wed apr 23, 2014 spec value hunter comment: … value hunter comment: recommendation strategy for...

KAISER RESEARCH ONLINE : http://www.kaiserresearch.com : Excerpt

Wed Apr 23, 2014

Spec Value Hunter Comment: Recommendation Strategy for EMC Metals Corp Publisher: Kaiser Research Online

Author: Copyright 2014 John A. Kaiser

EMC Metals Corp (EMC-T: $0.03)

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Spec Value Hunter Comment - April 23, 2014: Recommendation Strategy for EMC Metals

Corp

EMC Metals Corp was recommended on January 3,2014 as a Good Relative Spec Value Buy at $0.03 onthe expectation that during 2014 it would secureunencumbered title to the Nyngan scandium projectin Australia and initiate a new feasibility study usingHPAL (high pressure acid leaching) technology withenvironmental licenses and a construction decision inplace by the end of 2015, and with scandiumproduction underway by 2017. A key assumptionbehind my recommendation was that by now themarket would have recognized the inherent value ofthe Nyngan project and bid the stock price to a higherlevel where funding the title vesting cost would beless dilutionary than if done at the recommendation price. As it now stands, EMC's balance sheetis neutral apart from a US $1.2 million debenture due June 24, 2014, and the final AUD $1.4 millionNyngan payment due June 30. Because the Nyngan asset is collateral for the debenture, andbecause this collateral evaporates if the final Nyngan payment is not made, EMC must raise aboutCAD $2.75 million by June 24 or lose the Nyngan asset and the $3 million plus it has invested inthis project since 2010. The low stock price, further burdened when Pinetree dumped over 5 millionshares on January 31 as part of its liquidation of several hundred million shares of "losers",apparently in response to a margin call, has become a catch -22 obstacle to EMC management'sefforts to eliminate the default risk and raise another $3.5 million needed to fund delivery of a newfeasibility study by Q3 of 2015. Raising this capital at a higher price that assigns a $10-$20 millionvaluation to the Nyngan project should not be that difficult, especially in view of my cash flowmodel for Nyngan which generates an after-tax NPV of $221 million and IRR of 30% for a 375 tpdoperation generating 52 tonnes of scandium oxide annually. EMC's catch-22 situation woulddisappear if the market better understood the value potential of Nyngan, the extraordinary natureof scandium, and the current mine development window of opportunity thanks to the solid oxide

fuel cell business of Bloom Energy that is on the threshold of going exponential. In thiscommentary I explain why I think scandium is special, why Bloom is the thin edge of the

wedge that will crack scandium's historical chicken-egg supply-demand problem, why the

Nyngan deposit is critical, and why EMC should be trading at a 5-10 times higher valuation,

provided it can raise $2.75 million at better prices during the next 60 days.

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The Nyngan after-tax NPV sensitivity chart above, which suggests that Nyngan is worth USD $221million at $2,000/kg Sc2O3, is a preview of a comparative cash flow analysis I have done onNyngan and which is attached to this report as an Appendix. This updated recommendationpresents EMC Metals Corp to KRO members as a hedge against a bear market afflicting theresource sector for another couple years because Nyngan and the broader scandium story are notlinked to global economic growth as a raw material demand driver nor the geopolitical and financialfactors that govern interest in precious metals. Nyngan and scandium are a simpler variation of the

rare earth story I helped launch in 2009. EMC is the most interesting and predictably profitableresource junior opportunity available in the universe of Canadian listed juniors covered by

Kaiser Research Online.


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During Q2 of 2009 while the resource sector was still in a funk about the direction of metal pricesother than for gold I came to the conclusion that concerns about security of supply and globalwarming would drive market interest in critical metals led by rare earths. I was very right about rareearth security of supply and very wrong about rising footprint consciousness. China's manipulationof rare earth supply created a rare earth price bubble that generated a media storm and turned mytop rare earth recommendations into big winners. But the economic fallout from the 2008 Crashand the political ascendancy of the Tea Party stifled footprint consciousness as consumers focusedon survival and resigned themselves to the consequences of global warming. The success of theshale oil-gas revolution in the United States, which for the first time in decades allowed Americansto dream seriously about energy self-sufficiency, sapped the momentum from renewable energytechnologies which more often than not relied on critical metals for key functionality. By Q2 of 2011the critical metals space had joined the downturn in the precious and base metals sectors thatbegan in 2011 when politicians around the world caved to the austerity siren call.

Five years after I alerted KRO members to the rare earth story I am contemplating the prospect of afourth bear market year in the resource sector after a failed attempt at a market turnaround in Q1of 2014. The global economy is weak as emerging markets grapple with the tapering of Americanquantitative easing, as China deals with the slow motion implosion of its own real estate basedcredit bubble, and as globalization assumptions crumble while China and Russia explore their"rights" to lost "Lebensraum". Against this backdrop of global economic weakening the UnitedStates appears to be crawling out of its economic hole in a "last man standing" mode, underminingthe arguments for higher gold prices that dominated the past five years. And, because the freemarket economy really does work, prices for major raw materials such as iron, potash and copperare weakening as the time-lagged mobilization of new mine supply in response to deficit drivenhigher real prices delivers a surplus of supply at a time when the market has put the super-cyclenarrative on hold.

Normally in times like this we resource sector addicted Spec Value Hunters flee the "ounce-


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or-pound-in-the-ground" feasibility demonstration juniors and retreat into the discovery explorationoriented juniors. But, thanks to regulatory "innovation" with regard to how markets and rulesoperate, coupled with the risk aversion created by the nagging sense that one is on the wrong sideof the rising inequality equation, the retail audience that supplies the capital which funds discoveryexploration has vanished. Such circumstances require one to find a story with the capacity to standalone, outside the box, immune to market vagaries and driven by big picture forces that commandan international audience. That story is an obscure metal called scandium, which I predict

within a decade will be nominated by Time Magazine as "Metal of the Year", an honor which

during the past 50 years I would have bestowed only on neodymium, the rare earth whose

super magnet property was discovered in 1982 and which underpins very much of what we

take for granted today.

I introduced scandium to KRO members on November 8, 2010 when I first recommended EMCMetals Corp as a buy at $0.10. Bill Lupien, a major shareholder of EMC until April 22, 2014 whenAmericas Bullion Royalty Corp (soon to be renamed Till Capital Ltd following a 100:1 rollback)acquired Lupien's Kudu Partners LP hedge fund, had brought scandium to my attention earlierthat year, around the time when Rick Rule famously dismissed the emerging interest in rare earthsas nothing more than "storium, fraudium, scamium and...unobtainium". I doubt Rick Rule reallyappreciated the pun, because if he knew anything about scandium, he would have avoidedmocking scandium unless he was among those burned by Emtech Technology Corp (laterrenamed Ashurst Technology Ltd) in the mid nineties, the first ever resource junior promotion ofscandium in which JJ Elkin and Eike Batista of TVX fame played an ill-fated jumpstarting role.

Emtech developed an ambitious relationship with Ukrainian state owned enterprises which gaveEmtech access to an advanced materials business and the world's only primary scandium mine atZhovti Vody in south central Ukraine. Zhovti Vody is in a region where about half the populationspeaks Russian and is included in the area eyed by Putin as "New Russia". Zhovti Vody is amining town that initially thrived on mining iron and later in the 1950's mining uranium. Althoughhuge tonnage of 38% magnetite taconite iron ore was available at surface, the Soviets went afterthe richer but deeper 51% iron ore. In the course of developing 20 km of underground workings toa depth of 1,200 metres the Soviets discovered 100 g/t plus scandium enriched zones that wereseparately mined as a supply of scandium which was turned into aluminum-scandium master alloythat the Soviet military used to construct its MiG fighter jets. At the time it was the only meaningfulglobal source of scandium supply, and the rest of the world simply did without scandium until theSoviet Union collapsed and the no longer needed master aluminum-scandium alloy stockpilescame onto the global market. How much of the stockpile remains is unclear, but, judging fromRussian efforts to recover scandium as a by-product of uranium ISL operations in Russia andKazahkstan, I suspect only looted material remains available in small amounts.

