Avalon Rare Metals (AVL-T) president Don Bubar is reminding investors and analysts that the $899.7-million price tag to develop Canada’s first rare earth element mine – the Nechalacho project near Thor Lake, NWT, 100 km southeast of Yellowknife — is just a prefeasibility study number.
Bubar says there’s a lot of room for optimization going forward for the 2,000-tonne-per-day operation with an 18-year mine life.
“Despite that big number our analysis has produced some pretty positive results,” Bubar says. “It’s something close to worst-case scenario so if it stands up as positive given those realities, it’s good news.”
The prefeasibility study, which included a 22% contingency, gives the Nechalocho project an after tax internal rate of return of 12%, net cash flow of $1.5 billion and a net present value of $540 million.
The cost to build the mine, mill and hydrometallurgical plant was estimated at $589.3 million while the remaining costs include contingency, sustaining capital, reclamation and engineering, procurement, construction and management.
The company is not sure on the location of the hydrometallurgical plant – whether it will be at an existing facility at the former Pine Point mine 85 km from Hay River, NOWT on the south shore of Great Slave Lake or elsewhere. Concentrate would then be sold or toll-processed at one or more separation plants outside of China.
Average operating costs were put at $267 per tonne of ore mined or $5.93 per kg of product.
The 18-year mine life was based on proven and probable reserves of 12 million tonnes grading 1.7% total rare earth oxides (TREO) plus 3.16% zirconium oxide, 0.41% niobium oxide and 0.041% tantalum oxide.
“The initial thing that caught my eye and a lot of eyes was the capital cost. It’s a fairly significant number,” says Barry Allan, a senior mining analyst at Mackie Research Capital in Toronto. “Now I realize there was a lot of padding and I think that reflects the newness of the rare earth space in the mining industry.”
About 95% of the world’s rare earths are supplied by China but the country has been cutting back on exports over the last couple of years creating supply risk for end users elsewhere in the world and opportunity for juniors looking to develop projects.
“This is new ground for the investment community and we are all learning as we go on how to make this business work,” Bubar says. “It’s happening because the market needs these materials.”
Avalon’s Nechalacho project is unique in that compared to other deposits; it’s composed a high ratio of the heavy rare earths, which are more in demand and worth far more. The company used a price of US$21.94 per kg of TREO for its mixed rare earth oxide concentrate by using a complex formula that took into considering demand and production forecasts both in and outside of China in the coming years.
“It’s more difficult to do with commodities like these that don’t trade on an auction market,” Bubar says, noting, “There is virtually universal consensus that these prices are going higher and will be higher at that point in time (when Avalon’s hopes to start production).”
Allan says it’s difficult to estimate the price Avalon will actually be able to get because what the company will produce won’t be a final product. “It will be taken by somebody else and converted into the individual rare earth products,” Allan says. “What would a processor pay for that?”
Avalon is having off-take agreement discussions right now with potential rare earth concentrate customers. Although he couldn’t say who Avalon was having discussions with, Bubar pointed to companies that make products for the automotive industry as a key potential customer.
Rare earths are the key metals needed for powerful magnets used in hybrid cars motors, clean technologies related to renewable energy and even flat screen televisions. There are 15 in total, known as the lanthanide metals on your periodic table, and usually occur together in varying ratios, and then must be separated in order of atomic weight.
Avalon has a lot of room for expansion and Allan expects that to show up in the feasibility study.
“There’s no doubt that Avalon has a project of quite large size even though the initial production base is reasonably modest,” Allan says.
The Basal zone has a total of 90 million tonnes of resources but only 12 million tonnes of reserves are considered for the 18-year mine life. Allan expects the company will add to reserves after the 2010 drilling season and then consider expanding the capacity of the operation down the road.
“My expectation, subject to the availability of the market to accommodate the concentrate produced by Avalon, is that there would be an expansion down the road, beyond the 2,000 tonnes per day,” Allan says. “At 18 years with the existing reserve base that’s already starting to be a bit long.”
Much of the initial costs were related to infrastructure, he says, so an expansion wouldn’t be as expensive.
The company says construction would take 24 to 30 months and right now the company is looking at a start up goal of 2015.
The Industrial Minerals company of Australia forecasts that a total of 205,000 tonnes of total rare earth production will be needed by 2014 to meet demand. A pricing
Avalon’s market share of total world rare earth demand is forecast at less than 3% initially at 5,000 tonnes per year TREO, moving up to less than 5% at 10,000 tonnes per day full production.
I may stand to be corrected here but I believe that supply of the oxides of zirconium, niobium and tantalum are not dominated by China AND are currently (at least Tantalum) in oversupply. Both the Tanco and Wodgina mines have ceased Tantalum production due to low pricea/demand as new products requiring capacitors using Tantalum have been designed to use about 10% of what they did just a few years ago. An example is the XBox 3 which used one tenth the tantalum of what the XBox 2 did.
The rare earth elements that China has a virtually monopoly on now are the elements 58-71 in the periodic table including Cerium, Terbium, Yiterbium and others with odd names. Does Avalon’s project have any of those? That is where there are shortages projected for SOME of those elements AND the fear that China will cut back on exports.