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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.
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