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ORBITE: A STRATEGIC SCANDIUM PRODUCER Prepared by Marcel Côté, Partner, SECOR Guillaume Caudron, Senior Manager, SECOR Joannie Tanguay, Consultant, SECOR September 2012 Version 1 MONTREAL :: NEW YORK :: PARIS :: QUEBEC :: TORONTO :: VANCOUVER TABLE OF CONTENTS DISCLAIMER AND GENERAL INTRODUCTION .................................................................................... I Disclaimer .................................................................................................................................................. i General Introduction ............................................................................................................................. ii The Study .............................................................................................................................................. ii Methodological Framework ............................................................................................................. ii Document Structure ........................................................................................................................... ii 1. EXECUTIVE SUMMARY ............................................................................................................... 3 2. SCANDIUM: A RARE EARTH ELEMENT ......................................................................................... 4 3. SUPPLY CURRENTLY CONSTRAINS MARKET GROWTH ..................................................................... 7 4. ORBITE ALUMINAE IS POSITIONED TO BECOME A LEADING SCANDIUM PRODUCER ........................ 9 6. CONCLUSION ........................................................................................................................11 ABOUT…...................................................................................................................................12 About Orbite......................................................................................................................................... 12 ADDITIONAL INFORMATION ......................................................................................................... 13 Version 1 DISCLAIMER AND GENERAL INTRODUCTION DISCLAIMER Some statements contained in this document are forward-looking. These forward-looking statements relate to Orbite’s future financial conditions, intentions, expectations, beliefs and operational or business results. These statements may be current expectations and estimates relating to markets in which Orbite operates and assumptions regarding these markets. In some instances, these statements require management to make assumptions, and there is a significant risk that these assumptions may not be correct. The words “may,” “would,” “could,” “will,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “expect” and other similar expressions, as they relate to Orbite or its market, often identify forward-looking statements. Such statements reflect SECOR’s current beliefs and are based on information currently available. These statements are subject to important risks, uncertainties that are difficult to predict, market versatility, and assumptions that may prove inaccurate. The results or events predicted in forward-looking statements may differ substantially from actual results or events. SECOR and Orbite disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. No reliance may be placed for any purpose whatsoever on the information and opinions contained in this document or on their accuracy or completeness. No representation, warranty or undertaking, expressed or implied, is given as to the accuracy or completeness of the information and opinions contained in this document by SECOR or Orbite, their respective employees or its affiliates, and no liability is accepted by such persons for the accuracy or completeness of any such information and opinions. Nothing contained herein can be relied upon as a promise or representation as to past or future performance. Orbite’s Revised Preliminary Economic Assessment published on May 31, 2012 (PEA), is preliminary in nature and it includes Inferred Mineral Resources of aluminous clay as they relate to alumina, metals oxides and earth rare elements that are considered too speculative geologically to have the economic considerations applied to them that would enable them to be categorized as Mineral Reserves. There is no certainty that the conclusions reached in the PEA will be realized. Mineral Resources that are not Mineral Reserves have not demonstrated economic viability. The information of a scientific or technical nature relating to the Orbite processes and mineral resources discussed herein has been reviewed and approved by Denis Primeau, Eng., a “qualified person” pursuant