Tuesday, May 24, 2016

Niobium Insurance

Niobium is the most recent ‘shiny, grey metal’ to catch the attention of investors.  Steel laced with niobium forms a lighter, stronger alloy that can make more fuel-efficient cars and airplanes.  Teamed up with other metals such as titanium and tin, niobium alloys make excellent anti-corrosive superconductors.  The list of new applications goes on, suggesting growing demand for this obscure element.  Unlike the rare earths, which are everywhere, niobium is truly rare.   The last two posts “Niobium By Any Other Name” and “Niobium Down Under”, mentioned the small club of three companies in Brazil and Canada currently producing niobium.  A fourth aspirant, Niocorp Development, is developing a new niobium resource in Nebraska. 
There are others that have awakened to the potential in niobium and are racing to bring supply to the market.  The question is whether there is enough demand to support planned production at prices that will deliver a profit.

MDN, Inc. (MDN:  TSX) recently signed a letter of intent acquire the Argor niobium deposit in northern Ontario.  The resource has been known for fifty years and was originally estimated to hold 62 million tons of niobium.  MDN has not completed economic studies of Argor at current niobium prices near $40 per kilogram, so the verdict is still out on whether Argor will ever yield niobium supplies.  MDN has already given up on its Prairie Lake property in Ontario, terminating options agreements with property owners as investment requirements mounted.  Yet another project in Crevier Township near Quebec may be struggling against economics as well.  A preliminary economic assessment completed in 2010 had been positive and MDN moved forward with a feasibility study on niobium and tantalum.  However, initial pilot plant tests were disappointing and MDN has not moved forward for lack of capital to support a third, more definitive pilot test.
Rare earth miners have also come down with the niobium fever.  The Technoinvest Alliance is one of Russia’s largest producers of rare earth elements.  Technoinvest has planned a mining and metallurgical complex at the Zashihinskoe field that will specialize in tantalum and niobium ores.  Planned production capacity is 2,000 tons of niobium and 200 tomes of tantalum.  A preliminary off-take arrangement for 100% of future production has been made with Angarsk Electrolysis Chemical, one of Russia’s largest uranium enrichment facilities.  As recently as August 2015, Technoinvest cited 2018 as the target for initial production.  The project is expected to require an investment of 13 billion rubles (US$320 million) with a payback period near ten years using a price of US$50 per kilogram.    With niobium selling prices sticking in the low 40s it seems like a tough sell, but Technoinvest has not made public the prices it has discussed with Angarsk.
Australia’s Lynas Corporation Ltd. (LYC:  AUS or LYSCF:  OTC) is also clearly focused on rare earth elements.  However, in October 2015, when the company announced updated estimates for its Mount Weld rare earth reserves, it also confirmed the estimation for niobium at that deposit.  Rare earth producers the world over have been on their knees for the past few years as China once again has opened the chutes and flooded the world with its cheap and seemingly not so rare earths.  Lynas has survived through a financial and strategic relationship with the Japan Australia Rare Earth B.V.  Lynas received commitments for US$250 million in debt and equity in exchange for 8,500 tons of rare earths per year for ten years.  After achieving breakeven financial results in the six months ending December 2015, Lynas weathered another difficult quarter in the first three months of 2016, as weakened selling prices cut into sales value.
Each of these companies faces challenges of one kind or another.  Nonetheless, the existence of capable management teams with known niobium resources at hand suggests that with any uptick in prices, considerable additional supply could be brought to market.  It might especially be worrisome for the largest producers in Brazil:  CBMM and AngloAmerican Plc (AAL: London or NGLOY:  OTC/PK).  Indeed, production capacity in the two largest producing areas, Brazil and Canada, appear to exceed current demand already.
The U.S. Geological Survey reported that world niobium consumption was about 59,000 tons in 2014.  Apparently, historically supply has equaled annual consumption.  Brazil is credited with approximately 90% of supply or about 53,100 tons per year.  Canada is the second largest producer, which is primarily Magris Resources’ Niobec at about 5,310 tons per year or about 9% of total.  The rest of the world provides the balance of about 590 tons per year.  The U.S., which is the most intensive user of niobium for steel, does not produce any niobium.
The combined production capacity of CBMM and AngloAmerican is approximately 120,000 tons per year.  Niobec claims 8,300 tons annual production capacity.  Supplying 99% of world demand these three producers have reach only about 45% of collective capacity near 130,000 tons per year.    Considering NioCorp Developments with its plans to bring on another 7,500 tons per year in Nebraska, Techninvest Alliance with 2,000 tons in Russia and MDN with its shotgun approach, it would seem that there are active plans for at least another 10,000 to 12,000 annual ton capacity.  That represents about another 8% to 9% increase in capacity.  It does not seem like very much.  However, CBMM is planning its own expansion by 150,000 tons.
It is true that engineers are finding new and exciting ways to use niobium.  It will take a great many new applications to soak up current niobium production capacity.  Otherwise, it is more likely that niobium selling prices will not hold at a point where Elk Creek, Nebraska or Argo, Ontario or Mount Weld, Australia will make economic sense.  The stocks of the companies pursuing these projects are priced at compelling levels  -  until the risk of this economic reality is considered.  In my view, these stocks are reflect value of the underlying niobium deposits MINUS the cost of ‘insurance’ against adverse niobium price changes.  

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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