SVH Tracker - February 28, 2017: SCY mining lease for Nyngan awaiting completion of NSW department reorganization
On February 27, 2017 during the last hour of trading about two thirds of the 1,500 plus Canadian resource companies featured in KRO encountered selling pressure during the last hour of trading that left them with closing prices below the sideways range where they have been stuck since peaking in mid February. The stronger the company, the sharper the chart dangler. It looked very much like the entire sector, perhaps in pre-emptive anticipation of the PDAC Curse that usually kicks in after the world's biggest annual mining show in Toronto in early March (it did not do so in 2016), or the end of the Trump "infrastructure" trade ahead of his speech to Congress on Tuesday night. It did not matter the metal focus of the company, and the stronger its story, the more vulnerable the short term chart looked to a breakdown in the making. I observed this pattern Monday night while going through the PDAC 2017 Exhibitor List which full KRO Members can use to prepare for the conference if they are attending (these companies exhibit in the Investors Exchange to which admission is free - see PDAC Attendee Registration Info). My own presentation in the Newsletter Session on Sunday is at 10:20 am ET. I am also scheduled to be on BNN Market Call with Andrew Bell at 1 pm ET on Monday March 5, 2017. If you don't want me just fielding questions about companies I don't follow in any detail or ones you do not care about, make sure you email your questions to email@example.com. No doubt I will be asked to comment on my three favorite picks made last year during my BNN Market Call session: one turned out to be a huge winner, one is just getting started and still a favorite, and the other is so far a dud though still up from where it started.
With regard to the late Monday sell-off in the resource sector, in most cases the market was stable Tuesday morning. Apparently the cause was a decision by S&P Dow Indices on February 23 that effective February 28 the relative weight of Enbridge Inc in various indices would be increased to reflect its recent acquisition of NYSE listed Spectra Energy Corp. What does that have to do with resource sector stocks? Besides the fossil fuel indices Enbridge is included in various TSX composite indices. What this means is that based on the closing prices on February 27 structured products such as mutual funds, ETFs and any index mimicking portfolio would need to trim the position of every other company so that the "portfolio" reflects the new relative weight of Enbridge. Needless to say the high frequency traders would have been on top of this structural event and done what they could to spook the market. The final hour sell-off turned into a contagion that affected other resource sector stocks that are not part of any index in which Enbridge is member. The fact that most short term charts are exhibiting rounding tops proved helpful to HFT traders. Anybody who observed this apparent beginning of a widespread collapse Monday night would have been very twitchy about Tuesday morning. In fact, one trader pounded out 415,000 shares of SCY at the open at $0.285 through Qtrade, an online brokerage firm that specializes in retail investors. A review of the SCY house summaries for Qtrade indicates that the Qtrade investor bought about 640,000 shares in 2015-2016 at an average price of about $0.15, and appears to be flat with its Tuesday morning sale. I suppose fear of losing a double proved greater than fear of missing out on an overall ten bagger.
Admittedly Scandium International Mining Corp shareholders are becoming impatient over the delay in being granted a mining lease for the Nyngan scandium project by the government of New South Wales in Australia. SCY obtained a development consent from the NSW Department of Planning and Environment on November 11, 2016 which allowed SCY to apply to the Department of Industry for a mining lease (see NSW Approval Process). Hopes that approval might be granted by mid December before Australian government workers take a month long "vacation" failed to materialize. Now it is the end of February and everybody is starting to wonder if there is a problem. Apparently there is no problem, but the speed with which things get done in New South Wales has been compromised by a series of recent political changes.
On January 18, 2017 (ABC News) NSW Premier Mike Baird resigned for family reasons. He was replaced on January 23, 2017 by Gladys Berejiklian, who has reshaped the Cabinet, appointing Anthony Roberts as the new Minister of Planning on January 30. Roberts was Minister of the Department of Industry, Resources and Energy from 2015 onwards. It is curious that Roberts is now minister of the "Department of Planning", with the "environmental" part missing in action. The various NSW government web sites do not offer a coherent organizational picture, and it appears that these two distinct departments of "planning" and "industry" are being reorganized. If this is the case it is no wonder that nothing is being accomplished in terms of approvals. SCY shareholders will need to be patient while the NSW bureaucrats sort out their new responsibilities and decision chains. On the plus side, approving a mining lease for Nyngan would be a low risk signal that NSW is once again open for business. With luck the NSW government announces the Nyngan mining lease with lots of fanfare.