to National Instrument 43-101 – Standards of Disclosure of Mineral Projects (NI 43-101). Mr. Primeau is the Chief Engineer of Orbite, and as such, is not independent pursuant to NI 43-101. Version 1 i Disclaimer and General Introduction… GENERAL INTRODUCTION THE STUDY This study is an analysis of the global market for scandium and the opportunity it presents for Orbite Aluminae. Orbite will produce scandium as a by-product of its alumina production, which uses a new proprietary process to extract alumina from aluminous clay. “Orbite: a strategic scandium producer,” is part of a series of five white papers. Topics addressed in the additional four reports include: The high-purity alumina market and Orbite’s competitive advantages Orbite’s red mud remediation and mineral recovery process Orbite: a strategic rare earth elements producer Orbite: a strategic gallium producer All five reports present a strategic view of the various markets and products Orbite is targeting and producing outside of smelter-grade alumina (SGA), which has been fully covered by the PEA. 1 METHODOLOGICAL FRAMEWORK Using existing studies, public data, reports from experts, and information and data provided by Orbite, this whitepaper presents a point of view on Orbite’s scandium market potential based on collected data and SECOR’s analyses. This study presents a strategic rather than technical point of view. DOCUMENT STRUCTURE The study consists of three sections: A short introduction to scandium, which is a non-lanthanide rare earth element, and its main applications. The current scandium market, which has strong potential due to constraints such as limited supply sources and high prices. An introduction to Orbite Aluminae and an assessment of its potential to become a key supplier of scandium. 1 Orbite NI 43-101 Revised Technical Report, prepared by Roche and Genivar (May 30, 2012) Version 1 ii 1. EXECUTIVE SUMMARY Scandium is a strategic rare earth element (REE) known for its high strength, high resistance to corrosion, and light weight. These aspects make the material valuable for a broad array of applications in the high-tech industry as well as other sectors. Scandium is one of the 17 rare earth elements, a set of increasingly strategic elements used in advanced industries: Scandium is widely present in the earth but it occurs in very low concentrations; consequently, mining is complex and often prohibitively expensive. Scandium, typically sold as oxide, is mainly used to strengthen aluminum alloys. Aluminum-scandium alloys’ light weight, high resistance, and high performance are important for use in the aerospace and naval industries, and increasingly in the automobile industry. Scandium is also a highly efficient electrolyte in solid fuel cells (scandium-stabilized zirconia) and has good potential for lighting applications (scandium iodide). Usage and overall consumption of scandium is low due to its limited supply and high price; less than 10 tonnes per year are produced globally. Most of the scandium supply currently comes from the former Soviet Union’s weapon stockpiles, which are thought to represent a supply of approximately 400 tonnes. Current annual production capacity from this source is estimated at 1 to 2 tonnes per year, although a smaller amount is probably actually produced. Currently the main producing country is China with its Bayan Obo mine, a unique rare earth mine located in Inner Mongolia. Other noteworthy past producing countries include Russia, Ukraine, Kazakhstan, Norway, and Madagascar. Orbite has developed a proprietary breakthrough clean technology to extract alumina and other metals, including scandium, from aluminous clay. As a result, Orbite has the opportunity to become an important low-cost producer of scandium and significantly affect the market. While Orbite’s main business is alumina production, the company has demonstrated that its process can recover various valuable elements at the same time including hematite, magnesium, gallium, commercial-grade silica, and at least 11 rare earth elements including scandium. Orbite’s technology for recovering rare earth elements has also been demonstrated to work on lowgrade bauxite, and on third-party feedstock like red mud and fly ash from coal combustion. Based on the project presented in Orbite’s Preliminary Economic Assessment (PEA) of May 2012, with 2.5 million metric tonnes per year of aluminous clay mining and a processing operation in the Gaspé region of Quebec, Orbite could be able to produce up to 60 tonnes of scandium every year. This significant increase in the global production has the potential to drive down prices, making scandium much more affordable than it is currently and greatly expanding its potential market. With scandium as a by-product of its alumina production, Orbite