STRATEGIC ANALYSIS FOR A NEW ENTRANT INTO THE NIOBIUM INDUSTRY By Andy William King Yu Bachelor of Commerce, University of British Columbia, 2002 Chartered Accountant, Chartered Accountant School of Business, 2004 Certified Public Accountant, Oregon Board of Accountancy, 2006 PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION In the Faculty of Business Administration © Andy William King Yu 2013 SIMON FRASER UNIVERSITY Summer 2013 All rights reserved. However, in accordance with the Copyright Act of Canada, this work may be reproduced, without authorization, under the conditions for Fair Dealing. Therefore, limited reproduction of this work for the purposes of private study, research, criticism, review and news reporting is likely to be in accordance with the law, particularly if cited appropriately. Approval Name: Andy William King Yu Degree: Master of Business Administration Title of Project: STRATEGIC ANALYSIS FOR A NEW ENTRANT INTO THE NIOBIUM INDUSTRY Supervisory Committee: ___________________________________________ Dr. Andrew von Nordenflycht Senior Supervisor Associate Professor ___________________________________________ Dr. Aidan Vining Second Reader Professor Date Approved: ___________________________________________ ii Abstract Taseko Mines Limited (“Taseko”) believes that it can penetrate the highly concentrated niobium industry through its Aley Niobium Project (“Aley”). This thesis addresses the following questions: Is the niobium industry attractive enough to further advance the exploration and development of Aley? If so, how should Taseko finance the additional exploration and engineering work necessary to develop Aley to the feasibility stage? This paper concludes that the following support Taseko’s assumptions about the attractiveness of the niobium industry and its entry into the industry: a foreseeable demand growth for niobium, a steadily increasing niobium price, and a low intensity competitive environment. The paper further concludes that Aley is an attractive niobium project and Taseko can be successful in exploring, developing and operating Aley. Due to the attractiveness of both the niobium industry and Aley as a niobium project, Taseko should further advance Aley to the feasibility stage. After evaluating a number of financing options as well as Taseko’s internal capabilities, Taseko should use the free cash flows generated from its operations to finance the advancement of Aley. iii Dedication I dedicate this project to my FAMILY My Papa, Antonio and my sister Dianne; To the memory of my beloved Mama, Nedila – your love has inspired me to be the best I can be – I miss your love and guidance every day; and To my lovely wife, Stella – you continue to inspire me to be the best I can be – your love keeps me going every day. iv Acknowledgements Thank you to my EMBA group – Polaris: Sheri Willey, J.P. Harrison and Brian Young for making the EMBA experience fun and full of good memories. We will always strive to chart the best course. Thank you to Mr. Russell Hallbauer (President and CEO of Taseko Mines Limited) and Peter C. Mitchell (former CFO of Taseko Mines Limited) for granting me permission to write about Taseko and the Aley Niobium Project. Thank you to Dr. von Nordenflycht and Dr. Vining for your guidance. I truly learned a lot during the process. Thank you to my sister, Dianne Michelle Yu, and to my father, Antonio Yu, for their support throughout the EMBA program. Lastly, thank you to my wife, Stella, for being supportive and patient despite my not spending much time with you during our first month of marriage while researching and writing this paper. v Table of Contents Approval ......................................................................................................................................... ii  Abstract ......................................................................................................................................... iii  Dedication ....................................................................................................................................... iv  Acknowledgements ......................................................................................................................... v  Table of Contents ........................................................................................................................... vi  List of Figures ............................................................................................................................. viii  List of Tables .................................................................................................................................. ix  Glossary ........................................................................................................................................... x  1: INTRODUCTION ...................................................................................................................... 1  2: BACKGROUND ........................................................................................................................ 3  2.1  Taseko Mines Limited ............................................................................................................. 3  2.1.1  The Gibraltar Copper-Molybdenum Mine ................................................................. 4  2.1.2  The New Prosperity Copper-Gold Project ................................................................. 5  2.1.3  The Harmony Gold Project ........................................................................................ 7  2.1.4  The Aley Niobium Project ......................................................................................... 8  2.2  Taseko’s Current Strategic Position ........................................................................................ 9  2.2.1  Taseko’s Current Strategy .......................................................................................... 9  2.2.2  Taseko’s Current Performance ................................................................................... 9  3: WHAT IS NIOBIUM? ............................................................................................................. 16  3.1  Mineralogy ............................................................................................................................ 16  3.2  Industrial Applications .......................................................................................................... 18  3.3  Substitutes ............................................................................................................................. 