After the collapse of the Soviet Union in 1991 newly independent Ukraine took over the Zhovti Vodyiron-scandium mine and formed a joint venture with Emtech which was supposed to develop amarket for scandium. Kilborn reported a resource of 7.4 million tonnes of 105 g/t scandium whichwould be too low grade today to develop as a primary scandium mine. Emtech blew up in 1998after the Ukrainians chewed up the $30 million advanced by Emtech, a rogue trader for a DeutscheBank fund managed to accumulate over 50% of Emtech stock, and $5 million parked in a trustaccount vanished. The Ukrainians carried on mining iron ore for a while but eventually gave up andthe mine is now flooded. Emtech had the right idea about scandium but bad timing, the wrongpartners, and a scandium deposit that was not economic under post-Soviet conditions. An analogywould be the Kutessay rare earth deposit in Kyrgyzstan which the Soviets exploited for heavy rareearths, not to make money, but because they needed the material for their military applications. As

far as most end-users and observers are concerned, including Jack Lifton, who in a March 5,

2014 TMR article (Fuel Cell Vehicles and Critical Metals) grumbled that there is nowhere near


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enough scandium supply to make possible a new generation of solid oxide fuel cell enabled

cars that no longer rely on platinum group metals, aside from the now dead Zhovti Vody

deposit the world has no primary scandium deposits with a meaningful size.

What intrigued me about scandium was that this "transitionmetal", often pegged as a "rare earth", whose crustalabundance of 22 ppm is greater than that of lead at 14 ppmbut which is devilishly difficult for mother nature toconcentrate, is a "magic" metal, an enabler or extender that,when alloyed with an abundant metal such as aluminum oradded to zirconium as a doping agent, boosts functionality tosuch an extent that the result may have transformationalimplications for the future of human-kind. This is veryimportant, because I sense that America's lowered gaze withregard to the problem of carbon dioxide loading of theatmosphere through fossil fuel consumption is about tochange, whether or not a Republican administration ends upcontrolling America's destiny in a couple years.

The shift I detect is that the debate is no longer about whether or not fossil fuels contribute toglobal warming, but what can be done to mitigate the rate of global warming without forcing asacrifice of human welfare. The old debate involved the upper half of the economic spectrumharvesting moral righteousness by sacrificing discretionary consumption capacity, while urging thelower half to sacrifice non-discretionary consumption in order to collect something of which it wasnot suffering a deficit. The new debate discards the moral dimension in favor of the pragmatic

question: what can be done to reduce the carbon dioxide footprint in a way where

everybody ends up better off. And that shifts the debate into the arena of materials science, theonly arena where change is possible that is not a reshuffling of existing cost-benefit allocation. Thisis an arena where the Koch brothers and Al Gore can lay down their ideological disagreements, roll


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up their sleeves, and get stuff done that is a win-win for everybody.

Somebody recently asked me what field a young person should pursue as a career. Myunequivocal response was, forget the digital world which just keeps consciousness following thedot, and forget the biological world which merely facilitates endless dot following. Instead, embracethat horrifying complex of physics, chemistry, mathematics and computation that constitutesmaterial science, and give us the physical breakthroughs that change the way we exploit the worldwithout harming ourselves and the rest of it. Scandium, thanks to its latent potential as anefficiency agent and its lamentable supply history, is an elephant in this arena, particularly as analloying agent that makes aluminum stronger and thus lighter, a key strategy for achieving energysavings for anything that moves like aircraft and cars.

Replacing the brackets and skins of its aircraft with aluminum-scandium alloy material is a HolyGrail for Airbus (Reuters - Aluminum makers fight plastic planes with new alloys - June 20,

2013) which believes a 15%-20% weight reduction is possible. It has been calculated that if a majoraircraft maker would replace the brackets and body skins of the 400 short-haul commercial planesit sells annually with aluminum-scandium alloy, it would require 14 tonnes of scandium oxide at acost of $70,000 extra per airplane. That is a big deal in an age of rising jet fuel costs. When you

consider that Airbus in its Global Market Forecast projects 29,230 new passenger and freightaircraft over the next 20 years, that is an awful lot of potential scandium oxide demand.

Aluminum by itself is not very strong, but alloys with other metals have been created that are muchharder and stronger. The problem these alloys have is that welded joints are not as strong as thealloy itself. Aluminum-scandium alloy weld joints are as strong as the alloy itself. A mundaneapplication would be aluminum-scandium alloy bicycle frames, while light but strong LNGcontainers for the growing seaborne trade would be a more profound application.


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Scandium has a high melting point, which makes it desirable for components where weight andtemperature are factors. Cars currently use cast iron brake rotors because they are cheap and canhandle the high temperatures created by braking. Aluminum's melt point is too low, but analuminum-scandium brake rotor would work and would reduce the 40-50 kg weight of a typicalcar's rotors by more than 50%. That would only boost fuel efficiency by about 1 mpg, but as theEPA's 54 mpg 2025 deadline looms, carmakers, already embracing aluminum parts, will bescrabbling for every kilogram of weight reduction.

Scandium also has high conductivity which could be a boon for high tension wires where thepreferred material is an aluminum alloy. The drawback is that the relative weakness of thealuminum alloy limits the distance between support towers, which adds to the construction andmaintenance cost of grid transmission. Adding steel wires will strengthen the cable but reduceconductivity. Aluminum-scandium alloy strengthens the high tension wire and boosts overallconductivity, resulting in lower wheeling losses and wider tower spacing. Scandium also has goodanti-corrosion properties, which opens ship-building as a market for aluminum-scandium alloys. I

do not have space in this writeup to explore all the functionalities scandium enables - I shall

save that for later, and you will get plenty of opportunity to hear more, because scandium is

going to be the encore to the rare earth story I helped kick off in Q2 of 2009.

Assuming my big picture reasoning is plausible as to why scandium will be a standout story whileother metals likely languish in the doghouse for a few years, what is the nature of EMC's catch-22predicament? EMC's immediate problem is to raise $2.75 million to make the Nyngan default riskdisappear. The story, as I will shortly demonstrate, is big enough that such a financing should be apiece of cake. But the company's market capitalization of less than $5 million discourages potentialequity backers who are reluctant to end up owning more than 50% of the company and thusbecome responsible for EMC's future.


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To understand how EMC ended up in this situation we have to look back to 2010 when EMCoptioned 50% of the Nyngan project from Jervois Mining Ltd, which prior to a 100:1 rollback wastrading at a quarter penny with 4 trillion shares issued. The deal required EMC to fund all costsneeded to deliver a NI 43-101 compliant feasibility study and pay AUD $1.3 million by February2012 to earn a 50% stake in Nyngan. Given the financial and structural condition of Jervois it wasnot clear how the two parties would proceed with mine development and financing once EMCvested, especially if one company ended up significantly stronger than the other which at the timelooked like it would be EMC. Why Jervois management did not deal with this topic upfront becameapparent after EMC delivered the feasibility study and wired the required AUD $1.3 millionpayment.

Although Jervois management had been kept abreast of all work on the study and voiced neitherconcerns nor suggestions, when EMC submitted the feasibility study on February 24, 2012 Jervoisimmediately rejected it as inadequate and declared EMC as having earned nothing. EMCmanagement found it curious that legal correspondence about the rejection was dated prior toJervois receiving a copy of the feasibility study. My suspicion was that Jervois used EMC to do the


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mine planning work, flowsheet testing and offtake marketing - none of which it had the internalresources to execute - while intending all along to keep 100% and flip Nyngan to another party.The agreement required the dispute to go to binding arbitration whose no-lose outcome for Jervoiswould have been 100% Jervois or 50:50 with EMC. This dispute resolution clause was a recipe fordisaster that EMC's Nyngan deal writer, who left when George Putnam came on board, shouldhave negotiated out of the deal. It was a dismal time for EMC and its shareholders.

But when Jervois discovered that EMC had filed a lien against Nyngan prior to presenting thefeasibility study, the CEO flew into such a rage that he committed the strategic blunder of filing alawsuit against EMC in an Australian court on June 22, 2012. This was a blunder because it shiftedthe dispute into a court of law where EMC management's attention to the terms of the agreementbrought a high probability of vindication. EMC spent a year and lots of legal fees preparing for thetrial, during which Bloom Energy gave up on EMC/Jervois and did an offtake deal with Metallica.Meanwhile it gradually became apparent to Jervois through the discovery process that it would notonly lose the lawsuit, but the court might also award legal costs and possibly damages to EMC,which would put into EMC's hand a financial hammer capable of extracting the other 50% ofNyngan and bankrupting Jervois. On the day before the February 4, 2013 scheduled trial Jervoisproposed a settlement deal, which worked out to EMC acquiring 100% for AUD $2.5 million in twostages and a 1.7% royalty applied to the first ten years of production.

