Friday, December 19, 2014

Scandium Sweetspot

Subsequent to publishing the December 12th post on the aspirations of two Australian companies to open the first mines dedicated to the rare earth element scandium, I learned that there is potentially a third contestant in the race.  An unlikely rare earth miner, Clean TeQ Ltd. (CLQ:  ASX)  is included in the Emissions Group of our Mothers of Invention Index.  Indeed most investors know this Australian company for its air purification products that have been its bread and butter for over two decades.  That said, Clean TeQ also commands an ion exchange technology for cleaning up hard-to-treat waters.  This process can also be used for recovering strategic metals from slurries and other liquid waste streams.  This is how Clean TeQ has made the leap from water treatment to scandium mining.

Clean TeQ has been using its ion exchange technology branded Clean-iX to help Ishihara Sangyo Kaisha Ltd. (4028: JP) in Japan extract and purify scandium from waters used in titanium dioxide production.  The company claims its metals recovery process works even on liquids containing very low concentrations of scandium.  Quality scandium commands prices from US$3,000 to US$7,000 per kilogram, supporting economic production even under the most difficult recovery circumstances.  Clean TeQ has applied for a patent to protect its scandium extraction and recovery process.

Apparently, Clean TeQ management thinks scandium is a worthwhile market to pursue.  The company is attempting to acquire a nickel-cobalt mining project called  Syerston in New South Wales from Ivanhoe Mines Ltd. (IVN:  TSX).  The two companies have common leadership and we note Clean TeQ’s current chief executive office is an alumnus of Ivanhoe.  The plan is to use Clean TeQ’s ion exchange technology to makes the recovery of scandium at Syerston more economical.  The company recently issued drilling results that support claims scandium levels in the soil and rock are among the highest quality and concentrations found in Australia.

If the scandium project does not work out, Clean TeQ has another potential customer on the line in Carbine Resources Ltd. (CRB:  ASX).  Carbine wants to use the ion exchange technology to recover copper resources in Queensland.  Clean-iX will be integrated into Carbine’s regular mining process, which includes a step to reprocess gold, copper and pyrite tailings at the mine.  A significant amount of tailings have been left behind after mining operations that have span over a century. 

In the fiscal year ending June 2014, Clean TeQ reported AUS$6.1 million (US$5.0 million) in total sales.  Importantly, the air purification products and services represented over three-quarters of CleanTeQ’s total revenue.  Revenue from the division declined significantly from the previous year largely because the company simply spent less on marketing in the face of price competition from a key competitor.   

The end result in the fiscal year 2014 was a net loss of AUS$4.9 million (US$4.0 million).  This was the second year in a row that the company reported a deep loss.  Sales have been in the decline since fiscal year 2012, when the company reported AUS$12.0 million (US$9.8 million) in total sales and a net profit of AUS$1.2 million (US$1.0 million).  The disappointing results in 2014 were answered with cost cutting efforts and a reduction in personnel.

Even after raising AUS$7.2 million (US$5.9 million) in new capital through stock issuances and convertible notes, the company ended up with AUS$2.4 million (US$2.0 million) in cash on its balance sheet.  More recently Clean TeQ again sold common stock for AUS$0.06, raising $AUS$2.3 million (US$1.9 million) in new capital.  The company used its cash for more than just supporting operations.  It acquired related companies in Japan and Australia, ostensibly to make it easier to reach its markets and command control of needed technologies to complement its own core ion exchange functions.   

Clean TeQ shares were recently trading at AUS$0.06 (US$0.05), a level which suggests investors have little confidence in management to deliver on the strategic plan.  Over the last year the stock has traded at a range of AUS$0.09 to AUS$0.04, despite a series of fundamental developments that could have been considered a valuation inflection points.  The future dilutive impacts of common stock and convertible note issuances are likely weighing on investors’ minds.  What is more the pending acquisition to acquire a mining operation will dramatically change the company’s business model.  Despite the connection to metals recovery and a very lucrative metal in scandium, the acquisition is likely seen as fraught with risk.  Thus the stock may appear cheap, it might be a fairly good gauge of business risk for Clean TeQ.

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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