Intro to Fluorspar

Jon Hykawy, Ph.D., MBA Clean Technologies & Materials 647.426.1656 [email protected]

Alex Watt, MBA Associate 647.426.0474 [email protected]

Please see end of this report for important disclosures

Introduction to Fluorspar and an Acidspar Price Deck

Stone-Age Minerals into Space-Age Materials

The Fluorspar Industry

Fluorspar, also known as fluorite, is a mineral composed primarily of calcium fluoride (CaF2). It is generally categorized by CaF2 content as one of metallurgical grade (60–85%), ceramic grade (85–96%) or acid grade (97%+). Fluorspar is the dominant source for the chemical element fluorine (F), and due to F’s extreme chemical properties, fluorine is largely irreplaceable in its use. These uses include steel pickling, aluminum smelting, fluoropolymers and fluorochemicals, and thus we see fluorspar as playing a key role in driving economic growth in the future.

This industry report focuses on acidspar, and contract prices for this commodity, because acidspar is the highest-grade form of fluorspar and has the highest indirect use in downstream industry.

Price Increases, Softened by New Supply

Our analysis focuses on the primary downstream uses of fluorine and their projected growth in relation to global GDP, as well as near-term projects that we expect to come into production.

Based on our analysis, we believe the price of acidspar will generally trend upward with increasing demand. However, we believe that additional supply entering the market may move prices slightly downward for the next two years. For various reasons, spot prices for acidspar are higher than the contract prices we have analyzed, and these price levels are easily sufficient to maintain industry profitability.

Acidspar Price Deck

Our analysis yields annual average contract prices for acidspar as shown in Exhibit 1. The average annual price of acidspar through 2020 is projected to be $441/tonne.

Exhibit 1 – Projected Supply, Latent Demand and Acidspar Price

Source: Byron Capital Markets, Roskill, USGS

As with many other commodity materials, spot prices tend to be higher than contract prices. We do not have sufficient data to properly estimate how much higher average spot prices may be than contract prices.

Year 2013 2014 2015 2016 2017 2018 2019 2020

Supply (Mt) 4050 4700 4770 4800 4800 4800 4800 4800

Latent Demand (Mt) 4362 4584 4823 5075 5341 5622 5919 6233

Price (US$/t) $380 $377 $357 $388 $432 $480 $530 $582

August 1, 2013

Source: CKMI Minerals

Source: Wikipedia

Source: Samuel Steel Pickling Company

Source: images-of-elements.com

Introduction to Fluorspar and Price Deck for Acidspar

Jon Hykawy, Ph.D., MBA 647.426.1656 [email protected]

Alex Watt, MBA 647.426.0474 [email protected] Page | 2

Industry Background

Fluorspar, or fluorite, is a mineral form of the chemical compound CaF2. There are three principle grades of fluorite concentrate:

Metallurgical grade (metspar) = 60–85% CaF2 with a fairly lenient limit on silica content, and is used as a fluxing agent in the making of steels. In essence, the addition of metspar lowers the melting point of steel by an appreciable amount, making steel far less expensive to manufacture.

Ceramic grade = 85–96% CaF2 is used to make certain glasses and ceramics. Given the chemical stability of compounds containing F, these materials are able to withstand high temperatures without issue, and include cookware, labware and the like.

Acid grade (acidspar) = 97%+ CaF2, as well as a number of other criteria that depend on the buyer, usually including fairly tight tolerances on silica content. Acidspar is so called because it is converted to hydrofluoric acid (HF), the basic starting point for almost all fluorochemistry. Acidspar is also the starting point for the creation of one of the key compounds used in the smelting of aluminum, aluminum fluoride (AlF3). Aluminum refining is a major consumer of acidspar.

Fluorspar is the main source of commercial fluorine, which is an essential element that is used in a wide variety of mundane chemical processes. These processes include those related to metal smelting, as well as chemical compounds that play key roles in our modern lives and are becoming increasingly important globally.

Fluorine is the most electronegative element on the periodic table. In simple terms, chemical compounds incorporating F have the strongest chemical bonds possible. Strong chemical bonds take more energy and/or more time to break, so chemical compounds containing F are innately more stable at high temperatures, when attacked by other chemicals or when subjected to bombardment by ultraviolet light. That some chemical compounds made using fluorine also have other, unexpected properties makes them even more interesting.