Unfortunately, the market no longer cared, choosing instead to focus on several long term debtsthat were coming due in 2013, a $3 million debenture for which the Springer tungsten project wascollateral, and a $3.5 million mortgage for a ranch EMC had purchased to secure water rights itnever needed for the Springer project. EMC could not find anybody during 2012 interested infunding redevelopment of the Springer Mine, and in 2013 after it had won 100% of Nyngan anddecided to sell Springer, all the potential purchasers took a look at EMC's weak marketcapitalization and $3 million debenture, soaked up all the information, and sat back waiting for thedebenture to default. If the current Nyngan situation gives you a sense of deja vu it is not becauseyou are delusional.

EMC was able to rid itself of the serious debt overhang that came due in 2013 by selling theSpringer tungsten project in September 2013 at the last minute to an indirectly related party for $5million (Americas Bullion), and returning the ranch real estate to the lender to extinguish amortgage. But these transactions did not show up on the balance sheet until the year endDecember 31, 2013 financials were filed on March 26, 2014. When the smoke cleared the balancesheet was neutral except for a US $1.2 million debenture held by a "combination of directors,insiders and independent shareholders" whose identities have not been disclosed. This debenturewas issued in June 2013 to raise the money for the first Nyngan payment, with the Nyngan assetas collateral, and is structured so that the creditors can take possession of the Nyngan agreementthe day after the June 24 maturity so that they are in position to make the final Nyngan payment onJune 30 and secure 100% title for themselves. Once again tire-kickers are eyeing an EMCdebenture, wondering how much the creditors would sell Nyngan for if they got stuck owning itoutright. Fortunately, unlike the Springer debenture, the Nyngan debenture is held by parties whoare "insiders" by virtue of owning EMC stock, and thus are far more interested in seeing EMC makethe AUD $1.4 million Jervois payment than owning Nyngan and a pile of near worthless EMCshares. The troubling question one has to ask is, what are the debenture holders doing to helpEMC solve its $2.75 million Nyngan title vesting problem? The answer as far as I can tell is thatthey are giving the CEO George Putnam free rein to explore every possible avenue to raise themoney from other sources. That is not the sort of support that generates market enthusiasm for astock.

Third parties exploring a corporate acquisition through a merger point at the low EMC valuationwith the declaration that the "market never lies", even though they have the benefit of information


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secured through a "non-disclosure agreement" and know better. Thanks to an NDA they get to seethe NI 43-101 compliant feasibility study prepared by SNC Lavalin that EMC delivered in February2012 as part of its 50% earn-in agreement with Jervois Mining Ltd. The feasibility study was neverpublished on SEDAR because Jervois rejected the study and declared EMC as having earned zerointerest in the Nyngan project. When the title dispute was resolved a year later through anagreement that allowed EMC to acquire 100% of Nyngan for AUD $2.5 million and a 1.7% ten yearroyalty, the study had become stale, not just due to changing costs, but also due to EMC'songoing internal work on HPAL as a superior alternative to the acid bake process used in thefeasibility study presented to Jervois.

Regulatory restrictions on what a junior can publicly disclose without a published supporting43-101 technical report limit management to making disclosures under an NDA which prohibits theother party from doing anything without formal approval from EMC. It has the side effect ofeducating another party about the potential of a project without creating any positive impact on themarket, an outcome that serves the interest of the NDA restricted party. What the public can see isthat Nyngan has a measured and indicated 43-101 resource of 12,012,000 tonnes at 262 g/tscandium which has an in situ value of $9.6 billion and a rock value of $801 per tonne at $2,000/kg

scandium oxide. Think about that for a second. This is the equivalent of an open-pittable 7.4

million oz gold deposit grading 19 g/t at $1,300 per oz. Would a junior with such a deposit in

a politically secure jurisdiction with no permitting obstacles have a value of less than $5

million? The simple answer is no, but the more sophisticated response would be a two part

question: 1) what does it cost to recover the "gold", and, 2) at what price are there enough

buyers for all the "gold" produced? The answer to the first question is hidden in the oldfeasibility study. The answer to the second question is tricky because Nyngan's output would bescandium oxide rather than gold. It is this second question which drives the cautiousness of theNDA restricted tire kickers and it is to them that I am especially eager to explain Bloom Energy's

role as the Thin Edge of the Wedge.

As far as the feasibility and economic value of Nyngan as envisioned by SNC-Lavalin areconcerned, I, along with the rest of the market, am in the dark. My only clues have beenmanagement statements that its goal is an initial production capacity of 20-30 tonnes of scandiumoxide per annum, a CapEx below $100 million, and general statements by CEO George Putnamabout a development rule of thumb from his BHP days that small to medium sized projects needan NPV equal or greater than CapEx and an IRR equal or greater than 15%. On that basis I canestimate that a 200 tpd mine with a 75% recovery operating 330 days per year would produce25,000 kg of scandium oxide annually over a 20 year mine life from a resource of 1.3 million tonnesof 330 g/t scandium (a subset of the near-surface limonite resource EMC optimized in theSNC-Lavalin open pit mining plan). At $2,000/kg this would generate annual revenue of $50million, and, at an OpEx of $300/t ore, would produce after-tax cash flow of $25 million annually,which, if CapEx is $100 million, would yield an after-tax NPV of $103 million at a 10% discount rateand an IRR of 25%.

Management refuses to divulge or comment on the SNC-Lavalin study numbers, so bear in mindthat while my reverse calculated mine plan parameters are likely close to those of the study, thestudy's cost numbers and scandium oxide base case price could be very different. On thisconjectural basis EMC would be worth $0.53 per share rather than $0.025 as the market asserts,provided one does not worry how the $100 million CapEx gets funded. Given EMC still needs to

raise about $6 million to vest title and deliver a new feasibility study that can serve as a

financing document, it is reasonable to assert that EMC should be trading at least in a

$0.05-$0.10 range within which potential equity backers or corporate acquirers should be

negotiating a deal rather than the gutter to which circumstances have consigned the stock.


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Fortunately, thanks to ASX-listed Metallica Minerals Ltd which published a prefeasibility study inearly 2013 for a similar but lower grade primary scandium deposit called Lucknow, it is possible forme to construct a Nyngan cash flow model on the basis of actual cost parameters which shouldenable the market to better appreciate the potential value of the Nyngan scandium story.


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When the Metallica study's assumptions are adapted to Nyngan's higher grade ore and scaled toproduce the same annual scandium oxide output (about 52,000 kg Sc2O3), one can see thatNyngan is potentially worth USD $221 million with a 30% IRR using a 10% discount rate and$2,000/kg scandium oxide price. Assuming no additional dilution beyond the current 192.9 millionfully diluted and 98.5% net interest, this translates into a value of CAD $1.18 per EMC sharecompared to the $0.025 stock price. For those interested in how I have constructed my Lucknow

and Nyngan models you will find a detailed description and comparative analysis in the Appendixof this report, as well as after-tax NPV sensitivity charts that present the NPV in absolute USDdollars.


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Metallica's Lucknow plan is a non-starter because its grade isn't high enough to deliver a robustNPV and IRR at $2,000/kg Sc2O3, its output capacity is nearly double what Bloom Energy iswilling to purchase under an offtake agreement signed in October 2012, none of Lucknow'spotential aluminum alloy end-users are willing to commit to offtake agreements until profitablesupply from a reasonably long-lived primary scandium resource is established, and its $247 millionCapEx is too high in light of the offtake uncertainty. Given the current offtake limitations for 52,000kg annual scandium oxide supply, namely existing supply-demand in the order of 10-15 tonneshighly fragmented among both suppliers and end-users, my comparative analysis appears to bean exercise in futility. However, EMC does not want to build a mine with this high an initial capacitybecause it wants to keep CapEx below $100 million and supply 20-30 tonnes scandium oxideallocated between aluminum alloy end users and Bloom Energy. When you consider that EMC hasalready produced a positive feasibility study using a less cost-effective acid bake technology, andwould now utilize a batch HPAL autoclave system rather than the continuous autoclave proposedby Metallica, a 200 tpd initial mine plan with a CapEx below $100 million producing 25,000 kgSc2O3 with an NPV of $100 million plus and IRR well above 15% is plausible. Importantly, anoperation of this scale could probably be built in 15 months rather than the 24 months suggestedby Metallica for its 600 tpd operation. More importantly, the Nyngan design would allow rapid

output expansion through the addition of extra batch autoclaves and solvent extraction

cells, which is critical in a "chicken-egg" situation where the materialization of new

scandium oxide demand will be a function of successful supply.


