I read an interesting article in MiningNews.net on Monday, with the headline “Anatomy of a disaster”, written by Robert Milbourne of K&L Gates (1). It was an insightful dissection of how the mining industry came to get itself into its current state of malaise.
In essence Robert argues that demand for any commodity is reasonably predictable; most if not all commodities show a growth over time generally in line with population growth. He contends that it is the supply-side response which has been responsible for the collapse of metal prices over the last two years. Despite the fairly predictable demand, miners continued to pour capital into capacity expansions, even though they knew; or at least should have known, that supply was going to outstrip demand, in which case the usual economic principle of supply and demand would take over and result in lower prices until such time as the surplus high cost supply is squeezed out of the market.
Whether we can avoid this cycle the next time around is something that I might revisit in the future article but it is not the subject of this week's post.
This week I am more interested in examining whether or not Robert’s hypothesis stacks up for some of the rarer commodities such as scandium. I picked this particular metal because it has received a fair amount of coverage in the Australian mining press of late. Australia now boasts three scandium deposits for which JORC or NI43-101 compliant resources have been estimated.
The metal is rumoured to sell for around $5,000 per kilo (11), however Scandium Investing News (6) describes the scandium market as "disorganized” and goes on to say “There is no formal buy/sell market today – it is not traded on a metals exchange and there are no terminal or futures markets. Scandium is traded between private parties, mostly at undisclosed prices and in undisclosed amounts. Therefore, understanding the precise volume of scandium production and trade is difficult, and independent estimations become more relevant.” Nonetheless, the purported pricing has, not unexpectedly, got some investors excited about the potential for their shareholding in the owners of these three deposits.
Perhaps we should start with a few fundamental details about scandium.
Scandium (2); chemical symbol Sc, and atomic number 21, is reported to be the 50th most abundant element on earth and 35th most abundant in the crust. It is a silvery-white metal that is one of the rare earth elements (12), like yttrium it is not one of the Lanthanoid grouping.
It was first discovered in 1879 but the first extraction of metallic scandium was not achieved until 1937. It then took until the 1970’s until applications were developed for its use. These were primarily in the aerospace industries where aluminium-scandium alloys containing as little as 0.5% Sc are used to reduce the grain size in the alloy following welding. Other uses of aluminium-scandium alloys include sporting goods such as baseball bats, lacrosse sticks and bicycle frames (3). Scandium stabilised zirconia is used in solid oxide fuel cells (SOFC) and scandium oxide is used in high intensity discharge lamps where it produces a bright white light with a spectrum similar to sunlight.
It can be substituted for in some applications by the use of titanium, aluminium or carbon fibre (4).
In the same way that there is no transparent pricing data available, global production/consumption is similarly opaque, although Scandium Investing News (6) states that independent authors place the historical production at between 2t to 10 t per annum, with production in 2014 estimated at 15t.
The US Geological Survey (USGS) (4) report on scandium for 2014, indicates that in recent years “scandium was produced as by-product material in China (titanium and rare earths), Kazakhstan (uranium), Russia (apatite), and Ukraine (uranium). Foreign mine production data in 2014 were not available.”
Christopher Eccelstone (5) writing in the publication Investor Intel, states that “The primary production is 400 kg while the rest is from stockpiles of Russia generated during the Cold War. These stockpiles are bound to be exhausted within the foreseeable future, and alternative sources are therefore likely to be needed.” The term "foreseeable future", is a somewhat ambiguous statement which could mean many things to many people.
I have no doubt that Ecclestone is right in as much as these stockpiles are likely to be finite, but exactly what their magnitude might be is quite honestly anyone's guess, Russia being a less than transparent jurisdiction. Indeed most of the world's primary production comes from countries to which the above description applies to a greater or lesser extent.
The rumoured price point for the metal has attracted a number of explorers and resource owners to pay some attention to this metal in recent years.
In Australia there are three large scandium deposits.
In New South Wales, Scandium International Mining Corp (TSX:SCY) (7) owns the Nyngan scandium deposit. Their Preliminary Economic Assessment (PEA) (8) suggests that it will produce about 35t per annum of scandium oxide, equivalent to approximately 23t of scandium metal.
Clean TeQ Holdings (ASX:CLQ) (9) owns the Syerston scandium project, also in New South Wales, which a scoping study has indicated may produce 42.5t of scandium oxide per annum, equivalent to about 28t of scandium metal.