Demand Side

Our examination of fluorspar demand is primarily driven by the past downstream uses of fluorine. By applying the categorization of Villalba et. al. (Exhibit 2) to production levels of acidspar, we can delineate the amount of acidspar used by various segments of the fluorine economy.




Exhibit 2 – The Fluorine Economy

Source: Villalba, Ayres, and Schroder, “Accounting for fluorine: production, use, and loss”, Journal of Industrial Ecology (2008)

The most important end-use segments of the fluorine economy are steel pickling, aluminum smelting, fluoropolymers and fluorochemicals. We assume that other areas, such as production of fluorosilicic acid, petrochemical catalysts or fluorine gas will grow no faster than global GDP. The effect of an underestimate in this regard will be minimal since these areas represent roughly 10% of the global demand for acidspar.

Steel and Aluminum Industry Demand

The steel industry is a sizeable user of HF in so-called “pickling” lines, where steel is stripped of any surface corrosion or contamination by an acid bath. Sensibly, the main driver of HF use in the steel industry should be, we believe, annual production of steel. It should be noted that metspar is often added to furnaces making steel to help lower the melting point and save money otherwise spent on energy. However, our focus is on the higher-grade acidspar used in pickling.

The World Steel Association recently noted that steel production grew only 1.2% in 2012, and the organization predicts that growth will be 2.9% in 2013 and a further 3.2% in 2014, with a long-term CAGR of 4.4% through 2020.

Chemical compounds containing F (cryolite [Na3AlF6] and aluminum fluoride [AlF3]) are used during the production of aluminum, as they melt at much lower temperatures than aluminum oxide (Al2O3) but also dissolve aluminum oxide and make it possible to electrolytically extract aluminum metal, consuming much less energy than would be required otherwise. This is usually referred to as the Hall-Héroult process. Consumption of acidspar is, we believe, most closely related to aluminum production levels, with estimates for required cryolite ranging between 10 kg and 23 kg/tonne of aluminum metal.




The International Aluminium Institute has published figures showing 2.8% growth in output in 2012, followed by a long-term projection of 4% thereafter, through 2020. We have built such growth into our model in the areas of steel pickling/metal fluoride and cryolite demand.

Fluoropolymer and Fluorochemical Industry Demand

Likely the most well-known fluoropolymer is Dupont’s Teflon, a compound properly known as polytetrafluoroethylene, or PTFE. The growth in the use of fluoropolymers is, we believe, more rapid than the steel and aluminum usage. The use of Teflon has passed a tipping point, with consumers in India and China now being able to afford the use of Teflon-coated (or similar) cookware and kitchen utensils. A fluoropolymer known as polyvinylidenefluoride (PVDF) is used in lithium batteries, as well as more broadly in the chemical and electronics sectors. Along with PVDF, a polymer known as fluorinated ethylene propylene (FEP) is used in the jackets of fiber optic cables. Fluoropolymers are also critical elements in certain composite materials.

Several authors have estimated growth rates that correspond quite well to levels of more than 50% above global GDP for 2006–2011. The spotty data that exists supports this conjecture. We assume a conservative growth level for this use of 150% of global GDP moving forward.

The most interesting growth area to us involves the various fluorochemicals, such as the refrigerants, including chlorofluorocarbons (CFCs), hydrochlorofluorocarbons (HCFCs), hydrofluorocarbons (HFCs) and hydrofluoroolefins (HFOs). This is most interesting because of the reduction of chlorine (Cl) in these chemicals due to the Montreal Protocol and a desire to reverse damage done to the ozone layer. Additionally, the ongoing development of new refrigerants such as HFOs (with their associated much lower levels of greenhouse gas activity compared to CFCs, HCFCs and even HFCs) is associated with an increasing use of fluorine. Exhibit 3 indicates that HFOs use the most F per unit mass, and have no Cl content.

Exhibit 3 – Growth in Fluorine Use with Advanced Refrigerants

Source: Byron Capital Markets

As the switch continues to these more evolved chemicals, and as the use of refrigerants in general increases with rising levels of GDP in the developing world, the need for acidspar increases dramatically. Given the growth in consumer wealth and available energy in developing economies such as China and India, we can foresee acidspar demand growth through more prevalent use of refrigeration in harsher climates. Our estimates essentially result in demand for the purposes of making fluorochemicals that grows at levels of at least global GDP, in spite of the growing use of alternative refrigerants, based on available data from 2004 to the present day. We conservatively extend this growth through 2020.

