Warning to participants in private placements

In an article to subscribers of a European newsletter, Canadian company Niocorp was put in the limelight. The article appears directed at convincing people to take part in the upcoming private placement, which has now been made available to the ordinary private investor as an ‘exception’. Normally, such PPs are available for experienced professional investors only, and the minimum participation level is set at $100,000. The Niocorp financing is now available for a minimum investment of $10,000, a real bargain. The tone of the article is reminiscent of how the ‘giant’ discovery by uranium explorer Xemplar was marketed, many years ago. This story ended badly for nearly all investors. In response to questions from participants, we feel compelled to comment on this company.

Niocorp is an exploration company that is looking for niobium and scandium in the US. Niobium is mainly applied in infrastructure projects as a steel strengthener, a market that certainly has growth potential, but is unlikely to show the exponential rise in demand we expect from the rare earth elements (REEs), and energy storage metals. The market for scandium is miniscule, it is mainly used for research.

Niocorp published two economic studies (PEA) this year. The first considered niobium as the primary economic product. This study presented an after-tax IRR of 14.6%, with a capex of $919 million. Way too expensive and unfeasible. The niobium by itself clearly does not create a deposit that is mineable using underground methods. They then performed a second study, which now includes scandium and titanium as co-products. The titanium part is negligible, but with the scandium included, the project is suddenly very profitable. The scandium doubles the value of the project.

We have great issues with this approach. Niocorp’s business case revolves around its ability to sell 97 tons of scandium each year. The problem with scandium is that the entire market is currently only 5-10 tonnes. Where are those remaining 87 tonnes going ? Who will buy them? Scandium’s breakthrough in the airliner industry has been ‘imminent’ for at least the last five years. We see the potential here too, and follow a number of companies that have a primary focus on scandium production and who are in a much more advanced stage. But for now it is nothing more than potential. There has not been one aircraft builder that has applied its immense capital to putting a few hundred million dollars in the accumulation of scandium. So maybe the potential isn’t so great after all? And even if the market does catch fire, Niocorp is not a so-called first-mover, and it remains to be seen whether there is still demand for its scandium once it starts producing. To build the whole economic model around a market that isn’t there, as Niocorp is doing, is a huge risk in our opinion.

CEO Mark Smith has earned a bad reputation in the REE sector, where he, unburdened by any amount of significant rare earth expertise, helped lead a promising company to ruin. Molycorp, with Smith at the helm, was toyed by a number of US investment banks, which allegedly earned billions on the company. What Smith himself retained is unknown, but he is known to be a wealthy man. He was, incidentally, fired before Molycorp went bankrupt. Smith has always balanced on the edge of what is permissible in his statements about Molycorp. Things were always good, issues were far away. He made statements which later proved to be untrue. He made promises he did not keep. The SEC even spent time investigating his disclosures, although no punishment followed. Long-only investors mostly lost money.

Smith recently made two loans to Niocorp, earning a total of $350,000 on interest in one year. This is on top of his salary (a similar amount), and senior management also grants itself $2 million a year in options. We find this steep for a company that has just published a PEA and is likely at least four years from production.

Ultimately, any business in this sector can rise in value through good marketing, if only temporarily. Xemplar at the time was the only billion dollar exploration company with no recognized resources. With a market cap of $100 million for what we believe is an unfeasible niobium project, Niocorp, after an increase from 14c to 66c in two years, to us has become pretty expensive.