The Mining Report: It is now known that China's State Reserve
Bureau intends to begin stockpiling medium-to-heavy rare earth elements
(REEs), and that China will also strengthen REE export quotas. Will these
actions lead to a race to get non-Chinese REE projects into production?
Tom Hayes: It will. One shouldn't view the
general tightening of heavy rare earth elements (HREE) export quotas in
isolation, however. It's more relevant to look at actual demand for
particular REEs. About 30�40% of Chinese supply is subject
to an export quota, but Western demand does not currently meet the amount of
REEs approved for export. Reduced export quotas will probably result in
Western demand meeting Chinese supply. This, along with China's reform of its
REE industry, will probably aid rare earth prices in the long run.
TMR: What is the nature of this reform?
TH: China's central government aims to
exert control. Lack of central control has resulted in large, illegal REE
operations, which have had a widespread negative effect on the environment.
TMR: Does the scale of these illegal
operations suggest some level of political support?
TH: This support is likely local and
not national. It is local corruption that has allowed illegal mining of REEs
to expand to its present level.
TMR: What's your forecast for REE
demand for the rest of the decade? And how will changes in demand and supply
affect prices?
TH: Edison doesn't have specific
growth forecasts for REEs, but the industry consensus is annual growth
anywhere from 3�8% until 2020. What will that mean
for the supply and demand of particular REEs? This is an industry that is
plagued by misnomers. When REEs were first in the limelight in 2011, when the
bubble was forming, there was a complete lack of understanding of what
"rare earths" meant.
Since then, people have
begun to understand the difference between light rare earth oxides (LREOs)
and heavy rare earth oxides (HREOs). The industry has now become an even more
granular and complex story about the actual supply and demand drivers with
regard to particular REEs. When we talk about REE demand growth, we must
consider specific minerals among the 16 REEs. To comment on where REE prices
are going is not particularly useful.
TMR: What is it about the heavy and
strategic REEs that make them particularly valuable?
TH: It's really their use in
particular applications such as green technologies. Wind turbines are a case
in point. Political support for renewable energy sources drives further
development of wind farms and, by extension, boosts actual demand for the
metals used in those applications.
TMR: If the average initial capital
expenditure (capex) of an REE project is $700 million ($700M), how much of
that is the optimum amount companies should have to raise themselves, outside
of offtakes and other deals?
TH: There's a burgeoning strategy
behind financing these projects, considering that the equity markets are
pretty much dry. Companies are looking for funding from governments, from
offtake loans and from strategic partnership loans. From the figures that
I've seen, REE projects might expect to get one-quarter to one-third of capex
from government agencies and export quota agencies, and maybe another
one-quarter to one-half through strategic partner loan agreements.
This still leaves a
considerable shortage, and this is a real challenge for REE projects. It
could mean they will remain unfunded until the equity markets pick up and/or
investor interest in mining picks up.
TMR: Can you name a REE project that
has recently cut initial capex significantly?
TH: Avalon Rare Metals Inc. (AVL:TSX; AVL:NYSE; AVARF:OTCQX), which has the Nechalacho
project in Canada's Northwest Territories, recently announced a 10-year
partnership with the Belgian company Solvay SA (EBR:SOLB). Avalon had planned
previously to build a $400M refinery in Louisiana.
TMR: With this agreement, what is
Avalon's path to market?
TH: Nechalacho's underground mine will produce ore
that is taken to surface and turned into two REE concentrates: LREOs and
HREOs. Those concentrates will then be sold to the third-party refiner,
Solvay, to be processed on a toll basis at its separation and refining plant
in La Rochelle, France.
TMR: Is Avalon's April 2013 Nechalacho
feasibility study (FS) now totally superseded?
TH: I'd say it's been optimized. With
a significant portion of the $1.58 billion ($1.58B) projected capex now
removed, the Nechalacho project is now much more viable.
TMR: Given your extensive mining
experience in Australia, which REE projects there are most prospective?
TH: I cover a company called Alkane Resources Ltd. (ANLKY:OTCQX; ALK:ASX). The company holds an interesting asset in
New South Wales, the Dubbo Zirconia project. This is predominantly a zirconia
project with secondary niobium and HREEs. Alkane is persistent and has chosen
to take a slow-and-steady approach to Dubbo. It sits on a parcel of land that
has already allowed the company to divest a 49% share in its Tomingley gold
resource. That gained Alkane about $75M. Bringing Tomingley to production
bolstered the company's infrastructure as well as its ties with the New South
Wales government and its banking partners, such as Credit Suisse and
Sumitomo.
Dubbo's revised
definitive feasibility study (DFS) was published in April 2013. It has a mine
life of 70+ years, a net present value of $1.15B, an internal rate of return
of 19.3% and an initial capex of $931M. Construction should begin by the end
of 2014, with production scheduled for 2016. Dubbo will produce about 10,000
tons of HREEs annually. This is quite an interesting opportunity because the
company is cash flow generative, and it sits on a parcel of land that is
still to yield further gold and base metals discoveries, which it may be able
to divest.
