Rare Earth Companies To Watch: Arafura, Avalon Rare Metals, Frontier Rare Earths, Great Western Minerals, Greenland Minerals - Proactiveinvestors (AU)

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Avalon Rare Metals www.avalonraremetals.com

Avalon Rare Metals Inc. (TSX & NYSE Amex: AVL) is a mineral exploration and development company focused on rare metals deposits in Canada. Its flagship project, the 100%-owned Nechalacho Deposit, Thor Lake, NWT, is emerging as one of the largest undeveloped rare earth elements resources in the world. Its exceptional enrichment in the more valuable 'heavy' rare earth elements, which are key to enabling advances in green energy technology and other growing high-tech applications, is one of the few potential sources of these critical elements outside of China, currently the source of 95% of world supply. Avalon is well funded, has no debt and its work programs are progressing steadily. Social responsibility and environmental stewardship are corporate cornerstones. Avalon's performance on community engagement in the north earned it the 2010 PDAC Environmental and Social Responsibility Award.

 

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Rare Earth Companies To Watch: Arafura, Avalon Rare Metals, Frontier Rare Earths, Great Western Minerals, Greenland Minerals

Saturday, March 12, 2011 by Jackie Steinitz

This article, an updated version of one from October 2010, reviews fourteen rare metal companies ranging from grassroots explorers through those on the brink of mine production to those already operating downstream, manufacturing rare earth and beryllium products.  These companies are operating in four continents in climatic zones ranging from the polar conditions of Greenland and the Far North of Canada to the arid climes of Australia and Southern Africa.

As before factors to consider when reviewing the companies include the skills base within the company, the likely access to capital (rare earth projects are expensive), the political risk and the required infrastructure (many are in remote places).  The development stage of the project is also an important consideration as (a) rare earth projects are complex and take longer than those of other commodities particularly as they require a pilot plant to test the complex metallurgical process and (b) in a relatively small market first mover advantage is important. 

Particularly crucial too is the quality and metallurgy of the orebody:  Is the mineral amenable to REE recovery? 
Are there contaminants and if so how will they be treated? Will environmental permitting be possible?  What is the grade of the REE and the distribution of the metals within the total?  What proportion are heavy rare earths and the metals expected to be in particular shortage in the future (see part 1 of this article)?  Downstream manufacturing, sales and marketing considerations are significant too, particularly for the more advanced projects and for companies with an integrated pipeline. Finally, of course, there is the price of the equity. 

A word of caution.  Please note on some of the comparative charts shown in the sections on individual companies; this is a fast moving sector with companies racing to exploit the anticipated supply gap so resource estimates are quickly becoming out of date. 

Arafura Resources [ASX:ARU]

Arafura Resources is developing the Nolans rare earths/phosphate/uranium project in Australia.  The project, which has the potential to be low cost and high recovery, is currently at the Bankable Feasibility Study stage and on target to begin production at a rate of 20,000tpa in late 2013.  It will comprise an open pit mine at Nolans Bore in the Northern Territory and a processing plant at Whyalla on the South Australian coast which will produce rare earth oxides, phosphoric acid, gypsum and small quantities of uranium oxide.


Nolans Bore is a world class deposit.  Exposed at surface it has a JORC resource estimate of 30.3 million tonnes, at a grade of 2.8% rare earth oxide, 12.9% phosphorus pentoxide (P2O5) and 0.44 lbs/tonne of uranium oxide (U3O8), equivalent to an in situ resource of 848,000 tonnes of rare earths, 3.9 million tonnes of phosphorus pentoxide and 13.3 million pounds of uranium oxide.  The mix of rare earths includes a relatively high proportion of neodymium; the average price of the Nolans Rare Earth mix is currently $79/kg. 

The deposit, which covers an area roughly two by two kilometres, is located 5km from a gas pipeline, 10km west of the Stuart Highway, (the principal north-south route through Central Australia), and 135km from Alice Springs.  Ore from the open pit will be transferred to an on-site beneficiation plant for upgrading to a concentrate. It will then be trucked 65km by private road to a rail siding on the Darwin-Adelaide railway and thence taken 1400km by rail to the Rare Earths processing and separation complex to be built at Whyalla.  The process flow sheets for the complex have already been extensively tested and refined at the ANSTO (Australian Nuclear Science and Technology Organisation) facility in Sydney; recovery rates are now expected to be high.

Whyalla was recently announced as the chosen site following a two and a half year site selection survey.  It was picked as it is a brownfield site, has good access to a skilled labour force, is well serviced by road, rail and port facilities, the seawater can be used for a desalination plant, and as the community and State Government are supportive; the South Australian government has announced that it will declare the Complex a 'major project', thus according it the same status as BHP Billiton's Olympic Dam project.