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Scandium has a "Field of Dreams" character where "if you build it they will come". In the real worldthe industry that builds mines has an aversion to building anything for which it does not have aguaranteed offtake market. With deep markets such as gold and copper which are worth over $100billion annually the only concern is what the price will be when supply hits the market. But in acase like scandium where all sorts of end-users carve up by-product supply from a variety ofsources, including old Soviet master alloy stockpiles, estimated at 10-15 tonnes scandium oxideper year, no miner is interested.

As far as the end-users are concerned, they may know of all kinds of applications they couldprofitably commercialize if a large enough scandium oxide supply were available on a reliable basisfrom multiple sources at a stable long term price. But they want nothing to do with the messinessof mining scandium ore and processing it to produce the required purity. And because the $100billion plus aluminum industry has lived forever without the ability to make anything but a tokenvolume of aluminum-scandium alloy, it is happy to do without indefinitely until an abundant,upwardly scalable supply has come on stream. If this were exclusively the situation today, EMCwould have to raise risk capital for Nyngan's development from parties willing to stockpilescandium oxide while coaxing end-users off the sidelines. Given that end-users who have waitedforever can afford to wait until Nyngan runs out of cash to operate revenue-less production, EMC

would never raise the capital to develop Nyngan. But fortunately, and this I believe is notgenerally understood by the market nor any of the NDA parties to whom EMC has pitched its

Nyngan story, there now exists an end-user who by 2016 will have a far bigger problem on

its hands if the amount of scandium oxide EMC plans to produce from Nyngan is not

available. That end-user is Bloom Energy which I know is very familiar with EMC and the

Nyngan deposit.


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Silicon Valley based Bloom Energy has raised over $1.4 billion in equity and subsidies since

launching in 2002 with the help of Kleiner Perkins, a venture capital fund "headed" by John Doerrwhich made a fortune during the late nineties by backing the likes of Netscape, Amazon andGoogle. Bloom Energy has figured out a way to stabilize the zirconium electrolyte in a solid oxidefuel cell by allowing it to operate at a lower temperature than is possible without the use ofhopelessly expensive platinum group metals. Solid oxide fuel cells are an old invention from morethan a century ago which converts a simple input fuel such as hydrogen, natural gas and evencarbon monoxide into electricity through an ion exchange process that does not involvecombustion. This electrochemical process can convert 60% of the energy in a unit of natural gasinto electricity compared to 35% for combustion when heat recycling is not deployed. The reasonsolid oxide fuel cells have never been successfully commercialized is that the zirconium electrolytebreaks down quickly, requiring costly maintenance and unacceptable down-time. Researcherswere able to get away from using platinum group metals by stabilizing the zirconium with the rareearth yttrium, but the results were still unsatisfactory.

In 2001 Dr. K.R. Sridhar and his former NASA team, which had worked on technology forconverting Martian atmospheric gases into oxygen, created Bloom Energy to commercialize solidoxide fuel cells with the help of his insight that scandium was much more effective at stabilizing theelectrolyte than yttrium. Over 100 patents related to the role of scandium have since been filed byBloom, which appears to have solved the reliability problem. Bloom now markets its 100 kW and200 kW "Energy Servers" popularly known as "Bloom Boxes" as a way to reduce the consumer'scarbon dioxide footprint where the grid is fed with electricity from coal-fired power plants and toreduce vulnerability to grid blackouts in regions where the difference between the carbon dioxidefootprints of a Bloom Box and grid electricity powered by a combined cycle natural gas plant is awash.

To what extent a Bloom Box reduces an owner's carbon dioxide footprint depends on how theaverage carbon dioxide footprint of the electricity grid is calculated. In jurisdictions where the grid isfed with electricity from nuclear power plants, hydro-electric power, natural gas and renewable


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power such as solar and wind, it will be difficult for the Bloom Box to document a lower CO2footprint because it consumes just natural gas. The only way to achieve a zero carbon footprint isto feed a Bloom Box with biogas whose CO2 output is deemed as zero because the biologicalsource material harvested its carbon payload through the photosynthesis of atmospheric CO2. Butwhere the grid is fed by CO2 output intensive coal a company's installation of a Bloom Box easilyreduces the CO2 footprint relative to that of the electricity the building pulls from the grid. Iflegislation ever gets adopted requiring companies to demonstrate CO2 footprint reduction or pay apenalty, the Bloom Box becomes a verifiable way to document such reduction. The bonus is themuch greater reliability for the natural gas transmission network than the electricity grid. Thenatural gas network's main disruption vulnerability is an earthquake, but the largely above groundelectricity grid is vulnerable to weather related disruptions as well as solar flares. Whether this isrelated to global warming or not, the world seems to be in a cycle of increasingly intense weathersystems that threatens electricity grids already under stress from heavy loads and a politicalaversion to infrastructure renewal spending.

As far as cost is concerned, the Bloom Box at $800,000 per 100 kW of capacity, enough to poweran office building, is not truly competitive with combined cycle natural gas powered grid electricityunless transmission losses and the grid construction and maintenance costs are factored in. Thecost of constructing and maintaining the natural gas distribution network does not come into playfor the Bloom Box because this infrastructure already exists to provide natural gas for heatingpurposes. Currently there is a controversy as to whether or not the Bloom Box will ever beprofitable without a subsidy. However, just as has happened with the solar industry, economies ofscale that materialize as sales grow will likely reduce the production cost of a Bloom Box to a levelwhere it makes sense for business to invest in a Bloom Box rather than rely on grid electricity,especially when the costs of power outages are taken into consideration. Because the Bloom Boxgenerates DC current that has to be converted to AC for normal use, which results in some energyloss, the Bloom Box is particularly attractive to businesses that operate data centers which can useDC electricity.

This cost reduction is unlikely to come from reducing the amount of scandium oxide, which has atheoretical limit of 8-10 kg per 100 kW Bloom Box. Through reverse engineering of Bloom's patentfilings third parties have estimated that the current generation of Bloom Boxes requires about 15 kgof scandium oxide, down from 20 kg at the start. Analysis of the latest patent filings suggests thatfurther reductions in scandium utilization have not been the focus of Bloom's R&D efforts. In anycase, even if Bloom squeezed the scandium oxide intensity down to 10 kg/100 kW Bloom Boxcapacity, it would shave off only 1.25% of the current $800,000 price. Bloom's problem is notsqueezing down the price of scandium oxide. How much scandium oxide the Bloom Box needs is asensitive topic for Bloom and a serious vulnerability if sales take off, something investors will bevery curious about when Bloom goes public with an IPO, now projected for 2015. Bloom is wellaware of this problem and has been scouring the world for potential scandium supply. In doing soit has become competition for small scale demand from scientists, military applications, andpremium sports equipment makers.

Various efforts are underway to provide incremental scandium supply through by-product fromuranium in-situ leaching in Kazakhstan, the Bayan Obo iron-rare earth mine in China, nickel-cobaltHPAL operations such as Sumitomo's Coral Bay in the Philippines, and various Asian tailings

projects such as the ISK titanium dioxide waste stream recovery project of Clean TeQ Holdings

Ltd in which Robert Friedland became a major investor in 2013. Even remediation of the red mudtailings generated when the Bayer Process is used to convert bauxite into alumina is beinginvestigated as a source of scandium. Red mud can grade up to 150 g/t scandium concentratedfrom the 10-20 g/t scandium in the bauxite ore, so this would seem to be a reasonable extractiontarget. But this scandium is locked up in an iron oxide that must be dissolved with acid which alsodissolves many of the other materials in the caustic waste. While the scandium can be precipitated


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out of this solution, the real problem is what to do with the rest of the stuff still in solution, aproblem whose disposal cost exceeds the value of the recoverable scandium. Some potentialscandium sources, as is the case with certain rare earth minerals, are not economically accessible,but those sources which are feasible as a by-product supply have a different limitation.

