world’s largest primary scandium project & world leading water...

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BW EQUITIES RESEARCH

Clean TeQ Ltd | Desk Coverage May 8 2015

World’s largest primary Scandium project & world leading water

treatment technology

Rating: Speculative Buy

Company Statistics

Share Price $0.205

Shares on issue (mil.) 309.1

Market Cap $63.4

Enterprise Value $66.4

Options (mil.) 16.5

Cash $2.6

Convertible Notes $3.6

Debt $2.0

Financial Summary

FY Yr. End 2014 2015e

Revenue 6.1 8.0

EBITDA -5.6 -5.2

Net Income -4.9 -4.2

Net Assets 11.2 13.0

Share Price

Company Description

Clean TeQ Ltd has developed world leading proprietary continuous ion exchange technology, which it is applying to metal recovery and water treatment projects globally. The company is advancing two lead projects, metals recovery at its Syerston Scandium project in NSW Australia and a potential water treatment JV with one of China’s leading Design Institutes.

Analyst Simon Gennari, CFA 61 3 9602 4808 [email protected]

Investment Summary

Clean TeQ Ltd is developing what is likely to be the world’s first primary Scandium mine. Using its metal recovery IP, the company has a lead on other projects to potentially deliver a very low capex, high margin project. The company is also at an advanced stage of discussions with the Shanghai Investigation, Design & Research Institute Co. Ltd. (SIDRI) to execute a JV

agreement to deploy the company’s technology in the multi billion dollar water treatment industry in China.

Investment Highlights

Syerston - scandium

▪ CLQ developing potentially the worlds first and largest primary

Scandium mine in NSW Australia.

▪ Scandium is a strategic metal in scarce supply with significant

growth in demand forecast over coming years in industries including aerospace and 3D printing.

▪ Scoping study due this quarter which we believe has a strong

likelyhood of highlighting a low capex and high margin long life project. The company is well placed to accelerate this project to BFS delivery within 9 months of scoping.

▪ Management achieving significant progress on off-take

discussions with the supply chain of several industries.

Water - China

▪ Company at advanced stage of discussions for establishment

of joint venture in China with SIDRI, owned by Three Gorges Corporation, the Ministry of Water Resources and the Shanghai Municipal Government.

▪ Large opportunity to deploy CLQ’s technologies to treat

industrial and municipal wastewater in China a multi-billion dollar problem with 1000‘s of potential projects to address.

▪ Near term catalysts (<3 months) include:

- Syerston scoping study - Technical milestones on first water project in China. - Commercial agreement on first water treatment project

and potential JV execution - Commencement of BFS and pilot Scandium production

for off-take partner testing - Scandium Off-take agreements.

▪ Very strong and highly succesful management team with

committed long term major share holder Robert Friedland.

Investment Recommendation

▪ We advise a Speculative Buy

▪ Look to iniate with full valuation and price target upon delivery

of scoping study and further news regarding off-take.

▪ We point to muttiple de-risking events over the coming 2

quarters as providing strong basis for de-risking and share price re-rating.

mailto:[email protected]

Clean TeQ Ltd (ASX:CLQ) | Desk Coverage May 8 2015

Page 1

Contents

Company Overview .................................................................................................................... 2 Metals Division – Syerston ........................................................................................................ 3 Overview ..................................................................................................................................... 3 Location ...................................................................................................................................... 3 Project History ............................................................................................................................ 4 Project Geology & Drilling ........................................................................................................... 4 Scandium resource ..................................................................................................................... 5 Scoping Study ............................................................................................................................. 7 Clean TeQ scandium recovery IP ............................................................................................... 8 Accelerated development timetable ........................................................................................... 9 Scandium marketing .................................................................................................................10 Timeline & milestones...............................................................................................................11 Conceptual project value ..........................................................................................................12

Scandium .................................................................................................................................. 13 Overview ...................................................................................................................................13 Price and market .......................................................................................................................13 Scandium Use ..........................................................................................................................14 Market Development.................................................................................................................15 New and growing applications ..................................................................................................15 A Scandium Analog – Niobium .................................................................................................17

Water Business ......................................................................................................................... 19 Overview ...................................................................................................................................19 Industrial waste stream water treatment solutions ...................................................................19 Clean Teq’s Water Treatment Technologies ............................................................................20 Water business model ..............................................................................................................21 China Opportunity .....................................................................................................................21 Timeline & re-rate events .........................................................................................................23

Air business .............................................................................................................................. 23 Corporate Information ............................................................................................................. 24 Executive Team ........................................................................................................................24 Board of Directors .....................................................................................................................24

Appendix A – China water market .......................................................................................... 25 The Opportunity ........................................................................................................................25 Waste water treatment – market size .......................................................................................26

Disclaimer ................................................................................................................................. 28


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Company Overview

Clean TeQ Ltd listed on the ASX in 2007, founded by current executive director Peter Voigt in

1989. Peter brings to the company 30 years of engineering and technology invention and

licensing in the field of water remediation and metals recovery from slurry and tailings.

The company today has 3 main business units:

Metals

The business unit is based on the company’s deployment of its Clean-iX® Continuous Ion

Exchange technology, originally licensed from Russia (All Russian Research Institute of

Chemical Technology), and has been developed by Clean TeQ with significant additional patent

protected IP.

The process is world leading and considered the most cost effective (profitable) and environmentally friendly technology for the extraction and purification of metals from slurries and solutions.

Water

The Continuous Ionic Filtration & Exchange (CIF®) technology is also a world leading solution for

the mining, oil and gas and municipal industries in the treatment of industrial waste waters.

CIF® is based on 50 years of research and development and includes Clean TeQ’s patented

improvements.

Air

CLQ owns 59% of air purification subsidiary Clean TeQ Aromatrix Pty Ltd – biological, thermal, carbon filter, advanced cyclones and air stripping treatments to remove odour and airborne contaminants

Two lead projects:

Of the 3 divisions the company has a current commercial and technical focus on Metals and Water and within these business units the lead projects are:

Syerston – Metals:

World leading and largest scandium project awaiting completion of Scoping Study by mid/late

this current quarter with potential for BFS delivery within 9 months.

