Harry Norman: Hello, this is Harry Norman for Proactive Investors and welcome to another Proactive audio interview. Today is the 17th August 2010 and I’m talking with Don Bubar, President and CEO of Avalon Rare Metals. Listed on the TSX metals and mining sector. Stock ticker, AVL. Share price, $2.67 Canadian. Market cap, $210.9 million Canadian. Web address, www.avalonraremetals.com. Don, thank you very much for joining us for this interview.
Don Bubar: Thanks, Harry. Pleasure to be back.
What's been happening in the world of rare earths since we last spoke, back in 2009?
Of course China’s the dominant supplier of rare earths to the world and China has recently announced further reductions in the export quotas; the material they make available for export to consumers around the world. The recent announcement was quite a substantial reduction by some 64% for the balance of 2010.
So, this caused quite a bit of concern out there amongst consumers around the world, certainly about security of supply going forward and has also had the effect of pushing up prices in China.
We’re seeing substantially higher prices than where they were in 2009, and they’ve gone up some 35% over the first six months of the year and even more over the last month or so. Demand continues to outstrip supply; supplies are constrained, creating an even better opportunity for new suppliers to emerge in other parts of the world.
How significant is it that Avalon Rare Metals 100% owned Nechalacho Rare Earth Element Deposit at Thor Lake in Canada, is the largest rare earth resource outside China?
It’s very significant to our customers who want to know, once we achieve commercial production and start producing product for them, that we’ll be around in the longer term, in other words we’re not at risk of running out of resources and product going forward.
Most rare earth resources tend to be fairly large, what's really key to the economics is the grade or the concentration at which the rare earth elements occur in that or under ground. At Nechalacho we’re blessed with a relatively high grade and also a relatively favourable distribution of the heavy rare earths verses the light rare earths.
As you will recall, Harry, most deposits tend to be dominated by the light rare earths, the heavy rare earths occurring in only trace amounts. So, that makes them scarcer as a whole and they tend to attract much higher prices. At Nechalacho, our resource there contains over 20% of the heavier rare earths, making for a more valuable ore in the ground and ultimately, we believe, a more profitable operation going forward.
What are your thoughts on the results of the 2010 winter drill program at Nechalacho, Don?
It’s a very large program, we did over 11,000 metres of drilling and I had a couple of main objectives. The main one was to do what's called infill drilling, or definition drilling, where we drill between earlier holes to prove up the continuity of resource between holes and I was very successful in that regard. There are very few gaps in the mineralisation and it’s remarkably consistent and continuous over the area that we have explored to date.
This is allowing us to increase the confidence level on the resource from a mine development planning standpoint. Effectively we drilled a number of holes outside of the area where we had already drilled, to see if there might be further extensions of the zone outside of the known area.
We were successful in a number of those holes and intersecting the zone, well outside of the previously drilled area, and demonstrating considerable potential for further expansion of the resource, further additions to the existing resource inventory. So, it confirms that it is indeed a very large deposit, with room for further growth and excellent continuity.
We will be reporting on how those results impact on the resource before too long here. We are now compiling all of the analytical data that was reported earlier into our block model and will be able to report to the market how has impacted on our resource estimates, so hopefully within the next few weeks.
Please will you talk investors through the pre-feasibility study for the Nechalacho deposit, published by Avalon Rare Metals in June?
The pre-feasibility study was an important milestone in the advancement of this project. It was the first full blown analysis of how this project would develop and the first analysis on the costs and revenues and profitability of it.
We were really pleased that we were able to report to the market a positive result and it was confirmed to be an attractive investment opportunity. Furthermore, as we've discussed since then, we were able to readily identify lots of opportunities for further optimisation of the project going forward.
As most of your listeners will know, from a pre-feasibility level analysis tends to be very conservative analysis. In other words you apply the most conservative assumptions possible on costs and revenues and to see if it stands up under a very conservative scenarios, as with positive economics, which indeed this project did. Given those conservative assumptions we see lots of room for optimisation here.
For example, because of the increasing demand for the rare earths now we see the opportunity to increase the production rate in the early years, which would generally increase revenues and improve the overall profitability. We're seeing areas with much higher grade or higher valued rock in the ground, than any new mining operation.
Those higher grades areas tend to be mined first to increase the revenues in the early years as well, which also positively impacts on the economics, assurance, the payback period on capital costs etc.
There are lots of opportunities here to benefit from higher prices and make this an even more attractive opportunity once we complete our bankable feasibility study, which is the next major step moving forward in the project.
How are the prices of rare earth metals holding up and where do you think they're heading, Don?
Prospects are for further constraints on supply out of China, that’s likely to put further upward pressure on prices over the short to medium term. Really, I think, most people believe are catching up to where they probably should be.
What is Avalon Rare Metals’ financial situation, Don?
It's pretty good, we have about $8 million in the treasury right now, more than adequate for our current needs although we will need to access additional capital before too long to ensure we are adequately funded to complete our bankable feasibility study.
Fortunately market conditions appear favourable for attracting additional capital. Recently Molycorp Minerals, the US producer or the Mountain Pass mine in California, completed a successful initial public offering and raised some $390 million in equity financing to allow them to refurbish their facility there and restart full production within the next couple of years.
It demonstrates there's a lot of interest from investors around the world in the rare earths business and opportunities for other emerging producers, like us, to attract capital for good projects like our Nechalacho is going forward.
What can investors expect from Avalon Rare Metals over the next 12 to 18 months, Don?
We'll have a steady stream of news as the project advances here. Coming up next will be an announcement on the impact of our recent drilling through the winter on the resources in the deposit, or an updated resource estimate for the deposit should be available to report within the next few weeks. We are drilling still there now, so there will be additional results from the summer drilling program to reports on through the fall.
We're also starting our pilot plant work sample, we’re we’ve got bulk sample ready to start processing, to test the process flow sheet that we developed last year and start producing some of the actual products. So, we’ll be reporting on the progress of that work as it advances over the next 6 to 12 months.
Lastly we've already initiated our environmental impact assessment, a key step in securing our operating permits going forward and we’ll be reporting on the progress on that front as well, as that advances over the next 12 months.