In far North Queensland, Metallica Minerals (ASX:MLM) (10) SCONI (Scandium-Cobalt-Nickel) project is forecast to produce 50t per annum of scandium oxide, equivalent to around 33t of scandium metal.
So between these three Australian projects whose owners have their sights set on production, we have a total of 84t of contained scandium metal or approaching six times the 2014 production of scandium. Any one of them going into production, at their currently proposed scale, would more than double the 2014 production of the metal.
The USGS (4) notes that Japan is looking at recovery of scandium from titanium dioxide residues. In the Philippines a 10 kg per month plant is recovering scandium oxide following the leaching of nickel laterite. And in Russia an aluminium producer is looking at recovering scandium concentrate from the red mud residue from alumina production. The plant is apparently capable of producing 2.5t per annum of concentrate. In Lermantov, Kurgan region a pilot plant is looking at recovering scandium from uranium processing.
In addition to the Australian deposits and the recovery of scandium from residues, there are at least two other known high-grade scandium deposits, one in Norway and one in Madagascar. Although from my brief searches, details of these deposits are difficult to find, other than that they contain thortveitite (2), which can contain up to 45% scandium as oxide. Although this statement is somewhat misleading in that it refers to the scandium content of the mineral and not the abundance of the mineral, and therefore the grade of scandium in the resource.
Until Christopher Ecclestone wrote a follow-up article in April this year (11), there had been no mention of the impact that increased supply might have on pricing. Indeed prior to this article most reports spoke about the lack of secure, stable supply being a constraint on increased use. I did note that a number of the sources used exactly the same wording, which would point to a single source and a bit of plagiarising!
Ecclestone's latest article specifically talks about Scandium International Mining Corp’s, Nyngan scandium deposit and in his final paragraph acknowledges that if Nyngan goes into production, then it will drive down the price of the metal. He then argues that this will make it more accessible to potential user’s thereby expanding demand.
I couldn't agree more. Pricing is the key factor that has been missing from the debate about demand up until now.
Logic would suggest that if price were not the determining issue, then were there sufficient demand, supply would have expanded to meet that demand, indeed would probably have over expanded. More of the Russian stockpile would have been delivered into the market, the known deposits would have moved towards production and the various secondary processing opportunities would have been progressed or expanded. So what has stopped this from happening? It can only be that the current price of scandium is too high for it to be economic to use in all but a few specialist applications. In particular, those for which there can be no substitute for the properties of scandium.
With all these companies lining up to go into production, I believe that they and their shareholders will be in for a serious dose of "price discovery", in which fundamental economics will take hold and the price will settle where users can afford to incorporate scandium in their products and some producers can afford to produce scandium and still make a profit.
As with any mining venture there will be high-cost producers and low-cost producers and the market will determine who stays in business and who falls by the wayside. And whilst profits will be made by some, I believe that it is a fair bet that it will not be as lucrative a market as many currently predict.
If you are an investor inclined to take the odd punt, then by all means have a “flutter” on a scandium play, maybe you'll pick the winner. But don't for one minute believe that it is going to see you retire in the lap of luxury!
So to return to the question I posed at the beginning of this piece. Do Robert Milbourne's comments regarding the predictability of demand hold true for a commodity such as scandium?
My response would be a qualified, yes they do. There are undoubtedly applications of the metal where it is either not being used to its fullest extent or are not being utilised at all. That would hint at a potentially higher demand. We know that substitution using titanium, aluminium or carbon fibre is possible for some applications, therefore price point must be a key consideration for these uses. Higher production; of itself, will not lead to greater utilisation of this metal. Only a lower price for the commodity will see it used in preference to the substitutes. The question for would-be producers is what is the price point at which these “swing” applications will start buying scandium instead of the alternatives and does this leave the producer’s sufficient margin above the cost of production to warrant the capital expenditure required to establish these projects?
In my view, an objective review of the “swing” uses and the costs associated with the alternatives to scandium currently applied, would determine the price point at which scandium becomes the preferred alternative. This combined with growth projected on a historical basis for those applications where there can be little or no effective substitution, should give a reasonable prediction of demand.
History however, suggests that the supply side response will lead to oversupply and price collapse.