SIDRI JV – Water:

A potential JV in China with the Shanghai Investigation, Design and Research Institute Co.

(SIDRI), currently at advanced stages of commercial negotiation. With the first water treatment

project at final stages of delivering technical milestones, in what may prove to be a considerable

pipeline of water treatment projects throughout mainland China.

Analysis:

In this note we focus on these two projects/businesses as being the main value drivers and seek

to highlight the significant potential these projects could deliver shareholders in the short to

medium term.


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Metals Division – Syerston

Overview

Syerston is the world’s largest and highest grade scandium resource; the project is located

in central NSW Australia.

Scandium is a little known metal which is increasingly gaining interest as an alloying additive

for aluminium with existing use and significant potential further uptake within the aerospace,

automotive and fuel cell industries. Applications are growing, with current world wide use set

to grow significantly in coming years. Scandium Oxide (Sc2O3 – 99.9% purity) sells for

approximately US$2500/kg.

The company is currently completing a scoping study. Development success will see the

adoption of Clean TeQ ion exchange technology in the processing route to produce a high

purity scandium oxide 99%+.

We believe the company is set to highlight its unique position as the world’s first primary

Scandium producer. Potentially producing large tonnages of low-cost scandium for the

industrial alloy, additive layer (3D printing) and fuel cell markets in the near future.

Location

Project is located 2km from the regional town of Fifield, 350km northwest of Sydney.

Figure 1: Syerston location map - NSW

Source: Company presentation


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Project History

Pre 2000: The district is Australia’s only historic source of platinum production, producing

20,000 ounces of the metal between 1887 and the mid‐1960s.

2000: SNC-Lavalin completed a Feasibility Study for Black Range Minerals Limited, for a nickel laterite operation. The project gained development approval from the New South Wales government in 2001.

2004: Ivanhoe Mines acquired the project from Black Range Minerals and completed a revised Feasibility Study with SNC-Lavalin in 2005. In May 2006 the development consent was triggered on the project. The project did not proceed to full development due to base metal prices at the time.

2014: Clean TeQ agreed to acquire the project from a wholly owned subsidiary of

Ivanhoe Mines Ltd (TSX: IVN) in November 2014, to focus development on

scandium.

2015: Clean TeQ completed acquisition on 31 March 2015, providing consideration of 7.4 million ordinary shares, a $3 million promissory note, $32,000 cash, and a 2.5% gross revenue royalty on the Project payable to Ivanhoe Mines.

Analysis:

We note the effective consideration (ex freehold) of ~AU$500k for Syerston is an extraordinarily

cheap price for such a prospective and advanced project, one that no doubt would not have

been consummated without the belief (and ownership) by Robert Friedland in the Clean TeQ

processing route and CLQ’s ability to unlock the value of in situ resource.

Project Geology & Drilling

Scandium occurrences within the project have been known for two decades, with a detailed

understanding of the ore body having been built throughout the project’s history. It has only

been recently with building interest in the industrial use of scandium as a metal for alloying that

the prospectivity of the project for this mineral has become the focus.

Geology:

Fifield District known for its significant occurrences of minerals containing platinum, nickel,

cobalt and scandium.

Deposit hosted within a Tertiary age lateritic weathered profile. During weathering, selective

leaching of more soluble elements such as magnesium and silica occurred, leaving a laterite

rich in base and precious metals.

The Tout Ultramafic Complex underlies the laterite at the Syerston Project. Accelerated

preferential weathering over the ultramafic core has resulted in the laterite profile reaching

its maximum thickness of 35-40m over the core and thinning out laterally over surrounding

less mafic rocks.

A 2014 assessment of drill data by Clean TeQ confirmed significant high-grade Scandium

mineralisation present at shallow depths in lateritic soil. The scandium-rich zones occur on

the periphery of a large dunite complex located in the centre of the deposit. The 2014

modelling also highlighted several other prospective areas of very high-grade scandium for

further exploration.


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Figure 2: Syerston district geology


Scandium resource

In January of this year Clean TeQ announced its maiden scandium mineral resource, we

note that the resource is open to the east and south, with significant potential for resource

expansion:

Figure 3: Syerston scandium mineral resource

Cut off Classification Tonnage

(Mt) Sc Grade

(ppm) Sc

Tonnes Sc2O3

Tonnes

<300ppm Measured 1.1 411 465 712

Indicated 17.9 424 7,570 11,583

Inferred 6.4 386 2,480 3,795

Total 25.4 414 10,516 16,089

>600ppm Measured 0.1 686 62 95

Indicated 1.1 667 701 1,073

Inferred 0.1 630 55 84

Total 1.2 666 818 1,252 Source: Company announcements

The resource is delineated based on 1,242 holes and 29,377 scandium assays, of which

725 RC were drilled by Black Range Minerals for a Feasibility Study in 2000, 117 RC drilled

by Ivanplats for a 2005 Feasibility Study, and 14 holes by Ivanplats in 2014. This drilling

campaign focused on potential high-grade scandium mineralisation in the north of the EL.

Scandium mineralisation occurs from the alluvial layers in the uppermost layer of the deposit

to the goethite zones below, this is approximately from 5m to 40m below surface.


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Figure 4: Syerston cross section / ore body


Below we highlight the significant in-situ resource value of contained scandium:

Figure 5: Syerston contained scandium value

Implied In situ Value Contained Sc US$ billion US$1000/kg US$2000/kg

<300ppm Measured $0.7 $1.4

Indicated $11.6 $23.2

Inferred $3.8 $7.6

Total $16.1 $32.2

>600ppm Measured $0.1 $0.2

Indicated $1.1 $2.1

Inferred $0.1 $0.2

Total $1.3 $2.5

Source: Company presentation, BW estimates

Syerston v. other global scandium projects

We reference other Scandium projects globally and there are no other resources which

compare either in size or grade with Syerston at the measured and indicated category, with

CLQ’s upcoming drill program targeting an increase in all categories of resource.

