PROSPECTORS SPECULATE ON RESERVES

Written on the 11 February 2011

PROSPECTORS SPECULATE ON RESERVES

ONE has found traces of rare earth metals that US Congress described as ‘strategic elements’ while the other is out to harness energy from volcanic deposits. China Yunnan Copper Australia (CYU) and Hot Rock (HRL) are two local companies making bold claims about future growth, with exploration projects in Australia and South America.

UNTIL recently CYU’s main drawcard was its copper-gold exploration site Humitos in northern Chile, but a rare earth discovery near Mt Isa on January 6 sent investors into a buying frenzy.

The elements found at the Mount Dorothy site are classified as heavy rare earth elements (HREE), which include lanthanum, cerium, neodymium, samarium, europium, gadolinium and holmium.

CEO Jason Beckton says these ‘strategic elements’ are used for superconducting electricity and other high-tech industries.

“What you’ll find happening is that companies that can get these elements into production with decent resources will not be able to name their price, but the price of these elements will increase,” he says.

“This is not speculation or hedge fund activity; this is a genuine supply-demand equation going forward. This is why, perhaps correctly, the Chinese are restricting exports because they need what little resources they have for themselves.”

“What we can see is not only Mount Dorothy but a grouping of prospects in that central belt between Mount Isa and Cloncurry, which are effectively untested and unevaluated for rare earth elements, so there’s a whole corridor there.”

However lucrative the Mount Dorothy area might be, Beckton predicts that given slow mining lease approval times it could be another three to five years before production starts.

It’s a timeframe that begs the question of funding, leading Beckton to discuss the importance of CYU’s Chile operations and the potential for upcoming acquisitions in that market.

“It’s important for any investor when they invest in a speculative company like us to see there’s more than one project, more than one egg in the basket, and certainly for us that’s Chile,” he says.

With Mount Dorothy drilling underway Beckton is now in the South American nation to monitor operations, highlighting that CYU may buy Chilean production properties soon.

“The move to increase pressure in Chile is to ensure that business is driven correctly and that we move to cash flow in that part of the world, which is reasonably rapid if you do things within the laws of the country,” he says.

“All good companies have internal competition of projects, and if it’s generally similar between two projects we’ll be looking at regulations.

“If you look at it from the point of view of an investor, people don’t invest in companies like this to double their money; they look for 10 times the result and that’s what I’m aiming for.”

Beckton points out that Chinese company Yunnan Copper – which itself is 51 per cent owned by Chinalco – only owns 22 per cent of CYU while the rest belongs to retail investors with a minor foreign component.

Lucrative lava

While markets have been reluctant to embrace geothermal energy in recent years, Hot Rock Limited (HRL) managing director Mark Elliott believes it’s only a matter of time before the ‘penny drops’ with investors for the industry’s potential. Elliott, who is coincidentally a former managing director at China Yunnan Copper, likens the situation to the cynicism that surrounded coal seam gas (CSG) in the early 2000s; an industry which has since attracted the likes of British Gas, Shell and PetroChina to Queensland.

He is quick to emphasise the variety of methods in geothermal energy extraction, which differentiates Hot Rock’s Otway Basin project in Victoria from others in Australia, as well as the company’s exploration efforts in Chile and Peru.

“There are two different types here. One is related to deep-seeded granites and these are the ones that companies like Geodynamics and Petratherm are following, but there’s very little commercial generation from these deposits worldwide after 25 years of exploration,” he says.

“But the one we’re focused on is called the hot sedimentary aquifers model and this style of geothermal has been operating in places like the US in California, and has been commercial for the last 25 years so we know it works.

“The issue is that to drill test these projects is very expensive – we’ll be drilling to a depth of 3700m so therefore we need a big drilling rig, like they use in the petroleum business, so each hole would cost us in the order of $10 million.”

Elliott is looking for government support for the project, similar to the way Germany was propelled into wind power in the 1980’s. He is also open to joint venture partnerships.

If funding is not forthcoming, Elliott is bullish on the potential for commercial projects in Chile and Peru, whose location on the volcanic ‘ring of fire’ makes them a kind of low-hanging fruit for geothermal speculators.

“They have surface expressions of geothermal activity like hot springs, sinter deposits, some geysers, so we know they’re there, but the governments in South America have been quite remiss in not really focusing on this indigenous source of energy that’s actually been sitting right under their noses,” he says.

“In early 2000 the (Chilean) Government decided to transfer from coal-fired power stations to gas, and they did a contract with the Argentineans to supply gas to their power stations, which operated for about seven years before Argentina ran out of
gas.

“This put Chile in an absolute power crisis so now they understand the concept of security of energy with indigenous resources and they are quite bullish about now developing geothermal energy and Peru is doing the same thing.”

As the company starts its surface exploration program in Chile this month, Elliott sees the potential for production as highly likely within three years.

“Then it’s just a matter of production bores to the projects and ramping up the power generation, but we’re looking at potential we believe to be a few thousand megawatts in Chile and Peru.”

To put this figure into perspective, Origin Energy has around 2300mW of generation and it is a $14.7 billion market cap company.

Hot Rock will also need to overcome the negative publicity in Chile from a geothermal project gone wrong in 2007 at the tourist hot spot El Tatio Geysers, where a badly-managed Chilean-Italian joint venture resulted in a disastrous steam explosion.

“They should have shut down that well sooner than they did. That was just allowing water and steam to come out of the top of the well, which had disintegrated – Enel is a very long-standing Italian geothermal company that really should have known better,” says Elliott.

He admits that until the company gets results his claims are ‘all talk’, but remains optimistic that by the end of 2011 Hot Rock will be a ‘very different’ company.

“It’s been very low profile, but actually geothermal energy can compete with gasified power in Chile at the moment because the price of gas has increased significantly, but the real benefit for geothermal is it’s base load, so it operates 24-hours a day and it’s basically zero to very minor greenhouse gas emissions,” says Elliott.

“Most of our projects are located fairly close to the existing transmission grid. Once people appreciate how good these projects are, the penny’s going to drop and we’ll see a lot more geothermal developments going on, not only in South America, but elsewhere in the world.”


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