should be resistant to market price fluctuations, allowing it to effectively enter into long-term contracts with major users. Version 1 3 2. SCANDIUM: A RARE EARTH ELEMENT The term “rare earth elements” describes the set of 17 elements identified as such in the periodic table. Fifteen belong to the lanthanide series, while two are from the transition metals series. Lanthanides are also divided into light and heavy elements, on the basis of their atomic number. The two non-lanthanide elements, scandium and yttrium, are included as rare earth elements because of their similar chemical and physical properties and the fact that they commonly occur together. Despite their name, rare earth elements (REEs) are fairly abundant. For example, scandium is the 23rd most common element in the earth’s crust. However, REEs naturally occur in low concentrations, which makes them difficult to profitably mine and supply to the market. Rare earth elements are commonly sought after for their magnetic, luminescent, and strength properties. Scandium, named after Scandinavia where it was discovered, is valued for its high strength, high resistance to corrosion, and light weight. Scandium is a byproduct of the extraction of other elements and is usually sold as an oxide. RARE EARTH ELEMENTS LIGHT LANTHANIDES HEAVY LANTHANIDES NON-LANTHANIDES Lanthanum (La) Gadolinium (Gd) Scandium (Sc) Cerium (Ce) Terbium (Tb) Yttrium (Y) Praseodymium (Pr) Dysprosium (Dy) Neodymium (Nd) Holmium (Ho) Promethium (Pm) Erbium (Er) Samarium (Sm) Thulium (Tm) Europium (Eu) Ytterbium (Yb) Lutetium (Lu) Source: Congressional Research Service, DOI, US Geological Survey, Circular 930-N Because scandium is the most potent grain-refining agent known for aluminum, it is primarily used in aluminum-scandium alloys. Added to aluminium, scandium improves durability, weldability, corrosion resistance, and plasticity. Scandium is stronger than similar elements such as titanium, boron, or zirconium. It is also lighter and offers more corrosion resistance than other aluminum alloys. Additionally, because it reduces susceptibility to heat-cracking, it is particularly valued in the aerospace sector. Aluminium-scandium is also a good substitute for the aluminium-lithium and aluminium-titanium alloys used by the aerospace industry in terms of both price and performance. Version 1 4 2. Scandium: A Rare Earth Element… SCANDIUM YIELD STRENGTH FOR DIFFERENT ALUMINUM ALLOYS In ksi (kilopound [1,000 pounds] per square inch) 100 Without scandium 90 With scandium 80 70 60 50 40 30 20 10 0 Al -1% Mg Al -6% Mg Al -Zn Mg Al -Zn Mg -Cu Ashurst alloys Source: Scandium Information Center Highly durable “superalloys” are usually made of aluminum and up to 2 percent scandium. They exhibit the highest strength-to-weight ratio compared to other similar alloys and have been relied on for use in Russian MiG aircraft and in the Mir space station. Using aluminium-scandium alloys for its aircraft gave Airbus significant weight- and operational cost savings 2, and the US Navy is planning to use superalloys in its newer vessels. The automotive industry is increasingly considering them for engines and car bodies, and aluminumscandium alloys are also used in high-performance sports equipment, such as bicycle frames and metal baseball bats. Despite the multitude of potential applications for aluminum-scandium superalloy, its actual use is limited by scandium’s lack of availability, high price, and a limited number of suppliers. Given the significant advantages that these alloys can offer, demand could be expected to increase significantly with more suppliers and lower prices. The second major use of scandium is in solid oxide fuel cells (SOFCs) as a zirconia dopant. Scandiumstabilized zirconia (ScSZ) cathodes provide the highest level of ionic conductivity, and SOFCs generate electricity by oxidizing fuels. The main benefits of SOFCs are a longer lifespan, higher efficiency of the cells, and lower operating temperature. Primary SOFC end uses relate to power and heat generation in buildings, and in auxiliary power units for electrical systems in vehicles. Compared to combustion as a source of energy, SOFCs provide clean and efficient energy. SOFCs produce lower emissions of carbon dioxide, nitrogen oxide, and sulfur oxide, while lower operating temperatures also extend the life of fuel cells, making it possible to generate power and heat at a lower cost in the long term. According to BCC Research, the global solid fuel cells market was around US$380 million in 2011, and is expected to reach US$530 million by 2016, showing a compound annual growth rate of about 7%. 