high grade No. 19 interval from hole 052-W02 on March 23. This wedge hole was supposed to carry on and intersect the No. 1 vein several hundred metres further downdip from the high grade interval reported February 22. Apparently the drilling has been troubled by hole deviation related to the porphyritic unit that hosts the No 19 vein and the wedge hole veered off target. Another wedge hole is being set up. The shallower drilling targeting the porphyritic unit has not hit anything obviously spectacular, though there is evidence of gold smoke in some of the intervals. Most importantly, PC Gold has observed that the porphyritic unit is riddled with veins, which bodes well for the prospect of finding more gold mineralization at the deeper level where the mother and wedge holes cut the No. 19 veins. PC Gold has closed the $9.1 million financing announced during the trading frenzy that followed the 052-W02 interval and is an excellent financial shape with additional money coming in from the early exercise of warrants.
Sennen Resources Inc signalled on April 30, 2010 that it will take on two mineral projects in Spain. It will do this by paying a lot of cash and shares to an undisclosed third party for the option to pay a lot more extra cash and shares for an 80% stake in one private company and a 75% stake in another private company. One owns a small polymetallic VMS deposit discovered in 1979 and apparently last explored in 1981, and the other owns a manganese-cobalt deposit last investigated by a Spanish state entity at an unknown time. The first would cost Sennen US $7 million and 18 million shares and the second would cost $6.25 million and 14 million shares over a three year period. The news release is written to imply that all this money and paper goes into the pockets of the existing shareholders of the private company with Sennen having rights of first refusal on the minority interests after it exercises its options. These payments are staged, so Sennen can bail out at any time, but the deal structure is such that Sennen could sit back for the next few years and give away its money while others acquire a control position in it. The private companies will operate programs on their projects, but it is not clear how money will flow into their treasuries to fund work unless their treasuries are already loaded with cash. So I called Sennen for clarification and was told that I would have to speak to Ian Rozier who might not return my call until Monday. Rozier has not returned any of my calls over the years, so this would indeed be a surprise. Bottom-fishers should be very careful about viewing this latest news as a positive development, because if it is the news release could have been written differently. I have input the historic resources which you can view by visiting the Sennen Profile. They look small but appear to have expansion potential if new exploration is thrown at the targets, which is why I am concerned that this is a cash vanishing act. Sennen does not state that this is a non-arms-length transaction, but the richness of the deal and the lack of any indication on how the advancement of the projects will be funded makes this look like a cash vanishing act. The news release was written by lawyer Doug Hyndman who only briefly had skin in the game in 2003 when he exercised options that he promptly sold. Rozier himself sold two-thirds of his position in the summer of 2008 at $0.40 in what were block trades, so his skin in the game is not what it used to be. My assumption has been that Sennen stock is held by a network of Rozier supporters, and if that is correct, I will likely get a good explanation as to why the Spanish deals are good for Sennen shareholders. Until we do, it is prudent to read the news release exactly as it is written.
Bottom-Fish Action Report for April 25, 2010 to May 15, 2010
Spec Value Hunter Comment - May 12, 2010: Rare Element gets back 100% of Sundance gold project
 Rare Element Resources Ltd announced after the market close on May 12, 2010 that Newmont had dropped its option on the Sundance gold project in Wyoming. Because this is a very important development that puts Rare Element's distinct rare earth and gold stories back on par with each other at a time when the rare earth sector is in a lull while a breakout in gold is pushing money into gold juniors, I am immediately issuing a Good Relative Spec Value Buy at $2.98 with a short term target of $6 as the market adjusts to Rare Element's restored dual focus. The key reasons for this recommendation are 1) the market is assigning zero value to the gold potential of Sundance for reasons that have just disappeared, and 2) a resource estimate is imminent which will demonstrate the multi-billion dollar critical mass a light rare earth deposit needs to be taken seriously as a development candidate. The stock has been under selling pressure during the past month, with persistent but not heavy handed selling from BMO Nesbitt. The selling style looks like profit-taking from a significant long position which may continue to provide liquidity for new buying, but this selling could stop on a dime once the seller realizes that from here onwards Rare Element's market will be driven by two distinct stories, gold and rare earths, which will likely ultimately be split into separate companies because each has a different market dynamic. The good news for the meantime is that there is little linkage between gold and rare earth market trends so that selling pressure due to weakness in one sector will tend to generate buying from the audience tuned into the other sector. Rare Element was recommended a medium priority bottom-fish buy in the $0.30-$0.49 range on December 24, 2008, and turned into a Spec Cycle Hold 100% recommendation on July 13, 2009 which has been confirmed several times. The new recommendation is targeted at KBFO members who lack exposure to the rare earth sector and who share my analysis that gold is an a major real price uptrend that will significantly outpace cost structure inflation and US dollar exchange rate declines. Bottom-fishers should continue to hold their positions, while Spec Value Hunters should take advantange of the recent price weakness related to the perception that Rare Element is all about rare elements, which has been appropriate as long as Newmont stood to earn 80% of the Sundance gold project. I suggest a buy limit of $3.50 for this Spec Value recommendation. At this point the recommendation is "relative" because we do not have a resource estimate on the table that allows us to determine if Rare Element's Sundance project is undervalued in absolute terms. At the current price Sundance is valued at $115 million, which is rich by itself in the absence of confirmed ounces in the ground, but the real implied value is zero because the Bear Lodge project by itself represents fair speculative value at $115 million for a $500 million dream target.
