Hallgarten Hallgarten - Zimtu Capital Corp. - Page - Fri May 22, 2020 · 2016-11-14 · Niobium...

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


Hallgarten & Company – Portfolio Strategy

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.



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%),



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



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).



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



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.



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.



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



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



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.



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.


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

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