NioCorp Developments — Opportunities and optimisations

Since our initiation note published on 8 January, NioCorp has:

In the meantime, the ferro-niobium price has continued to demonstrate the stability for which it is well known. However, we have reconfigured our financial model of NioCorp to include the possibility of upgrading a portion of the proposed scandium oxide output into 2% aluminium-scandium master alloy. We have also adopted a staggered equity financing assumption in two tranches in FY24 and FY25 to fund the project (cf a single equity fund-raising assumed previously). We have also reconsidered our rare earth pricing assumptions to reflect a more positive outlook, given increasing supply-demand divergence as a result of growing demand for magnets, EV traction motors and wind power generators, etc. All of these are then incorporated into our revised valuation of the company, below.

On 20 May, NioCorp announced the completion of a scoping study by its engineering contractor regarding the adoption of a Railveyor system at Elk Creek. The Railveyor system is a fully electric and autonomous bulk material handling system that has been in operation over many years in a number of underground mines and delivers mined ore to processing facilities via a narrow-gauge light rail system propelled by low-horsepower drive stations adjacent to the rail route. The study examined the impacts of:

While preliminary in nature, the study nevertheless used industry standards and best engineering judgement. In summary, the design removes the production shaft, ventilation shaft and all material handling infrastructure from the design of the mine to be replaced by two ramps. The first (Ramp 1) has been designed with a maximum gradient of ±15% and will be used for all personnel and equipment movement. The second (Ramp 2), with a maximum gradient of ±18%, will be for the Railveyor haulage system itself. The Railveyor train system is designed with cars that hold c 1.2t of material each and differ from a traditional train system in that the cars are connected in a continuous loop akin to a conveyor belt. This system allows for simple, continuous loading with the haulage flexibility of a train system. In addition, it runs on electricity and the new design would use battery-powered, instead of currently planned diesel-powered, equipment. As a result, the study posits significantly reduced emissions as well as the following economic benefits:

As a result of the study, for the purposes of our economic and financial modelling, we have:

The study also suggests that the Railveyor system could allow Elk Creek to reach full commercial production in month 40 of the project’s development, rather than month 45 (ie a five-month saving). For the moment however, we have yet to incorporate this chronological acceleration into our financial models (although we have included the capex and opex effects) and have maintained our original schedule of initial capex from CY25–28 with first production at the end of CY27 (FY28).

In our initiation note, we observed that we thought it likely that NioCorp would, in due course, upgrade its scandium processing line to produce a scandium-aluminium master alloy. Master alloys are created to introduce an accurate amount of a metal into a pre-existing alloy (eg ferro-niobium, ferro-vanadium, ferro-chrome, ferro-manganese, etc). In this case however, the master alloy in question would be a 2% aluminium-scandium master alloy for ease of adding small, but precisely controlled, amounts of scandium to aluminium alloys to improve their strength and lower the mass of metal required to support a pre-determined load (see our initiation note for a description of this). In simple terms, the creation of a 2% aluminium-scandium master alloy is achieved by introducing scandium to aluminium in molten phase. In practice however, it is impossible to achieve this by adding scandium oxide to aluminium and the scandium oxide therefore has to be first converted into either scandium metal or scandium chloride. Neither is technically demanding, although the requirement for the intermediate chemical reactions does impose some additional cost in the order of US$3.35/kg master alloy produced. In addition, there is a small capex requirement – small on account of the fact that NioCorp may produce in the order of 2,400tpa master alloy only – which we estimate to be in the order of US$7.75m. Nevertheless, over 90% of the value of the resulting master alloy is accounted for by the value of the contained scandium.

In our initiation note, we estimated a long-term scandium price of US$2,500/kg (cf a price of US$3,674/kg in NioCorp’s 2022 Elk Creek DFS). Given the costs and processes involved in creating a 2% aluminium-scandium master alloy, for the purposes of our financial modelling in this note, we have chosen to assume that 75% of NioCorp’s scandium oxide production is directed towards aluminium-scandium master alloy production and that the value of this product is US$98.00/kg (which is the most recently reported price by the USGS in its 2023 and 2024 Mineral Commodity Summaries for a one tonne lot size). This price of aluminium-scandium master alloy equates to a backed-out scandium oxide price of US$3,021/kg, which we believe will be justified as aluminium-scandium master alloys increasingly become the alloying agents of choice for industrial consumers. Variations from this price are considered separately in the Sensitivities section of this note (below).

In our initiation note, we assumed long-term prices of neodymium/praseodymium oxide (Nd/Pr), terbium oxide and dysprosium oxide of US$95/kg, US$1,125/kg and US$436/kg, respectively. In general terms, these are above current prices, but are below the levels of some specialist consultants in the industry:

While Edison is not yet revising its long-term rare earth oxide (REO) pricing assumptions, we have considered the valuation effect of third parties’ price forecasts in our Sensitivities section.

Where before we had assumed a single equity fund-raising of US$425.5m in the latter stages of FY24 in order to achieve a maximum net debt:equity ratio of 2:1 (in FY28), we have now revised this assumption to an equity raising of US$20–25m at NioCorp’s prevailing share price of US$2.00 in the near future in order to fund the company through to a final investment decision in early CY25. As a result of a degree of de-risking inherent in this process, we would expect NioCorp’s shares to appreciate in the interim, which we would then expect to form the basis of a much more material, US$318.7m fund-raising in FY25 (note: lower in aggregate than the original assumption on account of the reduced capex expectation included in the Railveyor development option) in order to achieve the same maximum 2:1 net debt:equity ratio.