The rare earth sector has been weak during the past month as new money stopped flowing into it, partly because of concern that the deteriorating Euro-PIIGS situation could squash a nascent global economic recovery, and partly because the market has adopted a wait and see attitude since Molycorp filed a registration statement on April 16 for a $350 million IPO to fund a restart of the Mountain Pass rare earth mine. It is my view that Molycorp will be a hot IPO which will unleash a new wave of investment capital into the rare earth juniors of which Rare Element will be a major beneficiary, especially if Rare Element secures the AMEX listing for which it has applied. Rare Element is several weeks away from delivering an updated 43-101 resource estimate for the oxide portion of Bear Lodge whose existing inferred resource of 4,560,000 tons at 4.29% TREO I expect to double. I am also looking for a higher grade 6-8% sweet spot of 2-3 million tonnes that could be the starter pit. At the 4.29% TREO the rock value is $372/t using 4 year averages, jumping to $590/t using recent prices. Although Bear Lodge is not as big as Mountain Pass, it need not be developed at the small rate of 1,200 tpd proposed for Mountain Pass. It would 2-3 years longer to develop than Mountain Pass, putting production startup beyond 2014 by which time conservative estimates suggest annual demand will have exceeded 200,000 tonnes. Assuming Bear Lodge does boost its oxide resource, its mining rate could be set at 2,000 tpd or higher, especially if the wild dynamic that resides within the rare earth sector manifests itself.
For an example of the "wild dynamic", by which I mean the potential for new applications with a critical reliance on certain raw materials, consider the XSORBX water filter Molycorp has internally invented. In its S-1 Molycorp makes the surprising statement that "Although IMCOA predicts that there will be a surplus of cerium in the future, we anticipate most of our production will serve the new, proprietary XSORBX(r) market segment. This segment alone is expected to consume many times more cerium units than we can produce." This is a shockingly brazen statement because Mountain Pass production would replace much of the current American rare earth import of 18,000 tonnes, and half of Molycorp's planned 19,000 tonne annual production would consist of cerium. If Molycorp's optimistic outlook about the market for its water filters is borne out by reality, it will need access to a lot more cerium than Mountain Pass can produce. Furthermore, given that Molycorp has solicited government support for the rebuilding of the rare earth supply pipeline in the United States, and that the proposed RESTART bill requires the American supply base to be competitive, there will be political pressure for other American rare earth projects to also be pushed toward production. Bear Lodge is the most advanced American candidate outside of Mountain Pass, and will be an obvious magnet for investors if the upcoming resource estimate meets expectations. Recognition of this, will take a few more months and is contingent on Molycorp getting approval for an IPO that does not turn out to be a flop.
 The immediate driver for higher Rare Element prices is a perceptual gestalt switch which bring's Rare Element's gold story back into focus for the market at a time when the breakout in the gold price is luring speculators from the sidelines. The gold story had faded from view because Newmont had an option to earn up to 80% which required the major to spent $3.5 million by June 1, 2010 as part of the $5 million commitment by June 1, 2011 to vest for 50%. But because Newmont spent a couple years getting a 200 acre surface disturbance permit, it managed to spend only $2,850,000. Newmont hoped to secure an extension, but this was not in Rare Element's interest because during the past year the 100% owned Bear Lodge rare earth project had become the valuation focus for the market, with the 20% net interest in Sundance largely ignored for a very simple reason. With 38.6 million shares fully diluted and a stock price in the $3-$4 range the implied value of 20% owned Sundance was in the $600-$800 million range. (For those of you unfamiliar with my rational speculation model, the implied value is fully diluted times stock price divided by net interest, which gives you a 100% value of a project based on how the market is pricing a junior's share of the project.) The gold results do not support such a lofty valuation, which meant that Rare Element's destiny hinged on the 100% owned rare earth story. Newmont's drill results from fairly shallow holes have not been earth-shattering, suggesting a low grade near surface gold system of of 50-100 million tonnes grading 0.5-1.0 g/t which preliminary metallurgical tests suggest could yield a recovery in the 70%-80% range for heap leaching. Within that may be a somewhat higher grade starter pit. Newmont was attracted to Sundance because it is an alkaline intrusive complex similar to the 20 million ounce Cripple Creek system in Colorado, but Sundance is less eroded than Cripple Creek, which means that the high grade feeders that make Cripple Creek special are considerably deeper at Sundance, if they exist, and thus much more difficult to find. Newmont's hope had been to develop an open-pittable gold system with more ounces at a somewhat better grade which would become the stepping stone for ultimately finding the deeper bluesky potential.
