Avalon Rare Metals: Shares Now At 66% Discount

Avalon (AVL) intends to capitalise on its early mover advantage and develop its heavy rare earth element (HREE) enriched Nechalacho deposit in the Northwest Territories, Canada. It has made significant moves to create strong relationships with future off-take partners, helped in part by strict adherence to its Corporate Sustainability Report, a key differentiator. With demand continuing to outstrip supply globally for valuable heavy rare earths, Avalon’s HREE enriched project is an attractive opportunity to enter the REE space with lower technical risk than many of its peers. We value Avalon on the basis of its April 2013 feasibility study (FS), which results in a value of C$5.44/share (at a 10% discount rate, fully diluted, with a 30% equity sell down for funding). To this should be added C$0.15/share for the value of its current cash balance of C$16m for a total valuation of C$5.59 per share.

First major separation plant outside China planned
Avalon intends to separate out the majority of the most valuable REEs into individual rare earth oxides at a current capex estimate of c C$423m for the separation plant and associated infrastructure in Louisiana, US (included in the total of US$1,453m). This is an important factor considering the lack of any significant capacity to separate REEs outside of China. A separation plant outside China represents a key de-risking factor for end-users that want to reduce their exposure to Chinese supply and aids Avalon’s objective to establish and maintain market share commensurate with its planned production capacity.

Corporate Sustainability Report a key differentiator
Avalon’s Corporate Sustainability Report allows off-take partners of Avalon’s future products to audit their supply chains, which is significant when corporate identity and reputation are as important as securing cheap raw materials and stable supply.

Valuation: Shares at 66% discount
Our valuation considers first production at Nechalacho in late-2016, with first cash flows in 2017 and reaching steady state production in 2018. In the light of recent decreases in rare earth and Nechalacho’s other end-product prices, we use conservative pricings (supplied by Avalon due to the opacity of these commodity markets), which results in a dividend discount valuation of C$5.44 per share (at a 10% discount rate and fully diluted). To this should be added C$0.15/share for the value of its current cash balance of C$16m for a total valuation of C$5.59 per share.

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