20  4: INDUSTRY ANALYSIS .......................................................................................................... 21  4.1  Industry Definition ................................................................................................................ 21  4.2  Industry Value Chain Analysis .............................................................................................. 21  4.2.1  Mining ...................................................................................................................... 21  4.2.2  Milling ...................................................................................................................... 22  4.2.3  Converting ................................................................................................................ 23  4.2.4  Transportation and Distribution ............................................................................... 24  4.3  Demand Analysis .................................................................................................................. 24  4.3.1  Historical Growth ..................................................................................................... 24  4.3.2  Geographical Distribution of Demand ..................................................................... 25  4.3.3  Demand Drivers ....................................................................................................... 26  vi 4.3.4  Demand Growth Forecast ......................................................................................... 27  4.4  Industry Competitive Structure and Environment ................................................................. 28  4.4.1  Major Producers ....................................................................................................... 29  4.4.2  Potential Entrants ..................................................................................................... 32  4.4.3  World FeNb Prices ................................................................................................... 34  4.5  Five Forces Analysis ............................................................................................................. 35  4.5.1  Rivalry ...................................................................................................................... 35  4.5.2  Threat of Entry ......................................................................................................... 36  4.5.3  Threat of Substitutes ................................................................................................. 37  4.5.4  Bargaining Power of Suppliers ................................................................................ 38  4.5.5  Bargaining Power of Buyers .................................................................................... 40  4.6  External Environment Trends Analysis ................................................................................ 41  4.6.1  Political Environment ............................................................................................... 41  4.6.2  Economic Factors ..................................................................................................... 43  4.6.3  Social Environment .................................................................................................. 45  4.6.4  Technological Factors .............................................................................................. 46  4.6.5  P.E.S.T. Effect on Five Forces Analysis .................................................................. 47  4.7  Sources of Advantage Analysis ............................................................................................. 48  4.7.1  Sources of Advantage of a Potential Niobium Project ............................................. 48  4.7.2  Relative Competitive Analysis of Aley as an Exploration Project ........................... 50  4.7.3  Sources of Advantage of a Niobium Exploration Company .................................... 51  4.7.4  Relative Competitive Analysis of Taseko as an Exploration Company ................... 52  4.7.5  Sources of Cost Advantage of the Incumbent Niobium Miners ............................... 53  4.7.6  Sources of Customer Utility Advantage ................................................................... 56  4.7.7  Relative Competitive Analysis of Taseko as a Niobium Miner ............................... 57  4.8  Industry Analysis Conclusion and S.W.O.T. Analysis ......................................................... 60  5: FINANCING OPTIONS .......................................................................................................... 63  5.1  Option #1: Use Cash Flow from Operations ......................................................................... 63  5.2  Option #2: Issue Flow-Through Shares ................................................................................. 63  5.3  Option #3: Establish a Joint Venture with a Partner ............................................................ 65  5.4  Option Evaluation Criteria .................................................................................................... 66  5.5  Feasibility Analysis ............................................................................................................... 68  6: CONCLUSION ......................................................................................................................... 71  Appendix A: Biggest Mining Companies in B.C. in 2012 Based on Revenues ........................ 72  Reference List: .............................................................................................................................. 73  . vii List of Figures Figure 1: Location of the Taseko’s Mineral Properties .................................................................... 3  Figure 2: Gibraltar’s Copper Production (2009 – 2012) ................................................................ 10  Figure 3: Copper Tons Milled at Gibraltar (Q1 – Q4 2012) .......................................................... 10  Figure 4: Taseko Revenue (2009- 2012) ........................................................................................ 11  Figure 5: Five Year Spot Copper Prices (USD per lb.) .................................................................. 12  Figure 6: Gibraltar Net Operating Cash Costs of Production per lb. of Copper (2011 compared to 2012) ........................................................................................................ 