In particular with respect to grade we note that Syerston has a material advantage against

other projects as a significant component of Opex is acid (sulphuric), potentially accounting

for up to 25% of Opex, we note this is a linear cost, as such the higher the grade of the

project the greater the Opex cost advantage.

Clean TeQ’s large resource and grade advantage is further buffeted by its processing route

IP, with their continuous ion exchange technology highly likely to circumvent the higher

Opex and capital intensity of other possible projects and their reliance on solvent extraction

and CCD circuits.


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Figure 6: Syerston v. comp scandium resources1, 2


Note: 1 With the exception of Owendale the other projects use

considerably lower grade cut-offs than CLQ.

2 Measured & indicated category

Scoping Study

Scoping study due mid/late current quarter

The company is currently working on the final elements of its scoping study and expects to have

this completed by mid to late current quarter.

Historical work and high levels of study confidence

We reference the considerable amount of work done on the project to date by previous owners,

likely in the vicinity of ~AU$30 million (at historical prices) as such we hold great confidence in

many items of the scoping study, we expect this to be substantially below the 50% level

contemplated in an average scoping study.

Conceptual project metrics

It is our understanding, referencing comparable studies that the contemplated project is likely to

have the following broad parameters:

Capex: ~US$70 - 80 million

Tonnage: 30-40 tonnes Sc2O3 p.a.

LOM: 30 years +

Opex: US$500-600/kilo of produced scandium oxide at 99.9% purity


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We note the reasonable degree of confidence that should be a takeaway on capex numbers

when the study is delivered, this is based on:

- a review of the studies of peers in NSW,

- the lower capital impost from CLQ’s proprietary processing route,

- closer proximity to infrastructure than other projects,

- access to water, which is very limited in the area, with ownership of existing bore field and

water entitlements.

Technical Feasibility

With respect to technical feasibility, we point to the high levels of confidence this study is likely to

produce, by way of example we highlight the significant resource data in the resource estimate,

sufficient to enable a pit design and mine optimisation, we also outline later in the note the

extraction route is proven at CLQ’s pilot project in Japan. It may be fair to conclude that the level

of work to date is closer to a PFS than scoping study.

Analysis:

The level of detail and data to produce this mineral resource is unquestionably rare at this stage

of a projects development. Information in this resource statement has determined resource to

the measured category, which is exceedingly rare as an input to a scoping study.

Clean TeQ scandium recovery IP

Clean-iX metals recovery process

Platform technology built on 40 years of R&D and used within Russia for the leaching,

extraction and elution of metals.

CLQ has built significant additional IP and technical capability with over 10 patents and 10

years work.

Any development of this project will incorporate CLQ IP, and likely remove the need for CCD

and solvent extraction circuits, which we see as a meaningful improvement to capital and

operating costs, supporting project economics even at low early year tonnages.

Figure 7: Clean TeQ Metals Recovery - Clean-iX® Process



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We highlight below the simple low cost, low risk plant proposed by Clean TeQ as being

the likely processing route:

Figure 8: Clean TeQ proposed process flow-sheet


Clean TeQ processing IP advantage over other processing routes:

Industry’s standard pathway for Sc extraction would involve counter current decantation (CCD)

circuit and a solvent extraction (SX) circuit. Such a flow sheet would likely result in technical

difficulties with recoveries of Sc requiring likely higher Capex and Opex compared to the Clean

TeQ ion exchange process.

Clean scandium recovery validation – ISK

During the March quarter 2015, CLQ confirmed that its ion-exchange extraction processes

can technically and commercially recover low concentrations of scandium from intermediate

process streams.

Clean TeQ successfully completed a campaign on its JV scandium recovery pilot plant at

Ishihara Sangyo Kaisha Ltd's (ISK) titanium dioxide facility in Yokkaichi, Japan, with

commercial discussions commencing to enable Clean TeQ to produce scandium from these

streams on a commercial scale.

Analysis:

We hold a strong view that CLQ is not only benefitted by having the world’s largest and highest

grade scandium resource but coupled with this has IP that will enable it to deliver lower Capex

and Opex than other contemplated projects in Australia and elsewhere.

Accelerated development timetable

Unlike typical early stage projects Syerston has several elements that are well progressed as

such we expect that management is likely to deliver a BFS within 9 months on a significantly

reduced expenditure than what would normally be expected.

We list below several aspects to highlight the advanced nature of the project:


Page 10

Environmental approvals and development consents have been obtained with relevant studies having been completed. With likely only small development consent modifications required for a scandium mine.

An existing bore field and water rights owned by the project company.

Detailed resource understanding sufficient to plan pit design.

Water key to development

One of the key challenges for all projects in the region is the lack of a reliable water source

in what is a relatively arid region of Australia. No large-scale water supply exists in the area

and currently the best option for Syerston is to pump water to site from its existing bore

fields near the Lachlan River (south of the Project).

Syerston has a material advantage in these established bore fields with an existing water

allocation granted by the NSW Office of Water which we understand is sufficient for initial

planned mine operations as well as significant expansion capacity. Other options for more

cost effective water supply are being investigated as part of the scoping study.

Clean TeQ demonstration plant

Clean TeQ owns a laterite Resin-In-Pulp plant which we understand will be used for feasibility work.

The plant is portable and can be located on site or other third party testing facilities.

This plant will be used to process Syerston ore, in order to provide high purity Sc samples to potential off-take parties in the third quarter of this year.

Drilling Campaign

A drilling campaign will commence late Q2CY15 to test high grade zones with the aim of

increasing the high-grade resource base.

As part of this drill campaign, a bulk sample will also be taken from the project to commence

piloting for the production of scandium oxide samples for customer testing and qualification

purposes

Scandium marketing

Technical risks low

We hold very high levels of confidence that the technical risk to delivering and commissioning a

mine and plant at Syerston is low when compared to similar projects at this stage of study.

