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KMW Blog May 6, 2016: Nearsighted vs Farsighted: which is Friedland and which is you?

Posted: May 6, 2016JK: Nearsighted vs Farsighted: which is Friedland and which is you?
Published: Apr 25, 2016Misc: Scandium: Robert Friedland's Little Secret
Barry Fitzgerald, Resources Editor for The Australian Business Review, has written an excellent article about the scandium story which is especially interesting because it marks the first time that Robert Friedland rather than CEO Sam Rigall is presented as the brains behind Clean TeQ Holdings Ltd which will soon follow Scandium International Mining Corp in delivering a definitive feasibility study for a world class scandium deposit. Friedland invested in ASX-listed Clean TeQ a few years ago based on the company's environmental services business that included applying ion exchange technology to recovering minute concentrations of metals from waste water. One of the applications was applying ion exchange to titanium dixoide waste streams which include scandium and which has apparently become the primary source of the scandium oxide Bloom Energy needs for its solid oxide fuel cells. Along the way Friedland realized that the sub-economic Syerston nickel-cobalt laterite deposit in Australia's New South Wales hosts perhaps the world's biggest scandium deposit with primary production potential. Ivanplats Australia spent over $30 million on a feasibility study that, ironically, used an elevation in scandium grade as a marker for delineating the nickel-cobalt mineralization for economic development. Where the nickel-cobalt grades dropped off, the scandium grade spiked to over 300 ppm, the minimum grade needed to call your scandium deposit a potential primary supplier of scandium oxide profitable at $1,500-$2,000 per kg.

The prices that nickel and cobalt ended up after 2008 rendered Syerston worthless and the project, along with other "private equity" busts, disappeared into Ivanhoe Mines Ltd where it did not even receive a footnote in any of Ivanhoe's disclosures. Somewhere along the path of Syerston's descent into worthlessness, but no later than 2014, it came to Friedland's attention that while the nickel-cobalt resource was worthless at prevailing metal prices, the scandium doughnut around the nickel-cobalt hole was worth billions at a scandium oxide price of US $1,500-$2,000 per kg. And unlike the slow-wits who depend on somebody like Friedland to show them the way, Robert Friedland quickly figured out that scandium was a far more interesting metal than rhenium whose super-alloying role is critical to jet engines thanks to its third highest melting point (3,180 degrees C) but not much else (46 tonnes supply for 2015 according to the USGS worth about $114 million at $2,500/kg compared to 10-15 tonnes of scandium oxide worth between $20-$50 million depending on the size lot sold).

Rhenium is so low grade in nature that its presence normally is computed from molybdenum roaster returns, the only element with which rhenium seems to have any quantitative correlation. Friedland's Ivanplats Australia discovered the Merlin molybdenum-rhenium deposit in Australia's Queensland in 2008. Merlin was remarkable in that it fire assayed a rhenium grade slightly better than the crustal abundance of scandium (21 ppm) and eventually delivered an M+I+I resource of 6.4 million tonnes of 1.5% Mo and 26 ppm Re. The contained 166.4 tonnes of rhenium have a value of about USD $376 million. Friedland did not keep Merlin; it ended up in the control of a Chinese company called Chinova. That was a smart move by Friedland because even though rhenium might have "magical" properties with applications well beyond "extreme heat" jet engine turbines, the absence of any primary scalable supply that is profitable at $2,000/kg or less makes the commercialization of rhenium enhanced applications not a practical option. The discovery of the scandium enriched laterite deposits in Australia's New South Wales is a game changer for scandium based applications, much as happened in the sixties when the world class Araxa niobium deposit was developed. Today niobium has an iron enhancing market worth $2.4 billion dominated 85% by CBMM's Araxa Mine in Brazil. Scandium has the potential to enhance aluminum in many areas, and in some cases even assist aluminum in displacing steel as a key input.

Friedland wisely punted Merlin to the Chinese, but nobody, including the Chinese who at that time were not yet cognizant of their growth trajectory's limitations, had any interest in a marginal nickel-cobalt project whose metal supply was being inundated by nickel-pig-iron from Indonesian and Filippino laterites and cobalt from the DRC. Syerston thus ended up inside Ivanhoe whose focus was a portfolio of world class copper (Kamoa), zinc (Kipushi) and platinum (Platreef) projects in southern Africa which required serious capital spending. So in late 2014 Ivanhoe sold Syerston to Clean TeQ for a pittance consisting of a royalty, some stock and AUD $1 million. It was a coup for Clean TeQ whose brilliance for obvious reasons Friedland did not trumpet to the world. Although the energy efficiency boosting function of scandium and its potential role on many innovation fronts fits very well with Friedland's penchant for futurism, he has had to hold his tongue while Sam Riggall pushed the project through the feasibility demonstration cycle, which includes sorting out the metallurgy of this scandium enriched laterite and probing potential end-users for offtake agreements.

