Tuesday, November 12, 2013
Hallgarten & Company (44) 795 08 53 621
&&&&Hallgarten Hallgarten Hallgarten Hallgarten
CompanyCompanyCompanyCompany Initiating Coverage
Christopher Ecclestone [email protected]
NioCorp Developments (TSXV: NB) Strategy: LONG
Price (CAD) 0.18$
12-Month Target Price (CAD) 0.23$
Upside to Target 28%
12mth hi-low $0.09-0.225
Market Cap (CAD mn) 17.10$
Shares Outstanding (millions) 95.0
Fully diluted (millions) 121.0
Key Metrics
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Hallgarten & Company – Portfolio Strategy Page 2
NioCorp The Pure Play on Niobium
+ Ditching the Rare Earth persona and turning itself into one of the only pure play Niobium
projects in the market place was a smart
+ Appointing Mark Smith, formerly of Molycorp, as CEO was a major coup with his strong
Washington connections and experience with the world’s leading Nb mine in Brazil
+ The Elk Creek Carbonatite grades at twice the level of Iamgold’s Niobec property
+ Niobium industry dynamics are good, with it being one of the few specialty metals with little
to no Chinese supply or control
+ A resurgent steel industry would help the metal’s dynamics
+ Price fluctuations in recent times have not been as extreme as many other metals
Creating a story in a niche where there are no other explorers means all the heavy lifting in
left to one company
It will be interesting to see if Mark Smith can transition from 800lb gorilla status to dweller
on the jungle floor
The environment for funding projects is very tough at the moment and while no projections
exist on capex here, we do not think it will be a small number
NioCorp – Changing Directions
Since we last wrote about this project the company has changed name (from Quantum Rare Earths) and
in the process lost its long-term association with the somewhat blighted REE space. Sitting through
another presentation by a Rare Earth company talking about their carbonatite is somewhat akin to that
old torture of fingernails scraping across a blackboard. The very words “Rare Earths” in a company’s
name was a severe downer that produced mood deflation for investors in an age where further mood
deflation is the last thing one wants.
Over the years Quantum (to give NioCorp its former designation) drifted in and out of our line of sight
but never got the pulse racing. However, like so many Rare Earth companies it either had a property as
an original raison d’ être that was not the Lanthanide series or hid some other light under a bushel just
in case things went wrong in the REE space. For most players the secondary game was Uranium and that
is scarcely anything most would want to crow about but in Quantum’s case the back-up plan was
Niobium. Back in early 2012 we decided that this sideline was interesting enough to prompt us to add
the stock to our Model Mining Portfolio. Our logic at the time was that the Niobium in the Quantum mix
would make the company interesting to the likes of Molycorp, which had once upon a time controlled
the self-same deposit that was now Quantum’s main claim to fame.
However, as Molycorp’s own problems escalated and its focus turned to self-preservation, the prospect
of its doing anything with the Quantum asset faded and we eventually closed the position in October of
2012.
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In recent times we have been watching with some interest the developments in the Niobium space
(particularly at that other sometime REE stock, Alkane Exploration) and it occurred to us to revisit
NioCorp, notably as it had managed to capture Molycorp’s former CEO Mark Smith for its advisory
board.
Mark Smith – Landing a Big Fish
We were intrigued indeed to see that NioCorp had managed to bag Mark Smith, formerly CEO of
Molycorp (MCP) as a member of its advisory board back in February of 2013. This addition was a big
catch indeed for NioCorp, as it segued from being a REE story into being a Niobium story. There was
eminent logic in the move though as the Elk Creek deposit had previously been part of his remit when it
had been owned by Molycorp in its Unocal days. Thus the presence of Smith at NioCorp was somewhat
of a reunion. Then on the 23rd of September 2013, the company announced that it has appointed Smith
as its new CEO (and as a director). This represented yet another coup for Niocorp in netting such a big
fish with a swathe of major US institutional investors in his Rolodex.