For example, ilmenite, the primary titanium mineral from which titanium dioxide pigment isproduced, contains 10-20 g/t scandium (note that scandium grades are reported as g/t or ppmwhich are equivalent, and that scandium is marketed and priced as scandium oxide which weighs1.534 times elemental scandium). The 6.8 million tonnes of ilmenite processed globally in 2013would contain 100-200 tonnes of Sc2O3 which one might imagine is available for by-productrecovery from the pigment tailings. However, the majority of titanium feedstock derived fromilmenite is converted into titanium dioxide through a chloride process from which no scandiumrecovery is possible. The remainder is converted through a sulfate process which leaves scandiumaccessible for recovery, but not if the titanium feedstock is in slag form whose creation locks up thescandium. So only about 25% of the potential scandium by-product is available for recovery, andmuch of that is from pigment operations in China where there is a proliferation of small scaleplants. At best 25-50 tonnes of Sc2O3 is annually available as by-product from titanium dioxidepigment waste streams, and then from a fragmented set of sources, none of which can scale upoutput in response to scandium demand.

Collectively these nickel-cobalt, titanium dioxide, rare earth and uranium ISL operations with ascandium by-product recovery circuit could contribute as much as 100 tonnes of scandium oxideannually, but this scale of by-product supply will not be mobilized until a robust supply of primaryscandium oxide has been established with a corresponding offtake market at a stable price. Thenthe arrival of by-product supply from multiple sources will be a good thing because it will reducethe supply disruption risk that accompanies dependency on a few primary supply sources. Bloomis unlikely to substitute out of scandium dependency, and desperately needs a reliable primaryscandium supplier with whom it can contract a long term offtake agreement. Time is running out

for Bloom Energy.


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During 2013 Bloom Energy reached two major milestones, first with achieving 100 mW of installedBloom Box capacity in the United States, and second with the first installation of a Bloom Box inJapan at a building owned by Softbank, Japan's telecom giant. While the United States has beenBloom's primary target market, the success of the Telecom installation could open up atremendous growth market in Japan, especially if Japan eliminates or limits is reliance on nuclearenergy. Bloom installs its Energy Servers in 100 kW and 200 kW capacities, which implies thatbetween 500-1,000 units have been installed since 2002. If Bloom's talk about doubling salesannually remained true in 2013, it would have installed 50 mW of capacity last year. At 15 kg perBloom Box the installed capacity will have needed about 7 tonnes of scandium oxide, with half ofthat used in 2013. But if Bloom installs 100 mW during 2014, it will need 7,500 kg, and if itmanages to grow its annual installation by 50 mW every year until 2018 when it would be selling300 mW of installed capacity, its annual scandium oxide demand would exceed 30,000 kg. If from2018 onward Bloom's annual installation growth rate slows to an extra 25 mW capacity, it would beselling 475 mW of Bloom Boxes by 2025 (equivalent to 4,750 boxes at 100 kW each). In my Bloomrelated scandium oxide demand model I am projecting that Sc2O3 utilization will drop to 14 kg/100kW in 2016-2021, and dropping to 13 kg/100 kW in 2022-2025). At these Bloom Box sales growthrates and scandium utilization intensities Bloom Energy will need 30 tonnes of scandium oxideannually by 2016 and 60 tonnes by 2025. There is no way that Bloom Energy can achieve such asales growth without relying on a primary scandium mine.

I am not just relying on third party scandium intensity estimates for my Bloom Box relatedscandium demand projections. Bloom gave us a clue that these demand numbers are realisticwhen on October 2, 2012 it struck an offtake agreement with Metallica whereby Bloom would berequired to purchase up to 30,000 kg scandium oxide annually, and have the right to purchase up


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to 60,000 kg. The initial 30,000 kg was an obligation defined by Bloom's actual requirement duringthe production year. The price was not disclosed, but when Metallica six months later delivered itsprefeasibility study for Lucknow as a standalone primary scandium mine using $2,000/kg as a basecase price, that was probably very close to the offtake price agreed upon by Bloom. I say thisbecause Metallica had to stretch its PFS numbers to achieve an acceptable IRR and NPV thatdisappear when I model Lucknow without the stretching. Since there are no published prices orany reliable way to establish scandium oxide prices, Metallica could have used a higher base caseprice to improve the economics of Lucknow, especially given that the USGS reported a $3,700/kgprice for 99.9% scandium oxide in 2011, more than double the $1,400/kg reported for prior years.

The chart above represents the prices the scandium specialists at the USGS have managed torecord for various purities since 1991. The price for the important purity of 99.9% needed by Bloomdisappeared after 2012 right around the time when all prices started to increase. The declineduring the early nineties likely reflects the arrival onto global markets of scandium from Sovietstockpiles no longer needed for the fabrication of MiG fighters after the collapse of the USSR. Theuptick in recent years could reflect procurement by militaries worried about runaway private sectordemand from the likes of Bloom Energy. As far as the timing of Bloom's demand is concerned, theMetallica offtake agreement also imposed confidential delivery deadlines on Metallica. At the timeMetallica predicted construction would require two years with commercial production possible in2016, which I regard as a clue about the timeline needed to keep the Bloom offtake agreement ingood standing.

I am not sure why Metallica chose 50-60 tonnes as the output capacity of its Lucknow facility, but I


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suspect that Metallica could not go lower than 600 tpd because when I plug Lucknow's 209 g/t Scgrade into my 375 tpd Nyngan model, generating 32,600 kg Sc2O3 annually, the after tax NPV at$2,000/kg Sc2O3 collapses from USD $221 million to just $30.3 million and the IRR to 13%. Itreally looks like a 300 g/t scandium grade is the minimum needed for a viable small scale primaryscandium mine. Metallica's output created a scandium oxide surplus in the early years for whichMetallica had to find a buyer. Metallica worked hard to find offtake partners for the half of its outputthat Bloom was unlikely to need before the end of this decade, including a non-binding 18 month

arrangement with KBM Affilips Master Alloys, a Netherlands based fabricator of alloys includingscandium aluminum master alloys. Not surprisingly, given the reluctance of end-users tocommercialize applications before a robust scandium supply is established, and the fact that downthe road Bloom had pre-emptive rights to all of Lucknow's output, Metallica failed to announce anyother offtake agreements or secure funding commitments. The KBM Affilips agreement appears tohave expired without renewal in April 2014 even though KBM was able to produce aluminum-scandium master alloy from a scandium oxide sample provided by Metallica.

With the delivery timelines looming into non-achievable range, Metallica pulled the plug on itsSCONI (Lucknow) project on October 18, 2013, laying off the SCONI team and demoting CEOGavin Becker to the role of "General Manager" on an as needed consulting basis, and suspendingenvironmental permitting work. Metallica, which had a $400,000 monthly burn rate during H2 of2013, finished the year with about $3 million working capital that came in the form of an R&D taxcredit related to SCONI metallurgical work. Metallica has since refocused its efforts on the UrquhartPoint heavy mineral sands project in Queensland. Andrew Gillies' Metallica has done acommendable job investigating Lucknow's metallurgy, promoting the scandium story, and luringBloom Energy to show its cards, but for now its scandium assets are sidelined.

With Metallica out of the running there will be renewed pressure on Bloom to establish a primaryscandium supply. It is not clear that rumored supply arrangements Bloom has made with scandiumby-product producers can feed annual demand of 30 tonnes by 2017, growing to 60 tonnes by2025. Bloom has apparently made supply arrangements with a Chinese titanium dioxide producerthat will tide it over for the next couple years, but it must still look for potential primary scandiumproducers such as Nyngan, for which it offered $4 million to Jervois in 2012 while the title disputewas underway. As far as I can tell, EMC's Nyngan project is best positioned to fulfill that role,especially if it can start with 20-30 tonnes annual output that it allocates between Bloom Energyand the aluminum alloy markets.