Not long after the acquisition, Clean TeQ, whose environmental services business was a financial black hole, saw its market cap expand to AUD $80 million plus based on Syerston (Australia's premiere stock forum, HotCopper, dwells on nothing but the scandium story), and yet nary a word from Robert. Now it may be possible that Barry Fitzgerald is just a cheeky, prescient journalist, but, precisely because scandium is such a good story it does not need a cheerleader like Friedland, possibly ruining a good story by raising the hackles of a prickly mining executive the market no longer adores but does sullenly respect, makes no sense unless Robert's endorsement is lurking behind the scenes. The Australian Business Review article is a signal that Friedland's self-imposed silence on scandium is coming to an end. Scandium Bob is about to be unleashed on the world.

That is why it was so funny to see Tim Worstall, a former peddler of small amounts of scandium oxide sourced from Russian stockpiles left over after the Soviet Union collapsed, post an article on Seeking Alpha (Be Very Wary Indeed Of The Coming Excitement About Scandium) indirectly calling Robert Friedland a buffoon for thinking that adding 40 plus tonnes to the 5-15 tonnes of current global supply of scandium oxide will accomplish anything but crush the price well below what it will cost to extract from deposits like Nyngan and Syerston. Worstall, who has accumulated a reputation as a "know-it-all" blogger annoying enough people to earn an online "why we hate Worstall" page (see Eziwrestler: Tim Worstall, British Attack Dog), used to have a side business sourcing scandium oxide from Russians and supplying it to the army of scientists playing with scandium as a magic "facilitating element" (start wandering through the Google Scholar Scandium Search to get a feel for this beehive of activity). But these days he can source nothing, and he bitterly admits it.

For somebody who has made such an effort to immerse himself in scandium I find his negativity puzzling if not outright perverse. I saw one article by him (A riveting chapter in Boeing and Airbus' rivalry) in which he first talks about the headache aircraft rivets pose, and in the second part talks about a Taiwanese bike manufacturer who exports bicycles with branded aluminum-scandium frames that sell for US $3,000 plus. That in itself is not interesting because we all know that the lighter a bike frame that does not twist out of shape or break, the more desirable that bicycle. Lightness plus strength commands a premium among cycling fanatics. But then he went on to explain that the bike maker produces an identical bicycle he sells in the domestic market for substantially less and which does not publicize the scandium content. How can that be possible he marvels? The answer is that although the scandium in the aluminum frame costs $10-$20 extra, the ease with which an extremely reliable frame can be welded together, a bicycle that quickly gains a reputation as a lot better than similarly priced brands though nobody knows why, more than offsets the extra material input cost. When I read that, I thought, if Worstall reported this correctly, the market for bikes with Al-Sc alloy frames goes far beyond a high income elite that is equally enamoured with carbon composite bikes. And he clearly gets it that scandium's attractiveness to end users goes well beyond the functionality it bestows on aluminum, that a good part lies in fabrication cost savings over alternatives with lower cost physical inputs.

When you consider that 15-20 million bikes are sold annually, and the vast majority sell below $500 each, and a Taiwanese manufacturer with access to scandium finds it worthwhile to use Al-Sc alloy frames for this low cost category, what if enough scandium were available at a stable price to allow Al-Sc alloy to be used for all bikes? It hardly matters that the high-end bikes use Al-Sc alloy because they have many additional features that explain the high price. The simple fabrication cost saving realized by utilizing Al-Sc alloy could turn scandium into an input for every single bicycle sold on the planet. When I first came across Worstall's insight I was absolutely stunned. An Al-Sc frame and fork will weigh 2-3 kg, which at 0.1% Sc would cost US$6-$12 per bike in scandium oxide input and would require 60,000-90,000 kg of scandium oxide (0.1% X 2 kg X 1.534 = 0.003 kg Sc2O3 X $2,000/kg= $6) for all annual bike production. If 0.2% is the magic number, the limit demand doubles and the input costs range $12-$24 per bike. Obviously bicycles are not what takes scandium demand to 1,000 tpa, but 10%-20% penetration would help absorb some of the new supply from Nyngan and Syerston. The important thing about this type of end-use is that a bike maker who does an offtake deal with the intent of marketing low to medium cost bicycles not branded as "scandium bikes" is not vulnerable to the possible failure of the Nyngan or Syerston mines to perform as expected. Such an end-user would phase in Al-Sc alloy as it becomes available, and only turn the scandium content into a marketing advantage when ongoing scandium supply is assured.

