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Special Interest Comment - June 9, 2010: Etruscan plans to float Lofdal rare earth project through an IPO by the end of 2010
 Etruscan Resources Inc has taken steps to create a public vehicle for its rare earth prospects in Namibia. This is a potentially significant development for the rare earth sector because the successful flotation of Namibia Rare Earth Inc would finally establish a beachhead for one of the heavy hitters in the junior resource sector. Until 2009 the rare earth sector was dominated by the Australians with the exception of Avalon Rare Metals and Great Western Minerals Group. When the sector started to wake up in May 2009 a number of other juniors realized they were sitting on significant rare earth projects and underwent strong price appreciation as they focused on advanced projects such as Strange Lake and Bear Lodge. The collective price surge of the dozen or so juniors which qualified for the KBFO Rare Earth Index pushed the index up dramatically, prompting some observers to cluck about a rare earth bubble. Talk about a bubble is inappropriate because the daily value traded in this group is quite low even with the help of the Australian stocks, and the numerous juniors who picked up projects with rare earth showings or recycled their uranium prospects as rare earth plays have attracted almost no buying interest from speculators. In fact, one promoter lamented to me that his nickel stock actually went down a penny after he announced rare earth sample values.
Missing from the equation has been a high profile spokesperson such as Robert Friedland, Lukas Lundin, Ross Beaty or Frank Giustra to pound the table about why rare earths are hot and why his company has the hottest rare earth portfolio on the planet. Instead we have had to listen to sour grapes driven dismissals from players who in most cases understand the sizzle of the story, but do not have a stake in a play that is a serious contender. In some cases such as Rick Rule, who admits he has not put any effort into understanding the rare earth sector, the players have looked at the small size of the markets for these obscure metals - $1.3 billion in the case of rare earths - and concluded that there is no room to make a big score in this sector. Their tendency has been to dismiss "rare" metal plays as promotions along the lines of "fraudium, scamium and unobtainium". Others such as Robert Friedland who possess a more developed visionary capacity have looked hard for a worthy rare earth project but discovered that they are few, far between, and already owned by somebody else (see the global rare earth distribution map below). And so the rare earth sector has lacked a strong cheerleader. Etruscan's efforts, however, may soon change that.
During the middle of last year somebody from Etruscan emailed me an REO distribution for the company's Lofdal dyke system in Namibia which I duly plotted up and emailed back with the comment "too bad Lofdal sits inside a gold producer whose bankers forced it to forward sell its gold production at $700 per oz". Etruscan was indeed in a pickle because back in 2007 when it borrowed $35 million from RMB and Macquarie to put the Youga Gold Mine in Burkina-Faso into production it was forced to hedge the first 5 years of production at $700 per ounce. In October 2009 Frank Giustra's Endeavor Financial rode to the rescue with a $43 million financing at $0.30 which gave it a 55% stake in Etruscan. Part of the proceeds were used to reduce the hedge book so that it now represents only 20% of the next few years of projected 80,000 ounces per annum production. During the last decade Etruscan had over-diversified itself which Endeavour remedied by insisting that the diamond assets be sold to Rockwell and that all efforts go into advancing the junior producer's west African gold projects. That, of course, stranded the Namibian rare earth project.
Etruscan entered Namibia during 2005 with the goal of exploring for IOCG deposits and in the process acquired a 100,000 hectare permit covering the Lofdal dyke system in 2006 whose existence had been documented decades ago. Etruscan failed to develop any IOCG targets, but became interested in the rare earth potential after the Geological Survey of Namibia in 2007 published its conclusion that the Lofdal dykes were part of a major 12,500 ha carbonatite intrusive complex. The sub-vertical dykes trend in a northeast direction, pinch and swell with thicknesses ranging 0.5-15 metres, and typically strike for 2-3 km. Etruscan conducted a sampling program where it collected samples from outcrops roughly every 200 m and established the presence of mineralization along a 12-15 km corridor that maps well with a thorium based radiometric anomaly flown on 200 m lines. Etruscan has established the presence of the light rare earth minerals bastnaesite, parisite, synchysite and monazite as well as the heavy rare earth minerals xenotime and aeschynite. The best 292 grab samples (1% cutoff) yielded an average grade of 2.28% TREO which includes some very high grade samples sometimes skewed toward the heavy earth earths. A composite distribution derived from 1,208 samples and applied to the 2.28% TREO grade (see below, and , note that the corporate presentation lists a 1.86% TREE grade which Etruscan's Don Burton has converted into 2.28% TREO) shows a presence of heavy rare earth elements that is above average for a carbonatite system. In fact, a 2008 Canadian Mineralogist paper co-written by Vicky Niku-Paavola, a senior geologist with the GSN who is doing her PHD dissertation on the Lofdal dyke system, focuses on the unusual presence of xenotime (the ytrrium rich phosphate mineral that includes the other heavy rare earths beyond europium) which is usually associated with peralkaline intrusives rather than carbonatites. The graphics below, which separately plot dysprosium and lanthanum values for all the sample locations (pink is the highest value), indicate that there are 3 distinct "corridors" where heavy rare earth grades are elevated within the dykes, likely due to the presence of xenotime. The controls and nature of this pattern are not yet understood, and finding out if they are supported by meaningful zones of heavy rare earth enriched mineralization is a key focus for Etruscan through its spinout vehicle.
