Niobium Nuance

Last week representatives of Niocorp Developments, Ltd. (NB:  TSX or NIOBF:  OTCQX) appeared at an investment conference in New York, talking up plans to coax niobium ore out of the rolling hills of southeastern Nebraska.  Significant deposits of rare earths and other ores are thought to be left behind in the glacial silt that supports the great prairies of the U.S. midsection.  

Unlike rare earths, which are found everywhere, niobium is actually an element of some rarity.  It has gained popularity with engineers for use in steel alloys to increase strength and heat resistance.  Stronger, lighter steel means lower weight and fuel cost for automobiles.  High performance steel alloys with niobium are also being put to use in pipelines as well as bridges.

As was noted in the short series on niobium a couple of weeks ago, Niocorp expects to produce 7,500 tons of ferro-niobium annually as well as 23,000 tons of titanium dioxide and 12.8 tons of scandium trioxide. A preliminary economic assessment completed in 2015 suggested the resource has a potential 36-year life and present value of $562 million after taxes net of $919 million in total capital costs.

Niocorp is entering a ‘big boys’ playground.  CBMM and AngloAmerican Plc (AAL: London or NGLOY:  OTC/PK) are two major resource suppliers in Brazil.  CBMM produces about 110,000 tons of ferro-niobium per year and recently announced plans to add capacity for another 150,000 tons by 2017.  AngloAmerican is significantly smaller with annual production near 10,000 tons per year.  The third major producer is Magris Resources’ Niobec subsidiary in Canada, which also has 8,300 tons per year capacity.

Niocorp is also not the only new kid circling around.  Several other newcomers have heard calls from the steel industry for niobium and appear to be taking steps toward bringing new supplies to the market. 

·        Alkane Resources (ALK:  ASX or ANLKY:  OTC/QX) is developing a large mineral resource in New South Wales called the Dubbo Zirconia Project.  Besides zirconia, the company expects to retrieve niobium, tantalum and several other rare earth elements.  The plan is to process one million tons of ore annually.  The resource is large with an expected life of 70 years.  

·        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.

·        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.  Reportedly 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.

·        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.

Then there is China.  Of course, this is the same China that has successfully manipulated the rare earth elements market for decades.  In late April 2016, Anglo American announced plans to sell its niobium and phosphates business in Brazil to China Molybdenum Co. Ltd. for USD$1.5 billion.  Anglo has struggled to maintain profits and support extensive debt loads in the recent commodity downturn, and it is right-sizing its operations with the sale of coal, iron ore and phosphate interests.  China Moly gets a phosphate mine and beneficiation plant as well as a niobium mine and three processing facilities.  There are two additional untapped phosphate deposits and two further mineral deposits. 

Some might have passed the deal off as being primarily phosphate related.  However, Niocorp management is taking the niobium element quite seriously, arguing that it was really the niobium that is of greater interest to China Moly.   Indeed, China’s Moly’s press release cites the transaction as important in positioning China Moly as a leader in specialized alloys.  The release also cited niobium production at 5,100 tons in 2015, well below the mine capacity as stated by Anglo American.

Of course, the cash flows from the assets in this deal are not to be ignored either.  Along with the niobium, the assets produced 1.1 million tons of phosphate fertilizer in 2015.  Sales totaled USD$544 million, delivering USD $163 million in EBITDA.  That is a tidy sum of 30% cash earnings on each sales dollar and not a difficult pill to swallow for a commodity-based company in China where capital is increasingly hard to come by.

Niocorp management may be focused on the right competitive threat.  In the hands of Anglo American, which has been preoccupied with its debt-heavy balance sheet, niobium had been given only nominal attention.  In the much smaller and highly motivated portfolio of China Moly, it is quite reasonable to expect a ramp to production capacity.  Unlike the other newcomers to the niobium playground, who like Niocorp are capital constrained, China Moly appears financially well fortfied.  They also are in a far better position to respond to the largest source of new demand for niobium  -  the China steel industry.

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.