Avalon Rare Metals: Land Use Permits And Water Licence Next

Federal government approves Nechalacho
Avalon Rare Metals Inc, (AVL) has announced it received federal government approval for its report of environmental assessment for its flagship heavy rare earth element-enriched Nechalacho deposit in the Northwest Territories, Canada. Approval was granted on 4 November by the Minister for Aboriginal Affairs and Northern Development Canada. This follows the Mackenzie Valley Environmental Impact Review Board’s positive recommendation in July 2013. Having reached this significant milestone, Avalon now has a better defined path to obtaining all remaining operating permits, and ultimately to arrange for financing the C$1.5bn price tag to achieve first revenues from Nechalacho in 2017.

Land use permits and water licence next
With approval from the federal government for its report of environmental assessment, Avalon can now proceed with formal applications for the required land use permits and water licences from the Mackenzie Valley Land and Water Board.

Shelf prospectus filed – ready for equity financing
On 12 September 2013 Avalon lodged a final base shelf prospectus, under which it would be able to issue shares, warrants or a combination of both for proceeds of up to US$500m. For now we continue to model Nechalacho being financed with a mix of 70% debt and 30% equity. We currently only forecast C$35m in equity raised at a notional C$1.00/share (see our May 2013 Outlook note).

Valuation: Reiterated until financing is clarified
We retain our base-case valuation given in our May 2013 Outlook note. This considers commissioning at Nechalacho in 2016 (which could still be achieved in light of this current federal project approval), with first cash flows in 2017 and reaching steady state production in 2018. The valuation is based on Avalon’s April 2013 feasibility study and on conservative commodity price inputs reflecting current levels provided by Avalon. On this basis, we value Avalon’s shares at C$5.44 (fully diluted using a C$1.00 share price and using a 10% discount rate), to which C$0.09 should be added for the value of its current cash, for a total valuation of C$5.53 per share. In our model we assume the equity component is sold to a strategic partner.

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