The economics of the project look favourable. Although the initial capital cost may be in the order of A$950M operating costs will be relatively low, recovery rates should be high and there will be significant by-product credits.  At current commodity prices ($79/kg for the Nolans Rare Earth mix which is considerably above even the high scenario) Arafura could generate more than A$1B in revenue each year with a mine life of at least 20 years, more if the current drilling programme is successful in expanding the resource.

 



Arafura's priorities in the short to medium term are to complete the bankable feasibility study, to finalise the processing technology, to continue the drilling programme to increase the resource base/reduce risk, to complete the community engagement, social impact and environmental assessments and gain the necessary approvals, and to seek appropriate financing and marketing arrangements.  Construction is scheduled to begin in 2012 with production beginning in late 2013.

Arafura owns several other exploration projects for various commodities in the Northern Territory ranging from early to advanced exploration stage.  It is seeking to joint venture all the non-REE projects.  In January 2011 it sold its Mount Porter gold project to Global Mineral Resources for A$1.5M cash, 7.5M shares and 7.5M options exercisable at A$0.25.

Arafura raised $90M from institutional and sophisticated investors in December 2010.  At the year-end it held A$97M in cash. Arafura's share price appreciated by 108% during 2010 while its market capitalisation, following two capital raisings rose from A$184M to A$542M.


Avalon Rare Metals [TSX & NYSE AMEX:AVL]

Avalon Rare Metals is developing several rare metals projects in Canada. Its flagship, the 100%-owned Thor Lake project, located 100km south west of Yellowknife in Canada's Northwest Territories hosts the Nechalacho deposit, one of the world's largest deposits both of rare earths and niobium. Besides being large the deposit is high grade, exceptionally well enriched with valuable heavy rare earth elements (which account for 22% of its total rare earths), and amenable to low cost mining methods. Access to the project is currently by air, but there will be ice road access in winter and summer access by barge across the Great Slave Lake to a railhead.

 

 


So far Avalon has spent six-years and $27M exploring the project, drilling 59,000 metres in 266 holes along the way.  The pre-feasibility study published in June 2010 and updated in September confirmed the positive economics for the project despite the remote location; the base case NPV (at an 8% discount rate) was estimated at $428M after tax rising to $1.05B once a number of optimisation opportunities, (all of which are already in progress), are included. Since the PFS was published the economics have become even more positive; a new, significantly larger resource estimate was released in January 2011 and the Avalon concentrate price by January 2011 was $45/kg TREO compared with the assumed $22/kg in the PFS. 

The PFS recommended constructing an underground room and pillar mine with an expected life of 18 years to process 2,000 tonnes per day of ore to produce 10,000tpa of mixed rare earth oxides.  The plan is to transport the ore to a hydrometallurgical plant, probably at Pine Point, some 8km from the southern shore of Great Slave Lake, where it would be processed into a mixed rare earth oxide product and separate zirconium oxide, niobium oxide and tantalum oxide products.  The total capital cost for the mine, plant and associated infrastructure would be $900M (allowing for a 22% contingency).  Production is scheduled to start in 2015. 

Avalon also recently published results from a scoping study into the construction of a separation plant to separate out the various rare earth oxides (there is currently no plant outside China capable of separating out the heavy rare earths on a large scale).  The study concluded it would cost $346M to build a 25,000tpa plant (which would thus be big enough to process all planned Nechalacho production plus further significant increases plus material from other producers).

 

 


A fully-funded bankable feasibility study is now underway for completion in 2012.  Other priorities include updating the pre-feasibility model, negotiating offtake agreements, attracting one or more consumers as strategic partners, further metallurgical work, planning the proposed separation plant, expanding the investor audience and research analyst coverage, and concluding agreements with the First Nations communities – a Negotiation Agreement has already been signed with the Yellowknives Dene and Deninu K'ue First Nations laying out the broad principles for eventual Accommodation Agreements which will cover impact and benefit issues.

Avalon's other projects include the Separation Rapids lithium project, the Lilypads tantalum project and the Warren Township calcium feldspar project in Ontario, (though Warren Township is currently inactive pending resolution of a permitting issue).  It also owns the East Kemptville tin-indium-gallium-germanium project in Nova Scotia where large inferred resources have been identified.
 
The company thus offers a number of competitive advantages including:

•    a rich endowment of heavy rare earths
•    development stage; Nechalacho is already 5-6 years down a 10 year development scale.
•    favourable metallurgy:  which has been shown to have no deleterious contaminants and exhibit good recoveries. Moreover there should be significant by-product revenues from zirconium, niobium and tantalum.
•    a pre-feasibility study "in the bag": enabling Avalon to begin offtake discussions with potential customers and for customers to know that the there is no risk of running out of resources.
•    considerable potential to increase the resource
•    strong management expertise in the sector
•    strong corporate ethics and CSR policies and good relations with the local First Nations communities; 40% of employment at the site is aboriginal. 
•    operations in politically stable jurisdictions.
•    strong balance sheet:  the company had no debt and $37m cash in December 2010.