Demand Driver Growth Rates

Given the above demand drivers for the steel/aluminum industries and the fluoropolymer/fluorochemical industries, we have projected the growth rates for each area of acidspar use as shown in Exhibit 4.

Representative Chlorine (Cl) Content % Fluorine (F)

Refrigerant/Propellant (atoms per molecule) (by mass)

CFC-113 3 14%

HCFC-225cb 2 47%

HFC-152a 0 58%

HFO-1234ze 0 67%




Exhibit 4 – Growth Rates for Areas of Acidspar Use, Global GDP

Source: Byron Capital Markets, World Bank, World Steel Association, International Aluminium Institute

We can determine the historical levels of latent demand for acidspar using the historical growth rates from Exhibit 4; this is presented in Exhibit 5.

Exhibit 5 – Acidspar Supply and Latent Demand

Source: Roskill, USGS, World Bank, Byron Capital Markets

Using the correlations between the variables shown in Exhibit 5 and the historical acidspar pricing, we find that acidspar pricing is most strongly dependent upon previous latent demand (within our variables of consideration). In other words, it appears that acidspar pricing is driven, to a large measure, by the robustness of the market one year prior, an effect likely related to the use of contract prices. Accordingly, we can derive a single-variable linear model for acidspar price, with a correlation coefficient to data from 2003 through 2010.

Supply Side

Switching over to an examination of the supply side, we use historical production data from the U.S. Geological Survey, as well as additional supply that we expect to enter the market in the years ahead.

Historical

2004 2005 2006 2007 2008 2009 2010 2011 2012

Steel Production Growth 9.4% 8.0% 8.9% 7.8% -0.4% -7.9% 7.5% 6.2% 1.2%

Aluminum Production Growth 6.7% 6.9% 6.4% 12.4% 3.6% -6.3% 11.3% 6.9% 2.8%

Refrigerants 4.0% 3.5% 4.0% 4.0% 1.3% -2.2% 4.3% 2.7% 3.0%

Fluoropolymers 6.0% 5.3% 6.0% 5.9% 2.0% -3.3% 6.5% 4.1% 4.5%

Fluorosilicic Acid 4.0% 3.5% 4.0% 4.0% 1.3% -2.2% 4.3% 2.7% 3.0%

Catalysts 4.0% 3.5% 4.0% 4.0% 1.3% -2.2% 4.3% 2.7% 3.0%

Fluorine Gas 4.0% 3.5% 4.0% 4.0% 1.3% -2.2% 4.3% 2.7% 3.0%

Global GDP (World Bank) 4.0% 3.5% 4.0% 4.0% 1.3% -2.2% 4.3% 2.7% 3.0%

Projected

2013 2014 2015 2016 2017 2018 2019 2020

Steel Production Growth 2.9% 3.2% 4.4% 4.4% 4.4% 4.4% 4.4% 4.4%

Aluminum Production Growth 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%

Refrigerants 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%

Fluoropolymers 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5%

Fluorosilicic Acid 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%

Catalysts 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%

Fluorine Gas 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%

Global GDP (World Bank) 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%

2003 2004 2005 2006 2007 2008 2009 2010

Acidspar Price (US$/t) $121.00 $146.00 $175.50 $181.50 $195.00 $307.00 $304.50 $246.00

Production (Mt, Roskill) 3070 3389 3513 3637 3879 4040 3297 3792

Production (Mt, USGS) 2799 2961 2869 3397 3429 3605 3087 3484

Latent Demand (Mt) 2802 2879 3068 3266 3562 3709 3441 3739

Global GDP (World Bank) n/a 3.99% 3.50% 3.99% 3.95% 1.33% -2.22% 4.34%




Going back to 1913, CAGR in fluorspar output has been roughly at the level of global GDP growth, approximately 3.7%. Exhibit 6 presents a subset of this data from the past decade, broken down into metspar and acidspar. While not a compelling statistical sample, it is arguable from this data that acidspar production is rising faster than metspar production.