In the way of background we would note that he served as the President of MolyCorp Minerals, LLC and
its Chief Executive Officer from October 2008 to 2012. He had previously held numerous engineering,
environmental and legal positions within Unocal and later Chevron. He was responsible for Chevron's
three coal mines, one molybdenum mine, a petroleum coke calcining operation and the Mountain Pass
REE mine. He held numerous engineering, environmental and legal positions within Unocal and later
Chevron. He also managed the real estate, remediation, mining and carbon divisions of Unocal
Corporation from May 1984 to August 2005. In total he worked for Unocal for over 22 years. He has also
been a Director for Avanti Mining Inc. since November 9, 2009 and of Neo Material Technologies Inc.
since May 2012.
He had been a Non-Executive Director at Talison Lithium Limited which was part of the Resource Capital
stable of interests (as was Molycorp), until Talison was taken over by Chinese interests last year. More
interestingly though he served as a Director of Companhia Brasileira de Metalurgia e Mineracao
(CBMM), part of the Moreira Salles Group. As mentioned earlier this company is the overwhelmingly
dominant player in global Niobium supplies.
While the story of Molycorp has not exactly been joyous of late, Mark Smith’s reputation is as a builder
of mines, not a faker as is so common in Canadian juniors. We would doubt he has joined Niocorp to
indulge in Vancouver-style self-pleasuring but rather to get this thing moving towards being a real mine.
Niobium – In the Grip of the Brazilians
Niobium (Nb) is another metal that is scarcely the word on everyone’s lips as the main listed exposure to
it is via Iamgold’s Niobec subsidiary which operates in Quebec. Talk in 2012 indicated that IAG intended
to float this off in the public markets but they seem to be hanging onto it. This may be because of weak
markets but we would also suspect it is because Niobium currently has a better outlook than Iamgold’s
staple metal, gold. If the spin-off had gone ahead it would have given the metal a much stronger public
awareness than hitherto where it has just been a bonanza earner for IAG hidden in its closet.
Despite Quebec’s role for IAG, the real player is Brazil, the world’s largest producer of niobium (92%),
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followed by Canada.
Brazil has two of the largest niobium deposits in the world, the Araxá and the Catalão deposits. The
Araxá mine is operated by CBMM, where decreasing grades are increasing operating costs at the mine.
CBMM is owned by the Moreira Salles family, one of Brazil’s wealthiest groups. Their fortune has largely
derived from a punt on Niobium back in the 1960s and interests in the banking sector. According to
Bloomberg, CBMM generates more than $600 million in annual profit. They calculated it was worth at
least $13 billion, based on the family’s sale of a 30% stake to a group of Asian steelmakers for $3.9
billion in 2011. The brothers are estimated to hold an equal share of the remaining 70% stake.
The Catalão mine in the state of Goias is owned by Anglo American Brazil. It has the smallest reserves of
the three Niobium “majors”. There has been speculation that the mine may run out of ore if the deposit
size cannot be increased.
Niobium – Uses and Dynamics
Niobium is an alloying agent which, when added to steel, creates a material with substantial benefits in
the production of high grade steel. Steel containing niobium has many properties making it stronger,
lighter in weight and highly resistant to corrosion. Adding niobium to steel also creates steel with a
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higher melting point. Ferroniobium (66% Niobium, 34% Iron) represents over 90% of world niobium
production. Molybdenum and vanadium can be substituted for niobium in some applications, but a
performance or cost penalty may outweigh substitution. For many applications, such as some super
alloys and oil and gas pipelines, there are no substitutes for niobium as the niobium allows for
withstanding extreme pressures.
Niobium demand has increased on average 10% a year for the
past decade, with growth forecast to continue in similar fashion
in the coming decade. The global market is estimated to reach
180,000 - 200,000 tpa by 2018 – 2020 while supply is expected to
be a maximum of 170,000 tpa.