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The only other primary scandium supply contender is the Owendale deposit of Robert Mosig's

ASX-listed Platina Resources Ltd which also has a world class primary scandium deposit in NewSouth Wales with a higher grade and bigger resource than Nyngan. Platina went public in 2004 toexplore for platinum metals in Australia and secured the backing of Tom Kaplan's Electrum GlobalHoldings, now Platina's largest shareholder. The Owendale intrusive complex is located in thesame Fifield platinum province as the Gilgai complex which hosts Nyngan. The region has yieldedplatinum group metals from alluvial deposits and juniors have tried for decades to find a bedrocksource with a high enough grade to be mined. Platina discovered the Owendale deposit in 2010 bydrilling a magnetic anomaly that yielded decent but subeconomic platinum grades. The bigsurprise was intersections grading 300-500 g/t Sc within a laterite horizon which Platina turned intoan indicated and inferred JORC estimate of 23.7 million tonnes of 384 g/t Sc containing nearly14,000 tonnes of scandium oxide.


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Despite this extraordinary discovery Platina has spent the past couple years focused more on theplatinum potential of Owendale than the scandium potential, possibly because the scandiumresource is in a separate lithology. Perhaps with the urging of Bloom Energy Platina is nowcollecting a sample for metallurgical studies as a prelude to an economic study. The Owendaledeposit has a high iron content and a somewhat higher magnesium content than Nyngan'slimonite resource, which may result in a higher extraction cost or lower recovery. In any case it willbe a couple years before Platina has Owendale at the same stage as Nygan is now, which meansthat Owendale is unlikely to solve Bloom's looming scandium supply problem. During Q1 of 2013Platina raised $1.3 million through a rights offering that entitled holders to pay $0.01 to converteach right into a warrant exercisable at $0.06 until September 30, 2015. As a result Platina hasdoubled its fully diluted from 132.6 million to 265 million shares. Rather than posing a threat toNyngan, Platina's Owendale deposit helps Nyngan because end users can now see more than20,000 tonnes of in situ scandium oxide in two major deposits with a grade that can support

profitable exploitation at $2,000/kg Sc2O3. The potential for Owendale to come on stream downthe road as a separate robust primary scandium supplier is exactly what the scandium

market needs for end-user demand to explode, and strengthens the argument for developing

Nyngan as soon as possible.


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Bloom Energy, whether it likes it or not, is the thin edge of the wedge that will crack the

chicken-egg scandium problem. EMC's Nyngan project, with its higher grade than Lucknow andso much work already done, is best positioned to guarantee the scalable scandium oxide supplyBloom Energy will desperately need if annual sales of its Bloom Boxes continue to inflect upwardsduring the next few years. Admittedly Bloom Energy could turn out to be a flop that never goespublic, but it would be several years before that became reality. The Bloom Box projected revenuechart above shows how scandium oxide demand would track Bloom Box annual sales growing intothe billions of dollars. While that alone could make Nyngan worth several hundred million dollars,the real bluesky for EMC and its Nyngan project lies with the possibility that aluminum alloy

demand will kick in as I have projected in the chart below. This potential demand growth fromthe aluminum alloy sector is the Field of Dreams aspect of the Nyngan scandium story that

could turn EMC Metals Corp into a major homerun for Spec Value Hunters.


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The bluesky is the substantially bigger aluminum-scandium alloy growth that will only kick in whenthe end-users are confident that scalable primary scandium oxide supply is in place. An airlineindustry eager to switch to lighter and stronger aluminum-scandium alloy based brackets, skinsand components would consume hundreds of tonnes of scandium oxide annually if it could. Thecar industry, eager to meet the 2025 EPA goal of 54 mpg fuel efficiency, could scavenge extra mpgsavings by replacing certain parts such as cast iron brake rotors with aluminum-scandium rotorswhich can handle the high temperature conditions ordinary aluminum alloys cannot. Aluminum-scandium alloy powder lends itself well to "additive layer manufacturing" more popularly known as3D printing. Furthermore, while there are plenty of high-strength aluminum alloys, a fatal flaw thatscandium fixes is the tendency of weld joints not to be as strong as the alloy itself. This is an issuewith the containers needed to ship LNG. All these uses, except in extreme military and aerospaceapplications which do not consume a large amount, are optional.

If Nyngan gets built and Bloom Energy goes belly-up, all this potential alloy demand in the wingswill rush onto the stage to grab the scandium oxide no longer spoken for by Bloom. The chartabove presents the value of annual scandium oxide demand at $2,000/kg if my scenario projectingBloom Box and alloy demand become reality. Yes, it is projecting a $600 million market for a metalthat currently represents annual revenue of only $20 million, but it is a market that EMC or itssuccessors have a shot at dominating.

I cannot predict the market's reaction to my analysis of Nyngan's value potential because the threeyear resource sector downtrend that enjoyed a brief turnaround in Q1 of 2014 has resumed its

downtrend. Without question EMC management is playing a difficult end game. A negative


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outcome would turn EMC into a penny junior with two promising scandium exploration

plays, a neutral balance sheet and a shattered share structure begging for a rollback and a

new financial backer. The Tordal prospect in Norway and Honeybugle in Australia's New SouthWales both have potential to yield significant high grade scandium resources, but it will costseveral million to drill them off, which EMC is unlikely to raise without a rollback and an overheadtrim to reflect the shift from a junior focused on resource feasibility demonstration to discoveryexploration.

EMC has 100% title to the Tordal scandium-enrichedpegmatite field in Norway where scandium gradessoar above 1,000 g/t. The trick will be to outline highgrade pods with similar mineralogy that can be locallymined and trucked to a concentrator for shipment to alarger cracking facility. EMC has looked hard throughthe existing literature for similar pegmatite fields, andhas acquired a few along the way, but only keptTordal after closer investigation. No doubt there areother scandium enriched pegmatite fields in the world,but until scandium's "supply problem" is solved,nobody is going to waste money and effort looking for

them. I would much rather see EMC work on

Tordal while it is also advancing the Nyngan feasibility study than see Tordal become the

main focus. Tordal has the potential to become a significant primary scandium source; such

a development would be positive scandium demand evolution because Scandinavia is a

secure jurisdiction geographically far removed from Australia.

Honeybugle, like the Gilgai complex that hosts the Nyngan deposit, is one of several ultramaficintrusive complexes within the Fifield platinum province of New South Wales that Jervois exploredin the early part of the last decade. Sampling of Honeybugle as part of a regional focus onmagnetic anomalies yielded promising scandium values, but not as interesting as the Gilgaicomplex, which became the followup focus for Jervois. As drilling gave shape to the Nyngandeposit, Jervois abandoned its other prospects. EMC believes that Honeybugle has the potential tobe another Nyngan, but it will take a couple years of work to prove this, which is why securingNyngan is the corporate priority for now.

A neutral outcome would see the existing EMC shareholder base heavily diluted through thearrival of a new dominant financial backer, a farmout of Nyngan that leaves EMC with a minoritystake, or a merger with a junior that has a substantially bigger market capitalization that shifts theNyngan upside to the acquiring company. This outcome is neutral because existing EMC

shareholders would not lose money from the recommendation price level and would

participate only modestly in the upside of the Nyngan asset.

The best plausible outcome would be one where EMC raises full funding for title vesting andfeasibility study delivery, projected at $5-$6 million, through the farmout of a minority interest inNyngan. The neutral outcome is the most likely, and has the potential to deliver short term100%-200% gains with further gains hinging on the result of the feasibility study in Q3 of 2015,while the best plausible outcome would deliver up to 400% gains in the medium term with the

rest hinging on the feasibility study.

A longshot outcome would be one where the market recognizes the Nyngan value, quicklyreprices EMC with a trading level in the $0.05-$0.10 range, attracts a financial backer in that pricerange who provides the $2.75 million capital to remove the Nyngan loss risk, following which EMC's


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stock price moves higher and attracts the remaining $3.5 million from a broader audience. SpecValue Hunters can hope for the latter but should focus on the neutral or best plausible

outcomes while keeping an eye on the negative outcome risk.

