By Darren Campbell -- Two years ago, not many had heard of Avalon Rare Metals and the commodity it hopes to dig out of the ground near Yellowknife: rare earth minerals. But a fortunate series of events - rising demand for these elements and a limited supply - has the company on the cusp of opening a mine that could last a long time and employ a lot of people.

In late September on a typically gray and drizzly fall day in Yellowknife, dozens of people squeezed themselves into floatplanes to make the 25-minute flight to a small exploration camp 100 kilometres southeast of the city.

The camp is known as Thor Lake and the visitors, including NWT Premier Floyd Roland and Phil Fontaine, the former national chief of the Assembly of First Nations, had gathered at this place, dotted with spruce and poplar trees, for a ceremony.

The event was held to officially give Thor Lake a new name, an aboriginal name: Nechalacho. The aboriginal people in whose traditional territory Thor Lake lies, the Yellowknives Dene First Nation, had agreed to lend the name to Avalon Rare Metals, the Toronto-based company that’s been exploring on this site since 2005. And so on a rocky point at the camp overlooking the lake, the 50-plus visitors listened to drumming and speeches and inhaled the smoke of burnt wood and tobacco in a traditional feeding-the-fire ceremony, as the Yellowknives leadership gave the renaming of Thor Lake their blessing.

Way down the end of the periodic table, the 17 so-called “rare” earth elements with tough-to-pronounce names like yttrium and praseodymium actually aren’t that rare at all. They can be found in the Earth’s crust as abundantly as nickel or tin. But what is rare about them is finding deposits concentrated enough to justify commercial extraction.

Nechalacho is one of those deposits, and it is the crown jewel of Avalon’s stable – which also includes three rare metal projects in Ontario and one in Nova Scotia – because it’s the biggest and the most advanced.

With a dazzling potential resource size of 64.2 million tonnes, such quantities could lead to a mine that operates longer than Yellowknife’s famous gold mines – Giant and Con. “It’s a huge resource,” says Avalon CEO Don Bubar, who estimates the mine would employ about 200 people. “Production rate and mine life will be dictated by the markets for the commodities, but assuming they continue to grow and demand remains at least stable for rare earths and other rare metals, there are resources there that could last decades – maybe 100 years or more.” So what is driving demand for rare earths and creating a buzz about Avalon and its Nechalacho project?

Bubar can thank our addiction to fossil fuels and concerns about climate change. Cutting our carbon footprint is in and so is “green” technology. And it just so happens that rare earths elements are used in a host of products integral to that technology: from the batteries used in the electric motors of hybrid cars to the magnets used in the production of wind turbines. (They’re also used in some not-so-green technology like the radar systems and lasers required in weapons like “smart bombs.”)

And where there is rising demand, there must be a corresponding rise in supply, and therein lies the problem. China has quietly cornered the market in rare earths, controlling – by some estimates – 97 per cent of global supply.

One country or cartel in control of a much-needed commodity is never a good thing (think OPEC and the oil crises of the 1970s.) It’s particularly troubling when that country has recently made noise that its production of rare earths will not be enough to meet domestic demands and it plans to cut back on exports and maybe even ban them altogether. In fact, according to the Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co. – owners of the largest rare earths mine in China, this has already happened. Chinese exports fell 35 per cent, from 52,300 metric tonnes in 2006 to 34,600 in 2008. More cuts are expected.

The world is beginning to catch on to the implications of this pending supply crunch. During a two-week period in September, media like the New York Times, Reuters, Bloomberg.com and Foreign Policy Magazine all published stories warning of the potential shortage and the effect it will have on a world dependent on cell phones, iPods and laptop computers – all of which require rare earths to be produced.

