Friday, December 12, 2014

Scandium Developers Hope to Turn Scarcity to Profits

The rare earth elements have become increasingly important in our economy as chemists and engineers have turned to these metals to enhance the performance of metal alloys.  There are seventeen of these metals with tongue twister names like neodymium, yttrium and gadolinium.  Some have begun to call them the technology elements because they have become so vital for innovations in electronics, aerospace and energy. 

One of the ‘light rare earth elements,’ scandium, does not seem to get as much attention as the rest  -  at least from investors.  It is a relatively soft and light element and has a much higher melting point that aluminum.  This makes it very interesting to aerospace engineers.


Scandia Alumina Stabilized
Zirconia Material for Electrolyte
Scandium has winnowed its way into a range of both consumer and durable goods.  Metals for baseball bats, golf clubs and bicycle frames also get improved with small amounts of scandium.  Another important application is high intensity lights used in television and movie production.  Scandium is also used to stabilize zirconia in electrolyte for solid oxide fuel cells in alternative energy devices.  However, most of the 5,000 kilograms that get used each year end up in aluminum alloys for aerospace components. 
 
The supply situation for scandium has some interesting twists.  Scandium is present in very small amounts in over 800 minerals and is distributed all over the world.  Yet most of the current supply originates as a by-product of uranium and platinum mining operations.  This provides about 2,000 kilograms per year.  The rest of demand had been met by tapping into the ample stores of scandium held in Russia from leftovers of military stockpiles of the former Soviet Union. Unfortunately, U.S.-Russia treaties have restricted some of the scandium exports from Russia.  At any rate, the stock piles are not being replenished and will eventually run out.

With no dedicated Scandia mining operations prices could be considered somewhat dear.  A survey of sources advertising on the Internet produced a range of prices.  High purity scandium evaporation materials were quoted at $270 per gram or about $122,500 per pound.  Quotes from China and Russia sources for scandium oxide were between $3,000 and $7,000 per kilogram.  High prices have precluded some from using scandium.  The U.S. Navy has announced plans to use aluminum-scandium alloys for certain components in ships.  Even in the small quantities that are needed to strengthen aluminum for metal components, demand from the Navy could put even greater pressure on scandium oxide prices. 

Scandium International Mining Corp. (SCY:  TSX or EMMCF:  OTC/PK) is counting on the scandium supply-demand dynamic to turn a profit from its scandium mining project near Sydney, Australia.  When ready the company’s Nyngan Scandium Project as it is called could be the first dedicated scandium mine.  Granted increase in supply could lead to a reduction in prices.  However, that could also trigger increased use and the company could benefit from higher quantities demanded at the lower prices.  Based on recent progress it appears the company could bring new scandium supplies to the market as early as 2017.

Since Scandium International is a publicly traded stock, even minority investors can get a piece of the action.  The stock is traded on the Toronto Venture exchange and is quoted on the U.S. Pink Sheets.  The stock trades regularly on the Toronto exchange, but is priced in pennies and has been stuck near a Canadian dime per share for over a year. 

The company does file financial reports with the U.S. SEC as well as remaining compliance with Canada’s SEDAR.  In a recent financial report the company provided projections of annual revenue of $72.0 million on which they apparently expect to reap a whopping $47.7 million in EBITDA.  That would be about $0.24 per share in earnings before capital costs and taxes.  That seems aggressive, but if even half that successful an investor could come out looking very good having bought a stock for $0.09. 

In the same financial report the company declared a $77.4 million price tag for the Nyngan mine project.  Unfortunately, there was only $1.1 million in cash on the balance sheet at the end of September 2014.  About half of this was made available through private placements of common stock in May, June and July 2014. 

There is a second way to play scandium in the public equity market with an Australian company called Metallica Minerals Ltd. (MLM:  ASX; MLMZF:  OTC/PK).  Metallica also has its plans for scandium mining from proven nickel-cobalt laterite deposits in northern Queensland.  It too was aiming for first-to-the-market bragging rights and has thrown up some buildings and equipment at the site.  However, management has declared their intention to find a joint venture partner for Queensland scandium project.  Until then the project is on hold until a partner and financing materialize.

Metallica already has made some progress in developing nickel, cobalt and bauxite properties.  However, its common stock trades at AUS$0.05 (US$0.04), giving it a market capitalization of about AUS$50 million (US$41 million).  For those investors who have still not opted for electronic delivery of brokerage information, their paper statements probably cost more than a share of Metallica.  

It appears scandium will become increasingly important to our economy even if it is used a gram at a time.  It can be very good business supplying a hard-to-get product some customers are willing to pay a good price.  Neither Metallica nor Scandium International operates from a position of great financial strength.  However, these companies both have control over scandium-rich resources.  Even if neither company cannot muster the capital to bring scandium supplies to the market on its own, some sort of return could still be extracted from the asset through sale or lease.

 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

 

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