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Index Member Comment - May 25, 2012: Commerce publishes PEA for Ashram rare earth project
 Commerce Resoucres Corp published a preliminary economic assessment on May 24, 2012 for its 100% owned Ashram (Eldor) rare earth project in northern Quebec. Although the deposit has a resource in excess of 200 million tonnes averaging 1.88% TREO, Commerce has adopted a mining plan that would process a resource of 35 million tonnes grading 1.81% TREO at 4,000 tpd over a 25 year mine life. The facility will produce a mixed rare earth oxide carbonate that will be trucked 185 km north from the mine site to a port on Ungava Bay from where it would be shipped to a separation plant during the 3-4 month ice-free season. Based on a head grade of 1.81% TREO, and a 66.5% recovery, the carbonate concentrate would contain 16,850 tonnes of rare earth oxides annually. Capital cost is estimated at $763 million and operating cost is $95.20 per tonne of ore. A quarter of CapEx is attributable to construction of the all-weather road; the company is hopeful that Quebec's Plan Nord might bring a proposed road from Schefferville to Ungava Bay within 35 km of the Ashram project. The PEA applies a 25% discount to the separated REO basket price to arrive at a pre-tax net present value of $2.32 billion at a 10% discount rate with an internal rate of return of 44%. The price deck projected for 2017 by Commerce and used in the PEA implies a basket price of $38.43/kg, which is close to the domestic spot $40/kg basket price as of May 24, 2012. If we discount to zero the value of cerium, lanthanum and yttrium, the three most abundant rare earths most likely to glut the market down the road, the domestic spot basket price drops to $30/kg, which is close to the $30.16/kg basket price implied by the 2016 price deck Toyota recommended Matamec use in its Kipawa PEA.
Commerce believes it is a contender to be in production before 2020, but given that its output is primarily in the form of light rare earths (only 4.7% qualifies as heavy rare earths), and that bench scale studies of the cracking portion of the flow-sheet have not yet started, I think Ashram is for 2020 and beyond. Nevertheless, because Ashram is a major new rare earth discovery, and the company does intend to proceed with a prefeasibility study, subject to the availability of financing that boosts the current $5 million working capital position, I have added Ashram to my list of supply contenders.
The Ashram deposit is a very fine-grained carbonatite whose key rare earth bearing minerals are monazite, bastnaesite, and xenotime, which is why the deposit has a higher percentage of heavy rare earths than carbonatites dominated by the bastnaesite group minerals. The distribution chart below is based on the average distribution of the measured and indicated resource at a 1.25% TREO cutoff the PEA used as its base case. The grade ranges 1.7%-1.8% during the first 14 years, before rising to 2% as the pit deepens. The measured resource of 1,590,000 tonnes of 1.77% TREO averages 7.1% heavy rare earths while the indicated resource of 27,670,000 tonnes of 1.9% TREO averages 4.6% heavy rare earths for an overall average of 4.7%. Ashram is not likely to come on stream before other large heavy dominated deposits such as Strange Lake and Norra Karr come on stream, so the heavy component at this point is immaterial.
Ashram's potential production profile shows that its supply will compete mainly for the markets that other light rare earth projects such as Arafura's Nolans Bore, GMEL's Kvanefjeld, and Frontier's Zandskopdrift hope to serve, not to mention the slew of phosphate deposits such as IAMGOLD's Niobec, Geomega's Montviel and Pacific Wildcat's Mrima Hills for which PEA's have not yet been published. Until we see the impact that 60,000 tonnes of new mainly light rare earth supply from Mt Weld and Mountain Pass has on rare earth prices during the next two years, these projects will have a hard time attracting investor capital, especially given the risk that China could choose to expand its own production of light rare earths.
Commerce has limited its metallurgical work to bench scale studies related to producing a pre-concentrate through crushing, grinding and flotation which is expected to eliminate 87.3% of the gangue minerals in the ore. The PEA indicates that the REO recovery to this mineral concentrate stage will be 70%. Commerce has not done any bench scale studies on cracking the concentrate so that the rare earths can be put into solution and precipitated as a mixed oxide carbonate product. Because the key rare earth bearing minerals that end up in the mineral concentrate are bastnaesite, monazite and xenotime, minerals for which commercial processing technology exists, Commerce has assumed that this stage will involve conventional technology that will yield a 95% recovery for the carbonate concentrate. On that basis the overall recovery before separation losses works out to 66.5%. However, the 300-600 ppm thorium and 2%-4% fluorite present in the ore will likely end up in the pre-concentrate, and separating these during the cracking stage so that they do not cause problems or end up in the mixed oxide carbonate will be a focus for upcoming bench scale metallurgical studies. Because of the large projected output scale Commerce will also have to investigate the design of a dedicated separation plant, which means that at some point after it has produced a mixed oxide carbonate it must conduct separation studies on this material.
Commerce hopes to have a PFS done by the end of 2013 and understands that to achieve this timeline it needs to initiate bench scale studies immediately and return to the project in the winter to conduct additional drilling in order to upgrade the resource and establish the location of infrastructure. While I have my doubts that the market and end-users will take the Ashram project seriously during the next couple years while we await the outcome of the first generation of non-Chinese rare earth producers, I do think this project is important enough to monitor. I have used the PEA parameters in my discounted cash flow model with a few adjustments to generate an after-tax basket price sensitivity chart. The main adjustment is to use a 30% basket price discount rather than 25%, and I have used the company's annual grade and strip ratio schedule for the 25 year mine life. The chart shows the after-tax NPV per share based on 161 million fully diluted shares and a net 100% property interest at different basket prices. At the domestic spot price of $40/kg which is close to the basket price generated by the price Commerce used in its PEA, the after tax NPV at a 10% discount works out to $1.2 billion or $7.64 per share. With the Toyota 2016 price deck whose $30/kg basket price is close to the domestic basket price when cerium, lanthanum and yttrium are reduced to zero value, the after-tax NPV is $600 million or $3.73 per share. The internal rate of return for these two basket price scenarios is 34% and 22% respectively. This suggests an eventual target price range of $4-$8 per share if additional dilution to deliver a feasibility study is avoided. However, I think the capital and operating cost assumptions are optimistic, though by how much we will not know until the end of 2013. If the market decides that Ashram is a supply contender for 2015-2020 rather than beyond 2020, in the current post rare earth mania market climate Commerce stock could trade at 10% of its ultimate target, which suggests that the stock could establish a trading level in the $0.40-$0.80 range during the next 12 months.
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