NioCorp: New Proposed Geotechnical Drilling Campaign Could Accelerate Investments

NioCorp Developments Ltd. (NASDAQ:NB) recently proposed a new geotechnical drilling campaign for the Elk Creek Project, which was valued at more than $2 billion a few months ago. With a market capitalization of less than $200 million, I am optimistic about the main project of NioCorp. In my view, if the company successfully explains to market participants the amount of dollars needed to produce niobium, scandium, and titanium products as well as the expertise accumulated by team members, cash in hand may increase. Under my conservative DCF model, the valuation of the project is definitely larger than the current market capitalization.

Business Model

NioCorp is a company in the mineral industry dedicated to the acquisition, search, and extraction of minerals. Furthermore, the company, through its subsidiary ECRC, is developing a project for superalloy materials, which will make it possible for the company to manufacture niobium, scandium, and titanium products in the future. This project, known as the Elk Creek Project, is located in southern Nebraska, and its development is currently the main objective of the company.

The only operating segment is the management of the Elk Creek project, unique for its ability to source rare minerals and resources in the United States. In addition, NioCorp has a subsidiary dedicated solely to the handling and management of Elk Creek shares. The company has a history of research and development of this resource area since 2009, through which it obtained some support and financing to develop the necessary infrastructure for the work and extraction of these resources.

The company reported a considerable amount of indicated, inferred, and probable mineral reserves of Nb, Ti, and Sc. I believe that investors would most likely pay a lot of attention as soon as the company successfully reports many more figures related to the total amount of proven reserves.

Niobium, scandium, and titanium open up the possibility of a wide range of value-added products. Niobium is used in the manufacture of superalloy materials frequently used in aeroparts and turbines. It is also used in metal alloys for use in automobile parts. Scandium, in its combination with aluminum, also results in alloying materials that are used in electronic components. Titanium, more common in its use and extraction, is used in a variety of products ranging from material manufacturing to paper industry products.

It is also worth noting that the company has already contracted 75% of the planned ferroniobium for the next 10 years and a considerable amount of Scandium production. It means that as soon as production starts, NioCorp would have buyers for its mineral products.

The investors inside the mining industry would also most likely recognize some of the players working with NioCorp on the project. If those companies accepted to have a relationship with NioCorp, it will most likely help management get in touch with market participants in the mining industry.

Management Appears Well Connected With Other Nb Producers

I believe that sufficient communication about the key members leading the company will most likely help the company receive financing. In particular, I would highlight the role of the CEO and President of NioCorp, who worked as director for Chevron (CVX) mining, and was also a director of CBMM, the world's leading supplier of niobium products.

In my view, as soon as more investors have a look at the expertise accumulated by management in the mining industry, the equity investments would most likely accelerate.

Balance Sheet: Cash In Hand Increased, But The Company Financed Its Operations With Convertible Debt And Warrants

As of March 31, 2023, the company reported $7 million in cash, 35% more than that in June 2022. Mineral interests stand at $16 million with total assets worth $24 million. The company reports more current assets than current liabilities, however, investors may need to pay attention to the long-term liabilities. NioCorp appears to finance its operations with long-term debt.

With accounts payable worth $3 million and a related party loan of $1.2 million, total current liabilities stand at $4.6 million. Besides, with convertible debt of $4.6 million and warrant liabilities of $5.3 million, total liabilities are equal to $34 million.

The asset/liability ratio is lower than 1x, which is not ideal. I also do not appreciate that NioCorp received convertible debt and warrants to finance its operations. In my opinion, the balance sheet would look more appealing if management reported more equity investors and less debt holders.

Feasibility Study And My Financial Model

The company offered to investors a feasibility study, which I studied carefully. Some of the relevant parameters about the Elk Creek asset include ore mined close to 36655 kt with an ore mining rate of close to 2764 t/d. The company also expects to report processing rate of close to 1009 kt/y with an average recovery of 82.4% of Nb2O5 and 93.1% of sc as well as an average recovery of TiO2 close to 40.3%. Besides, the realized market prices would be close to 46.55 $/kg for Niobium, $0.99 $/kg for the scandium, and 3674 $/kg for Sc2O3. With these figures, 38 years of mine life, upfront capex close to $1141 million, average EBITDA margin close to 68%, and a discount of 8%, the implied net present value would be close to $2.35 billion.

Considering the current market capitalization of NioCorp, I believe that market participants are not that optimistic about the assets and the future development of the mines. The market capitalization stands at less than $199 million, which is far from the NPV of $2.35 billion.

My DCF model included a bit more conservative numbers including production of approximately 4.9 million kg of Nb per year from 2027 to 2056, 0.110 million kg of Sc, and 13 million kg of TiO2 per year. Note that I expect that production would lower around the year 2056, and the mine life assumed is close to 30 years. I believe that my figures are quite conservative. With a fixed price of 45 $/Kg of Nb, $1/kg of TiO2, and $3500/kg of Sc2O3, I obtained total sales of close to $619 million per year. If we also assume a net margin of 10%-39% and a discount of 8%, the NPV would be close to $622 million. Note that I included payments of close to $800 million, $200 million, and $141 million from 2024 to 2026 to take into account the upfront capital expenditures.