Exhibit 6 – Fluorspar Market, According to U.S. Geological Survey

Source: USGS, Byron Capital Markets

According to the USGS, Chinese production of fluorspar was a combined 3.3M tonnes in 2010. Looking forward at the incumbent producers, the largest, and the one with the most clearly stated expansion plans, is Mexichem (BMV:MEXCHEM). In 2010, Mexichem was producing roughly 600k tonnes of acidspar annually, and announced plans in the fall of 2012 to expand production to 1.2M tonnes of acidspar annually, through both acquisition of presently producing mines as well as expansion. We believe that only about 400ktpa of Mexichem’s projected 1.2Mtpa will be new production. Mexichem is widely acknowledged to have the lowest production costs in the industry, but it also has a stated goal of producing downstream products and not selling acidspar. How well this new capacity will be absorbed by the existing market is thus debatable, but we will assume all the acidspar to be produced by Mexichem is consumed. Mexichem intends to supply this 400ktpa of new production starting in 2014.

Historical

2003 2004 2005 2006 2007 2008 2009 2010

Metspar Acidspar Metspar Acidspar Metspar Acidspar Metspar Acidspar Metspar Acidspar Metspar Acidspar Metspar Acidspar Metspar Acidspar

Argentina 5,422 - 6,891 - 6,962 - 8,278 - 9,735 - 15,098 - 13,424 - 14,000 -

Brazil 21,884 34,462 16,824 40,948 24,469 42,043 22,231 41,373 20,657 44,869 18,209 45,032 15,161 28,803 19,500 44,600

China 1,350,000 1,300,000 1,400,000 1,300,000 1,400,000 1,300,000 1,300,000 1,800,000 1,350,000 1,850,000 1,350,000 1,900,000 1,300,000 1,600,000 1,400,000 1,900,000

Egypt 500 - 500 - 500 - 550 - 11,558 - 9,115 - 4,343 - 5,000 -

France 10,000 79,000 10,000 80,000 10,000 80,000 5,000 35,000 - - - - - - - -

Germany - 33,289 - 33,203 - 35,364 - 53,009 - 54,359 - 48,519 - 49,962 - 50,000

India 6,300 4,200 6,400 4,300 6,500 4,400 5,800 500 5,000 1,000 5,500 1,500 5,600 1,600 5,800 1,800

Iran 47,730 - 54,052 - 54,000 - 65,000 - 68,192 - 65,000 - 65,000 - 65,000 -

Italy - 26,387 - 17,915 - 15,000 - 8,000 - - - - - - - - Projected

Kazakhstan 3,500 - 4,000 - 4,750 - 30,000 - 64,000 - 66,300 - 67,000 - 67,000 -

Kenya - 95,278 - 108,000 - 97,261 - 83,428 - 82,000 - 98,428 - 15,667 - 44,500

Kyrgyzstan 3,973 - 4,000 - 4,000 - 4,000 - 4,000 - 4,000 - 4,000 - 4,000 -

Mexico 347,136 409,122 440,945 401,753 550,882 324,568 470,000 466,000 420,000 513,000 465,964 591,955 405,264 640,676 430,000 640,000

Mongolia 155,000 120,000 206,700 148,200 233,400 134,100 239,400 108,300 245,000 109,900 219,100 115,700 344,200 115,300 300,000 120,000

Morocco - 81,225 - 112,100 - 95,000 - 94,254 - 78,900 - 60,700 - 75,000 - 75,000

Namibia - 79,349 - 104,785 - 115,886 - 121,700 - 109,300 - 108,800 - 73,580 - 95,092

Pakistan 1,000 - 1,026 - 1,040 - 2,839 - 2,082 - 1,700 - 1,400 - 1,500 -

Romania 15,000 - 15,000 - 15,000 - 15,000 - 15,000 - 15,000 - 15,000 - 15,000 -

Russia 40,000 130,000 52,000 174,400 56,000 189,500 50,000 160,000 40,000 140,000 80,000 189,000 80,000 160,000 70,000 180,000

South Africa 14,000 221,000 15,000 250,000 14,000 252,000 16,000 240,000 17,000 268,000 18,000 281,000 8,000 196,000 10,000 190,000

Spain 10,503 129,195 10,000 135,505 10,000 133,495 17,241 135,864 19,437 132,760 21,436 127,300 10,598 111,810 11,700 123,300