TMR: Do you see Alkane's gold hedge of
$1,308/ounce ($1,308/oz) with Credit Suisse as clearing the decks in order to
concentrate on Dubbo?
TH: That gold hedge applies to 25,000
oz of production, which is probably what Tomingley will produce by the end of
its financial year in June. That will provide some comfort in terms of
revenue in the current gold price environment and should lead to its banking
partners defining a funding strategy for Dubbo. The capex for Dubbo should be
met with a mix of credit and government funding, offtake partnerships and
strategic partner loans. The actual project itself sits within a separate
entity called Australia Zirconia Ltd., which might be sold.
When you take into
account a producing gold mine, cash flow, the ongoing exploration around
Dubbo, and the company's continuing improvements in REE recoveries, I would
say that Alkane has the means to ride out the current mining downtrend and be
well-positioned for the recovery.
TMR: What's the most interesting
American REE project?
TH: There is a particularly
interesting one from the point of view of its mineralogy: Texas Rare Earth Resources Corp.'s
(TRER:OTCQX) HREO Round Top project in Texas. It's
completely different from other REE projects, in that the geology is
rhyolitic.
TMR: What is the significance of that?
TH: It could lead to a much lower
capital intensity. In fact, the very preliminary project work suggests that
it could be developed as a heap-leach project, whereby acid is used to drain
off the REEs for further refinement. That would be quite a significant
alternative to the traditional REE model, whereby large amounts of money are
needed to crack and refine these REE metals.
TMR: How advanced is Round Top?
TH: It is still in the early stages of
metallurgical and mineralogical investigations and drilling.
TMR: What other American projects to
you want to discuss?
TH: Rare Element Resources Ltd.'s (RES:TSX; REE:NYSE.MKT) Bear Lodge project in Wyoming is another
interesting one. The company is working toward a DFS this year. Like Texas
Rare Earths, Rare Element has proprietary technology that might allow it to
reduce its capital requirements. However, it will take a little bit more work
to firm up its ability to create concentrates at an economically viable
level.
TMR: What's happening in Greenland?
TH: Greenland Minerals & Energy
Ltd.'s (GGG:ASX) Kvanefjeld project
in Greenland is a more traditional REE project. Unlike Nechalacho
in Canada and Dubbo in Australia, Kvanefjeld is more likely to be affected by environmental
considerations.
TMR: Greenland has been described as
the planet's last frontier for metals.
TH: It could also be considered one of
the last frontiers for conservation. Greenland has a political situation that
could be quite tricky for the development of a mining industry.
TMR: Unlike Greenland, South Africa has
been a mining leader for 150 years. Is there a REE project that stands out
there?
TH: Frontier Rare Earths Ltd.'s (FRO:TSX) Zandkopsdrift project is a particularly good project because Korea
Resources Corp. has had a strategic partnership with Frontier since 2011.
This has allowed Frontier to be fully funded through to a DFS. Zandkopsdrift
is certainly viable and has quite an amenable geology quite well understood
in terms of REE processing.
TMR: Frontier has a preliminary
feasibility study scheduled for this year. How far advanced is Zandkopsdrift?
TH: It's fairly well advanced, but it
will be the DFS that will allow us to venture an opinion as to whether it
will move into the construction phase.
TMR: Staying in Africa, what's
happening in Namibia?
TH: Namibia Rare Earths Inc.'s (NRE:TSX, NMREF:OTCQX) Lofdal project is an early-stage project,
but its actual value based on current metal prices is pretty good. The
strategic and HREO fractions of that resource are particularly strong and
high in content. Again, however, the question is how the company seeks to
develop it, and whether it takes on a strategic partner.
TMR: Lofdal's current resource is only
about 10,000 metric tons of total rare earth oxides (TREOs) in situ. But it's
80% heavies and 70% criticals. What do you think of the idea of a "boutique"
REE project, small but powerful?
TH: That's really the point I'm
getting at. The actual potential for a resource to be mined and shipped to a
third-party concentrate refining company is really where the strength of any
project lies. You're right, Lofdal is not a particularly large resource in
tonnage, but its value, considering its high concentration of heavy and
strategic REEs suggests quite an interesting business model, whereby very
little refinement would be done onsite.
TMR: Of all the companies we've talked
about, which are your favorites?
TH: In terms of the actual strength of
its resource, I like Namibia. In terms of its current position and financial
health, I like Alkane. In terms of its potential to develop a North American
heavy REE dominant resource, I like Avalon.
TMR: Tom, thank you for your time and
your insights.
Tom Hayes has been a mining analyst at
Edison Investment Research in London since 2010. He worked previously for the
consulting firm Mouchel and has been a lead production geologist and resource
definition geologist for mines in Australia and Saudi Arabia. He holds a
Bachelor of Science from the University of Plymouth and a Master of Science
in mining geology from the Camborne School of Mines.
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DISCLOSURE:
1) Kevin Michael Grace conducted this interview for Streetwise Reports LLC,
publisher of The Gold Report, The Energy Report, The Life Sciences Report
and The Mining Report, and provides services to Streetwise Reports as
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following companies mentioned in this interview: None.
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