The company listed on the New York Stock Exchange in December 2010 and was added to three S&P indices that month; Standard & Poor's Canadian Index Operations, the S&P-TSX Global Mining Index and the S&P-TSX Base Metals Index.

Frontier Rare Earths [TSX:FRO]

Frontier Rare Earths listed in an oversubscribed IPO on the Toronto Stock Exchange in November 2010 raising net proceeds of C$58M to advance the Zandkopsdrift rare earth deposit some 450km north of Cape Town in South Africa.  The company believes that Zandkopsdrift has the potential to be a world class project as the geology is favourable, with a large, good grade outcropping deposit which has several high grade zones, low thorium and uranium content and a favourable distribution of the rare earth elements.  Moreover transport links and infrastructure near the projects are good, the climate is favourable year-round, and the region, (which hosts several base metal, mineral sands, iron ore and diamond mines), is mining-friendly and low cost.  Importantly too commercial processes to extract the rare earth oxides already exist as the majority of the rare earth content in the deposit is hosted in supergene monazite which is similar to Lynas' Mount Weld project.  In short Frontier believes that the deposit could be large enough to supply at a rate of 20,000tpa which is comparable with some of the largest rare earth projects outside China, and it could be relatively straightforward, low cost and quick to develop.

Zandkopsdrift hosts a carbonatite which is exposed as a well-defined, outcropping hill some 40 metres above the surrounding plain.  It has been intermittently explored for manganese, phosphate, niobium and rare earths since the 1950s, particularly by Anglo American.  Frontier acquired all Anglo's data and samples in 2008, (including results from 3,400 metres drilled in 54 holes), and has since validated the data and drilled a further 13 holes and 1,000 metres.  In October 2010 Frontier published an NI43-101 resource estimating total indicated and inferred resources of 43.7M tonnes at a grade of 2.2% containing 946,000 tonnes of rare earth oxides (with more than half at the indicated level).  Three higher grade zones (A, B, and C) have been identified within the resources which are of sufficient size to be exploited as discrete units; note that Zone C, referred to as ZC1-C below with a grade of 4.6% is contained within B which is itself within A.  The deposit remains open both at depth and laterally so there is potential to increase the resource.

The mineralisation at Zandkopsdrift, similar to Lynas' Mount Weld deposit, has relatively elevated levels of certain key rare earths, including neodymium, terbium, dysprosium and praseodymium which are used in magnets, and europium for phosphors.  Frontier's calculations comparing grades between deposits on a neodymium equivalent basis are shown below.

 



The low levels of thorium (225ppm) and uranium (65ppm) relative to other rare earth deposits will reduce the potential environmental implications of the mine.  Preliminary studies into the metallurgy have already been undertaken by SGS Mineral Services who concluded that recoveries by flotation should be good, and that the rare earth bearing minerals are likely to be amenable to conventional extractive processes.


Zandkopsdrift is connected by gravel road to the tarred N7 which runs from Cape Town to Namibia.  Two towns lie within 30km and there are several closer settlements.  Springbok, the regional capital with an airport and a source of skilled labour and engineering expertise lies less than 140km away while the nearest railhead is 44km.  The rail connects with Saldanha Bay deep water port 230km to the south which handles the majority of South Africa's iron ore exports.  At present the nearest high voltage (400kV) power line is 100km away, though if plans by Eskom, the state electricity authority, to develop a power station at Oranjemund come to fruition a high voltage power line would pass through or close to the project area.  There are several seasonal rivers which flow west through the area.  A detailed hydrographical survey will be required but it was noted in the recent resource estimate that the "anticipated scale of possible mining operations are reasonably expected to be adequately supplied by available water sources".

Rights to the deposit are 74% owned by Frontier and 26% owned by Black Economic Empowerment shareholders.  The latter are carried to BFS but must pay 21% of the market valuation at that time so Frontier effectively has 95% economic interest in the project at present.  The company has no debt.  Completion of the pre-feasibility study is scheduled for end-2011/early 2012, the bankable feasibility study for end-2012 and production, if all goes well, for end-2014/early 2015.  The conceptual mining plan is to produce 20,000 tonnes of separated REO per annum with mining, flotation and potentially a cracking plant on site at Zandkopsdrift, and, possibly, a rare earth separation plant at Saldanha Bay.


The Management team has considerable experience of exploration, development and mining in the region.

Great Western Minerals Group [TSX.V: GWG]


Saskatchewan-based Great Western Minerals has a fully integrated rare earths mine to market (M2M) strategy.  The company's aim is to become the first vertically integrated rare earth elements producer in North America, a leader in the industry outside of China, and to create certainty of supply for its customers. To that end the company is investing in three stages in the rare earths supply chain: exploration, mining and processing.