There is one other potentially very positive outcome where EMC merges with a cash rich juniorthat does not have a blown up share structure and has enough cash to fund delivery of the newNyngan feasibility study. That scenario would likely involve a rollback for EMC shareholders, but ifthe cash rich part brings along the stock market savvy currently missing within the EMC technicalteam, such a rollback would not bother me at all. It is a scenario I personally prefer because I thinkthere is substantial value in the current technical team which has its roots in BHP: CEO GeorgePutnam has the business development background to bring a project like Nyngan into production,CTO Willem Duyvesteyn has the process engineering background needed for proper oversight ofthe Nyngan chemical plant's design, and John Thompson has permitted and built mines inAustralia. They also have personally significant equity stakes in EMC. Putnam and Duyvesteynhave spent the past three years cultivating knowledge and relationships within the potentialscandium end-user world. The depth of their knowledge is such that when I discuss anything with

them I run the risk of short circuiting my brain. Having accumulated a meaningful position inEMC and strongly recommended EMC to KRO members during the past three years I am

keen on an outcome that leaves existing EMC shareholders with a meaningful stake in a

story that can achieve a substantial market profile due to its uniqueness while the rest of the

resource sector languishes as it waits for higher metal prices or a discovery miracle.

Conclusion: To sum up, EMC is still short about CAD $2.75 million needed to make the final AUD$1.4 million payment due on June 30, 2014 to close the Nyngan acquisition, and repay the US $1.2million debenture due on June 24, 2014 for which the Nyngan agreement is collateral. EMC's CEOGeorge Putnam estimates that EMC needs another $3.5 million to achieve its goal of delivering afeasibility study (20% error margin) by Q3 of 2015: $500,000 to complete Nyngan accessagreements and collect a bulk sample for HPAL related metallurgical studies, $500,000 tocomplete the half-done Environmental Impact Statement leading to a mining license, $1.5 millionfor feasibility study engineering and metallurgical testing, and $1 million to cover the overhead ofan advanced junior. EMC is thus $6 million short of completing an economic study and getting amining permit for a Nyngan mine development plan capable of producing 20-30 tonnes ofscandium oxide per year at a CapEx of less than $100 million, a project scale that should bedoable without involving a major mining company.

Thanks to work Metallica Minerals Ltd published in 2013 for its similar but lower grade Lucknowscandium deposit, I was able to construct a scaled comparative cash flow model that shows whatNyngan is potentially worth and which leads me to believe that Nyngan is the key to an explosionof scandium supply, provided Nyngan's owner acts quickly to exploit the first mover advantageMetallica has ceded to it. Furthermore, what I have not until recently appreciated is that in the pastfive years exploration juniors have come up with at least three distinct scandium deposits inAustralia whose grades far exceed that of all other deposits from which scandium has historicallybeen extracted as a by-product, including the Zhovti Vody deposit which outfitted the SovietUnion's Cold War ambitions, and which together have sufficient size to provide the world with500-1,000 tonnes of scandium oxide annually for decades compared to the 10 tonnes currentlyeked out as by-product. Finally, my analysis has revealed that Bloom Energy with its scandiumdependent Bloom Box is the thin edge of the wedge needed to crack the chicken-egg problem thathas kept scandium from achieving its destiny as Time's future "Metal of the Year".

Appendix: Understanding the Potential Value of Nyngan through Comparison with Lucknow


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Metallica Minerals Ltd published its SCONI Phase One Prefeasibility Study on March 28, 2013,reporting an after-tax NPV of AUD $155 million and IRR of 15.9% for a 20 year mine that wouldprocess 200,000 tonnes of ore annually from the 100% owned Lucknow deposit in Australia'sQueensland to produce an average 51 tonnes of 99.9% scandium oxide (Sc2O3). The study used$2,000/kg as the base case price for scandium oxide and an 81.5% recovery that was based on a10 day continuous pilot plant test of 4,400 kg of Lucknow ore grading 276 g/t scandium, whosepregnant leach solution underwent solvent extraction through a separate pilot plant designed byMetallica. The LOM resource was 3,920,000 tonnes of 209 g/t Sc at 120 g/t cutoff pulled from alarger but lower grade resource. The flowsheet deployed HPAL technology (High Pressure AcidLeach) in the form of a continuous autoclave. The mining plan trucked sulfuric acid during the firstthree years and then invested $48 million in an onsite acid plant to which sulfur was trucked. Thestudy broke down the operating costs associated with the two stages but, as is the norm forASX-listed companies, did not provide the nitty gritty details such as an ore schedule normallyfound in the technical reports that Canada's NI 43-101 reporting system requires to be publiclyfiled. The information provided, however, was sufficient to allow one to model SCONI Phase One atdifferent scandium oxide prices using life-of-mine averages, and construct a lower scale versionthat processes ore from the Nyngan deposit.


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"SCONI" is an acronym for the three metals Metallica is targeting at its Greenvale area laterite

project in Queensland: SCandium, CObalt and NIickel. Since going public in 2004 Metallica hasbeen focused on developing its three Greenvale laterite deposits as an HPAL based primary nickel-cobalt mine with scandium as a by-product for which the NORNICO scoping study was publishedon July 4, 2012. It projected a pre-tax NPV of AUD $402 million with 16.7% IRR using a 10%discount rate and base case prices of $10/lb for nickel, $15/lb for cobalt and $2,000/kg forscandium with an AUD $597 million CapEx not including any contingencies. The low pre-tax IRR inthe context of a $10/lb nickel price made this scenario a non-starter. After signing a scandiumofftake agreement with Bloom Energy on October 2, 2012 Metallica shifted its focus to developinga primary scandium mine that would only exploit the higher grade Lucknow deposit and notendeavor to recover the nickel and cobalt whose grade has an inverse relationship to the scandiumgrade due to the nature of the scandium enrichment process. Once it had SCONI Phase Oneoperational Metallica planned to develop SCONI Phase Two which was the original primary nickelmine plan (note the ghosted portion of the above SCONI flow sheet). To avoid confusion I will referto Metallica's SCONI Phase One primary scandium mine plan as the Lucknow project.


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Metallica's Lucknow PFS is relevant to EMC's Nyngan deposit because they are geologicallysimilar deposits, and based on preliminary test work EMC has done with HPAL on Nygnan ore,have similar chemical characteristics. Both are laterite deposits within ultramafic intrusivecomplexes where laterization has enriched the unweathered bedrock grade, though within thelimonite horizon a process also took place which depleted nickel and cobalt while enriching thescandium. According to EMC's CTO Willem Duyvesteyn the Nyngan and Lucknow limonite havesimilar processing characteristics except that with the slightly lower iron grade and substantiallylower magnesium grade the Nyngan ore will consume 32% less acid per tonne of ore to liberatethe scandium. I have scaled the Nyngan plan to produce a similar annual amount of scandiumoxide over a 20 year mine life. The Lucknow Mine would process 200,000 tonnes of Lucknow oreannually, which converts into a 600 tpd mine operating 330 days, and produce 1,024,000 kg ofSc2O3 over 20 years worth just over $2 billion. As proposed in the PFS Lucknow would produce52,207 kg of scandium oxide during each full year of production.

Any investor taking a serious look at scandium needs to understand that the grade of scandiumore is reported as g/t elemental scandium, but when elemental scandium is put into solutionthrough acid and extracted through solvent extraction it combines with atmospheric oxygen to


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emerge as scandium oxide with the formula Sc2O3, which weighs 1.534 times more than scandiummetal. Scandium oxide is stable and is the form in which it is marketed to end users. So when youencounter a scandium "ppm" or "g/t" grade (they have identical numbers), you must multiply by1.534 to convert the grade into the oxide form in which scandium is priced. When the scandiumoxide is fed into molten aluminum to create a aluminum-scandium alloy, the oxygen "blows off" andonly scandium ends up in the alloy. The Lucknow deposit of 3,920,000 tonnes of 209 g/t scandiumwith an 81.5% recovery would yield 667,713 kg of scandium that puffs up to 1,024,000 kg (1024tonnes) of scandium oxide.

The near surface limonite portion of the Nyngan deposit has a measured resource of 1,444,526tonnes of 330 g/t Sc and an indicated resource of 4,703,927 tonnes of 292 g/t Sc. As the Nynganplan view above shows, the measured resource can be exploited as an initial western pit, followedby mining the indicated resource as an eastern pit. EMC did produce a detailed and optimizedmining plan for its unpublished feasibility study which likely initially processes central blocks thatgrade up to 500 g/t, but, as with Metallica's Lucknow, this information is not available.