Niobium prices have increased in line with this growth over the
last decade. The chart at the left shows recent prices but to put
that in context the price was US$44-45 back in mid-2011 so
prices have only eased off 10% over what has been a pretty
tough time for the steel industry.
Interestingly it ranks sixth of the BGS survey of Critical Metals, one place behind Rare Earths in criticality
of supply.
Alkane – an example to emulate?
In July, Alkane Resources Ltd, the ASX-listed Zirconia (and REE) focused explorer announced that it had
signed a Joint Venture Framework Agreement with the Austrian specialty metals major, Treibacher
Industrie AG, with a view to developing the company’s potential stream of ferro-niobium from the
Dubbo Zirconia project (DZP). This deal was a breakthrough as the company had previously announced a
MoU back in October 2011. As with most such MOUs the market loses interest after such a long
gestation of a deal. Therefore when the final deal came through it acted as a substantial kicker for the
Alkane stock price. The purpose in mentioning Alkane’s progress here is twofold. Firstly it shows that
new parties can break into the Niobium space and secondly that securing a credible partner (in this case
a trading house) can be a major kickstart for a stock price revaluation.
The intended Joint Venture activities are the production and marketing of ferro-niobium (FeNb) using
niobium concentrate from the DZP. The parties will form a company, initially wholly owned by Alkane, to
use Triebacher’s proprietary technology to process DZP niobium concentrate at a facility in Australia (or
other agreed location) to produce FeNb. Triebacher has the option to purchase 50% of the new
company within three years of commissioning of the plant and will have exclusive rights to market the
FeNb.
The Joint Venture expects to produce over 3,000 tonnes of FeNb, utilising all of the niobium concentrate
produced from the one million tonnes per annum development of the DZP, making it the only producer
of niobium in Australia once production commences in 2016. At current prices, annual production of
FeNb will generate revenue of approximately US$90 million with AZL’s share estimated to be about
A$80 million (depending upon A$/US$ exchange rate), which is 16% of total anticipated annual project
revenue as determined by the definitive feasibility study released to the ASX in April 2013).
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The EIS for DZP was lodged with the NSW Department of Planning and Infrastructure in late June 2013
marking the start of the approval process for this State Significant Project.
Elk Creek
Niocorp‘s main asset is the Elk Creek project in South East Nebraska (an hour south of Lincoln). Quantum
first secured the property in 2011 as a REE prospect. However, the property hosts concentrations of
niobium, REE and barium mineralization within the Elk Creek Carbonatite.
The USGS has commented that Elk Creek is potentially one of the "largest global resources of Niobium”.
Molycorp and Elk Creek
Curiously enough, the property is a former Molycorp project. The earliest known reference to Molycorp
operating within the Elk Creek gravity anomaly area is from 1973. It is unclear at precisely when
Molycorp first acquired the mineral rights in the Elk Creek anomaly area. Between, 1973 and 1974,
Molycorp completed six drillholes: EC-1 to EC-4, targeting the Elk Creek anomaly and two other holes
outside the Elk Creek anomaly area (Anzman, 1976). Drillholes were typically carried out by RC drilling
through the overlying sedimentary rocks and diamond drilling through the Ordovician-Cambrian
basement rocks.
Molycorp continued their drill program from 1977 and, in May 1978, Molycorp made their discovery of
the Elk Creek Nb-REE deposit with drillhole EC-11. The Elk Creek Nb-REE deposit was intersected at a
vertical depth of 203.61 m (668 ft) in the Elk Creek Carbonatite. Molycorp continued their drilling
program through to 1984 that mainly centred on the Elk Creek Nb-REE deposit within a radius of roughly
2 km. By 1984, Molycorp had completed 57 drillholes within the Elk Creek gravity anomaly area, which
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included 25 drillholes over the Elk Creek Nb-REE deposit.