Off-take key to decision to mine

The key to extracting value for shareholders will be to build awareness of scandium as a metal,

its merits, and certainty and security of supply. The lack of any reliable supply of scandium has

been the limiting factor in development of this market.


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We believe this is set to change rapidly and Clean TeQ is placed right in the centre of this, with

the application of its proprietary technology to the Syerston Project, we hold great comfort it is

best placed to develop the world’s first primary source of scandium oxide production.

This source of new lost cost reliable supply could be highly beneficial to the aluminium industry,

where low prices, systemic over‐capacity, and low growth in new applications could be

overcome by a radical re‐shaping of the performance characteristics of the metal and its value in

use in many new applications.

Off-take discussions gaining momentum

To this end during Q1CY15 the company made significant inroads in developing potential supply

routes and marketing relationships, these include:

Collaboration Agreements with both Airbus APWorks and KBM Affilips to develop the scandium market for aerospace and other industrial sectors. The agreements provide a framework under which Clean TeQ will work with the downstream scandium supply chain to determine potential demand and the ability of the Syerston Project to meet that demand at the required price and quality specifications.

Clean TeQ has also had discussions with a number of other parties who are interested in scandium supply including Bloom Energy, who consume the majority of the existing global supply of scandium to produce Solid Oxide Fuel Cells in the US.

Timeline & milestones

We look forward to a busy period ahead for Clean TeQ as it delivers multiple milestones over

coming months which we expect will materially de-risk the Syerston project and provide multiple

catalysts to further share price appreciation.

We also count that the market and investment community will have a chance to move up the

curve on the wider Scandium opportunity and the vast potential this metal offers the world

across multiple industries and many applications.

Below we offer a table highlighting the main milestones that we can expect over the coming few

quarters:

Figure 9: Syerston 9 months of milestones and catalysts

Source: Company estimates, BW estimates

Period (CY Qtr) Event / Activity

Q2 2015 Scoping study finalised

Commencement of trial mining campiagn

Testing of pilot plant

Further resource drilling - step out and infill

Q3 2015 BFS pilot study results

Ship trial high purity Sc to potential off-takers

MOU's for marketing and potential offtake

Q4 2015 Offtake agreement finalisation

Q1 2016 BFS study completed


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Conceptual project value

Valuation – our view!

In writing this note, it was tempting to determine a risked DCF valuation for the project to

support a price target and our recommendation. Given reasonable and supportable

metrics and assumptions, and levels of confidence we were able to justify a risked

project valuation higher than current EV of Clean TeQ.

Nevertheless, given the low volumes of current scandium consumption today, we have

chosen to wait on further evidence that the company and other potential producers are

able to build demand in line with supporting the capital requirements to make the

decision to mine.

We believe formal off-take with current announced negotiating partners and un-announced

parties is key to this projects potential NPV being more fully imputed in the share price and a

significant re-rating in the risk profile of the project.

Conceptual valuation

As a guide to highlighting the potential economics of the project we provide conceptual NPV’s

for various scenarios below:

Figure 10: Conceptual NPV's (US$ mil.) – $Sc2O3 v. Tonnes

Sc2O3 Price USD (kg)

$ 3.1

800 1000 1200 1400 1600 1800 2000

20 -28 3 35 66 97 128 159

40 19 82 144 206 269 331 393

60 67 160 254 347 441 534 628

80 114 239 363 488 612 737 862

100 161 317 473 629 784 940 1096

120 208 395 582 769 956 1143 1330

140 256 474 692 910 1128 1346 1564 ROM

Tonnage

Source: BW conceptual estimates

Notes:

- Conceptual NPV’s only

- assumes: US$60m capex, 30 year mine life, unlevered, pre-tax, cash cost US$500/kg, linear Opex, 10% discount rate,

off-take demand sufficient to support decision to mine.


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Scandium

Overview

Chemistry

Sc is a soft, silvery-white metallic element with an atomic number 21, and is technically a

light transition metal.

The properties of scandium compounds are intermediate between those of aluminium and

yttrium.

The smaller size of scandium’s ion allows it to react chemically with elements like

aluminium, magnesium and zirconium.

History

Discovered in 1879 by Swedish chemist Lars Fredrik Nilsson when he initially discovered

erbium and ytterbium, he later separated Scandium from the ytterbium.

Due to rarity and the difficulties in the preparation of metallic scandium, which was first

achieved in 1937, it took until the 1970s before applications for scandium were developed,

where the significant improvements to function and application from scandium on aluminium

alloys were discovered.

Geology & resources

Scandium comprises approximately 22 ppm of the earth’s crust, about the same as cobalt.

Rarely concentrates in nature. It does not selectively combine with the common ore-forming

anions, so time and geologic forces only rarely form scandium concentrations over 100 ppm.

Scandium is present in most of the deposits of rare earth and uranium compounds, but it is

extracted from these ores in only a few mines worldwide.

Resources in Australia are contained in nickel and cobalt resources in New South Wales.

China’s resources are in tin, tungsten, and iron deposits in Jiangxi, Guangxi, Guangdong,

Fujian, and Zhejian Provinces, and is currently produced at Bayan Obo, the REE deposit in

Inner Mongolia.

Resources in Russia and Kazakhstan are found in certain uranium-bearing deposits, and on

the Kola Peninsula in apatites. In the Ukraine, scandium was previously recovered as a by-

product of iron ore processing at Zheltye Voda.

Scandium in Madagascar and Norway is typically found in pegmatite formations containing

thortveitite.

Price and market

All scandium produced in the world today is a by‐product from the extraction of other

elements, usually uranium, nickel and cobalt. There is no primary mine production of

scandium anywhere in the world.

http://en.wikipedia.org/wiki/Aluminium

http://en.wikipedia.org/wiki/Aluminium

http://en.wikipedia.org/wiki/Alloys

http://en.wikipedia.org/wiki/Uranium


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It is usually sold as a high purity oxide (Sc2O3 at 99.9%).