But while the rare earths supply problem is a headache for companies like Toyota, makers of the popular Prius hybrid car, it’s the opportunity Bubar and Avalon has been waiting nearly a decade for. Global demand for rare earths in 2008 was approximately 124,000 tonnes. By 2015 that demand is expected to rise to 200,000 tonnes. If China continues to limit its rare earth exports – and with few rare earth projects in advanced stages of development elsewhere – the supply will have to come from somewhere. Nechalacho could be that somewhere.
Recessions tend to be messy times for the junior mining sector, so it’s ironic that this downturn has been good for Bubar’s venture. In 1995, Bubar was focused on gold mining when the company he was working for bought a lithium/tantalum rare metals property in northwestern Ontario.

The acquisition was a flier. No one thought much of these commodities at the time because the gold market was hot. But then the Bre-X gold scandal hit in 1997 and the junior mining sector tanked. Suddenly, the rare metal property Bubar’s company had bought was the only one it could attract investment capital into. “We shifted gears and away we went with it,” says Bubar. Avalon was formed in 1997.

And while the ceremony was a small one, the opportunity at Thor Lake is huge – for Avalon, for the Yellowknives and for the NWT. That’s because under the surface here lies one of the largest undeveloped rare earth elements resources in the world and Avalon aims to get at it and build a mine – one that could supply the world with these increasingly-in-demand commodities and provide jobs for the Yellowknives and other Northerners for decades to come.

The Nechalacho deposit is not a new find. Highwood Resources discovered it in 1976. From 1976 to 2004, over $12-million was spent on exploration and development work on the property. Geological mapping, geophysical surveys and nearly 200 holes were poked into the ground during that time. Underground development work was also done, along with bulk sampling and market studies on the property’s North T deposit.

Bubar’s chance to acquire Nechalacho came up in 2004. “I’d been in the business long enough to recognize an opportunity was there, although it was hard to quantify,” says Bubar. “In this business you’re opportunistic and use your sixth sense to tell you when something is right. Then you go for it.”

In this case, Avalon did go for it, snatching up Nechalacho in 2005 from Beta Minerals, a successor to Highwood. Since 2005, Avalon has spent more than $9-million on exploration at Nechalacho, and the company is at the point of working on a pre-feasibility study – a key step that will flesh out Avalon’s development model for the project and determine whether it makes economic sense to build a mine. Bubar says that is on schedule to be completed by the first quarter of 2010.

Nechalacho is still a long way from becoming a mine. Assuming the pre-feasibility study goes well, the company still has some major work to do: a bulk sampling program, pilot plant work and a feasibility study that will make the economic case for building the mine. And then there will be a regulatory review to go through. If all goes well, Bubar says Avalon might be able to achieve production by 2013. Bubar estimates the cost of developing the mine at $300-million, although he admits the cost and production date estimates are “very fuzzy” at this point.

Fuzzy as they might be, Avalon is on a hot streak of late. In March, its share price was in the 50-to-60 cent range. But thanks in part to concerns about China cutting off supply and a spate of positive press, Avalon’s shares were trading at around $3.50 on the Toronto Stock Exchange at press time. In September it secured $17.5-million in financing from CIBC World Markets – an impressive feat considering banks are not exactly in a giving mood these days. The money will help finance future work, like the bulk-sampling program, that will keep Nechalacho on track. Also in September, Avalon announced Phil Fontaine, the high profile former national chief of the Assembly of First Nations, had accepted a position on its board of directors.

Victor Goncalves, a Vancouver-based mining analyst, has been following Avalon and the Nechalacho project. He likes what he sees. He predicts a bull market for rare earths is coming and when the bull arrives a lot of new companies will be on the scene looking to take advantage of it.

“It’ll be like the uranium boom a few years back. There was a flood of companies that showed up because there was money to be had there,” says Goncalves. “But booms flush out the wheat from the chaff. Avalon’s got the expertise; they’ve got everything they need to turn [Nechalacho] into an economic project. I believe Avalon is the wheat.”

Goncalves’ praise for Avalon is based on a few factors. First, he doesn’t see demand for the products that use rare earths cooling off. He also likes the size of the Nechalacho deposit and the fact that it contains an unusually large quantity of the more valuable heavy rare earths. Rare earth element deposits tend to occur in two subgroups: heavy rare earths and light rare earths, with the heavy stuff being the most valuable. Avalon says the heavy rare earths make up 20 per cent of Nechalacho, an unusually high number.