2 Emerging Trends in Critical Metals: Richard Karn, published by the International Business Times (April 4, 2012) Version 1 5 2. Scandium: A Rare Earth Element… GLOBAL SOFC MARKET FOR VARIOUS TECHNOLOGIES Worldwide, in US $ millions 250 Central processing units Generators, remote and auxiliary processing units Other 200 150 100 50 0 2006 2010 2011 2016F Source: BCC Research A smaller but newer application for scandium is lighting. Scandium iodide (ScI3) can be added to mercury vapour lamps to simulate natural daylight, and scandium iodide lighting is widely used in televisions as well as screens for movies and sports stadiums. Version 1 6 3. SUPPLY CURRENTLY CONSTRAINS MARKET GROWTH NOTE: Official data on scandium production are difficult to find and verify. Therefore, this section relies on estimates and there is some uncertainty to projections due to a lack of available market information. The most significant source of supply of scandium resides in stockpiles of the former Soviet Union, which are estimated to total 400 million tonnes, more than 40 times the highest estimates for annual consumption. The largest source of new scandium is the Bayan Obo rare earths mine in the interior of Mongolia. Other known production sources are the apatite mines on Russia’s Kola Peninsula and the Zhovti mine in Ukraine, although it is not known whether the latter is still in production. Scandium production also occurs as a by-product of processing various ores, such as iron (China). Additionally, scandium can be found in uranium deposits (Russia, Kazakhstan) and pegmatite (Norway, Madagascar). There are a few known deposits around the world, but their economic exploitation is highly problematic. A well-known Australian project, promoted by EMC Metals, still has not been able to be financed despite several years of promotion. Companies mining rare earth elements rarely disclose their scandium production, making it difficult to estimate the global scandium production with any accuracy. The estimates used by financial analysts range between two tonnes and 10 tonnes per year 3. It is also estimated that less than half a tonne is produced through actual mining operations each year, and what is mostly comes from Bayan Oyo. The remaining supply comes from former Soviet Union stockpiles. WORLDWIDE SCANDIUM SUPPLY SOURCES Russia Norway Ukraine China Kazakhstan Madagascar Source: SECOR analysis 3 Orbite Aluminae Initiating Coverage, prepared by Jacob Securities Equity Research (November 23, 2011) Version 1 7 3. Supply currently constrains Market Growth… The potential demand for scandium may greatly exceed current production (by a factor of 10 according to Jacob Securities) if prices were lower. Although sales contracts, including prices and quantities, often remain confidential, the current price range for scandium is believed to be between US$1,000/kg and US$ 4,500/kg. While it is difficult to give a precise estimate, the consensus among the few analysts that follow this area seems to be in the range of $1,000/kg to $1,500/kg. According to the US Geological Survey, abundant concentrated reserves of scandium remain undiscovered and unexploited due to logistical reasons, difficulty accessing promising areas, and the generally low concentrations in which scandium occurs. Given scandium’s high potential in various applications and its high prices, many mining companies have recently started exploration, aiming to uncover scandium resources in significant concentrations. Version 1 8 4. ORBITE ALUMINAE: WELL POSITIONED TO BECOME A LEADING SCANDIUM PRODUCER Orbite’s main business is based on the production of smelter grade alumina (SGA) and high-purity alumina (HPA). The Company has developed a proprietary breakthrough process to extract alumina from a wide range of aluminous clays, as well as from bauxite. Unique to Orbite’s process is that, in contrast with the Bayer process which generates a red mud pollutant, it does not produce any toxic residues. Another key feature is its recovery, as by-products, of all added-value elements found in the ore such as hematite, magnesium, gallium, commercial-grade silica, and at least 11 rare earth elements including scandium. Orbite has also developed extraction technology and a separation process for rare earth oxides. The traditional method of producing alumina is the Bayer process, developed in the late 19th century in Germany. This method dissolves bauxite in caustic soda at high temperature and pressure, producing a solution of sodium aluminate, which is subsequently transformed into aluminum oxide, commonly known as alumina. The result is smelter-grade alumina (SGA), which is then used as feedstock by aluminum plants. High-purity alumina can also be obtained by refining SGA through additional crystallisation cycles. The highly toxic residue from the caustic soda treatment in the Bayer process, called red mud, is produced in large quantity. In fact, two tonnes of red mud are generated for each tonne of SGA