Niocorp Developments Ltd (NB)

[HoppaJohn]

From a Seeking Alpha article re Taseko Mines

http://seekingalpha.com/article/2514315-taseko-mines-moving-forward-or-spinning-its-wheels?app=1&uprof=46

The Aley Project

Just recently Taseko put out the results of a study of the economic viability of the Aley niobium project. This looks like a significant step forward, especially when you see that the project's NPV (C$860 at 8%) is roughly double that of the company's valuation. But there are a few problems that leave Taseko no better off than where it was prior to making this announcement.

The first issue is initial capex. The company estimates that its pre-production capital needs will come in at C$870 million. I don't think that the company is in a position to raise this capital, and there are a couple reasons for this. The first is its balance sheet. The company has C$114 in working capital and C$297 million in debt. Now it is generating operating cash-flow from its Gibraltar Mine--C$50 million annualized based on the most recent quarter (which saw copper price weakness)--but given that it has other debt to service and other expenses it simply doesn't have the capacity to raise this money.

The second is Aley's economics, which leads me to my second concern regarding this project. The company is anticipating that the project has a pre-tax IRR of just 17%. Not only will takes bring this down considerably, but even 17% is low. But it gets worse--the company uses a ferroniobium price of US$45/kg. while the current price $40/kg. So the price is down 11%, but the company's anticipated operating margin at $45/kg. is $21/kg., which means that at $40/kg. its operating margin is $16/kg. or 24% lower. That subtracts $45 million in annual cash-flow or just over $1 billion over the mine's projected 24 year life.

Even if you subscribe to the viewpoint that niobium demand will rise there are several other sources of supply that will potentially come online in the next few years. Global niobium demand may be growing at a rapid pace, but it is a very small market at less than 100,000 tonnes per year. Just Aley's 9,000 tonnes added to the market can seriously add to the supply. Furthermore IAMGOLD's (NYSE:IAG) Niobec expansion plan could increase niobium production from 5,000 tonnes per year to over 20,000 tonnes per year. We can also point to Alkane's (OTCQX:ANLKY) Dubbo Zirconia Project which will add 2,000 tonnes per year starting in 2017. Finally there is the biggest niobium mine in the world--CBMM in Brazil, which supplies 85% of the world's supply. This mine can easily grow production should the need arise.

To summarize:

Alley is valuable solely given its NPV, but realizing this value will be difficult for a company of Taseko's size.
The IRR is disappointing.
The NPV assumes a nigher-than-market niobium price.
There are bullish aspects to the niobium market but there is also a potential supply overhang that makes a marginal project such as Aley vulnerable and not worth pursuing in the current market environment.
The bottom line is that this project adds very little value to Taseko shares except for its optionality to the niobium price and for the scenario in which Taseko secures extremely favorable financing, which, given the project's economics, is highly unlikely.