All About Scandium

Growing interest, but demand can't grow until supply does...

 

RYAN CASTILLOUX is the founder of Adamas Intelligence, an independent research and advisory firm that provides strategic advice and ongoing intelligence on critical metals and minerals sectors.

 

Now Castilloux is getting a lot more inquiries about scandium, asking how it is used, its growth prospects, and how investors can get involved. In this interview with The Gold Report, Castilloux provides an overview of the scandium market and talks about why investors should take notice...

 

The Gold Report: At the annual Prospectors and Developers Association of Canada (PDAC) convention in March, scandium was probably the most talked about metal after gold. Please give us an overview of the scandium market.

 

Ryan Castilloux: Scandium initially found applications in Soviet aircraft and weaponry during the Cold War. It wasn't until the 1990s that commercial uses for scandium emerged when a now-defunct Canadian company, Ashurst Technology, together with a Ukrainian partner, harvested scandium from Zhovti Vody, a historic iron-uranium mine in Ukraine. Ashurst conceived a number of novel uses for scandium-aluminum alloys, including baseball bats and bicycle frames. It developed patents for these applications, later licensing them to others. 

 

Ashurst's mining operation was short-lived but the commercial uses of scandium that it birthed live on, with a number of others following suit, including the use of scandium-aluminum alloys in golf clubs, ski poles and handgun frames. Since then, scandium has also found its way into electrolyte material in solid oxide fuel cells, an application that fuels a major portion of global scandium demand and will continue to for the foreseeable future. 

 

Scandium is one of the most high-value elements on the periodic table. The value of just a few tonnes of scandium oxide would acquire almost any emerging scandium producer on the market. Projects that contain billions, even hundreds of billions, worth of scandium in the ground are owned by companies with market capitalizations less than $10 million. Anyone with a bullish outlook on scandium will never find a better buyer's market.

 

TGR: In the rare earth market, China is the gorilla in the room. What role does China play in the scandium market?

 

Ryan Castilloux: China doesn't play as large of a role when it comes to scandium. Russia is really the pioneer in scandium production and end-use development. In the 1950s, scientists in the Soviet Union were the first to recognize the metal's remarkable properties and how it could enhance aluminum. A small concentration of scandium, often just 0.2% scandium, alloyed with aluminum enables that aluminum to be effectively welded to another piece of similar scandium-aluminum 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.

 

From 1960 through 1990, Russia, Ukraine, Kazakhstan and Uzbekistan produced the vast majority of the world's scandium concentrates and other scandium compounds. Over this period the US and Australia produced small amounts of scandium as a byproduct of fluorite, uranium and tungsten ore processing. In the 1980s China began extracting scandium from mine tailings and other existing production streams but I understand that output never exceeded 25-30 kilograms (25-30kg) per year for the two decades or more thereafter. From 1990 until now, scandium has been sourced primarily from mine tailings in former Soviet Union countries, as well as from previously produced master alloys, much of which was accumulated in the Cold War era. 

 

TGR: What is the total global annual market for scandium?

 

Ryan Castilloux: The estimates vary widely. The low-end estimate is that 5 tonnes per year of scandium oxide are produced, or harvested from stockpiles, and consumed; the high-end estimate is 15 tonnes. It's a really tiny market but one that has explosive potential.

 

TGR: Why is the market so small?

 

Ryan Castilloux: The reason is twofold. The lack of consistent supply is one issue, but the other is price. Depending on the purity level and whether it's scandium oxide or scandium metal, you could be looking at $5-10m per tonne. That obviously precludes its use in a lot of applications that are cost sensitive. End users have been waiting for a consistent and elevated level of supply to come onstream and bring the price down. 

 

TGR: So you're not going to get a scandium chassis in your Toyota Corolla.

 

Ryan Castilloux: Not this year but automotive is a huge potential use for scandium, perhaps the greatest one on the horizon; that is a longer-term play. With the way things are heading, we could conceivably have 3-D printed engine blocks in the future that don't have heavy hardware weighing them down, but that's a topic for another day, or perhaps another decade.

 

TGR: Some scandium companies are not going to produce scandium because not all of them will be able to raise the necessary funding. But even if only one or two reach production, what's going to happen to scandium prices?