produced. A reddish substance, reflecting its high content of ferric oxide (hematite), red mud also contains silicon, titanium, and other elements. Extremely hazardous to the environment, it is very difficult to remove, and its disposal has become one of the major environmental issues of the aluminum industry. The process Orbite has developed uses hydrochloric acid instead of caustic soda to extract the alumina from clay as well as ores such as bauxite. The hydrochloric acid is then regenerated in the second phase of the process via closed loop. All other elements in the clay feedstock are recovered, leaving non-toxic silica as the only remaining low value material. The first step in the patented Orbite process consists of crushing and grinding the clay into small particles to maximize surface area for acid leaching. During the next phase, digestion, the particles are acid-leached at high temperature using hydrochloric acid. All the metals except titanium dissolve as chloride solutions. Silica and titanium remain insoluble and are removed by filtering. The leachate is then processed by first precipitating the aluminum trichloride and removing it as aluminum chloride hexahydrate. The aluminum chloride hexahydrate then goes through calcination and is transformed into alumina. The ferric chloride, which is still in the leachate, is hydrolyzed using a low-temperature process and produces a pure ferric oxide precipitate while regenerating hydrochloric acid. The ferric oxide (hematite) is very pure and can be sold commercially as a specialty by-product. Remaining in the leachate are metallic solutions including magnesium, gallium, alkaline, and rare earths, which are then recovered. No acidic residue remains at the end of the Orbite process, thus avoiding the red mud issue that plagues the Bayer process, and the recovered ferric oxide and metals are sold as by-products. Development work done in Orbite’s research center has demonstrated that the process can be used with a wide range of feedstock, Version 1 9 4. Orbite Aluminae is Positioned to Become a Leading Scandium Producer… including aluminous clay, bauxite ore, and even with pre-existing red mud, which still contains 20 percent in volume of alumina compounds. ORBITE’S PROPRIETARY PROCESS Source: Jacob Securities Equity Research, company documents, SMS In May 2012, Orbite filed a Revised Preliminary Economic Assessment (PEA) for its 2.5 million tonnes per year SGA plant in Grande-Vallée, Quebec. The facility is expected to process aluminous clays from a nearby mine, and has a projected production of 540,000 tonnes of smelter-grade alumina per year. As mentioned above, by-products will range from ferric oxide to rare earth elements. Additionally, scandium production is expected to amount to about 60 tonnes per year based on its presence in the clay deposit and the expected recovery rate. Orbite is also currently building a high-purity alumina plant in Cap Chat, about 120 km west of Grande Vallée, which is slated to begin production in Q1 2013. In the first year, production of 1,000 tonnes of HPA is expected from the processing of about 5,000 tonnes of feedstock. The HPA plant will also produce byproducts including an expected 100 kg of scandium if planned levels of HPA production are reached. Bottom line: Orbite’s breakthrough process has the potential to allow it to become a significant leader within the global scandium market by providing low-cost quantities of scandium that drastically exceed the entire annual production currently available. Version 1 10 6. CONCLUSION Scandium is one of 17 rare earth elements whose strength, corrosion resistance, and light weight are highly valued. Scandium is a strategic component in various applications, particularly in aluminum-scandium alloys, solid oxide fuel cells, and lighting solutions. Scandium is relatively abundant, being the 23rd most abundant element in the earth’s crust, however, as with most other rare earth elements, scandium is not concentrated enough to make it profitable to mine it individually. Current scandium usage, which ranges between two and ten tonnes annually, is well below the market potential, in large part due to limited supply and high prices. Orbite’s main business, which is based on production of smelter-grade alumina (SGA), has developed a proprietary breakthrough process that recovers elements such as hematite, magnesium, gallium, commercialgrade silica, and at least 11 rare earth elements including scandium, as high-value by-products from various types of ores and even third-party feedstock. At the planned production rate, Orbite’s SGA facility could produce 60 tonnes of scandium annually, which is a large quantity in light of the current market. Just as importantly, because scandium is produced as a by-product, Orbite’s costs