The work so far fell short of this goal, which is why Newmont decided to return the project and assign to Rare Element its nearby 100% owned claims, some of which also have untested rare earth potential. Newmont retains a right of first refusal on all the claims and a 0.5% NSR on its previously 100% owned claims transferred to Rare Element. The deal terms are consistent with the perspective of a major who still likes the big picture potential of a project, recognizes the weakness of its bargaining position, and is setting the stage to farm in again on terms Rare Element might offer another party, or mount a takeover bid for Rare Element should new developments change the fundamentals of Sundance. The latter is the rationale behind consolidating all the peripheral ground under Rare Element's ownership. All of this is very good news for Rare Element shareholders because it gives Rare Element control over developing a low grade open pit, heap leach mine just at a time when gold is breaking out into new high price territory in real and nominal terms. Even better, further work is now fully permitted, and Newmont's project manager for Sundance, John Ray, is joining Rare Element to carry on his oversight of Sundance's exploration. Rare Element indicates it will be able to deliver a 43-101 resource estimate in early 2011. Additional drilling this summer at a cost estimated less than $1 million is required to fill in some blanks needed for a 43-101 resource estimate. The departure of Newmont also eliminates a provision that gave Newmont pre-emptive exploration rights should its gold focused goals ever overlap with Rare Element's rare earth focused goals. Management always downplayed this potential conflict when asked about it, but did emphasize its disappearance in the Wednesday news release. The Bear Lodge and Sundance projects cover the same property; they are distinguished from each other in that Bear Lodge has rights only to rare earths and uranium. The gold and rare earth zones, however, are in separate parts of the property and could be developed independently. Spec Value Hunters should take advantage of what I believe will be a brief window of opportunity during which the market still thinks Rare Element is "just a rare earth play".
Spec Value Hunter Comment - May 13, 2010: Avalon expects Nechalacho prefeasibility study in late June
 Avalon Rare Metals Inc provided an update on May 12, 2010 for its Nechalacho rare earth project in the Northwest Territories which indicates that it hopes to deliver a prefeasibility study by mid to late June. Since initiating a drill program in late January Avalon has drilled 43 holes representing 11,398 metres mainly in the southern part of the Nechalacho system where higher grades and thicknesses have been encountered. The goal is to upgrade a good portion of the Basal Zone's 48,658,075 tonne inferred resource into the indicated category; less than 10% was indicated in the last 43-101 resource estimate published August 17, 2009. The latest release reports results for 22 holes and they include a pleasant Upper Zone surprise in the land based area northeast of a pond called North Tardiff Lake. The Upper Zone is dominated by a light rare earth distribution (heavies are only 7-8%) attributable to the minerals bastnaesite, synchisite, monazite and allanite. Of these baestnaesite is the most easily processed mineral, with allanite a complex mineral whose rare earth content is generally not recovered. Several holes in a 150 m by 150 m area encountered semi-massive bastnaesite mineralization which yielded grades as high as 19.84% TREO over 1.6 metres in hole 212 which was part of a broader interval of 30.95 m of 4.98% TREO. Avalon has reported an inferred resource of 19,896,817 tonnes of 2.01% TREO at a 1.6% cutoff for the Upper Zone, which has a rock value of $213 at 4 year average prices, jumping to $331 per tonne at April 2010 rare earth oxide prices. The 19.84% interval has a rock value of $2,104 at the 4 year average and $3,271 per tonne at the April 2010 prices. More significant from an economic standpoint is the 4.98% interval which has a rock value of $528 and $821 per tonne according to the two REO price sets. This high grade mineralization has been encountered between 14-50 metres, shallow enough to support a small open pit. If further definition drilling confirms a sweet spot with dimensions of 150 m by 150 m and a thickness of 30 m, this would represent a tonnage footprint of 1.5-2.0 million tonnes with a high rock value and an in situ value of $1.6 billion.
Although the Upper Zone sweet spot is a drop in the $19 billion bucket of the overall Nechalacho resource, it has important strategic implications that the market will eventually appreciate. Avalon has been focused on developing a mining and processing plan that targets only the Basal Zone because it includes minerals that host heavy rare earth elements. The reported average grade for the Basal Zone at a 1.6% cutoff is 2.14% of which about 20% is represented by the heavy rare earths. The higher value of the latter translates into a rock value for the Basal Zone of $318 and $487 per tonne using the 4 year average and April 2010 prices. The Basal Zone is a blend of the light and heavy bearing minerals, with most of the heavies split between fergusonite and zircon. Unocal investigated the mineralogy nearly three decades ago and concluded that cost effective cracking of fergusonite and zircon was not possible. This legacy perception prompts members of the rare earth old guard like Tony Mariano to make public proclamations to the effect that rare earths have never been economically recovered from fergusonite, and thus never will be, as he has done at presentations given at SME and PDAC. Mariano is correct in the first part, but presumptious in the second part, which is unfortunate because the rare earth old guard has fostered a perception within the investment community that most of the non-carbonatite rare earth deposits outside of China with decent in situ rare earth rock values have hopeless metallurgical problems.