Working backwards down the chain, the company already processes rare earths through two of its subsidiaries; Less Common Metals (LCM) based in Birkenhead, England and Great Western Technologies Inc in Troy, Michigan, USA.   LCM has been highly profitable for 18 years supplying customers globally with a wide range of rare earth based alloys and metals.  Its specialities include neodymium iron boron and samarium cobalt alloys for supermagnets, supplying 20% of the world demand of samarium cobalt.  Great Western Technologies is a leading production facility in North America for rare earth materials, powders, and custom vacuum-grade specialty alloys. Both companies aim to be leading-edge, innovative and high quality offering flexible customised approaches to their customers.  Great Western has just signed a letter of intent to supply samarium, gadolinium and samarium-cobalt alloys to the Pennsylvania-based Electron Energy Corporation to manufacture magnets.

Great Western will source its feedstock from the former-producing Steenkampskraal Mine in South Africa, located 350km north west of Cape Town. The mine was operated by Anglo American from 1952-63 producing rare earths and thorium (it was then the world's largest producer of thorium). It was eventually acquired by Rare Earth Extraction Co ("Rareco"), and in January 2009 GWT entered into an option agreement with Rareco to refurbish and recommission the mine and to have exclusive access to 100% of the rare earth elements mined there for a ten-year period. The New Order Mining Right was granted in June 2010, and in September 2010 GWT acquired a 20.8% equity interest in Rareco.  In December GWMG offered to purchase all the remaining Rareco shares at 3 South African Rand, an offer which Rareco Directors recommended accepting.  By 24 January the company had acquired about 70% of the outstanding shares.  The offer remains open until 28th February.

SRK Consulting is conducting a feasibility study on the project with the aim of resuming production as quickly as possible; the target is the second half of 2013.  Infrastructure is excellent, with access to the site by paved and gravel roads and close proximity to rail and sea-port; the government is pro-development, and there is technical expertise and a trainable workforce at hand.
 
GWMG is also looking to the long term by investing in 7 exploration projects in Canada and the USA all focussed to heavy rare earths; four of these are 100% owned and three are joint ventures.  Hoidas Lake in Saskatchewan some 50km north of Uranium City is the most advanced with an NI43-101 compliant measured and indicated resource of 2.6M tonnes at an average grade of 2.43% TREO plus yttrium oxide.  The endowment of neodymium is particularly high.


Greenland Minerals and Energy [ASX:GGG]


Perth-based Greenland Minerals and Energy is exploring and developing the giant multi-element rare earths/uranium/sodium fluoride Kvanefjeld Project.  This is located on deep fjords which run directly to the North Atlantic Ocean 8km from the port of Narsaq on the southern tip of Greenland and 45km from an international airport.  The company has conducted an aggressive exploration programme since acquiring 61% of the project in 2007 (with an option to acquire the remaining 39%). In February 2010 it published an interim report on the pre-feasibility study which indicated that the project has the potential to become a highly profitable world class mine.  Certainly the resource is massive, totalling 457M tonnes containing 4.91M tonnes of rare earth oxides, 283M lbs of uranium, 0.99M tonnes of zinc and 3.0M tonnes of sodium fluoride.  It is mostly outcropping and lies within 300 metres of the surface.

The mining studies have indicated the potential for a large open pit operation with a low stripping ratio.  The highest grades are to be found nearest to the surface and there is significant potential for new multi-element deposits.  The capital cost for the mine and processing plant capable of treating 10.8Mtpa is $2.3B. Construction could begin in 2013 and first production in 2015.  The projected mine life is over 23 years with the pre-tax NPV estimated at US$2.18N and the ungeared IRR 24%.

 

 


Greenland is an emerging mineral province.  It is highly prospective, underexplored, politically stable and open to investment.  However a key issue for GMEL has been the Greenlandic government stance on uranium exploration which until recently was a zero tolerance approach. In December however the company received approval from the government to fully evaluate the project including the radioactive component.  This was an important milestone; the share price has since risen 50% though there have been other contributory factors.  The company is now ramping up the work programs and has expanded the team with a view to finishing the pre-feasibility study later this year, beginning the definitive feasibility study and producing a new higher quality resource estimate by the end of Q1.  It is working closely with local communities on its environmental and social impact assessments which will be key in the permitting process.

Following the approval GMEL was able to announce drilling results from ten holes drilled during 2008 and 2009 in three new target areas in the northern Ilimaussaq Complex, each up to 7km or so from Kvanefjeld.  The results confirm the presence of widespread REE‐uranium‐zinc mineralization.  Results from the 2010 drilling season will be announced shortly.

Shaw Research recently published a buy recommendation for GMEL with a target price of A$2.50, up from the current level of A$1.13.

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