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Avalon’s Heavy Rare Earth Elements Offer Massive Competitive Advantage

When looking at the rare earth metals market, there are two broad categories the elements fall under; ‘lights’, which are very common and found abundantly in mineral deposits, and ‘heavies’, which are very rare and usually found in much lower concentrations than the light metals. Both types are always found together at rare earth metals, or rare earth elements (REEs), deposits, with the balance highly tipped in favour of the lights, usually around 97-99% of the deposit. This is where Avalon Rare Metals (TSX:AVL, OTC:AVARF) sees an advantage over its peers however, with their REE deposits showing an unusual balance of the two types; containing a much higher proportion of the more valuable heavy minerals than is usually the case, at over 20% heavies.

Avalon is a Canadian based junior mineral exploration and development company with a market capitalization of C$200 million and with around C$10 million available in cash and cash equivalents, which focuses on rare metals and minerals. The company has no debt, and its primary asset is the 100% owned, advanced development stage project, Nechalacho Rare Earth Element Deposit located in the Northwest Territories, Canada. This is the deposit which as highlighted above, has an unusual balance of heavy rare earth minerals, potentially the highest quality undeveloped REE deposits in the world. In addition to this, Avalon owns four other rare metals and minerals projects in Canada, three of which are in advanced stages of development.

Avalon’s flagship Nechalacho Rare Earth Element Project, located at Thor Lake in the Mackenzie Mining District of the Northwest Territories, Canada, is recognised internationally for its exceptional wealth of heavy rare earth elements. The site is located about 5 kilometres north of the Hearne Channel of Great Slave Lake and approximately 100km southeast of the city of Yellowknife. The property is comprised of five contiguous mining leases totalling 10,449 acres, and three mineral claims totalling 4,597. The mining leases have a 21 year life and each lease is renewable in 21 year increments.  The original property covered by the mining leases is subject to two underlying royalty agreements entitling the royalty holders to a cumulative 5.5% Net Smelter Returns Royalty, of which 2.5% can be purchased at anytime at a fixed, inflation-adjusted, price.

It is worth noting at this stage, that the property is situated in an area known as the Akaitcho Territory, which is subject to a comprehensive land claim negotiation between several communities of the Dene Nation (aboriginal peoples) and Canada's federal government. The rights of existing mineral rights holders in the area are unaffected, including right of access to mineral rights. Avalon takes a very active role in working with the local peoples to build good relations and contribute to the communities, and is actively consulting with the four nearest Akaitcho Dene communities with a view toward implementing a co-operative development approach for the Nechalacho Deposit.

In June this year, Avalon updated its January 2010 NI 43-101 compliant resource estimate for the Nechalacho deposit, incorporating additional information as a result of progress on the Prefeasibility Study. Indicated mineral resources for the Basal Zone are now estimated at 14.48 million tonnes of 1.82% total rare earth oxides (TREO), with an additional 6.89 million tonnes of 1.45% TREO in the Upper Zone. Estimated inferred mineral resources for the two zones total 175.93 million tonnes, averaging 1.43% TREO, representing 2.5 million tonnes of in-situ TREO

. This doubles the amount of contained TREO form the original estimate in January, with Nechalacho now ranking as the second largest rare earth elements deposit in the world (by reported TREO) and the third largest contained niobium deposit in the world.

To express exactly what kind of advantage the high composition of heavies to lights has for Avalon, let us consider first the prices of some of the elements. For the light REE, if we take lanthanum oxide for example, used in re-chargeable batteries, this is currently pricing in the region of US$6 per kilogram (/kg). If we move up the price scale for light REEs, we come to neodymium oxide for example, which is pricing around US$31/kg. If we now compare this to some of the heavy REEs, say europium oxide, used in TV phosphors for the colour red, this prices around US$520/kg. Terbium oxide, which is used for the colour green in TV phosphors, prices even higher still around US$575/kg.

Now as previously highlighted, both light and heavy rare earth elements are always found in combination with each other, and it merely the distribution between the different elements which defines the deposits potential value. If we compare the average value of Avalon’s deposit to other major deposits in the REE sector, we can see exactly how this translates. With Avalon’s Nechalacho deposit comprised of around 22.5% heavy rare earth elements, the average value per kilogram of the deposit is US$22.10. If we compare this with some of their peers, Baotou’s Baiyun Obo (<1% heavies) averages US$11.40/kg, and Molycorp’s Mt Pass deposit (<1% heavies) averages US$9.90/kg.

This is all very well you may say, but the deposits are still in the ground. How much will it cost to mine and process? How does Avalon intend to do this?

Mining and processing of rare earth elements is generally capital intensive. To date, Avalon have spent over C$20 million on the drilling and exploration program at the site, and the company estimate the capital required to bring the project to the production stage (scheduled for late 2014), will cost in the region of C$400 million. The company also have a conceptual plan in place of how they will mine the deposit when the time comes. This will likely be an underground room and pillar mine utilizing long hole stopping (this method is where material is extracted horizontally, leaving pillars of untouched material to support the overburden). This is one of the cheapest forms of mining available, and is likely to keep Avalon’s operating costs comparatively low. All told, including mining and extraction, milling and the hydrometallurgical (HydroMet) treatment of the mineral, the company estimate operating costs will be up to C$250 per tonne.

Looking at the planned schedule for the Nechalacho project, the remainder of 2010 is expected to see continued exploration and drilling at the site, as well as a ‘mini-pilot’ plant at an Xstrata (LON:XTA) facility producing 600kg concentrate, and a HydroMet pilot run using 20kg per day for 30 days. The company plan to have a bankable feasibility study in place by mid 2012, and following this, intend to get ministerial approval, water licensing and the final design and financing in place, by the second quarter of 2013. Project construction is then expected to take place, with the project start up rolling through in late 2014/early 2015.

So, although it is still relatively early days for this deposit, the potential value it holds is undoubtable. Its high concentration of heavy rare earth elements, not only makes it one of the largest such deposits in the world, but gives it a potential value far in excess of Avalon’s other peers. The company are making good progress at the site, and have clear, realistic expectations and scheduling already in place, taking the project through to production. The deposit is suitable for one of the cheapest mining methods available, likely to keep operating costs at a minimum once it is up and running. One could certainly suggest therefore, and please, forgive the pun, that Avalon is a rare find in the REE market.