Cracking problems typically take two forms. One problem is that the cost of the energy and reagent inputs needed to crack some minerals is higher than the market value of the recoverable rare earths. The cracking process is understood, but higher rare earth prices are required to justify the process. While the metallurgical engineers cannot do anything about the rare earth prices, they can try to come up with more efficient methods for cracking the mineral, or tell the exploration department to find higher grade ore.
The other problem is of a technical nature in that an effective recovery process has not yet been developed, such as is the case with eudialyte, a heavy rare earth bearing mineral which dissolves readily in acid, as does the silica which forms part of eudialyte. When dissolved the silica takes on a colloidal form, a gel that also contains the rare earths for whose extraction no demonstrated method yet exists. This problem requires basic materials science research, in other words a significant investment of capital, time and human ingenuity.
The "no-can-do" attitude of the old guard compared to the "can-do" attitude of the new guard is understandable, because very little research has been done on rare earth mineral cracking problems in the west during the past two decades. When Unocal and others last seriously looked at rare earth deposits with a significant "heavy" content, it was during the eighties when the demand for the heavies was small. Certain heavy rare earths had high prices, but this was for very small quantities intended for scientific research, not commercial applications. Since Unocal was a commercial operation, it had to weigh the cost of metallurgical R&D against the size and value of the market for the recovered heavy rare earths, with the result that "difficult" minerals dominated by the heavies received less attention than minerals rich with the light rare earths. The chart above shows that rare earth demand did not accelerate until the mid-eighties, by which time the South China ion adsorption clays discovered in the late seventies had come on stream with a low cost structure supported by the mineralogy of the clays, weathered nature of these surface deposits, and a Chinese disregard of emission standards . As the cost structure of non-Chinese operations such as Mountain Pass rose, and the collapse of the Soviet Union forced former Soviet rare earth mines to compete with Chinese production, in particular the heavy rare earths, non Chinese rare earth mines were forced to shut down except for a few monazite beach sand operations in India and Brazil. This ultimately led to the current security of supply problem where even China has become concerned about the longevity of its own resources, in particular the heavy rare earths which seem to be confined to the clay deposits now believed to have only 15-20 years of mine life left. In so far that new applications being developed for the heavy rare earths are expected to boost demand for the heavies dramatically, the entire world, including China, has an interest in seeing peralkaline intrusive complexes such as Nechalacho developed as rare earth mines. The urgency of the situation requires that the new guard tackle the "no can do" obstacles encountered by the old guard.
During the past two decades significant advances have occurred in chemical and metallurgical engineering, assisted by an explosion of computational capacity that has put the power of modeling in the hands of modern researchers. While the old guard did what it could with its bench scale test tubes and tiny budgets, the new guard has at its disposal a quantum leap in technology and substantially bigger budgets made possible by the dramatic expansion in the demand growth and application structure of the rare earth sector. The old guard is correct that very real cracking problems exist for certain minerals, and the new guard is correct in asserting that it is time to get cracking on the problem. What the investment community needs to understand is that delineating a rare earth resource is a straight-forward task, and that the real and expensive hurdle is developing an optimal recovery process which will need to be unique for each rare earth project. It is instructive to note that Molycorp has spent $35 million during the past couple years improving what was supposed to be a time tested recovery process for the simple bastnaesite dominated Mountain Pass deposit, with the pleasing outcome that better recoveries will enable Mountain Pass to produce the same level of output at 1,200 tpd that it delivered at 2,000 tpd during its full operational days.
Because the heavy bearing Basal Zone is a 200 metre deep layer, Avalon has chosen an underground mining strategy which will initially mine and process 1,000 tpd of Basal Zone ore eventually scaling to 2,000 tpd. This seems a rather modest througput for such a large system, but Don Bubar assures me that the geometry of the deposit lends itself well to expanded mining rate, and the processing facility will also have expansion capacity. He is starting out with a modest production scale whose output can be readily absorbed by projected demand growth, and ramped up in later years if demand skyrockets. The first stage will involve an on site flotation plant to produce a concentrate containing 80% of the assayed rare earth content. The concentrate will be barged across Great Slave Lake to Hay River where it will be first subjected to acid leaching to dissolve the minerals and produce a mixed rare earth oxide concentrate. The recovery at this stage is expected to be 90-95%, or 72-76% of the assayed ore grade. The next step is to separate the rare earth oxides from each other through solvent extraction to produce a marketable product. At the moment Avalon is planning to develop this final stage at Hay River, but it is all ears for alternative proposals at other locations in Canada.