NioCorp’s DFS – effective date 28 June 2022 – calculated a pre-tax IRR on the Elk Creek project of 29.2% (in US dollar terms) and a post-tax net present value (NPV) of US$2,350m at an 8% discount rate. With 36.8m shares in issue in May, this post-tax NPV equates to US$63.85 per share in issue. Stated alternatively, NioCorp’s current enterprise value of US$75.3m equates to just 3.2% of the company’s attributable project NPV.

Incorporating our revised assumptions to take into account the effect of the Railveyor development option as well as the 2% aluminium-scandium master alloy product upgrade, we calculate an IRR for the Elk Creek project of 24.8% and an unlevered NPV of US$1,357.8m, or US$36.89/share, to the beginning of July 2024 at our customary discount rate of 10% (cf a value of US$971.7m, or US$29.16/share, at the time of our initiation note in January).

Our valuation of NioCorp differs from our valuation of the Elk Creek project in that it values the company based on our estimate of the maximum dividends that it could pay to shareholders (discounted at a 10% rate). In this case, we assume an initial fund-raising of US$20–25m at the prevailing share price of US$2.00 in the near future in order the fund the company through to a final investment decision in early CY25. As a result of the de-risking inherent in this process, we calculate an updated valuation of US$7.62/share in FY25, when a second, more material fund raising of US$318.7m takes place. Assuming that the shares re-rate to this level and that the second fund-raising is then conducted at US$7.62/share valuation, we calculate a present value for NioCorp of US$17.57/share, rising to a peak of US$34.23/share in FY32 on the cusp of the company’s assumed maiden dividend, as shown in Exhibit 3. Note that if the shares do not re-rate and the second fund-raising is conducted at the same price as the first (ie the currently prevailing price of US$2.00 – see also Exhibit 7), then our valuation still rises by 6.4% to US$7.62/share (cf US$7.16/share previously), rising to a peak of US$14.84/share in FY32 (cf US$16.87/share in FY33 previously).

Alternatively, under these circumstances, it can be stated that an investment in NioCorp’s shares at the current share price should generate an IRR for investors equivalent to 30.3% per year for the 43 years from FY25 until FY68 in US dollar terms.

Exhibit 4, below, shows the evolution of our valuation according to each factor considered. Of note is that by far the largest contributor to our revised valuation is the assumed price at which the second tranche of equity is raised – now being US$7.62/share after a material share price re-rating between the first and second tranches in CY24 and CY25, respectively (note: the first tranche is assumed to be raised at the prevailing share price of US$2.00):

As per our discussions above, the two major sensitivities to be quantified for the purposes this note relate to the production of 2% aluminium-scandium master alloy and REO pricing. In addition, we have updated our Elk Creek project valuation with respect to the discount rate and our NioCorp valuation with respect to the price at which the second, major project equity fund-raising is conducted in CY25.

The initial price at which we have assumed NioCorp’s future 2% aluminium-scandium master alloy to be sold is US$98.00/kg, which is the most recently reported price by the USGS in its 2023 and 2024 Mineral Commodity Summaries for a one tonne lot size. This price equates to a backed-out scandium oxide equivalent price of US$3,021/t – the premium to our base case scandium oxide price being justified on the assumption that master alloy will trade at a premium to its equivalent scandium oxide price as it becomes the alloying agent of choice for industrial consumers. The table below demonstrates the sensitivity of both our NioCorp and Elk Creek project valuations with respect to variations in the price of 2% aluminium-scandium master alloy from this initial price assumption:

As noted previously, in our initiation note, we assumed long-term prices of neodymium/praseodymium oxide (Nd/Pr), terbium oxide and dysprosium oxide of US$95/kg, US$1,125/kg and US$436/kg, respectively. In general terms, these are above current prices, but are as much as 41.3% below the levels forecast by some specialist consultants in the industry. If, instead of using Edison’s long-term REO price assumptions, we use those set out in Exhibit 2, our valuations of NioCorp shares and the Elk Creek project would increase by 7.2% and 9.0%, respectively, as shown below:

Note that, for the purposes of the NioCorp valuation analysis, we left the assumed share price of the second equity fund-raising unchanged at US$7.62/share. In fact, the adoption of a higher REO price would imply that this should itself increase by 7.1%, to US$8.16/share, in which case the ultimate valuation of NioCorp would increase by a further 10.6%, from US$17.57/share (Exhibit 6, above) to US$19.43/share.

In the context of the above, our analysis of the sensitivity of our NioCorp valuation to the assumed price at which the second tranche of equity finance is raised in CY25 is as follows:

Finally, our Elk Creek project valuation sensitivity with respect to the discount rate used is shown in Exhibit 8 below. In this case, the project valuation’s high sensitivity to the discount rate may be attributed to the long life of the Elk Creek mine in absolute terms:

Two additional, operational refinements that we also understand NioCorp to be considering relate to its production of magnesium and calcium carbonates and iron oxide. Currently, both of these are considered waste products. However, calcium carbonate improves concrete’s particle packing and promotes its self-compacting properties, while magnesium carbonate shortens the setting time of cement paste. Both therefore could be redirected to a local cement plant and we understand that NioCorp’s management is currently evaluating this option as well as considering how they might be integrated into the Elk Creek mine’s backfill requirements. In a similar fashion, certain iron oxides are used by brick works to effect the red colour in bricks and we believe that this is also an option for Elk Creek’s iron oxide production. In addition to the supplementary revenue that either of these options could generate, the reduced amount of waste being directed to the project’s tailings storage facilities could also – potentially materially – reduce capital and operating cost requirements.