The lack of secure supply has led to significant volatility in pricing, with scandium oxide

prices ranging between $2,300/kg to $5,200/kg over recent years.

Supply is typically provided by old Russian stockpiles, mine tailings, master alloys and other

intermediate global waste streams such titanium dioxide processing.

In terms of global consumption, data is limited and generally a small market with volumes of

between 5-15 tonnes annually.

Scandium Use

Sc attributes in Aluminium alloys

In the 1950s, scientists in the Soviet Union were the first to recognize the metal's many positive

properties and how it could enhance aluminium. A small concentration of scandium, often just

0.2% scandium, alloyed with aluminium enables that aluminium to be effectively welded to

another piece of similar scandium-aluminium alloy, so you don't need heavy hardware to join

pieces together. Key to making this happen is scandium's ability to inhibit grain regrowth within

the alloy during welding, preserving the strength and integrity of the alloy at the weld.

Addition of Sc to Ai alloys achieves the following properties or benefits:

Increased strength – via smaller refined grains in the alloy microstructure

Super plasticity – increased stresses and more complex shapes

Hardening – Sc alloys are significantly harder

Corrosion resistance – improved corrosion resistance then other alloys

Conductivity – improved thermal and electrical conductivity

Weldability – significantly higher weldability with non-strength loss

Current uses and applications for scandium include: SOFC’s: Used as a substitute for yttria as a stabilizing agent for the solid

electrolyte (typically zirconia) in the fuel cell, allows reactions to occur at lower temperatures, extending the life of the components and increasing the power density of the unit, reducing Opex and capex.

Ceramics: Addition of scandium carbide to titanium carbide results in a doubling of the hardness of It-Sc carbide, second only to diamonds in hardness.

Electronics: Sc is used in the preparation of the laser material in switches in computers.

Lighting: Used in mercury vapour high-intensity lights to create natural light. Scandium has a broad emission spectrum that generates a ‘daylight’ effect desirable for camera lighting, movie and television studio lights.

Phosphorus/Displays: Sc compounds have application as a host for phosphorus or as the activator ion in TV or computer monitors.


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Market Development

The absence of reliable, secure and long term production has limited commercial

applications of scandium in most countries. This is despite a comprehensive body of

research and a large number of patents which identify significant benefits for the use of

scandium over other elements.

China has placed a high strategic priority on securing scandium supply as its rare earths

industry is facing significant environmental management issues.

In 2010 the European Union identified aluminium‐scandium alloys as one of the five most

critical emerging technologies in the automotive engineering and aerospace industry (EC

Enterprise and industry.

Solid Oxide Fuel Cells

Decentralised energy production and green energy is a reality that is gaining increasing

momentum. In many countries in the medium term it is likely that more than 50% of electricity

production will come from green and decentralised sources.

The world leading Sc based SOFC producer Bloom Energy is predicting 40tpa of Sc2O3 demand

over the next 5 years.

New and growing applications

Aerospace

Below we highlight the potential up-take of Sc from the aerospace industry:

Figure 11: New Airplane Deliveries through to 2032


Assuming 0.2% Sc use in all aircraft aluminium and 50% uptake, and industry forecasts for plane deliveries, this would produce 150 tonnes of annual demand for Sc2O3. We note this does not consider replacement of non-aluminium parts with Sc containing alloys, where strength and other improved functionality also enables the use of additive layer printing or other manufacturing methods.

We note the use of Sc as an alloying element in aluminium having been used in the aerospace industry for several decades. Russia has used these alloys for fuselage applications in large cargo planes and some parts of the MiG 29 military aircrafts. It is also


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reported that some parts of the international space station (ISS) are made from alloys with Sc.

Case study - Airbus

Scalmalloy® a second generation aluminium-magnesium-scandium alloy was developed by

Airbus for high strength extrusions and has very high fatigue properties. Scalmalloy® has the

specific strength of titanium, while remaining as lightweight as aluminium and superior level

of ductility (ability to stretch a metal).

Airbus and its technology unit AP Works believe Scalmalloy® will form an integral part of

manufacturing within the aerospace industry and other industries where 3D printing can

produce manufactured parts, with more precision, less cost and faster than traditional

machining techniques.

We understand that Scalmalloy® has undergone years of testing within Airbus, with technical

and functional hurdles having been surpassed, the only thing currently holding back

adoption on a wide scale is security of supply. We believe the Syerston project and Clean

TeQ will precipitate this supply issue when it brings its mine into production.

AP Works also believe robotics and automotive industries will adopt the use of Sc alloys

strongly.

Airbus has also been studying scandium (including specifically aluminium scandium

zirconium – AlScZr alloys) to enable welding rather than riveting of the aircraft’s surfaces,

this would result in significant cost and weight savings (possibly up to 10%) resulting in

significant improvement in fuel consumption and therefore profitability.

CLQ have collaboration agreement with Airbus and we understand good

relationships into the company and its supply chain.

Mobile devices

Below we illustrate the potential use of Sc in mobile devices; whilst conceptual it does serve

to illustrate the large uptake that Sc could undergo if there was sustainable supply.

These volumes far exceed (10x) any likely start up volumes from Syerston.

Without re-hashing the above technical benefits, the notion that a company would want to

market their next generation phone as a “Scandium” phone is plausibly very appealing.

We note that on this basis the implied additional cost for each device just on contained Sc

would be ~$0.30.

Figure 12: Conceptual demand Sc2O3 from consumer electronics - mobile devices

Total Annual Sales

Average Weight

(kg)

Average Ai %

Ai consumption

(kg)

Sc % of Ai alloy

Total annual Sc2O3 (Kg)

consumption

Sc2O3

Annual tonnes

demand

Sc price/kg

$

Sc Sales $ Annual

1,000,000,000 0.3 0.25 75,000,000 0.3% 344,250 344 1200 413,100,000

Source: BW conceptual estimates


Page 17

Automotive

Below we highlight the potential up-take of Sc from the automotive industry:

Figure 13: New light vehicle deliveries


Assuming 0.2% Sc in all light vehicle aluminium and 10% uptake, this would produce

potential demand of 3650tpa of Sc2O3. We also note this does not consider replacement of non-aluminium parts with Sc containing alloys, where strength and other improved functionality enables the use of additive layer printing or other manufacturing methods.

