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Elissa Resources plays on heated American REE space
By Justin Yan
Paul McKenzie, Chief Executive Officer of Elissa Resources Inc.
China's monopoly over rare earth elements (REE) has raised important national security concerns for the Obama Administration as they push for “green” energy adoption across the U.S. Coupled with increasing demand and skyrocketing prices, this has prompted a rush back into the space by mineral explorers to revive the once leading American industry.
With geopolitics in their favour, this has prompted Vancouver-based Elissa Resources Inc. (TSXV:ELI, OTC: ELSRF) to seize the enormously lucrative potential presented by this group of 17 elements. “There is a lot of interest in having domestic supplies of rare earths and so we think that we're really in the right space at the right time,” says Paul McKenzie, President and Chief Executive Officer of Elissa.
REE are used in a growing number of modern products including consumer electronics, wind turbines, electric and hybrid vehicles, as well as a host of military applications.
The Obama Administration and U.S. Congress have expressed concern over the lack of a domestic supply of rare earth elements on the backdrop of China's export restrictions policy. China produces 97 per cent of the global supply of rare earths and has continually reduced its export quotas since 2006 to ensure adequate supply in the domestic Chinese market as well as to achieve foreign policy objectives. This has many governments – at the behest of miners and manufacturers – including the U.S. and Japan, scrambling to find alternative sources.
Various bills have been introduced to U.S. Congress advocating for the critical nature of a secure domestic supply chain of REE.
“Any country with an advanced manufacturing base requires a supply of rare earth elements,” explains McKenzie from his office in Vancouver.
Desert Dreams
Elissa Resources, formerly Red Hill Energy Inc., owns the Thor Rare Earth Project in Nevada. Located near the California-Nevada border, the Thor project sits 26 kilometers (16 miles) east of Molycorp Minerals' Mountain Pass Mine and rare earth processing facility. It also owns two gold properties including the Sage Creek project in Idaho.
The exploration company acquired the recently expanded Thor project before the REE space heated up, says McKenzie. His team hails from a base and precious metals background and took a multi-commodity approach almost by accident, the CEO explains. “We knew very little about REEs but found some intriguing surface information [on the property],” he says of Elissa before acquiring the project.
Results from initial exploration work have since identified significant REE mineralization in three unique discovery zones with surface samples returning up to 10.6 per cent REE. In addition, the ratio of REE mineralization averages nearly one part heavy rare earth element (HREE) for every 10 parts light rare earth element (LREE), the company says. The mix includes significant concentrations of neodymium, terbium, dysprosium and yttrium – four elements the U.S. Department of Energy (DOE) says are domestically in critical short supply.
In an attempt to bolster its staff expertise, Elissa has hired two independent rare earth consultants to examine the Thor property, including David Jessey, a Geology Professor at California Polytechnic State University.
Positive results from its aerial survey and sampling program have refocused Elissa on the American REE space. The Vancouver-based explorer is aggressively seeking additional REE opportunities in Nevada and neighbouring states, according to a recent press release.
Going forward, Elissa plans to conduct detailed ground and air magnetic surveys and an in-depth geophysics program in July 2011 in preparation for a core drilling program later this year.
The Molycorp Variable
Skyrocketing prices for REEs have recently renewed the push for exploration and production in this sector, both in North America and worldwide. Molycorp's Mountain Pass Mine, once a leading producer of rare earth oxides (REO - the finished product from the processing of REE), went dormant when Chinese production began flooding the market with lower cost supply. In late 2010, the company announced the construction of a new state-of-the-art rare earth processing facility slated to produce nearly 40,000 metric tons of REO equivalent per year.
This development has McKenzie and his team excited. A potential economic resource at Thor, large or small, leaves them in a favourable position for a potential buyer or offtake contract. Given the complexity of REE metallurgy, building a mine and REE processing facility can cost hundreds of millions of dollars, according to the CEO. “You're looking at multiple sources of mineral under one rock and it's a complex process of extracting them,” he explains.
The size of the structures on the property point to a potentially large deposit, he says, but “if we ended up with a small deposit, we could not be in a better location for such a discovery.”
As Molycorp's Mountain Pass Mine consists of mainly LREEs, a resource containing more scarce and valuable HREE content found on the Thor property would likely garner attention from the producer and the government, says McKenzie. “We know that they are looking for heavies. They would like nothing more than to find heavies and they haven't found any as of yet.”
Given the proximity of the Thor property, it is very likely to be bought by Molycorp as it is really the only natural owner for those assets, says Daniel Heyman, Managing Director of Los Angeles-based Heyman Wealth Management, who has done investment analysis of the rare earth space.
“If there's a big orebody close to Molycorp, why would anybody start a whole new mining company out there? There's really no reason to. Molycorp has their site already; they're permitted. So much of that risk is already offloaded,” Heyman says.
Geopolitics at Work
Elissa is optimistic the U.S. government may step in to provide assistance to boost domestic rare earth production in line with Molycorp's push for federal loan guarantees from the U.S. DOE. “I know U.S. congress is very aware of this and [President] Obama has spoken to the necessity for rare earths and it's something that they support and encourage. Being in the US and having a heavy rare earth element component is certainly going to be of interest,” says McKenzie.
“I think what you're going to see is more favourable legislation and tax subsidies the way we've been giving some of the alternative energies, like solar and wind,” says John Licata, Chief Investment Strategist at Blue Phoenix Inc., a New York-based commodities research firm focused on clean energy.
Expedited time frames for permitting must also be put in place as permitting procedures take anywhere from three to five years on average, says Licata. “Otherwise, we risk falling way behind China,” he warns.
Yet, not everyone is convinced. Despite the need for REE supplies for clean tech manufacturing, Heyman is skeptical about government assistance for the REE industry: “There's really no big drive for it. There are so many bigger fish to fry”, he says, referring to loans slated for nuclear power plants. “The last thing I can see is one industry getting subsidies to get their mines into production.”
And perhaps the REE industry will not need much government assistance, given the market fundamentals of the space. The upward trajectory of REE prices coupled with surging demand for products incorporating REEs for the foreseeable future may be enough to push the industry forward on its own.
“We've got the right project in the right place at the right time,” emphasizes McKenzie. “Thor is really starting to shine and it's progressively getting more exciting.”
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