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At the 4 year average REO prices as of February 2009 the rock value on a 100% basis works out to $277 per tonne, and using April 2010 prices jumps to $430 per tonne, with more than half that value contributed by the heavies which represent 15.7% of the grade. These numbers are quite interesting, but grade without size is inconsequential in the rare earth sector, which is one reason early stage rare earth plays receive no respect from the market. Furthermore, the grade and distribution are derived by averaging the best grab samples. Etruscan did conduct a drill program involving a fence of shallow angled holes on a dyke which yielded light rare earth dominated grades, and a series of vertical holes into the "Main" plug which was demonstrated as barren.
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A plot of the distribution of samples with elevated heavy rare earth grades has highlighted four areas on which Etruscan ontends to focus exploration involving trenching and channel sampling starting in June 2010. The worrisome outcome scenario is that most of the mineralization at Lofdal is dominated by the light rare earth minerals while the heavy rare earth minerals exist only here and there as small discrete lenses. However, Etruscan is also focused on the possibility that within this very large footprint of rare earth enriched dykes there may be a blind plug or a large dyke with significant tonnage and grade that represent a world class mining target even if it is dominated by the light rare earths. During June Etruscan will conduct ground gravity surveys on the Main and Emanya plugs to see if there is sufficient density difference between the carbonatites and the metamorphic country rock to justify a 100 metre spaced airborne gravity survey this summer. It also plans to conduct an airborne magnetic-radiometric survey on 50 m lines as a tool to better define the dykes for follow up sampling. Etruscan plans to be in a position to start drilling in September. Although a large high grade zone has not been outlined at Lofdal, no systematic exploration has ever been conducted on this project. In view of the large footprint of locally high grade rare earth mineralization, Lofdal is a contender to yield a major rare earth discovery. In a sense it is in reverse what Molycorp is trying to do at its Mountain Pass project in California where it is exploring the area surrounding the 20 million tonne plus Mountain Pass deposit for other zones where the dominant rare earth minerals are the phosphates monazite and xenotime which have a higher presence of the heavy rare earths than does the bastnaesite that dominates the Mountain Pass deposit. Etruscan hopes to find a Mountain Pass scale light rare earth zone and heavy rare earth enriched zones with meaningful tonnage.
Etruscan has created 30 million shares of Namibia Rare Earths Inc which it intends to keep and is presently conducting a round of seed financing of 10 million shares at $0.50 to raise $5 million for an upcoming program that is to include 5,000-10,000 metres of drilling. Completion of this financing would imply a project value of $20 million for the 100% interest in Lofdal and the pending Marinka permit in southern Namibia. The company hopes to complete an IPO by the end of 2010 which presumably will be done at a higher price if exploration is successful in outlining a large zone with elevated rare earth grades that hangs together as a potentially mineable deposit and includes a decent percentage of heavy rare earths. The driver behind the rare earth spinout is Greg Johnson, formerly of Novagold which has its origins in Etruscan's Halifax home base. Although Frank Giustra sits on Etruscan's board, Namibia Rare Earth Inc will only indirectly be his story. Nevertheless, there are rumblings that Molycorp's CEO Mark Smith will also join the board and bring to this new vehicle the vast network of contacts he developed while pounding the pavement on Molycorp's behalf during the past year. Molycorp filed a registration statement on April 16, 2010 for its own IPO of up to $350 million and is currently in a quiet period as it deals with comments from the SEC prior to filing a prospectus. Hopes that Molycorp would complete an IPO before the summer have withered during the recent downturn and I suspect Molycorp will not make its debut prior to September. This may be quite as well because the Deepwater Horizon fiasco in the Gulf of Mexico worsens by the day, with pundits predicting bankruptcy for BP as the only way to deal with the far reaching liabilities. (Check BP's Live Video Feeds if you want to experience something akin to a deathrow watch.)