From 1984 to 1986, drilling was focused on the Elk Creek gravity anomaly area. The anomaly area is
roughly 7 km in diameter and drilling was conducted on a grid pattern of approximately 610 by 610 m
(roughly 2,000 by 2,000 ft.) with some closer spaced drillholes in selected areas. By 1986, a total of 106
drillholes were completed for a total of approximately 46,797 m (153,532 ft). The deepest hole reached
a depth of 1,038 m (3,406 ft) and bottomed in carbonatite. Molycorp left Elk Creek in the early 1990's
when it abandoned its exploration efforts to focus on the Mountain Pass project in California. Then, until
2011, no further exploration was recorded on the property.
We might also note that MCP became a Nb processor with its purchase of the Silmet plant in Estonia but
it does not own its source of supply for that operation. Some 150,000 feet of historical drill core is still
extant (most of which is stored at the University of Nebraska in Lincoln) from 113 holes drilled by
Molycorp in the 1970s and 80s.
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Elk Creek Geology
The property is comprised of the Elk Creek Carbonatite that has intruded into the older Precambrian
granitic and metamorphic basement rocks. The Elk Creek Carbonatite and Precambrian rocks are
unconformably overlain by layer of roughly 200 m of Palaeozoic marine sedimentary rocks of
Pennsylvanian age (approximately 299 to 318 Ma). There are no surface expressions of the Elk Creek
Carbonatite on the property.
The Elk Creek Carbonatite has been identified as a carbonatite since its discovery in 1971 through
drilling. The 3D graphic at the right shows the conceptual appearance of the Nb-bearing carbonatite.
Treves et al. (1972a and 1972b) indicated that the rocks resembled those of the Fen District of Norway
and suggested that they were carbonatites. The Elk Creek Carbonatite has also been compared to the
Iron Hill carbonatite stock in Gunnison County, Colorado. The relationship was based on rock-types and
mineralogy (Xu 1996).
Source: Quantum Rare Earths
Current studies suggest that the Elk Creek Carbonatite was emplaced about 500 Ma due to stress along
the Nemaha Uplift boundary. Three other geophysical anomalies were analyzed and drilled near the Elk
Creek Carbonatite along the Nemaha Uplift but were found to be gabbroic intrusive rocks.
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The Elk Creek Carbonatite consists predominantly of dolomite, calcite, and ankerite with lesser chlorite,
barite, phlogopite, pyrochlore, serpentine, fluorite, sulphides and quartz
Some metrics on the deposit include:
� 19.3 Mt @ 0.67% Nb2O₅ - Indicated and 83.3 Mt @ 0.63% Nb2O₅ - Inferred
� Indicated resources of 129,182,000 kg of contained Nb2O₅ and an Inferred resource of
523,844,000 kg of contained Nb2O₅
In August 2011, Quantum released results of three holes that were the first holes to be drilled across the
deposit with a highlight of 131 m Nb2O5 grading 1.02%. To put this in perspective the resource at Niobec
grades at 0.53%.
Resource Estimate(s)
In April 2012, QRE released an NI43-101 Resource estimate prepared by Wardrop Tetratech. The main
findings were:
Nb2O5 Tonnage Nb2O5 Contained Oxide
% % Nb2O5
Classification cutoff (Mt) Grade Tonnes
Indicated 0.70% 7.226 0.86 61,940
Indicated 0.60% 11.373 0.78 88,770
Indicated 0.50% 15.844 0.71 113,271
Indicated 0.40% 19.319 0.67 129,182
Indicated 0.35% 19.632 0.66 130,376
Inferred 0.70% 20.984 0.8 167,447
Inferred 0.60% 44.596 0.72 320,521
Inferred 0.50% 71.333 0.66 468,026
Inferred 0.40% 83.288 0.63 523,844
Inferred 0.35% 83.744 0.63 525,591
In TetraTech’s view the Niobium mineralization appears most concentrated in the northwest, and at
depth, of the known Elk Creek deposit, with an isolated concentration of elevated niobium values in the
upper southeast portion.