Analysis:

There a multiple potential industries and applications for the use of Sc in alloys globally, with the

main impediment to date for further work in developing end markets, the rarity of supply and cost

effective production. Syerston looks set to answers these issues and in so doing potentially

produce significant returns to investors.

A Scandium Analog – Niobium

Materials science is developing at an extraordinary rate, with discoveries, advancements and

applications occurring at an increasingly rapid rate. Things unimaginable and unknown a decade

ago are now common place in the lab, field tests and in use today. Below we discuss a specific

analog Niobium as a possible analog for the way we expect the Scandium story to play out over

the next few years; albeit with the way technology and applications are advancing at an ever

accelerating rate in a fraction of the time.

Niobium resources are scarce, but once economic large projects were brought into production

usage accelerated and pricing power remained with the early developers, particularly where

novel extraction routes and IP remained with the owners.

Discovery

Element 41 was discovered in England in 1801 by Charles Hatchett.


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Early applications

Earliest known use of niobium in 1925 when it was used to replace tungsten in tool steel

production.

Beginning of the 1930s, niobium began to be used in the prevention of intergranular

corrosion in stainless steels.

Economic primary source discovery and reduced production costs

Niobium use limited and on a very small scale until the discovery of pyrochlore deposits at

the beginning of the 1950s in Canada (Oka) and in Brazil (Araxá).

Previously it was a by-product of tantalum manufacturing from columbite/tantalite ores a

high cost route.

CBMM founded in 1955, the world’s largest niobium resource began mining and producing

in the 1960’s – giving way to sufficient supply to spur mainstream use.

Mainstream adoption

Micro alloyed steel, developed in England when in 1958 Great Lakes Steel entered the

market in 1958 with a series of steels containing nearly 400 grams of niobium per tonne of

steel that achieved high strength and toughness properties simultaneously.

The discovery that a tiny amount of niobium added to plain carbon steel significantly

improved its properties led to the widespread use of the micro alloy concept with major

economic benefits for structural engineering, transportation, oil and gas exploration and car

manufacturing.

In the 1950’and 60’s use of niobium increased significantly, being the lightest refractory

metal, niobium alloys such as NbTi, NbZr, NbTaZr and NbHfTi were created for use in the

aerospace and nuclear industries.

NbTi and Nb3Sn, used for superconductivity applications, today commonly used in Magnetic

resonance imaging devices for medical diagnosis use superconducting magnets made with

these niobium alloys.

Producer > own large rare resource, lowest cost, extraction IP

Because of its rarity and technically difficult extraction route, there are only a handful of

producers in the world, the largest and most significant with largest resource, greatest

production and lowest cost is CBMM of Brazil. The EV of this company is US$10+ billion.

This is the opportunity for Clean TeQ and Syerston!


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Water Business

Overview

The water business is currently focussed on consummating a joint venture with Shanghai

Investigation, Design and Research Institute Co. Ltd (SIDRI). The business has two lead

technologies to clean or remediate intermediate industrial water waste streams, Continuous

Ionic Filtration and Continuous Macroporous Adsorption.

Continuous Ionic Filtration: Removes inorganic salts including alkalinity, hardness, sulphate,

heavy metals, nitrate, fluoride, cyanide and arsenic.

Continuous Macroporous Adsorption: removes organic hydrocarbons, including benzene,

toluene, xylene, phenolics, polyaromatic hydrocarbons, chlorinated hydrocarbons

We highlight the enormous potential of the Chinese water market, the world’s largest, and being

in its own right supportive of a very large and profitable enterprise.

Industrial waste stream water treatment solutions

There are several existing technologies/processes for treating water from industrial waste

streams, we list the main solutions below and assess their specific qualities:

Process Description Quality treated water

Capex Opex High vol.

capac.

Simple Tech.

Broad range

applicns.

Clean TeQ: CiF & MPA

Ion Exchange

Passes water over a resin that replaces undesirable ions more desirable ones. The resin must be periodically “recharged” with replacement ions.

x x

Distillation

Heats water to vapour and condenses. The process removes minerals, many bacteria and viruses and chemicals. Cannot remove chlorine, trihalomethanes or volatile organic chemicals (VOCs).

x x

Membrane Filtration

Technologies and processes including reverse osmosis, fine holes to filter out particles, high energy inputs to drive pressure. Filters require constant cleaning/replacement

x x x

Carbon / Activated Carbon

Chemically bonds with and removes some contaminants, varies in effectiveness: Some just remove chlorine, others remove a wide range of contaminants including asbestos, lead, mercury and volatile organic compounds (VOCs).

x x x

Ceramic Filters

Very small holes throughout material, block solid contaminants such as cysts and sediments, do not remove chemical contaminants.

x x x x


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Deionization

Filters use an ion exchange process that removes mineral salts and other electrically charged molecules (ions). Cannot remove non-ionic contaminants or microorganisms.

x x x x

Ozone Kills bacteria and other microorganisms and is often used in conjunction with other filtering technologies

x x x x

UV Ultraviolet light to kill bacteria and other microorganisms, cannot remove chemical contaminants.

x x x x x

Source: BW analysis

Clean TeQ’s Water Treatment Technologies

Overview – Continuous Ionic Filtration & Exchange (CIF®) & Continuous

Macroporous Adsorption (MPA®)

50 years of development, including Clean TeQ’s patented improvements.

Superior operating advantage

Moving Ionic on non-ionic resin bed

Resin and water flow adjustable

Fully automatic operation

Uses low cost chemicals easily available chemicals

Tolerates suspended solids without fouling

Resin continually cleaned and regenerated

Operating metrics:

Low capital investment, nominal $200k per megalitre/day

Low operating costs nominal <$500 per megalitre

Low power use nominally <300kW per megalitre

Modular construction provides treatment capability up to 8 Megalitres per train.

