I must start by declaring an interest here. I know rather more about scandium, one of the rare earth metals, that is probably healthy for anyone to know. I'm no longer in the business but for a decade or so I pretty much was the global scandium business, handling more than 50% of the world's supplies in any one year. That I'm no longer in the business means you could regard what follows as simply being sour grapes. That I was in the business means you might also regard this as coming from a grizzled veteran who knows which way is up.
My basic point is that there's a number of junior miners at various stages of financing scandium projects. And I don't think that any of them have the slightest chance of being successful. This applies to Scandium International (TSK:SCY), Metallica Minerals (NYSE:MLM) and to a lesser extent to NioCorp (TSX:NB). They are all facing a basic economic problem which I don't think any of them can solve.
That problem is that for their plans and plants to be economic they need to be producing 30, 40, 50 tonnes of scandium oxide a year. But the global market is only 15 tonnes of scandium oxide a year. It's entirely true that demand has been increasing: when I first got into the game in the late 1990s demand was perhaps 1 tonne a year. But think about what will happen to prices if someone (even if just one) comes to market with two to three time global annual demand? Quite, prices will crater, well below production costs.
True, it's possible that lower prices and a certainty of available supply will increase consumption. But it takes an awful long time for that process to play out and there's no certainty at all that a producer would be able to ride out that process.
Scandium International's plans are briefly laid out here. Capex is $90 million off, Opex is $550 per kg Sc2O3. Production about 40 tonnes per year. The numbers for Metallica's project won't be far off that. It's the same basic ore and the extraction process will be largely similar. Nickel laterite (without much nickel or cobalt) and high pressure acid leaching I would guess.
The problem is simply that in order to get those Opex costs down the plants have to be about that sort of size. But having a plant of that sort of size means producing that 30- 50 tonnes a year of Sc2O3. For which there simply is no market. At least not yet there isn't. And yes, I know the people they're all talking to to gain offtake contracts and so on but there's offtake contracts and offtake contracts. One that says, well, if you produce we'll talk about price are very easy to get signed. Ones that guarantee to take product at a profitable price rather more difficult. and I have a nice hat here which I'd happily eat if they were getting that second type of contract out of anyone.
Back in the late 1990s when there was a reasonable stock of Sc2O3 lying around in Russia the price was $300 per kg. It would not surprise me at all if someone came to market with two times annual global demand from just the one source that the price would collapse back to below that. And if more than one came to market with projects of that sort of size probably lower. I even know people who would delightedly buy material at those sort of prices. But that's not going to do much for the shareholders of companies with $90 million Capex budgets and $550 a kg Opex costs, is it?
This makes this sort of article in The Australian something that worries me. As one of the few people who actually does understand this market I cannot see how it can possibly work.
NioCorp is a little different as I know less about their cost structure. And it would certainly help them in any battle for market share that they could, potentially, lose money on scandium while making it on niobium (niobium does not face this market size problem at all). And I've long predicted that that particular type of Nb deposit is where Sc is likely to come from in the future.
The point and purpose of this piece is that I can see those companies (and there are others in the same space too) gearing up to start asking for financing. And my, informed but perhaps not complete, view is that this is an area that simply isn't going to work. That much material coming to market will crater the price and I wouldn't expect producers to be able to weather that.
This is more a market to observe than one to invest in in my opinion. And as I said up at the top I'm out of this market entirely. I just don't see it all working out well.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I was in the scandium business for nearly two decades. I am now out of it.
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