Assuming the same 81.5% recovery I have worked out a processing rate of 375 tpd (330 days perannum) for Nyngan starting with the measured 330 g/t resource, which produces 51,520 kg Sc2O3annually for the first 11 years, transitioning to the 292 g/t indicated resource in year 12, andproducing 45,587 kg annually in years 13-20. During Years 12-20 I mine 1,052,974 tonnes or 22%of the indicated resource. This 375 tpd Nyngan mine plan would produce 980 tonnes of scandiumoxide over 20 years.


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As an aside, the detailed plan views of the measured limonite resource above and the indicatedlimonite resource below show that EMC could mine material at 50% higher grade than 330 g/tduring the first ten years. If the same 51,520 kg annual output were desired, high grading Nynganduring the first decade would only require a facility processing 250 tpd. EMC has indicated incorporate presentations that it would seek to develop a plant with only 200-300 tpd capacity withannual output of 20,000-30,000 kg scandium oxide depending on the head grade. Such a plantwould have a batch autoclave design rather than the continuous design in the Lucknow plan whichwould allow rapid scaling up of output in response to growing demand. Such a smaller scaledesign could have a CapEx below $100 million and offer EMC the flexibility to boost outputincrementally by feeding the initial configuration higher grade ore, or double output by addinganother batch autoclave, and another one to triple output if needed. The Lucknow configurationdoes not have this flexibility, and while the Lucknow resource has higher grade sweet spots, theLOM resource already represents a significant high-grading of the overall resource. EMC plans toproduce a feasibility study by Q3 of 2015 for its smaller scale but expandable scenario. But for thepurposes of demonstrating the potential value of Nyngan by borrowing from the cost discoveryachieved by Metallica through its Lucknow PFS, I am modeling a Nyngan plan with the sameoutput as Lucknow. One should keep in mind that the upside for the Nyngan scandium project isthat once end-users see a primary scandium mine in successful operation, with similar depositscapable of repeating this success, guaranteed scandium oxide off-take demand could soar into the300-500 tpa range within a decade.


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For the sake of simplicity and comparison I have ignored Metallica's acid plant scenario andoperated its mine with the same assumptions as the first three years of operation. At 375 tpd mymodeled Nyngan mine is 62.5% the capacity of the 600 tpd Lucknow mine. Metallica peggedLucknow's CapEx at AUD $247 million using a 1.11 AUD to USD exchange rate. The current rate is1.07 AUD:1 USD, and since I do not know how much of Lucknow's CapEx is sourced in USD andthe current exchange is only slightly different, I have accepted the $247 million CapEx as still valid.For the CapEx of Nyngan's 375 tpd plant I have taken 62.5% of $247 million and added 20% toreflect the fact that certain costs in a "chemical plant" do not scale, with the result that I haveassigned $185 million as the CapEx for Nyngan.


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Metallica's Lucknow PFS assumes an annual operating cost of AUD $66.6 million without an acidplant, which it further breaks down into $5.5 million for mining costs, $29.5 million for"consumables and reagents", $2.4 million for power, $12.8 million for non-mining labor, $7.4 millionfor maintenanace, $5.8 million for G&A, and $3.2 million as a contingency. Assuming 200,000tonnes of ore processed annually, this translates into AUD $333 per tonne OpEx. The mining costof $27.50 per tonne ore processed can be broken down by taking into account the 1.9:1 strippingrate which implies that it costs $9.48/t to mine and move 580,000 tonnes of waste and ore annually.This figure seems high compared to the $5/t Metallica used in its 2012 Nornico scoping study, but Ihave accepted it for the Nyngan mine plan, which has a stripping rate of only 0.8:1 for the limoniteresource according to the March 2010 43-101 technical report. On that basis Nyngan's mining costworks out to $17.06 per tonne ore processed. Most likely the high Lucknow mining cost is due tothe decision to build the plant near the nickel-cobalt deposits which requires trucking the Lucknowore about 8 km from mine site to the plant. EMC would build its plant next to the Nyngan deposit,which, importantly, is on private land whose surface rights are owned by Jervois and are part of theacquisition agreement.

The acid and other reagent consumption cost works out to $147.50 per tonne ore and is to a largedegree a function of the amount of iron and magnesium in the ore, with magnesium acting as thebiggest acid gobbler. The Lucknow resource table above reveals that the small but higherscandium grade measured Lucknow resource has 1.6% magnesium and 31.6% iron, changing to1.1% Mg and 34.9% Fe at the lower scandium grade indicated resource. The LOM ore will averagebetween 1.1%-1.6% magnesium. In contrast, the high scandium grade limonite resource below forNyngan reveal magnesium to be only 0.4% and the iron at 27.99%. I am not qualified to judgerelative acid consumption based on magnesium and iron content, but I am given to understandthat the magnesium grade difference between the Nyngan and Lucknow is important and couldreduce acid consumption by the Nyngan ore by a third, helped out by the 50% higher scandium


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grade. I have thus knocked back the Nyngan acid consumption by a third to $100/tonne, with thecaveat that this needs to be confirmed by further HPAL based metallurgical studies on Nyngan oreas EMC has budgeted for its feasibility study. I have accepted Metallica's other $158 per tonneoperating costs as presented, with the result that Nyngan's OpEx works out to $275 per tonne oreprocessed ($17/t mining + $100/t acid +$158/t processing) compared to $333 per tonne forLucknow.

For the purpose of NPV and IRR calculation I have charged CapEx in the year before commercialproduction, and the LOM sustaining capital has been treated as an average annual expense for taxpurposes. Metallica projects AUD $2.5 million as average annual sustaining capital for the first 15years of operation for a total of $37.5 million. I have scaled Lucknow's sustaining capital as 62.5%or $1,562,500 annually for a total of $23.4 million. I have depreciated CapEx on a 7 yearstraight-line basis and charged a 28% tax rate. Nyngan is subject to a 1.7% NSR while Lucknowhas no royalties. (EMC filings refer to an additional 1.5% "net smelter return" payable to theoriginal property vendor, but the definition in the 6 page property agreement spells out that the1.5% "royalty" is charged on income after deduction of operating costs, so I have treated it as a netprofits interest and adjusted EMC's net interest to 98.5%.)


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I have run the cash flow models in Australian dollars because most of the cost inputs are sourcedin Australia, and have assumed an exchange rate of 1.07 AUD per 1 USD for converting scandiumoxide prices into AUD revenues. Unlike Metallica's Lucknow PFS which uses a 1.18 AUD:USDexchange rate to convert USD denominated scandium oxide prices into AUD revenues, I have usedthe current 1.07 AUD:USD exchange rate. I have not applied inflators to the cost or revenue side.The Lucknow and Nyngan after-tax NPV sensitivity charts above and below have been convertedinto USD at the 1.07 AUD:USD exchange rate. What they reveal is that Nyngan at the $2,000/kgbase case scandium oxide price has potentially superior project economics over Lucknow, with anafter tax NPV (10% discount rate) of $220.8 million and IRR of 30% compared to Lucknow's $53.2million NPV and 14% IRR. I emphasize "potentially" because my analysis of Nyngan is aspeculative adaptation of Metallica's Lucknow prefeasibility study. Both projects benefitsubstantially at higher scandium oxide prices, but Lucknow dies quickly at prices below $2,000while Nyngan can still eke out an after-tax NPV of $31.1 million and IRR of 13% at the pessimisticprice of $1,300/kg Sc2O3.


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In conclusion, EMC's Nyngan deposit has superior economics to Metallica's Lucknow largely dueto a higher grade, suggesting that the minimum grade for profitably mining a near surface lateritehosted scandium deposit needs to be about 300 g/t scandium if $2,000/kg is the maximum pricefor scandium oxide. While it appears that $2,000/kg is an acceptable price for Bloom Energy'sscandium oxide needs, the bigger speculative question is whether the aluminum-scandium alloyend-users can live with that price. If they can, scandium demand will explode and scandium will bein the running for coronation as Time's Metal of the Year.

*JK owns shares in EMC Metals Corp

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