What I cannot understand is why Tim Worstall, despite deeply understanding subtle "fabrication cost advantage" aspect of the scandium story, is so pessimistic that if juniors like SCY and CLQ succeed in bringing 40 tpa of Sc2O3 each on steam annually, the demand from mundane sources such as the bicycle market will not absorb a good chunk of the "monumentally" bigger supply. Bicycles and other sports equipment are not the only mundane applications of Al-Sc alloy. Consider hydro-formed beverage cans, those fancy shaped beer cans that turn consumption into a fashion "cool" statement. The aluminum beverage container market soaks up about 8% of the annual 58.3 million tonne (USGS 2015) aluminum supply which, if converted into Al-Sc alloy could absorb 7,000-14,000 tonnes of Sc2O3 at 0.1% to 0.2% Sc content if the transportation cost saving created by thinner container walls along with a fabrication cost saving more than offset the extra scandium input cost. It would be quite a few years before such a conversion took place. Fancy shaped beer cans would be the initial adoption frontier because the fancy shapes require thicker container walls to ensure rigidity. Warm parts of the world where people drink beer outside and being seen by others is part of the experience would love a cool beverage can that does not soak up the sun's rays as does a bottle of Corona beer which contains a mediocre beer but has a cool silk-screened container. What if a brewer of cheap beer such as Pabst or Schlitz that America's cost conscious beer drinkers love and which is so uncool that hipsters have taken a shine to those beers came out with a "limited edition" of hydro-formed cans? If the Al-Sc alloy reduces the cost of a conventionally hydro-formed beer can, enabling the sale of a Pabst or Schlitz brew almost as cheaply as the normal can, their market would relish brandishing the fancy cans as a middle finger to drinkers of pricier beer brands. Even the hipsters would appreciate the irony of undermining the ironic posture implicit in their consumption of Pabst or Schlitz.

Another mundane use of Al-Sc alloy would be smart phone cases which have a high fabrication cost associated with making them look "cool" and scratch or corrosion proof. Apple is currently using a Series 7 aluminum-magnesium-zinc alloy for the case of certain editions. Not only is this material difficult to work with, but the case requires a veneer that prevents the aluminum alloy from taking on that cloudy look so familiar with aluminum window frames. It would not be a big risk for a smartphone maker to do an offtake on scandium that fails to deliver because the planned special editions simply never materialize with an Al-Sc case.

It is puzzling that Worstall does not understand that if you promise an "unlimited" supply of a critical ingredient at a fixed price to an end-user, and that end-user comes to believe you can deliver over the long run, the demand will grow to absorb the supply as it expands. The automotive and aircraft industries will initially dabble only in components that are not critical for the safety or functionality of a car or plane. They are the gorillas on the sideline with the potential to absorb 200-300 tonnes annually each if they incorporate Al-Sc alloy into their designs. They will not do so until Nyngan and Syerston are both successfully in production and prepared to scale up production. But even before the automotive and aircraft industries adopt Al-Sc based components, consider the possibility that the electricity sector will adopt Al-Sc as the basis for high tension wires which currently suffer from a sag problem when made only of aluminum that can only be alleviated by measures that reduce conductivity such as incorporating a copper core. Electricity related end-uses represent 13% of the annual aluminum supply. As for his assertion that the new scandium projects will not deliver, he has no technical qualifications for making such an assertion, nor, if he did, does he have access to the technical details of the processing plant flow-sheets so that he would be in a position to question the assumptions made by the engineering firms retained by SCY and CLQ for their feasibility studies. While the technical reports contain lots of mumbo jumbo intelligible only to process engineers, the writers are engineers who know exactly what to leave out so that the competition does not learn any shortcuts.

Somebody like Robert Friedland understands all this, which is why he finessed Syerston out of a simple mining company with operations in a challenging location into an entity with process engineering capacity. While he can dismiss Tim Worstall as an ignoramus bleating into the blogosphere, it will be interesting to see how he deals with an institutional audience which by its nature bleats the language of sheep and will no doubt find validation in Worstall's warning.


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