During the May 6 Thursday night panel session in Saskatoon at the Cambridge Conference I asked Saskatchewan's Premier Brad Wall if he supported the development of a rare earth oxide separation and metal refining center in Saskatchewan, a province noted for its robust extraction and growing industry (uranium, potash, coal, oil, cattle, wheat, canola etc) and, alas, feeble downstream manufacturing and processing industry. He was already familiar with the concept and quite receptive to the idea, which expands into making Saskatoon a major materials research and processing center for North America. The April 14, 2010 GAO Report identified the absence of separation and refining capacity and an entrenched American NIMBY ("not in my backyard") attitude as a major obstacle to developing a rare earth based supply chain in the United States on a timely basis. Saskatchewan is not without its own hypocritcal NIMBY attitude - witness the opposition to nuclear power by the people of a province which supplies 20% of the world's uranium production - but it is also quite capable of recognizing a new industry that not only could create a lot of high-end jobs, but would also be a big offset to its growing carbon footprint as a fossil fuel producer. Saskatchewan's central location could make it a destination for rare earth oxide concentrates from all North American mines, and possibly even the downstream manufacturing of components that require rare earth inputs such as NdFeB magnets. Such a development would be good news for Avalon, because railing mixed REO concentrates from Hay River to Saskatoon for separation and refining is cheap.
Avalon's stock has been in a lull as the market awaits hard numbers for the cost structure associated with the optimal recovery process for the Basal Zone ore and the recoveries that will be achievable for the various rare earth elements as well as zirconium, niobium and tantalum. There is some uncertainty about how much of the valuable heavies embedded in the fergusonite and zircon will be recoverable at reasonable cost. The discovery of the high grade bastnaesite zone is thus a boon for Avalon, because its recovery characteristics are likely to be cheaper and simpler than the more complex mineralogy of the Basal Zone. Furthermore, because the heavies are only 20% of the Basal Zone grade, the recovery process will also be optimized to process bastnaesite. One reason the prefeasibility study has been delayed is because Avalon is looking at incorporating this high grade Upper Zone material into the initial mill feed which could produce an upfront blast of cash flow while the recovery process targeting the heavies is fine-tuned. The REO distribution charts below for the Upper and Basal zones look very similar, but the Upper Zone has 66% of cerium and neodymium compared to 55% for the Basal Zone. It would take another 4-5 years to get Nechalacho into production, two years longer than it will take Molycorp to get Mountain Pass back on stream if it encounters no unusual permitting delays. By then Molycorp could be in need of additional cerium if its water filters are a success, and neodymium if it gets its mine to magnet strategy working. It is doubtful that the Nechalacho process will initially work well recovering the heavies from fergusonite and zircon, but it will probably work well recovering the lights from the bastnaesite. Blending Basal Zone ore with high grade Upper Zone ore would thus offset any problems fine tuning the recovery of the heavies. The potential to produce an initial blast of light rare earths from a mine with a very large resource that includes the heavies would be of considerable interest to an end-user seeking security of supply, or even Molycorp whose quest for the heavies may not be fulfilled by exploration in its Mountain Pass backyard.
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The next step will be for Avalon to collect a bulk sample and build a small flotation plant to produce about 5 tonnes of mixed REO concentrate to feed a pilot plant scale test of the recovery process established by the prefeasibility study. Don Bubar figures the first part will be done by the end of 2010, with the second part taking place in 2011. He estimates that on top of the current $15 million working capital Avalon will need another $20-$30 million to deliver a bankable feasibility study. Avalon filed a Project Description Report with the Mackenzie Valley Land and Water Board on April 23, 2010 which has been accepted by the MVLWB. It is expected that by early June the MVLWB will refer the project to the Mackenzie Valley Environmental Review Board which will kick off the Environmental Assessment process that is expected to take 1.5-2.5 years before it goes to the Federal Minister of Indian and Northern Affairs for final approval. Once Avalon has delivered its prefeasibility study and the EA has been initiated, which milestones I expect to have both been reached by July 2010, the capital markets will take a fresh look at Avalon's Nechalacho project. Meanwhile I recommend that bottom-fishers and spec value hunters continue to hold their positions in expectation that the prefeasibility study will resolve the uncertainty about cost structure and recovery process, and that by July a successful IPO by Molycorp will embolden the capital markets to take a hard look at other solution candidates to the rare earth security of supply problem.
Bottom-Fish Comment - May 14, 2010: Sennen announces Spanish deal that smells like a cash vanishing act
 Sennen Resources Inc was recommended a top priority bottom-fish buy in the $0.10-$0.19 range effective December 24, 2008 based on the strength of management and a strong working capital position of $18 million. Sennen has been through 3 prior unsuccessful bottom-fish recommendation cycles that were all closed out at a loss. Since the last closeout in late 2005 Sennen managed to sell 3 Australian coal deposits it acquired from insiders in 1998 for A$25 million which left Sennen with $18 million working capital by early 2010 after the final payment was received and taxes were paid. Although Sennen has been through a couple of half-hearted distribution cycles involving a dot-com porn blocker story in 2000 and a Guyana gold play in 2003, the assumption was that Ian Rozier's network has a strong position in the stock, especially in view of block sales by Rozier during the summer of 2008 at the $0.40 level which has reduced disclosed insider stock positions to about 7% based on 44.5 million issued and 50 million fully diluted, with dilution consisting of options. Ian Rozier is an experienced Canadian junior resource sector executive, but his focus during the past five years has been as CEO of Eastern Platinum Ltd, owner of several producing and advanced platinum group projects in South Africa.
