Avalon Rare Metals Increases Estimate on Canadian Deposit -- Stock Falls Anyway

Rare earths miner Avalon Rare Metals Inc. (NYSEMKT: AVL) today reported the results of a resource estimate for its Nechalacho Deposit in Canada’s Northwest Territories. The report shows a Measured Mineral Resource of 8.9 million metric tons with a ratio of heavy rare earths to total rare earths of 21.7%.

The resources are estimated on a scale from ‘inferred’ to ‘indicated’ to ‘measured’, with each level demonstrating an increasing level of confidence in the prospects for economic development. Perhaps the key metric is the ratio of heavy to total resources, and in the case of the Nechalacho Deposit, that metric has risen from an ‘inferred’ level of 18.97% to an ‘indicated’ level of 20.72% to a ‘measured’ level of 21.7%.

This is good news for Avalon, as this deposit is by far the company’s richest if not its largest. The not-so-good news is that prices for rare earth oxides have been falling and show no signs of stopping their slide, even given the curtailment of shipments from China, the world’s leading producer of rare earths.

And in order to monetize the deposit, Avalon will have to spend huge sums that it will need to raise from capital markets. Plus, developing the deposit and the facilities to mine it will take no less than a couple of years.

We noted yesterday the effect that falling prices and the search for substitute materials has had an impact on shares of Molycorp Inc. (NYSE: MCP). Avalon and Rare Element Resources Ltd. (NYSEMKT: REE) suffer from the same issues. Likewise, the Market Vectors Rare Earth/Strategic Metals ETF (NYSEMKT: REMX).

As if to demonstrate the impact of declining demand, Avalon’s shares are off -1.8% this morning, at $1.46 in a 52-week range of $1.36-$6.91 on light trading. Molycorp’s shares are off -1.3%, while Rare Earth Element’s shares are down -1.6% and the lightly traded rare earths ETF is up 0.1%. Even reasonably good news doesn’t mean much in the rare earths space these days.

Paul Ausick