Tetra Tech recommended a Phase I and Phase II drilling program for the investigation of the Elk Creek
deposit. The first phase of drilling will concentrate in the southeast portion of the deposit where drill
and sample data are less dense. The Phase I drill program will reduce the nominal drill spacing between
60 to 100m which will establish a greater confidence in the continuity of geology and grade to warrant a
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Hallgarten & Company – Portfolio Strategy Page 10
higher resource classification. Subsequently, Phase II drilling will focus on the northwestern portion of
the deposit and at depth where Niobium grades appear to increase. Niocorp note though that pending
the results of the Phase I drilling, this phase is subject to change.
Recent Financing
In late September, Niocorp published a private placing memorandum for the issuance of up to 66.6mn
shares at CAD$0.15 to raise around $10mn. The allocation of funds was intended to be $5mn for the
aforementioned drilling at Elk Creek, $2.5mn for metallurgical testing (a sizeable number for even a
major), $250K for repayment of a principal loan (owed to a director, Peter Dickie) and the remaining
$1.36mn was to be for working capital.
The company announced a month later on October 22, 2013 that it had closed the first tranche of its
brokered private placement financing for gross proceeds of a disappointing US$927,992. However, the
ambitions were mighty and the disappointment is only in relation to the number desired, for raising
nearly $1mn in the current environment is a triumph in itself. This First Tranche consisted of the
issuance of 6,186,612 common shares at a price of US$0.15 per Share. Northland Securities arranged the
transaction.
We would note that a goodly proportion of the issue was taken up by insiders with Mark Smith
subscribing for 3.4 mn shares and Peter Dickie, the subscribing 500,000 Shares. Thus over 60% went to
insiders.
As the funds raised clearly do not lend themselves to fulfillment of the drilling campaign (even in part)
the focus will be on commencing the mineralogical and metallurgical studies to be led by SGS Canada.
The Rest of the Team
The company’s CEO (and a director) is Peter Dickie who is a graduate of both the University of British
Columbia, and the University of Victoria (B.C.), his background includes four years in the Securities
industry with Jones, Gable & Co. He has served on the board of a number public companies, including
Lateegra Gold Corp. where he was instrumental in acquiring the primary asset for the company which
ultimately resulted in a takeover of Lateegra by Excellon Resources.
Dave Beling, Director, has over 47 years of experience in the global precious metal, base metal and
energy mineral sectors. He has significantly reviewed or was directly involved with 84 underground
mines, 127 open pit mines and 163 mineral processing plants as a consultant or while employed with
Phelps Dodge, Union Oil, Fluor, United Technologies, Westinghouse, and several Canadian and US junior
mining companies. Since 1981 he served as a senior executive and member of the Board of Directors of
eight public mining companies. In addition to developing and managing operations, he initiated or
strongly contributed to the marketing and closing of several debt and equity financings, commodity and
asset sales, mergers, acquisitions and joint ventures.
Of all the directors probably the most intriguing (even more than Mark Smith) is Claude Dufresne. This is
due to the fact that he collaborated with Iamgold's Corporate Development group while continuing with
its Sales & Marketing activities, which included niobium and bauxite. In January 2008, he started Camet
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Hallgarten & Company – Portfolio Strategy Page 11
Metallurgy Inc, a joint venture company with Iamgold, which is responsible for the worldwide Sales and
Marketing of Iamgold's niobium from the Niobec mine. This role makes him one of the most informed
people around on the arcane subject of Niobium marketing.
The kickstart to his career was when he graduated with a Bachelors degree in Mining Engineering from
Laval University in 1991. He then started working with Cambior as a metallurgist. In 1996, he was
transferred to Cambior's largest operation, OmaiGold Mines Ltd., located in Guyana, S.A before been
promoted to Marketing Manager. After Cambior's acquisition by Iamgold Corp, he made the move into
Iamgold’s Niobec division. He is a member of the Ordre des Ingenieurs du Quebec, and of the Tantalum
& Niobium International Study Center.