Unfortunately it looks like Sennen bottom-fishers will be disappointed. On April 30, 2010 Sennen announced that it will get involved with two mineral projects in Spain by by paying a lot of cash and shares to undisclosed third parties for the option to pay a lot more extra cash and shares for an 80% stake in one private company and a 75% stake in another private company. One owns a small polymetallic VMS deposit discovered in 1979 and apparently last explored in 1981, and the other owns a manganese-cobalt deposit last investigated by a Spanish state entity at an unknown time. The El Paredon acquisition would cost Sennen US $7 million and 18 million shares and the Calatrava acquisition would cost $6.25 million and 14 million shares over a three year period. The news release is written to imply that all this money and paper goes into the pockets of the existing shareholders of the private company with Sennen having rights of first refusal on the minority interests after it exercises its options. These payments are staged, so Sennen can bail out at any time, but the deal structure is such that Sennen could sit back for the next few years and give away its money while others acquire a control position in it. The private companies will operate programs on their projects, but it is not clear how money will flow into their treasuries to fund work unless their treasuries are already loaded with cash. So I called Sennen on April 30 for clarification and was told that I would have to speak to Ian Rozier who might not return my call until Monday. Rozier has not returned any of my calls over the years, and in fact he did not return my call. Bottom-fishers should be very careful about viewing this latest news as a positive development, because if it is, the news release could have been written differently. The historic resources have modest in situ values, but appear to have expansion potential if new exploration is thrown at the targets. The failure of the news release to spell out a game plan and other important details gives this rich transaction involving so-so projects the odour of a cash vanishing act. The news release was written by lawyer Doug Hyndman who only briefly had skin in the game in 2003 when he exercised options that he promptly sold, and since he is not known to be incompetent we have to take the news release at face value. In fact, an April 22, 2010 National Post article points out that "there has been speculation that the former chair of the B.C. Securities Commission, Doug Hyndman, who is heading the Canadian Securities Transition Office, will assume the role of national regulator." Surely Hyndman would not be party to a cash vanishing act? Keep in mind that "cash vanishing acts" do not violate any laws, and that lawyers and regulators are mandated to deal with the letters of existing laws and not fuss about any spirit investors may believe underlies them - look no further than Wall Street. My assumption has been that Sennen stock is held by a network of Rozier supporters, and if that is correct, there may yet turn out to be a good explanation as to why the Spanish deals are good for Sennen minority shareholders. The bottom-fish recommendation is converted effective May 14, 2010 into a Spec Cycle Hold 100% recommendation with a caution that the disclosures about the company's plans so far do not pass my sniff test.
Top 10 Bottom-Fish Volume Traders
| Company |
|
Volume |
High |
Low |
Close |
Chg |
Status |
| Torex Gold Resources Inc (TXG-T) |
 |
42,316,900 |
$1.980 |
$1.150 |
$1.400 |
$0.220 |
BF Spec Cycle Hold 100% |