If we also include a WACC of 8%, cash of $7.15 million, related party loan close to $1.29 million, convertible debt of $12.26 million, and warrant liabilities of about $5.30 million, the implied equity valuation would be $610.99 million. Finally, the implied price would be close to $20.105 per share.

I believe that the financial model depends quite a bit on the discount we use because there are large capital expenditure payments in the beginning. If we use a WACC of 10.5%, and maintain the same assumptions around future production, mineral prices, mine life, and upfront capital expenditures, the implied market capitalization would be close to $198 million. The implied price would be $6.52 per share.

New Proposed Geotechnical Drilling Campaign And Agreement With Stellantis N.V.

I am optimistic about the future of NioCorp not only because of the total amount of indicated and inferred reserves, but also because of the total amount of communication efforts and agreements with other partners. Recently, management noted about the new Rare Earth Offtake Term Sheet signed with Stellantis N.V. Besides, in June, management also noted proposed site preparation, grading, heavy construction, and a geotechnical drilling campaign. In my view, these communications will most likely bring new investors, and may lower the cost of equity.

Stellantis N.V. and NioCorp Developments Ltd. today announced the signing of a Rare Earth Offtake Term Sheet. The objective is to enter into a definitive rare earth supply agreement to support Stellantis' commitment to build resilient supply chains and reach carbon net zero by 2038 and to help accelerate NioCorp's path to commercial production of magnetic rare earth oxides in the U.S. Source: Stellantis and NioCorp Sign Rare Earth Offtake Term Sheet in Support of Stellantis' Commitment to Reaching Carbon Net Zero by 2038

NioCorp Developments Ltd. today announced the successful completion of a geotechnical drilling campaign at the Elk Creek Critical Minerals Project in southeast Nebraska, which was done in advance of the proposed site preparation, grading, heavy construction, and eventual foundation pours for the Elk Creek Project. Source: Stellantis and NioCorp Sign Rare Earth Offtake Term Sheet in Support of Stellantis' Commitment to Reaching Carbon Net Zero by 2038

Competitors

Competition in the mineral resources market is aggressive, and even more so when it comes to the search for and acquisition of projects with commercial potential. The competition is set on participation in promising projects, obtaining licenses for commercial activity on the extraction wells, and hiring of specialized personnel to carry out the work.

In my view, due to the company's lack of active experience and the lack of records to prepare forecasts, it is possible that the payments to personnel will be higher than those of more established companies.

Competition also occurs over obtaining investors and financiers against companies that often have greater prestige, recognition, access to resources, and productive capacity than NioCorp. It is interesting to add that the conditions to enter and participate in these markets are very high, considering the high operating costs and the large costs for infrastructure development as well as the long series of legal procedures to obtain licenses.

Risks

The amounts of funds needed to get the mineral resources activity off the ground are still considerable, and there are no sure indications that NioCorp has secured the allocation of investments or resources for financing. These data are accompanied by a recent history of losses, but without assurances that the surplus will be restored in the short term. Regarding this series of uncertainties, it must be added that the resources enabled in Elk Creek are not known, and even the production limit that the company is faced with has no forecast.

In addition, competition in this sector is high, and the company still does not have any market share, and its margin to influence the sector is almost nil. Specifically, there are risks regarding the handling and management of water in the extraction area, which adds to the general uncertainty in relation to forecasts. In other words, there is still no assurance that NioCorp will be able to obtain the series of legal authorizations to take the project to its commercial stage.

It is clear that investing in this company is extremely risky as all the information is currently speculative, and there are still no material developments, not even primary ones.

Besides, I believe that lower production than initially expected and failed assessment of the proven reserves would most likely lead to lower net sales growth and net income growth. As a result, I think that some investors may decide to dump their stakes, which could lower the demand for the stock, and lower the stock price.

In addition, changes in the international price of Nb or other minerals would lower the implied valuation of the mines, and may lower the implied fair stock price. I would also be concerned about an increase in the oil price, changes in the price of mining tools, inflation, and even salary increases. In the worst case scenario, the IRR of the mines would lower, or production may not be profitable.

Investors may also be concerned about the recent volatility in the stock price. Further volatility could lead to higher WACC, which many stock analysts use to assess the fair valuation of the company. Higher WACC would lead to lower fair price, and would usually mean lower stock price targets from other equity researchers.

Conclusion

With an impressive feasibility study with significant EBITDA margin and net income margin, the net present value of the main mining project stands at more than $2 billion, which is far from the current valuation of NioCorp. I believe that market participants are expecting to see more cash in hand in the balance sheet, sufficient to pay the initial capital expenditures necessary to commence mining production. The new proposed geotechnical drilling campaign may help bring new investors, however, there is still a lot of work to be done. Under my own DCF model, I obtained an extremely conservative valuation of close to $500-$600 million with a discount of 8%, which is still above the current market valuation. In my view, even considering the risks from failed assessment of proven reserves, higher production costs than expected, or inflation, the company is a good read, and I would follow it carefully. As more investors offer financing, and the balance sheet grows, I think that the stock price could increase.