By Desmond McMahon – Exclusive to Rare Earth Investing News.
At the halfway point, 2010 has not been kind to junior rare earth companies. Avalon Rare Metals (TSX:AVL), with its Nechalacho project in northern Canada, has watched its stock hover around the $2.00 mark after starting the year at $2.96. Another promising junior, Quest Rare Metals (TSXV:QRM), which holds the rights to several sites including Nebraska’s Elk Creek Carbonite, has fallen from $3.23 to $2.15 since the start of the year.
Speaking to Brian Sylvester of The Gold Report, Byron Capital analyst Jon Hykawy explained these losses are not related to rare earth prices, as they have been moving up steadily. “My guess,” he says, “would be that some people are feeling less certain about the near-term economy. The other side may be that people are starting to realize that the path to commercialization for these companies is a lot more difficult than they thought when they first bought the name.”
Hykawy says China is in the driver’s seat with rare earths because of their low production costs and that makes it harder for new sites to get into the market. Since China entered the rare earth market, mines around the world have been shut down because the Chinese came in with such low pricing that no one else could afford to compete.
In June, Avalon released a Pre-feasibility study suggesting their Nechalacho rare earth site is economically viable: it estimated the required capital investment of $890 million would generate a $1.5 billion cash flow. But Hykawy doesn’t think it’s that simple and cautions that rare earth extraction is a complex process and not for the faint of heart. He was unable to reconcile the company’s public statements on the cost of processing with some of the work they’ve published on the site’s metallurgy, and thinks its operating costs are high at $5.93 per kilogram of finished product. “This makes the economics of the project difficult,” he says.
“The most important thing to recognize is that the production of rare earth elements is still mining; so many of the same rules that hold for a gold explorer or a copper explorer continue to hold for a rare earths company.”
But, if Alaskan Senator Lisa Murkowski is reading the situation correctly, the tides may be turning for rare earth juniors. When she introduced the Rare Earth Supply-Chain Technology and Resource Transformation Act on the Senate floor last week, she explained China’s recent moves to stop issuing new domestic licenses for rare earth exploration and cap this year’s production at 81,000 tonnes is part of an effort to drive up world prices for the minerals. Murkowski estimates Chinese annual exports will average only 35,000 tonnes over the next five years, further straining demand on worldwide consumption, which totals 120,000 tonnes annually (including China). If China’s tightening on supply continues to drive world prices up, it will make sites outside of China more viable as rare earth consumers outside China attempt to secure a supply.
In her speech, Murkowski mentioned Ucore Uranium’s (TSXV:UCU) Bokan Mountain project, located 60 km from the ports of Ketchikan, Alaska. Ucore’s stock has dropped from 52 cents at the start of the year to around 24 cents in June. A 1989 US Geological Survey reports the area hosts niobium and other rare earth elements (both heavy and light) as well as tantalum. Uranium was mined at the site during short periods between 1957 and 1971 using both open-pit and underground mining.
The Senator’s bill is important to the development of sites like Bokan Mountain. Additional government investment, access to federal loans and expedited permitting would all help to start production and bridge the gap between production costs in China.
As Andrew Bloodworth of the British Geological Survey told Reuters on Wednesday, “People think China is sitting on all the rare earth resources, that’s not true. As concerns grow about the Chinese monopoly, there is growing commercial interest in developing other deposits and bringing them to mine status.”