| Brazauro Resources Corp (BZO-V) |
 |
31,767,900 |
$1.330 |
$0.470 |
$1.280 |
$0.730 |
BF TP Buy $0.20-$0.29 |
| Volta Resources Inc (VTR-T) |
 |
23,301,600 |
$1.790 |
$1.250 |
$1.550 |
$0.140 |
BF MP Buy $0.10-$0.19 |
| B2Gold Corp (BTO-T) |
|
18,932,800 |
$1.880 |
$1.350 |
$1.790 |
$0.250 |
BF TP Buy $0.30-$0.49 |
| Nevsun Resources Ltd (NSU-T) |
|
14,822,000 |
$3.340 |
$2.900 |
$3.070 |
($0.020) |
BF Spec Cycle Hold 100% |
| Brett Resources Inc (BBR-V) |
|
8,305,500 |
$3.960 |
$3.210 |
$3.660 |
$0.440 |
Good Absolute Spec Value Buy |
| Sabina Gold & Silver Corp (SBB-T) |
|
6,487,100 |
$1.950 |
$1.270 |
$1.820 |
$0.500 |
BF TP Buy $0.30-$0.49 |
| Atacama Minerals Corp (AAM-V) |
 |
6,345,200 |
$0.610 |
$0.480 |
$0.480 |
($0.040) |
BF LP Buy $0.20-$0.29 |
| Spanish Mountain Gold Ltd (SPA-V) |
|
5,545,700 |
$0.445 |
$0.325 |
$0.430 |
$0.050 |
BF TP Buy $0.20-$0.29 |
| IBC Advanced Alloys Corp (IB-V) |
|
5,498,700 |
$0.165 |
$0.130 |
$0.135 |
$0.000 |
New BF LP Buy $0.10-$0.19 |
Top 10 Bottom-Fish Value Traders
| Company |
|
Value |
High |
Low |
Close |
Chg |
Status |
| Torex Gold Resources Inc (TXG-T) |
|
$57,722,279 |
$1.980 |
$1.150 |
$1.400 |
$0.220 |
BF Spec Cycle Hold 100% |
| Nevsun Resources Ltd (NSU-T) |
|
$44,821,625 |
$3.340 |
$2.900 |
$3.070 |
($0.020) |
BF Spec Cycle Hold 100% |
| Brazauro Resources Corp (BZO-V) |
|
$40,208,770 |
$1.330 |
$0.470 |
$1.280 |
$0.730 |
BF TP Buy $0.20-$0.29 |
| Volta Resources Inc (VTR-T) |
|
$36,234,805 |
$1.790 |
$1.250 |
$1.550 |
$0.140 |
BF MP Buy $0.10-$0.19 |
| B2Gold Corp (BTO-T) |
|
$30,039,775 |
$1.880 |
$1.350 |
$1.790 |
$0.250 |
BF TP Buy $0.30-$0.49 |
| Brett Resources Inc (BBR-V) |
|
$29,830,565 |
$3.960 |
$3.210 |
$3.660 |
$0.440 |
Good Absolute Spec Value Buy |
| Sabina Gold & Silver Corp (SBB-T) |
|
$10,984,810 |
$1.950 |
$1.270 |
$1.820 |
$0.500 |
BF TP Buy $0.30-$0.49 |
| Mountain Province Diamonds Inc (MPV-T) |
|
$10,322,383 |
$2.780 |
$2.100 |
$2.400 |
($0.250) |
Good Absolute Spec Value Buy |
| Peregrine Diamonds Ltd (PGD-T) |
|
$9,492,603 |
$2.700 |
$2.050 |
$2.300 |
$0.070 |
Good Absolute Spec Value Buy |
| Wesdome Gold Mines Ltd (WDO-T) |
|
$8,529,634 |
$2.750 |
$2.250 |
$2.570 |
$0.230 |
Good Relative Spec Value Buy |
Top 10 Bottom-Fish Price Gainers
| Company |
|
Volume |
High |
Low |
Close |
Chg |
Status |
| Brazauro Resources Corp (BZO-V) |
|
31,767,900 |
$1.330 |
$0.470 |
$1.280 |
$0.730 |
BF TP Buy $0.20-$0.29 |
| Sabina Gold & Silver Corp (SBB-T) |
|
6,487,100 |
$1.950 |
$1.270 |
$1.820 |
$0.500 |
BF TP Buy $0.30-$0.49 |
| Brett Resources Inc (BBR-V) |
|
8,305,500 |
$3.960 |
$3.210 |
$3.660 |
$0.440 |
Good Absolute Spec Value Buy |
| Golden Queen Mining Co Ltd (GQM-T) |
|
1,055,200 |
$1.450 |
$1.100 |
$1.450 |
$0.290 |
BF MP Buy $0.30-$0.49 |
| B2Gold Corp (BTO-T) |
|
18,932,800 |
$1.880 |
$1.350 |
$1.790 |
$0.250 |
BF TP Buy $0.30-$0.49 |
| Wesdome Gold Mines Ltd (WDO-T) |
|
3,375,700 |
$2.750 |
$2.250 |
$2.570 |
$0.230 |
Good Relative Spec Value Buy |
| Torex Gold Resources Inc (TXG-T) |
|
42,316,900 |
$1.980 |
$1.150 |
$1.400 |
$0.220 |
BF Spec Cycle Hold 100% |
| South American Silver Corp (SAC-T) |
|
4,666,500 |
$0.810 |
$0.530 |
$0.770 |
$0.210 |
BF TP Buy $0.10-$0.19 |
| Orko Silver Corp (OK-V) |
|
4,146,400 |
$1.830 |
$1.550 |
$1.800 |
$0.200 |
BF TP Buy $0.30-$0.49 |
| Impact Silver Corp (IPT-V) |
|
2,290,500 |
$1.340 |
$1.080 |
$1.270 |
$0.170 |
BF MP Buy $0.30-$0.49 |
Top 10 Bottom-Fish Price Percentage Gainers
| Company |
|
Volume |
High |
Low |
Close |
Chg |
Status |
| Brazauro Resources Corp (BZO-V) |
|
31,767,900 |
$1.330 |
$0.470 |
$1.280 |
133% |
