Wednesday, June 16, 2010

Avalon Rare Metals, Inc.: A Rare Opportunity

While investors are starting to wake up to the incredible opportunity in precious metals mining stocks, the sub-category of rare earth metals remains largely unknown.

Both "light" and "heavy" rare earth elements represent a family of minerals found in consumer products such as TV displays and cell phones, as well as environmental applications such as hybrid engines and wind turbines  Rare earths are also instrumental to medical equipment such as X-ray machines and MRI machines

U.S. military technologies such as guided bombs and night vision rely heavily upon rare earth elements currently supplied by China.  Securing an independent U.S. supply could take up to 15 years, according to a new report by the U.S. Government Accountability Office (GAO).

New rare earth mines in the U.S., Australia, Canada and South Africa won't commence operations until at least 2014, based on industry estimates.  The GAO report listed rare earth deposits in states that include California, Idaho, Montana, Wyoming, Colorado, Missouri and Utah.

Of particular concern is that many U.S. deposits lack the "heavy" rare earth elements critical for much of today's technological innovations.  In addition, Chinese corporations are using their vast dollar holdings to buy mining companies that hold various U.S. deposits.

China has set quotas limiting rare earth exports and added on export taxes, despite supplying as much as 97% of the world's rare earth oxides.  Over the last 7 years, China has reduced the quantity of rare earths for export by 40%.  Even more troubling is Beijing's official plan through 2015, in which it warns that its own industrial demand might force it to stop exporting entirely.

There are very few publicly traded miners of rare earth metals, although investment in building capacity is growing rapidly.  One such company of note is Avalon Rare Metals, Inc. (TSX:AVL)(OTCQX:AVARF).

Avalon is a mineral exploration and development company focused on rare metal deposits in Canada, including a wholly owned project known as Nechalacho, which is emerging as one of the largest undeveloped rare earth elements resources in the world.  Nechalacho is particulary well endowed with the more valuable heavy rare earth elements, which are critical to environmental and high-tech applications. 

Avalon presently owns 4 other rare metals and minerals projects in Canada including a lithium project in Ontario, an inactive calcium/feldspar project in Ontario and a tin-indium-gallium-germanium mine in Nova Scotia.  None of these are expected to be operational any time soon, however.

The Nechalacho deposit now ranks as the second largest rare earth element deposit in the world, after the giant light deposits of Bayan Obo in China, yet the full extent of the Nechalacho deposit is still undefined.  Especially important is the fact that Nechalacho has the highest proportion of heavy metals of any major known deposit, giving it a higher value per ton.

The Bayan Obo deposit in China is believed to contain 56.9 million tons, but with a proportion of heavy metals of only 2%.  By comparison, Nechalacho has a much smaller resource base of 2.5 million tons, but contains a bountiful 22% of the more valuable elements.  Thus, in the heavy category, Nechalacho has nearly half the resources of the giant Chinese mine.

The 2 largest other deposits in the world lie in Kvanefeld, Greenland with 2.15 million tons (14% heavy) and Mountain Pass, U.S. with 1.84 million tons (0.98% heavy).

Avalon has 77 million shares and closed yesterday at $2.43, giving it a market capitalization of less than $200 million.  The company has no debt, but a relatively small cash balance of $10 million. The stock is reasonably liquid.

As a disclosure item, I have a position in Avalon and expect to for the forseeable future.  While this is a higher-risk investment, it is well worth looking into and possibly adding to one's porfolio of mining companies.

Marko's Take

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  1. Too bad you didn't list the stock prices of other rare earth mines for comparison to Avalon's.

  2. Hello Anon:

    Too bad, indeed! Feel free to mention ones that you believe have merit, and I'll look into them.


  3. What you think of Great Western Minerals Group (GWMG)?

  4. I did check out GWMG, but the information is fairly scant. Preliminary my thoughts are follows: GWMG has a market cap of $60 MM, about 1/3 of AVARF. As far as I can tell, the known resources are not well delineated yet, althought the South African project looks promising.

    In the type of mad scramble we're about to see for rare earths, there is no reason this stock can't go up multiples. That said, I would personally prefer Avalon.

    The company you did NOT mention is Ivanhoe (IVN).
    It has a much, much larger market cap, so I'd still prefer Avalon.

    If I'm able to learn more about GWMG, I'll pass it on.

    Thanks again for bringing it to my attention.



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