 

Ryan Castilloux: As one or more new sources of supply come onstream, prices for 99.9%-99.99% pure scandium oxide will likely come down to the $1500-2500 per kilogram range, depending on how quickly new suppliers ramp up production and how quickly the market absorbs it. The number of new producers in the market will also have an impact on the new floor price for scandium, as will the identities of the new producers. If we look at the cost curve of emerging scandium producers, we see that the supply side of the market will struggle to exist at a scandium oxide price of $1000/kg or lower, with some exceptions. While we see some projects with cash costs well below the $1000/kg mark, it's important to bear in mind that this cash cost excludes sustaining capital and any applicable royalties, and beyond that there needs to be a profit margin so companies can pay back preproduction capital, and most importantly, retain earnings for investors.

 

With long-term AUD/USD and CAD/USD exchange rates of 0.90 and 0.90, the average cash cost of scandium oxide production for emerging primary producers based on projections we extrapolated from each project's respective technical reports is US$728/kg scandium oxide. When further taking into consideration capital costs, sustaining capital costs and royalties, there's strong support for a scandium oxide floor price above $1000/kg. However, on the contrary, the average cash cost of emerging secondary producers is negative US$1200/kg scandium oxide, after credits. 

 

TGR: What new scandium applications are expected to drive demand growth over the next 5 to 10 years?

 

Ryan Castilloux: Current demand growth levels will continue to be supported by the established novel end uses of scandium-aluminum alloys, including baseball bats, bike frames, handguns and others. However, the real demand growth in the next five years will be driven by the use of scandium in solid oxide fuel cells. According to data from FuelCellToday, from 2010 through 2014, global solid oxide fuel cell shipments increased at a compound annual growth rate of nearly 50%. At that rate, we're looking at an order of magnitude increase in scandium demand for solid oxide fuel cells by 2020.

 

Over a 5 to 10-year time horizon, the use of scandium-aluminum alloys in aerospace applications will also drive a lot of new demand growth. About 1,200 passenger aircraft are produced each year, each of which weighs around 75,000kg and contains around 50,000kg of aluminum. Airlines continue to demand larger aircraft and with those bigger planes comes the need to reduce weight without compromising safety. One conceivable way to achieve that is to use welded scandium-aluminum alloy fuselage panels rather than conventional aluminum alloy panels that need to be held together with thousands of heavy fasteners. And every kilogram reduction in airplane weight can result in 800 to 1,000 gallons in fuel savings over the lifetime of an airliner, so there's a tangible financial incentive to make it happen, which could explain the recent Airbus APWorks agreement with Clean TeQ. 

 

TGR: What about beyond 10 years?

 

Ryan Castilloux: Looking beyond the 5 to 10-year time horizon, I think that applications of scandium-aluminum alloys in the automotive industry hold the greatest potential. By 2020, the average light vehicle produced will contain about 135kg of aluminum. If just 1% of the roughly 100 million light vehicles that will be produced in 2020 use scandium-aluminum alloy rather than conventional aluminum, that would create over 400 tonnes of new scandium oxide demand annually. However, this absolutely needs to come at the right price point.

 

TGR: How should an investor approach this space at this stage?

 

Ryan Castilloux: Over the next five years, most demand growth for scandium is expected to come from use in solid oxide fuel cells (SOFCs). Keep an eye on the business performance of major SOFC manufacturers like Bloom Energy for an indication of how scandium demand is growing for the application. If recent years are any indication, expect demand to grow strongly. 

 

Over the longer term, applications in aerospace and automotive hold the greatest potential to drive demand to towering new heights. Because of long technology development lead times in these industries, it's likely that plans to use scandium in new cars or aircraft will hit the mainstream well before the material hits the assembly line so keep an eye out for early signals, be it patents, partnerships or company announcements. 

 

Lastly, if looking at emerging primary producers of scandium, grade is important but cash cost will be king. If looking at emerging secondary producers, make sure you understand the markets to which each project is exposed. Don't ignore "wildcard" projects that forecast negative cash costs after credits because if they reach production they may have serious pricing power over their peers.

 

TGR: Thank you for all your insights, Ryan.