BF TP Buy $0.20-$0.29 |
| Sabina Gold & Silver Corp (SBB-T) |
|
6,487,100 |
$1.950 |
$1.270 |
$1.820 |
38% |
BF TP Buy $0.30-$0.49 |
| South American Silver Corp (SAC-T) |
|
4,666,500 |
$0.810 |
$0.530 |
$0.770 |
38% |
BF TP Buy $0.10-$0.19 |
| Secova Metals Corp (SEK-V) |
|
1,459,100 |
$0.175 |
$0.110 |
$0.150 |
36% |
New BF LP Buy $0.10-$0.19 |
| Tatmar Ventures Inc (TAT-V) |
|
89,000 |
$0.600 |
$0.450 |
$0.600 |
33% |
New BF LP Buy $0.20-$0.29 |
| Golden Queen Mining Co Ltd (GQM-T) |
|
1,055,200 |
$1.450 |
$1.100 |
$1.450 |
25% |
BF MP Buy $0.30-$0.49 |
| ICN Resources Ltd (ICN-V) |
|
1,225,500 |
$0.170 |
$0.130 |
$0.150 |
25% |
New BF MP Buy $0.20-$0.29 |
| Olivut Resources Ltd (OLV-V) |
|
739,000 |
$0.350 |
$0.270 |
$0.350 |
25% |
BF MP Buy $0.10-$0.19 |
| Torex Gold Resources Inc (TXG-T) |
|
42,316,900 |
$1.980 |
$1.150 |
$1.400 |
19% |
BF Spec Cycle Hold 100% |
| Orosur Mining Inc (OMI-V) |
|
311,900 |
$0.400 |
$0.320 |
$0.400 |
18% |
New BF MP Buy $0.50-$0.75 |
Top 10 Bottom-Fish Price Losers
| Company |
|
Volume |
High |
Low |
Close |
Chg |
Status |
| Quest Rare Minerals Ltd (QRM-V) |
|
906,000 |
$3.720 |
$2.920 |
$2.950 |
($0.480) |
Good Relative Spec Value Buy |
| Marathon PGM Corp (MAR-T) |
|
2,851,400 |
$2.320 |
$1.560 |
$1.830 |
($0.290) |
BF MP Buy $0.30-$0.49 |
| INV Metals Inc (INV-T) |
|
967,000 |
$1.040 |
$0.710 |
$0.790 |
($0.260) |
BF MP Buy $0.10-$0.19 |
| Champion Minerals Inc (CHM-V) |
|
2,827,000 |
$1.090 |
$0.780 |
$0.830 |
($0.250) |
BF MP Buy $0.30-$0.49 |
| Mountain Province Diamonds Inc (MPV-T) |
|
4,331,600 |
$2.780 |
$2.100 |
$2.400 |
($0.250) |
Good Absolute Spec Value Buy |
| Amazon Mining Holding Plc (AMZ-V) |
|
1,430,100 |
$1.790 |
$1.250 |
$1.420 |
($0.240) |
Good Absolute Spec Value Buy |
| Crazy Horse Resources Inc (CZH-V) |
|
136,500 |
$1.150 |
$0.870 |
$0.880 |
($0.220) |
New BF Spec Cycle Hold 100% |
| Polar Star Mining Corp (PSR-V) |
|
660,800 |
$0.980 |
$0.700 |
$0.740 |
($0.220) |
BF MP Buy $0.20-$0.29 |
| Antares Minerals Inc (ANM-V) |
|
1,908,900 |
$2.980 |
$2.440 |
$2.640 |
($0.210) |
New BF Spec Cycle Hold 100% |
| Treasury Metals Inc (TML-T) |
|
2,156,200 |
$0.730 |
$0.470 |
$0.480 |
($0.200) |
New BF MP Buy $0.30-$0.49 |
Top 10 Bottom-Fish Price Percentage Losers
| Company |
|
Volume |
High |
Low |
Close |
Chg |
Status |
| Medallion Resources Ltd (MDL-V) |
|
2,302,700 |
$0.265 |
$0.150 |
$0.165 |
-37% |
New BF LP Buy $0.10-$0.19 |
| Nevada Exploration Inc (NGE-V) |
 |
1,299,000 |
$0.110 |
$0.070 |
$0.080 |
-33% |
BF XP Buy below $0.10 |
| Treasury Metals Inc (TML-T) |
|
2,156,200 |
$0.730 |
$0.470 |
$0.480 |
-29% |
New BF MP Buy $0.30-$0.49 |
| Tawsho Mining Inc (TAW-V) |
|
223,600 |
$0.170 |
$0.130 |
$0.130 |
-28% |
New BF LP Buy $0.10-$0.19 |
| U3O8 Corp (UWE-V) |
|
1,722,000 |
$0.450 |
$0.300 |
$0.320 |
-27% |
BF LP Buy $0.20-$0.29 |
| Newport Exploration Ltd (NWX-V) |
|
378,500 |
$0.150 |
$0.110 |
$0.110 |
-27% |
BF XP Buye below $0.10 |
| Lithic Resources Ltd (LTH-V) |
|
487,200 |
$0.250 |
$0.180 |
$0.180 |
-25% |
Good Relative Spec Value Buy |
| INV Metals Inc (INV-T) |
|
967,000 |
$1.040 |
$0.710 |
$0.790 |
-25% |
BF MP Buy $0.10-$0.19 |
| Firestone Ventures Inc (FV-V) |
|
647,500 |
$0.145 |
$0.110 |
$0.115 |
-23% |
New BF LP Buy $0.10-$0.19 |
| Champion Minerals Inc (CHM-V) |
|
2,827,000 |
$1.090 |
$0.780 |
$0.830 |
-23% |
BF MP Buy $0.30-$0.49 |
New Bottom-Fish Lows
| Company |
|
Volume |
High |
Low |
Close |
Chg |
Status |
| Galena Capital Corp (FYI-V) |
|
3,103,200 |
$0.055 |
$0.040 |
$0.045 |
($0.005) |
BF XP Buy below $0.10 |
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