Another director, and one of our previous acquaintance, is Erin Chutter. We know her from her role at
Global Cobalt (GCO.v) which has a number of projects on the go in that metal. She is also a founder and
director of two private companies. Active in politics since the late 1980s, Erin has managed and advised
campaigns at three levels of government, as well as party leadership races.
The company also has a former Idaho State Senator, Tony Fulton, on the board for some political
guidance.
Risks
The prime risks we can envision at this stage are:
� Financing problems
� Ongoing stock price weakness
� Association with the blighted REE sector
� Over-supply in Niobium space
� Punitory action by CBMM to ward of threats to its quasi-monopoly
The first two factors are linked. We feel that if the company can get a strategic shareholder or a
significant end-user lined up then financing problems would evaporate and stock price would not be an
issue (as it would rise). However, without such a party in sight, the stock price could continue to languish
making financing an on-going problem. The Canadian market is not sympathetic to metals it
understands and is familiar with, let alone new concepts that it must absorb. The recent financing came
in well under target and that leaves the company short on fulfilling expectations. Its drilling program has
to stay in hibernation and the metallurgical efforts must be scaled back severely.
The company has a further burden, the compensation in the executive suite, which is running at least
$35,000 per month. Salaries will need to be scaled back to match the tight financing.
Conclusion
The attraction for us at NioCorp is the Nb content. Another carbonatite with REE does nothing for us,
and clearly the management at Quantum Rare Earth did the right thing in exiting from the dead-zone
that is Rare Earths. The new leadership knows Niobium from the inside out and this is a big feather in
the cap for the company.
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The company now needs to start making a dialogue with the market on production and capex thereon.
The market needs more drilling like it needs a hole in the head and cannot have been thrilled to hear of
a $5mn budget for the extra work. Maybe the coat should have been cut to suit the cloth on this score.
But unfortunately for Niocorp, only more drilling will give it a resource from which it can craft a credible
PEA and PFS.
With a resource of this size in a strategic metal AND located in the United States, we start to ponder
who might want to make a move on this company. Formerly the obvious candidate was Molycorp, now
significantly less so. Surely Japanese and Korean steel makers would like to see an alternative source of
supply to the Brazilians, while the US resource security hawks would be happy to see a Niobium source
within the US (but they have proven less amenable to paying to develop such sources in the recent
past).
We consider Niocorp has Long characteristics and good potential to reach our 12-month target price of
US$0.23.
Tuesday, November 12, 2013
Hallgarten & Company (44) 795 08 53 621
Important disclosures I, Christopher Ecclestone, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report. Hallgarten’s Equity Research rating system consists of LONG, SHORT and NEUTRAL recommendations. LONG suggests capital appreciation to our target price during the next twelve months, while SHORT suggests capital depreciation to our target price during the next twelve months. NEUTRAL denotes a stock that is not likely to provide outstanding performance in either direction during the next twelve months, or it is a stock that we do not wish to place a rating on at the present time. Information contained herein is based on sources that we believe to be reliable, but we do not guarantee their accuracy. Prices and opinions concerning the composition of market sectors included in this report reflect the judgments of this date and are subject to change without notice. This report is for information purposes only and is not intended as an offer to sell or as a solicitation to buy securities. Hallgarten & Company or persons associated do not own securities of the securities described herein and may not make purchases or sales within one month, before or after, the publication of this report. Hallgarten policy does not permit any analyst to own shares in any company that he/she covers. Additional information is available upon request. © 2013 Hallgarten & Company, LLC. All rights reserved. Reprints of Hallgarten reports are prohibited without permission. Web access at: Research: www.hallgartenco.com 60 Madison Ave, 6th Floor, New York, NY, 10010