NioCorp Developments Ltd.
NB: Price: $3.66; Market Cap (M): $111
Rating: Buy; Price Target: $13.00
Heiko F. Ihle, CFA
Marcus Giannini
Successful Production of Scandium; Phased Approach For Next Steps to De-Risk AlSc Production; Reiterate Buy
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Successful production of scandium. On August 14, NioCorp Developments announced the successful production of scandium metal on a pilot-scale. This test was undertaken at a facility owned and operated by Creative Engineers (private) in Pennsylvania. In our view, the production of scandium (even on a small scale) represents an essential step in the firm’s phased approach to producing an aluminum-scandium (AlSc) master alloy, which could ultimately be incorporated into the firm’s overall production plans at Elk Creek.
Next steps for de-risking production of AlSc. NioCorp's management team now aims to produce kilogram-sized ingots of AlSc master alloy in order to provide material for independent testing and commercial product samples. In turn, the first sample of this material is anticipated to be produced in the coming weeks. Importantly, the production of AlSc is taking place through a proprietary process that has been developed by NioCorp’s partner Nanoscale (private), which is believed to increase efficiency while reducing the environmental impacts of AlSc production relative to more conventional processes. Importantly, management has stated that these initial results indicate the ability to make scandium metal at a purity level that should be accommodating for pilot-scale production as demand continues to grow for scandium alloys across the commercial transportation and national defense sectors.
We reiterate our Buy rating and our PT of $13. Our valuation for the firm remains based on a DCF of operations. We once again utilize our unchanged 13% discount rate and 0.5x NAV multiple. We believe that these figures still fairly account for the various risks associated with the longer-term timeline of reaching production at Elk Creek. We also maintain our view that this valuation remains in line with similar early-stage assets in locations carrying equal geopolitical risk factors. Finally, we stress that continued progress, including work related to de-risking of financing arrangements for the site, should ultimately yield a longer-term decrease in our discount rate for the asset.
Looking ahead at additional phases. NioCorp presently intends to target a three-phased development plan for the commercial production of AlSc. In turn, management's ultimate goal is to achieve full-scale AlSc master alloy production at around the same time as commercial production at Elk Creek. Assuming the firm encounters strong results at the pilot-scale and commercial demonstration stages, NioCorp intends to secure an Engineering, Procurement, and Construction contractor to lead the commissioning and full-scale production ramp-up of operations. Longer-term, the company anticipates capacity for about 100 tonnes of scandium per annum from Elk Creek’s estimated production.
Risks. (1) Increased capital requirements to construct Elk Creek; (2) financing risk; and (3) operating and technical risks.