An obvious outcome is a groundswell of support for a long term commitment to the electrification of the transportation industry in the United States which currently relies heavily on liquid fuels made from oil. The oil industry and its end-users have been huge cost dumpers on the general public: 1) in the form of greenhouse gas emissions which have elevated the atomosphere's carbon dioxide level into uncharted territory that is destabilizing the world's climate patterns and has increased the acidity of the ocean by a 25% margin not seen for millions of years, 2) in the form of a monster military budget dedicated mainly to ensuring that America's gluttonous addiction to oil does not suffer from global oil trade flow disruptions, and 3) now in the form of massive devastation to habitat and industry on the coastline of the Gulf of Mexico from an overall deep-sea source that adds only 1.3 million barrels to America's daily consumption of 20 million barrels. You can already hear the clean-tech knives being sharpened in Silicon Valley for the gutting of the oil oligarchy whose pool of apologists is shrinking to the likes of Rush Limbaugh (it's natural) and Rand Paul (it's just an accident).
From a rare earth perspective the strategy is simple. The Obama administration has an election problem on its hands in November. The Republicans have been trying to hang Deepwater Horizon on Obama as his Katrina, but this tactic can be easily overturned by focusing on the legacy of the oil oligarchy within which the Bush family is deeply embedded. Obama needs a long term vision which restores a leadership role for America on the global stage, and America is exceptionally positioned to lead the gradual shift away from oil's stranglehold on the modern economy. This is not a no-brainer, as Robert Bryce, author of "Gusher of Lies" and "Power Hungry", makes clear in his argument that no other forms of energy can compete in cost terms with oil as it is currently priced in the United States. But in his critique of "green" fuels Bryce neglects to include the hidden costs of oil which Deepwater Horizon is now illuminating. If Obama is to save not just his presidency but America from spiralling down the toilet, he will need to articulate a very forceful vision of the future which will extend well beyond his two term limit and make perfect sense to all successors regardless of political stripe. One sensible path is to push for a gradual reduction in dependency on oil as a transportation fuel, and leave oil for its non-substitutable role as a chemical input and fuel for applications that do not have access to an electricity grid. What the post-industrial world needs, in particular America, is the mindset of the fallen hero who to continue his journey must undergo a difficult transformation that leads to redemption and renewed success. Everybody understands this narrative for it is a mainstay of popular entertainment. The electrification of the car industry is easy to understand but will be difficult to achieve and take several decades. Yet it is a transformational goal readily kept in sight and progress toward it will be noticeable and empowering.
In a recent Toyota Renewables Conference Speech Bryce laments that we could be trading one dependency for another, in this case rare earths, which play a critical role in technologies that transform energy usage, enhance energy efficiency, and defer energy consumption through greater durability. While there is some truth to his argument in the current context where virtually all global production of rare earths comes from China, what he appears not to realize is how he is implicitly making a powerful argument for the need to develop rare earth mines outside of China, the solution we have been proposing for some time. While he concludes by stating that rare earths are only starting to capture public attention, and that he expects to be hearing much more about them shortly, we can add that we also anticipate the gradual acceptance of the obvious response to the rare earth supply bottleneck in the development of new mines outside of China, with obvious implications for the leading rare earth juniors. But whatver one might think of Bryce's speech, a long term trend toward the electrification of the transportation industry is already in place and does not need Obama's explicit endorsement to continue, but such an endorsement would lend considerable moral support to private sector efforts in this direction, particularly if he were to back it with a strong materials science research funding commitment. (See A Business Plan for America's Energy Future.)
In any case, Molycorp will get its IPO done before the end of the year, and it will likely be taken down by institutions focused on the clean-tech sector, not the institutions that invest in mining companies. Having Mark Smith on board Namibia Rare Earth Inc will no doubt benefit the junior, particularly given that Frank Giustra and former president Bill Clinton are eager to promote their Clinton Giustra Sustainable Growth Initiative which has obvious linkage to the clean-tech sector. Lofdal is still early stage, but the project has a very large footprint, and if exploration work during the next six months confirms a major rare earth deposit, the timing for an IPO by the end of the year will be good, and the arrival of a Giustra backed rare earth junior will give the entire rare earth sector a substantial boost. While the current weakness in the rare earth sector may be perplexing to those who understand why the development of non-Chinese rare earth deposits should be a top priority, keep in mind that the rare earth story has a very high comprehension threshold that will not be overcome until powerful network hubs have serious serious skin in the rare earth game.
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