The mining lease is important to SCY because it kicks off the 30 business day window for Scandium Investments LLC to decide whether to convert their 20% project interest in Nyngan into an SCY equity stake, and thereby become the largest shareholder, or fund their 20% share of $100 million CapEx directly. It is possible SIL is ready to make a decision as soon as the mining lease is granted, especially since it is now clear that Robert Friedland's Clean TeQ Holdings Ltd has decided to focus on first developing Syerston as a nickel-cobalt sulphate producer for the battery market, with scandium as a future possible by-product. Clean TeQ is still awaiting its development consent modification, which simply allows the company to include scandium as a commercial by-product. But Clean TeQ has no urgency in this regard because it will not make a decision to apply for a mining lease, which requires detailed mine engineering plans, until it has completed the DFS for the 7,000 tpd nickel-cobalt sulphate operation, expected by the end of 2017. In its recent presentation at the BMO conference in Florida the promotional theme is dominated by future battery demand growth and the electric car industry's vulnerability to cobalt supply from Congo, with scandium supply an after-thought tacked onto the end of the presentation. Friedland has forfeited the race to become the first primary scandium producer, though it is conceivable that he can still accomplish that goal by having Clean TeQ absorb SCY down the road.
In a stunning development Clean TeQ announced on February 28, 2017 that it had raised AUD $81 million from a Chinese conglomerate called Pengzin Group which has agreed to assist Clean TeQ with raising the USD $700 million plus Clean TeQ will need to develop the Syerston project. The 92,518,888 shares at $0.88 boost Clean TeQ's fully diluted to 610 million. In early Wednesday morning Australian trading Clean TeQ was at $0.96, giving the Syerston project an implied value of AUD $586 million compared to CAD $98 million implied for the Nyngan project based on 248 million fully diluted, $0.315 stock price and net 80% interest. SCY's Nyngan project does not have any nickel or cobalt content to speak of, and has a simple flowsheet exclusively targeting scandium recovery that has expansion potential. Spec Value Hunters who need a reminder of how the Nyngan output expansion scenario translates into potential future price targets under different CapEx funding scenarios should review my SVH TRacker - November 11, 2016. It is a tough bit of analysis to digest, but years down the road it will be referred to as a classic whose comprehension divided those who strive to see the future and those who are content to follow the trend. For those who prefer the shorter "trust me" version, I suggest reviewing the January 17, 2017 Recommendation Strategy.
Clean TeQ will be focused during the rest of the year engineering the sulphate purities needed by the battery market. It is very unlikely that the initial flowsheet design which Pengzin Group will help bankroll will include scandium by-product recovery because the scandium has to be stripped out of the solution first with a resin-in-pulp stage customized for scandium before it can move on to recovering the primary revenue streams, nickel and cobalt. When the nickel and cobalt sulphates are coming out as expected, then it would make sense to insert scandium by-product recovery on a scale that enables Syerston to produce 100,000 tpa of scandium oxide. Assuming Syerston nickel-cobalt comes on stream in 2020, that means at least 2021 before a meaningful supply of scandium can be expected, which is why Friedland has relegated scandium to the status of a presentation "appendix". It is kind of interesting that Friedland raised AUD $81 million at this point, which is not needed to deliver the Syerston DFS, because that amount would just about cover the CapEx of Nyngan on an 80:20 joint venture basis with SIL.
My conservative assumption is that the SIL principals will utilize their 30 business days to make a decision on ponying up 20% of CapEx or converting it into the largest single SCY equity stake and effectively taking on SCY's financing destiny. SCY is internally capable of executing Nyngan's development. The risk to SIL is that if they end up as a 20% participating partner in a subsidiary of Clean TeQ, they may discover that Nyngan's theoretical profitability ends up subsidizing market development for the 100,000 tpa of scandium oxide the nickel-cobalt Syerston mine will generate in about five years. Unless that is the scenario preferred by SIL, I suspect a decision will come a lot sooner than in 30 business days once the mining lease is granted. One of the principals of SIL retired on January 31, 2017 as CEO of a NYSE listed company he built into a $2 billion annual revenue powerhouse. He has spent the past month relaxing, possibly grateful that the New South Wales government underwent an upheaval. Friedland just let himself get diluted from 19% to 15.4% of Clean TeQ; SIL will end up with just under 20% of SCY. At this point neither company is a competitor, but SCY's valuation has lots of room for valuation catchup.
Scandium International Mining Corp is not just a Good Absolute Spec Value Buy that offers 5-10 times upside over the next 2-4 years, but it is a game changing resource junior one can be proud about being a shareholder of. Clean TeQ does not offer 5-10 times upside from its current valuation, at least not based on its current projects, but it also does qualify as a junior whose story makes its shareholders feel good. One hundred years from now nobody will remember Oyu Tolgoi, Fort Knox, Kamoa-Kakula or Voisey's Bay. But the emergence of scandium as the perfect alloying mate for aluminum in a world obsessed with energy conservation whether it comes from fossil fuels, uranium or renewables will end up in the history books. Friedland can talk all he wants about the "wealth" he has so far created, but none of that changes what shows up at the top of a Google search for Toxic Bob. I have a suspicion that once the Chinese have absorbed Ivanhoe Mines Ltd, freeing Friedland from having to stare down concerns about an unstable Congo or an increasingly dysfunctional South Africa, Clean TeQ will evolve into his swan song.
*JK owns shares in Scandium International Mining Corp