Tajikistan 9,000 - 9,000 - 9,000 - 8,500 - 8,500 - 8,500 - 8,500 - 8,500 -

Thailand 2,180 - 2,375 - 295 - 3,240 - 1,820 - 29,529 - 120,340 - 100,000 -

Turkey 718 - 880 - 800 - - - - - - - - - - -

UK - 56,000 - 50,080 - 50,000 - 49,676 - 44,936 - 36,801 - 18,536 - 20,000

Totals 2,043,846 2,798,507 2,255,593 2,961,189 2,401,598 2,868,617 2,263,079 3,397,104 2,301,981 3,429,024 2,392,451 3,604,735 2,467,830 3,086,934 2,527,000 3,484,292

Combined Total 4,842,353 5,216,782 5,270,215 5,660,183 5,731,005 5,997,186 5,554,764 6,011,292




Pricing and Conclusion

Barring a near-term economic collapse, or a serious situation developing within either global steel or aluminum industries, we see no reason for acidspar prices to fall back to the price levels seen during the global financial crisis. Historical and projected prices for acidspar are shown in Exhibit 7.

Exhibit 7 – Average Acidspar Contract Pricing

Source: Byron Capital Markets, Roskill, Huxtable Associate, USGS

The average annual price of acidspar through 2020 is forecast to generally trend upward with demand, with a medium-term softening as a result of, primarily, additional supply from Mexichem. Overall, $441/tonne is the projected average annual price through 2020. Naturally, this assumes the entry to the market of at least four new producers, in addition to Mexichem’s upgraded output. We fully expect additional producers to be attracted by those increasing prices in 2016 and beyond, but we also fully expect the market to remain robust and profitable.

Historical

2003 2004 2005 2006 2007 2008 2009 2010

Supply (Mt) 2799 2961 2869 3397 3429 3605 3087 3484

Latent Demand (Mt) 2802 2879 3068 3266 3562 3709 3441 3739

Price (US$/t) $121 $146 $176 $182 $195 $307 $305 $246

Expected / Forecast

2011e 2012e 2013f 2014f 2015f 2016f 2017f 2018f 2019f 2020f

Supply (Mt) 3650 3700 4050 4700 4770 4800 4800 4800 4800 4800

Latent Demand (Mt) 3976 4162 4362 4584 4823 5075 5341 5622 5919 6233

Price (US$/t) $310 $352 $380 $377 $357 $388 $432 $480 $530 $582




IMPORTANT DISCLOSURES Analyst's Certification All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of the subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report. The particulars contained herein were obtained from sources which we believe to be reliable but are not guaranteed by us and may be incomplete. Byron Capital Markets Ltd. (“Byron”) is a Member of IIROC and CIPF. Byron compensates its research analysts from a variety of sources. The research department is a cost centre and is funded by the business activities of Byron including institutional equity sales and trading, retail sales and investment banking. Since the revenues from these businesses vary, the funds for research compensation vary. No one business line has greater influence than any other for research analyst compensation. Dissemination of Research Byron endeavours to make all reasonable efforts to provide research simultaneously to all eligible clients. Byron equity research is distributed electronically via email and is posted on our proprietary website to ensure eligible clients receive coverage initiations and ratings changes, targets and opinions in a timely manner. Additional distribution may be done by the sales personnel via email, fax or regular mail. Clients may also receive our research via a third party. Company Specific Disclosures: None

Investment Rating Criteria STRONG BUY BUY

The security represents extremely compelling value and is expected to appreciate significantly from the current price over the next 12-18 month time horizon. The security represents attractive value and is expected to appreciate significantly from the current price over the next 12-18 month time horizon.

SPECULATIVE BUY The security is considered a BUY but in the analyst’s opinion possesses certain operational and/or financial

risks that may be higher than average. HOLD The security represents fair value and no material appreciation is expected over the next 12-18 month time

horizon. SELL The security represents poor value and is expected to depreciate over the next 12-18 month time horizon. Other Disclosures This report has been approved by Byron for distribution in Canada for the use of Byron’s clients. Clients wishing to effect transactions in any security discussed should do so through a qualified Byron salesperson, registered in their jurisdiction. Informational Reports From time to time, Byron will issue reports that are for information purposes only, and will not include investment ratings. These reports will be clearly labeled as appropriate.

Investor Relations

Intro to Fluorspar