Compelling cost benefit compared to ore technologies


The Science

Water fed directly into adsorption sorption module where positive ions such as

(e.g. sodium, calcium) are exchanged with a counter ion such as hydrogen.

Where negative ions, such as sulphate and chloride are exchanged for hydroxyl ion.


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Where non-ionic compounds such as hydrocarbons, are adsorbed onto the surface

No static barrier/membrane/filter, therefore scaling and fouling are eliminated achieving lower Opex.

Ion exchange and macroporous resins are continually cleaned and chemically regenerated before being reused.

The Clean TeQ solution

Clean TeQ solutions use its IP and know how to treat industrial waste stream with 90% of the

water then being flowed into agricultural and irrigation uses and for environmental purposes

such as river or aquifer rebalancing.

The company’s has successfully achieved compelling minimum quality outcomes in a wide array

of applications, by way of example reducing feed water with Sulphates of 2000mg/L to below

250mg/L, recovering phenols from feed water at 15,000mg/L delivering ex plant 5000mg/L and

capturing the valuable credit.

Water business model

Compelling revenue model

Typical water businesses that sells equipment for example GE, would deploy its product and

services on an installation (capex for the acquirer) and service model, where equipment is priced

with a margin and service contracts in place.

One avenue for Clean TeQ is working towards an annuity type model, whereby equipment is

funded into the customer on a BOOT basis with an annuity revenue stream for a predefined

period average may be in the range of 10 years. This model puts the solution with the customer

on an operating cost basis, without the upfront capital requirement, thereby less hurdles to clear

in the customer decision process.

China Opportunity

The Opportunity

Clean water is recognised as a major impediment to improved standard of living and economic growth in China. Increasing scarcity becoming a significant and growing problem.

Central government has sought to greatly increase public sector investment in water.

Increasing private sector investment in water infrastructure. These investments cover the natural environment, agricultural, urban and industrial water use.

Recent study in China determined that up to 60% of its groundwater is of a poor or very poor quality, despite an increase in the numbers of wastewater treatment plants, wastewater treatment remains a big issue due to challenges in operations. A need for more advanced treatment technologies has been identified as key to dealing with this problem.

China’s central policy & 12th five year plan commits the government to spend ~US$500

billion on fighting air and water pollution.

An amazing 98% of water treatment plants in cities above county level are based on simple conventional treatment processes such as coagulation sedimentation, filtration and


Page 22

disinfection, which is not sufficient to purify contaminated source water. Only a few plants in first tier cities use advanced treatment technologies such as ozone treatment and activated carbon to remove trace contamination.

Clean TeQ China break-through

October 2014 Clean TeQ signed a very rare and potentially company making Heads of Agreement with Shanghai Investigation, Design and Research Institute Co. Ltd (SIDRI) in China.

Purpose – to establish a local joint venture to exploit the many large scale opportunities for water treatment projects in China by deploying Clean TeQ’s IP.

SIDRI is majority-owned by China Three Gorges Corporation, the state-owned Chinese

company responsible for construction of the Three Gorges Dam Project (the world largest

hydroelectric power plant and one of the world's largest energy companies); other

shareholders are General Institute of Water Resources and Hydropower Planning and

Design, Ministry of Water Resources and Shenergy Group of Shanghai.

Technical validation for first Chinese project

During the Q1 CY15 CLQ successfully treated complex industrial wastewater streams from a coal gasification plant, meeting the technical hurdles set by their first JV customer. -

Discussions are current to progress to next phase and deploy a full scale Clean-iX® facility at the plant.

The success of the test work programme for the customer is the first of 2 hurdles required to be met before the establishment of the SIDRI JV. With a working project required to enable valuation of CLQ IP, which will in turn be used to determine the level of SIDRI funding to the JV.

Other markets & opportunities

We understand the company is progressing discussions at multiple sites with large organisations in South America to treat water within the mining and food industries.

Advanced discussions are also underway in South Africa with partners to roll out CLQ technology in several industries.

As such we share the company’s confidence that contracts within the water business are imminent

Analysis:

It appears that commercial negotiations are at a reasonably advanced stage with SIDRI and

that a JV has a high probability of being consummated; this will be a precursor to a very

large pipeline of projects where Clean TeQ can deploy its solutions. We expect execution of

this JV could be as early as this quarter.

We understand that typical water treatment projects can range in size from a $2m install to

up to $50m. With confirmation of a live economic kick off project due imminently.

The company has publically stated a 2 year target to develop a $70m pipeline of projects for the water treatment business, we expect the bulk of these to be sourced in China from the SIDRI relationship.


Page 23

We note the company’s 5 year target of $100m annualised revenues as being a very large target that would support an Enterprise value alone of 10X current EV.

We highlight the enormous Chinese investment task as being directly addressable by Clean

TeQ, with a substantial percentage of this having the potential for conversion by Clean TeQ

over coming years.

Timeline & re-rate events

We expect a period of significant activity for this business in the coming few quarters and outline

below potential milestones and re-rate events:

Air business

The Air business is not a focus or immediate priority for this business at the current stage and

historically has been a major drain on cash. We believe at present this unit is cash neutral to

operations and has been growing some its pipeline of work with a focus on Asia given its recent

merger with Aromatrix.

Period (CY Qtr) Event / Activity

Q2 2015 Delivery of technical hurdles for pilot project

Commercial agreement to first China project / revenue model

Formal JV with SIDRI agreed

Q3 2015 New projects awarded

Financing route for projects secured


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Corporate Information

Executive Team

Sam Riggall – Chairman / acting CEO

Previous roles - Executive Vice President of Business Development and Strategic Planning at Ivanhoe Mines Ltd, securing the agreement to develop the Oyu Tolgoi copper / gold mine in Mongolia, previously a director of Ivanhoe Australia Limited and Oyu Tolgoi LLC; and worked for over a decade in several roles with Rio Tinto Group, covering project generation and evaluation, business development and capital market transactions.