12 Figure 7: Gibraltar Production Cost Variance 2011 vs. 2012 ........................................................ 13  Figure 8: Taseko Adjusted Gross Profit and Adjusted EBITDA (2009-2012) .............................. 14  Figure 9: Taseko Share Price – One-Year Performance (Aug 2012 to Aug 2013) ........................ 14  Figure 10: Niobium in the Periodic Table ...................................................................................... 16  Figure 11: Niobium in Metal Form ................................................................................................ 17  Figure 12: FeNb Consumption by Principal Market: ..................................................................... 19  Figure 13: The FeNb Industry Supply Chain ................................................................................. 21  Figure 14: Open-Pit Mining vs. Underground Mining ................................................................... 22  Figure 15: The Milling Process ...................................................................................................... 23  Figure 16: World Demand for FeNb .............................................................................................. 25  Figure 17: World Consumption of FeNb by Region ...................................................................... 25  Figure 18: BRIC GDP, Steel Production and FeNb Consumption 2000-2010 .............................. 26  Figure 19: FeNb Usage Intensity and Steel Production, 2000-2010 .............................................. 27  Figure 20: FeNb Incumbent Producers Market Shares .................................................................. 28  Figure 21: Historical and Forecasted Niobium Price Performance ................................................ 34  Figure 22: Niobium Price Performance Relative to Substitutes ..................................................... 37  Figure 23: Mine Site Cash Cost Escalation .................................................................................... 38  Figure 24: Five Forces Analysis for the FeNb Industry ................................................................. 40  Figure 25: BRIC GDP Growth Forecast ........................................................................................ 43  Figure 26: S.W.O.T. Analysis ........................................................................................................ 61  Figure 27: Flow-Through Share Illustration ................................................................................... 64  . viii List of Tables Table 1: Niobium Products ............................................................................................................. 18  Table 2: Forecast Demand for FeNb (000s tonnes per year) .......................................................... 28  Table 3: CBMM’s Niobium Reserves ............................................................................................ 30  Table 4: Niobec’s Niobium Reserves and Resources ..................................................................... 31  Table 5: Catalão’s Niobium Reserves and Resources .................................................................... 32  Table 6: Current Niobium Projects ................................................................................................. 33  Table 7: Steel Consumption Short Range Forecast ........................................................................ 44  Table 8: Effect of P.E.S.T. Factors to the Five Forces in the FeNb Industry ................................. 47  Table 9: Relative Competitive Analysis of Niobium Exploration Projects .................................... 50  Table 10: Estimate LOM Revenues of Niobium Exploration Projects .......................................... 50  Table 11: Relative Competitive Analysis of Niobium Exploration Projects .................................. 52  Table 12: Niobec and Catalão 2012 Operating Profit/Margin ....................................................... 58  Table 13: Relative Competitive Analysis between Aley and Niobec ............................................. 59  Table 14: Net Asset Value Formula ............................................................................................... 66  Table 15: Financing Option Evaluation Ranking Based on Criteria .............................................. 68  Table 16: Financing Option Feasibility Analysis ........................................................................... 69  ix Glossary °C Degrees Celsius Aluminothermic Aluminothermic reactions are exothermic chemical reactions using Reaction aluminium as the reducing agent at high temperature. Carbonatite Carbonatites deposits are igneous rocks largely consisting of the carbonate Deposit minerals, calcite and dolomite which contain the niobium mineral pyrochlore, rare earth minerals or copper sulphide minerals. EBITDA Earnings Before Interest, Taxes, Depreciation and Amortization Feasibility Study A feasibility study is a report that explores the practical implications of a decision to proceed or abandon a particular project. Detailed feasibility studies require a significant amount of formal engineering work, are accurate to within 10-15% and can cost between ½-1½percent of the total estimated project cost. FeNb Ferroniobium (“FeNb”) is an iron niobium alloy with a niobium content of 60-70%. Flotation Flotation is a method of mineral separation whereby after crushing and grinding ore, froth created in slurry by a variety of reagents, causes some finely crushed minerals to float to the surface where they are skimmed off. g/t Gram per tonne HLSA High-strength low-alloy steel (“HSLA”) is a type of alloy steel that provides better mechanical properties or greater resistance to corrosion than carbon steel. Indicated Mineral An “Indicated Mineral Resource” is that part of a Mineral Resource for Resource which quantity, grade or quality, densities, shape and physical characteristics can be estimated with a level of confidence sufficient to allow the appropriate application of technical and economic parameters to support mine planning and evaluation of the economic viability of the deposit. The estimate is based on detailed/reliable exploration and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes that are spaced closely enough for geological and grade continuity to be reasonably assumed. Inferred Mineral An “Inferred Mineral Resource” is that part of a Mineral Resource for Resource which quantity and grade or quality can be estimated based on geological x