associated with its production of the material will be lower than the suppliers currently in the market. Consequently, Orbite can provide a reliable scandium supply over the long term at competitive prices, and contribute to significant expansion of the market. Version 1 11 ABOUT… ABOUT ORBITE Orbite Aluminae Inc. is a high-tech Canadian company whose unique technologies could have a significant impact on the aluminum industry. These technologies allow for the environmentally sustainable extraction of smelter grade alumina, high-purity alumina and high-value elements—including rare earths—from locally sourced aluminous clay. Orbite has exclusive mining rights on its 6,441-hectare Grande-Vallée property, the site of an aluminous clay deposit 32 km northeast of Murdochville, and a 28,000 sq. ft. high-purity alumina production facility in CapChat, both in the Gaspé region. The Revised Preliminary Economic Assessment on Orbite Aluminae – Metallurgical Grade Alumina Project dated May 30, 2012 and effective as of November 24, 2011 and the amended and restated 2010 Field Work Grande-Vallée Property NI 43-101 Technical Report dated August 21, 2011, which are available on Sedar (www.sedar.com), identified an indicated resource of 1 billion tonnes of aluminous clay in part of the deposit, thus representing a half-century of the total current Canadian alumina imported. The higher-quality smelter grade alumina—containing less iron and silicon impurities— produced using Orbite’s process has been independently utilized by internationally renowned facilities such as INRS and SINTEF to produce high-quality aluminum. The Company also owns the intellectual property rights to a unique Canada and US patented process for extracting alumina from aluminous ores and for which other international patents are also pending. Orbite plans to offer smelter grade alumina (SGA) and high-purity alumina (HPA) and license its technologies to well-qualified producers aiming to reduce their costs and environmental footprint. www.orbitealuminae.com SECOR is the largest independent strategy and organizational consulting firm in Canada. It has helped top management teams plan and implement their corporate strategies. SECOR relies on over 150 professionals and has offices in Montréal, New York, Paris, Quebec City, Toronto and Vancouver. For over 35 years SECOR has been helping businesses succeed. Its clients include leading national and global companies as well as medium-sized organizations, governments, departments and agencies. In this time, the firm has developed methodologies and insights based on its experience with the most innovative and successful corporations. As architects of strategy and transformation, we make strategy happen. We operate according to an alternative model for success in consulting based on customer intimacy. We offer personalized and collaborative support to senior executives who want to dramatically improve performance. www.secorgroup.com Version 1 12 ADDITIONAL INFORMATION China’s Rare Earth Elements Industry: What Can the West Learn?, prepared by Cindy Hurst – Institute for the Analysis of Global Security (March 2010) China’s Rare Earth Industry and Export Regime: Economic and Trade Implications for the United States, prepared by Wayne M. Morrison and Rachel Tang – Congressional Research Service (April 30, 2012) China’s Rare Earths Industry and its Role in the International Market, prepared by Lee Levkowitz and Nathan Beauchamp-Mustafaga – US-China Economic and Security Review Commission (November 3, 2010) Emerging Trends in Critical Metals: Richard Karn, published by the International Business Times (April 4, 2012) Rare and Minor Metals Company Review Exploration, Development & Production, prepared by Resource Capital Research (March 2011) Rare Earth Elements – Critical Resources for High Technology, prepared by the US Department of the Interior & US Geological Survey (2002) Rare Earth Elements – End Use and Recyclability, prepared by Thomas G. Goonan – US Department of the Interior & US Geological Survey (2011) Rare Earth Elements: The Global Supply Chain, prepared by Marc Humphries – Congressional Research Service (September 6, 2011) Scandium, prepared by Steven Munnoch, Avon Metals and Tim Worstal, The Low Hanging Fruit Company Scandium in aluminum alloys, prepared by J. Royset and N. Ryum – Department of Materials Technology of the Norwegian University of Science and Technology (February 2005) Scandium in Aluminium Alloys Overview: Physical Metallurgy, Properties and applications, prepared by Jostein Royset – Metallurgical Science and Technology (2007) Orbite Aluminae Initiating Coverage, prepared by Jacob Securities Equity Research (November 23, 2011) Orbite NI 43-101 Revised Technical Report, prepared by Roche and Genivar (May 30, 2012) Version 1 13