Peter Voigt – Founder & Executive Director Established Clean TeQ in 1990 and up to his appointment as CEO was the company’s Chief Technology Officer. Prior roles include product and technology development roles with Arnotts and Uncle Bens’.

Ealden Tucker – GM Water 20 years’ senior Global Operations experience within Multi National living 8 China. Experience in Water, O&G, Chemical, and Power sectors for US based companies in Australia & China, and more recent Swedish FMCG electronics sales & manufacturing based in China. Roles include company’s Pentair, Tyco, BHP and Tubemakers.

John Carr – GM Metals

Chemical Engineer, 10 years’ experience in technical, development and commercialisation roles in the mining and oil & gas industries. Experience includes: technology development and commercialisation, corporate development, project management, research and development, process engineering, and strategic planning.

Ben Stockdale – CFO

16 years’ experience in executive roles at public and private mining companies including Oxiana Limited, Citadel Resource Group and Unity Mining.

Board of Directors

Peter Voigt Roger Harley – Non Exec. 20 years’ experience as a corporate adviser, manager and investor. Principal of Fawkner Capital, 11 years with Deutsche Bank.

Ian Knight – Non Exec.

Fellow of the Institute of Chartered Accountants, a member of the Australian Society of Certified Practicing Accountants, an Associate Fellow of the Australian Institute of Management and a member of the Institute of Company Directors.

Melanie Leydin – Company Secretary

Experienced Company Secretary and Chief Financial Officer having held these positions at a number of small public companies.


Page 25

Appendix A – China water market

The Opportunity

Global thematic drivers for water treatment and re-use Competition for scarce water supply from multiple uses, domestic, industrial, agricultural and

environmental use.

Population growth and urbanisation.

Agriculture and increasing yield requirements due to population growth.

Acute shortage of reliable and clean water in China, India and other heavily populated countries

# 1 Opportunity – China – water quality and scarcity a large and growing problem Clean water recognised as a major impediment to improved standard of living and economic

growth in China. Increasing scarcity becoming a significant and growing problem, with an increasing demand and supply disequilibrium. Pollution a major issue and is largely responsible for the supply deficit.

Central government has sought to greatly increase public sector investment in water.

Increasing private sector investment in water infrastructure. These investments cover the natural environment, agricultural, urban and industrial water use.

About 20% of water resources are located in Northern China where 46% of the population lives, as an example, wheat-producing provinces Henan (Central China), Shandong (Eastern China) and Hebei (Northern China) suffer from extreme water scarcity. Industrial and urban development in these areas is severely constrained by water resources.

Recent study in China determined that up to 60% of its groundwater is of a poor or very poor quality, despite an increase in the numbers of wastewater treatment plants, wastewater treatment remains a big issue due to challenges in operations. A need for more advanced treatment technologies has been identified as key to dealing with this problem.

China’s central policy & 12th five year plan

Water security in particular related to scarcity and pollution is now a central part of the eco-civilisation policies which were headlined in the 18th party congress in 2012. For the first time it included a specific section on water.

The plan commits the government to spend ~US$500 billion on fighting air and water

pollution.

Plan includes the goal of treating 85% of the total wastewater generated in urban areas. With 20% of the treated wastewater to be reused. Improving water quality for major rivers and lakes by 60%.

98% of water treatment plants in cities above county level are based on simple conventional

treatment processes such as coagulation sedimentation, filtration and disinfection, which is

not sufficient to purify contaminated source water. Only a few plants in first tier cities use

advanced treatment technologies such as ozone treatment and activated carbon to remove

trace contamination. The new standards may drive greater and wider investment in such

processing equipment for which there currently is limited design and production capacity in

China.


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Though 97% of the urban population have access to centralised water supply, less than half

of this supply meets the full set of water quality standards based on 35 measurements

specified in 1995, leading to low public confidence in the quality of tap water.

Waste water treatment – market size

By the end of 2010, the processing ability of urban waste water treatment facilities had reached 125 million cubic meters per day, with a treatment rate of 77.5%.

Below we highlight the significant capex currently occurring, with strong growth set to continue:

Figure 14: China National Urban Water Supply and Wastewater Capital Expenditure

The enormous amount of annual waste water discharge from residential and industrial facilities, pollution not being the only problem but the impact it also has on water resources and availability.


Page 27

Figure 15: China waste-water emission statics

With the five year plan highlighting the urgent need for investment in recycling capacity, including the construction of waste water station, upgrading of waste water treatment plants, sludge treatment and water reclamation and reuse.


Page 28

Disclaimer

This research was prepared for wholesale investors only as defined by section 708 of the Corporations Act.

This report was prepared as a private communication to clients and was not intended for public circulation

or publication or for the use of any third party, without the approval of BW Equities Pty Ltd (BW Equities).

While this report is based on information from sources which BW Equities considers reliable, its accuracy

and completeness cannot be guaranteed. Any opinions expressed reflect BW Equities judgment at this

date and are subject to change. BW Equities has no obligation to provide revised assessments in the event

of changed circumstances.

BW Equities, its directors and employees do not accept any liability for the results of any actions taken or

not taken on the basis of information in this report, or for any negligent misstatements, errors or omissions.

This report is made without consideration of any specific client’s investment objectives, financial situation or

needs. Those acting upon such information do so entirely at their own risk. This report does not constitute

an offer or invitation to purchase any securities and should not be relied upon in connection with any

contract or commitment whatsoever.

DISCLOSURE OF INTEREST

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Equities and/or its affiliated companies and/or their employees from time to time may hold shares, options,

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ANALYST DISCLOSURE

I, Simon Gennari, certify that the views expressed in this report accurately reflect my personal views about

the company and no part of my compensation was, is or will be directly or indirectly related to the specific

recommendations or views expressed in this report. Analyst compensation is based on several factors

including BW's total revenues, a portion of which are generated by corporate advisory activities.

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