Goncalves also gives the company high marks for the work it’s done to get aboriginal people on board with the project – an important point considering how often aboriginal people and the mining industry have locked horns in the North over the years. While getting a high profile figure like Fontaine to join the board was a coup, Goncalves thinks the renaming ceremony held at Thor Lake, with the Yellowknives Dene leadership looking on approvingly, was more significant. “You have to have a lot of community endorsement for projects in the North,” he says. “Having the right people backing this is key. That’s why the re-naming of the project was a major win for Avalon.”

However, it would be a mistake to view the Yellowknives’ involvement in the re-naming ceremony as signaling unconditional support for the project. Ed Sangris, the Yellowknives chief for the community of Dettah, says he’s happy with how his people have been treated by Avalon thus far in the process. But he also cautions there is a long way to go before the Yellowknives consent to having a mine that could be operating for over a century in their backyard.
“This is just the first step,” says Sangris. “We have to walk a fine line between protecting our land, our culture and economic benefits. We’ll see what happens. We have our standards and our level of comfort. We have to look at this from all angles. We have to get some questions answered.”

Avalon appears keen to answer them. Bubar has been at the forefront of improving relations between the Canadian mining industry and aboriginal people for some time. Since 2004, Bubar has served as chair of the Prospectors and Developers Association of Canada’s aboriginal affairs committee.

That is where he got to know Fontaine and worked with him and the Assembly of First Nations on developing and then signing a memorandum of understanding in 2008 between PDAC and the AFN. The MOU established a two-year plan to create partnerships, investments, education and employment opportunities for aboriginal people and aboriginal companies with the mining industry.

Fontaine says one of the reasons he joined Avalon’s board after retiring as chief of the AFN was his high regard for how Bubar and the rest of the company’s management deal with aboriginal communities. “Don knew of the legal requirements and the duty to consult and accommodate aboriginal interests,” says Fontaine. “He knew development couldn’t be undertaken without full engagement with First Nations. He reached out to our communities and I’m impressed with his understanding and approach.”

Bubar’s shown he’s got a good touch in his dealings with the Dene people in the NWT thus far. And he is no Northern neophyte. His first industry job was looking for tungsten in the Yukon and he knew some of the history between the mining industry and aboriginal people in the North wasn’t good.

So Bubar and the company started consultations early – before Avalon had done any work on the property. Not only did Avalon talk to people in Ndilo and Dettah – the communities that would be most affected if a mine were operating at Nechalacho – it also reached out to the two other communities within the regional aboriginal organization the Yellowknives are a part of: Lutsel K’e and Fort Resolution.

Bubar believes the legwork has paid off. It has resulted in a cordial working relationship with the Yellowknives, one that has led to results like the renaming ceremony at Thor Lake.

“I know a lot of companies find it difficult to arrange meetings and get any kind of feedback at all and they get frustrated and give up,” Bubar says. “But we took the approach that a lot of First Nations have limited capacity and the leadership have lots of different issues they have to deal with. Meeting and greeting with an exploration company isn’t necessarily number one on their list of priorities. You have to recognize that and accommodate that and keep talking until you can establish a dialogue.”

That dialogue will have to continue, as Avalon and the Yellowknives learn more about what each other’s expectations are and what they really want out of the Nechalacho project. Chief Sangris talks of the Yellowknives one day owning the mine and running it. Bubar isn’t looking that far off. He’s more concerned right now about financing and future work at the site, the stuff that will keep Nechalacho on track for a 2013 startup.

“Rare earths are not in short supply today. But the whole issue is where are the supplies going to come from in four or five years if there are not new sources and China’s internal consumption keeps going up such that they don’t have anymore available for export internationally,” Bubar says. “If we can get this moving forward and ready to enter that market in four or five years, it looks like it’s pretty much ideal timing to capture market share and have a good, solid business.”