MAY 15th, 2024~Advancing Scandium Use in Metal Alloys for U.S. Weapon System Production and Sustainment

Advancing Scandium Use in Metal Alloys for U.S. Weapon System Production and Sustainment SBIR.gov
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OUSD (R&E) CRITICAL TECHNOLOGY AREA(S): Advanced Materials

The technology within this topic is restricted under the International Traffic in Arms Regulation (ITAR), 22 CFR Parts 120-130, which controls the export and import of defense-related material and services, including export of sensitive technical data, or the Export Administration Regulation (EAR), 15 CFR Parts 730-774, which controls dual use items. Offerors must disclose any proposed use of foreign nationals (FNs), their country(ies) of origin, the type of visa or work permit possessed, and the statement of work (SOW) tasks intended for accomplishment by the FN(s) in accordance with the Announcement. Offerors are advised foreign nationals proposed to perform on this topic may be restricted due to the technical data under US Export Control Laws.

OBJECTIVE: The Defense Logistics Agency (DLA) seeks to promote responsive, best value supplies of related materials, components, and systems to Department of Defense (DoD) customers and other DoD stakeholders. DLA investigates advancements in technologies and business processes for new and improved materials, more efficient means of their production, and competitive domestic supply chains which will lead to greater innovation in current and future defense systems combined with benefits to other commercial and government applications.
DLA is interested in exploring future defense industrial base uses for scandium (Sc) because of its unique properties as a pure metal and, as an alloying agent, to significantly increase the performance of traditional aluminum (Al) alloys, and therefore expand the use of Al alloys. Further benefits include, substituting aluminum-scandium (Al-Sc) alloys for incumbent expensive materials (e.g., titanium) and/or replacing material forms that are both costly and difficult to source (e.g., forging, complex machined parts, and extrusions), as Al-Sc alloys are highly compatible with additive manufacturing techniques.
Scandium can impart high strength properties to Al alloys which allows for reduced weight designs (compared to traditional Al alloy) and components for a wide range of defense platforms and other military items. Al-Sc alloys exhibit increased resistance to high temperature and corrosion when compared to common Al alloys. Of further interest, is the high weldability of Al-Sc alloy. Alloys with high weldability can reduce manufacturing labor and other costs associated with joining components and structures. Al-Sc alloy can be especially useful when used as a powder or wire in additive manufacturing. Potential DoD applications for Al-Sc alloy include the production and sustainment of missiles, aircraft, space launch vehicles, satellites, solider systems, military ground vehicles, marine applications, and other weapon systems (e.g., small arms and artillery).
While Sc metal has many attractive material characteristics, its cost is frequently considered prohibitive for Al alloying purposes compared to other alloying elements. In addition, the supply of Sc metal and compounds is limited and highly concentrated in a small number of foreign countries including China and Russia. As such, there is reluctance to develop wide scale uses for Al-Sc alloys for many applications including DoD weapon systems and large-scale non-defense applications (e.g., commercial aviation and automotive manufacturing).

In the United States mining operations for Sc ore are being planned and developed to feed a domestic supply chain and, recently, new sources of Sc now exist in Canada (an important member country of DoD’s National Technology Industrial Base). There are also established defense industrial base companies and other businesses in both countries that can significantly contribute to development and commercialization of Al-Sc supply chains for both military and commercial applications.

Given the important properties of Sc, and in anticipation of increased affordable domestic supply, DLA is interested in engaging small businesses with the capability to develop and expand expertise and industrial base production capacity of Sc-containing materials, especially in areas relevant to the supply of Al-Sc alloy components for DoD end-uses.

Specific materials, processing and manufacturing areas of interest include:

• Raw material refining
• High purity Sc metals, compounds, and alloys
• Additive manufacturing feedstock
• Additively manufactured DoD systems prototype parts

Research and Development (R&D) efforts selected under this topic shall demonstrate and involve a degree of risk where the technical feasibility of the proposed work has not been fully established. Further, proposed efforts must be judged to be at a Technology and/or Manufacturing Readiness Level (TRL/MRL) 6 or less, but greater than TRL/MRL 3 to receive funding consideration.

TRL 3. (Analytical and Experimental Critical Function and/or Characteristic Proof of Concept)
TRL 6. (System/Subsystem Model or Prototype Demonstration in a Relevant Environment)

DESCRIPTION: DLA seeks SBIR project opportunities in new and innovative materials, processing, and manufacturing of Sc compounds, Sc metal, Al-Sc alloy and master alloys, and related areas of additive manufacturing. While Al and Sc are the primary metals of interest for this solicitation, it is anticipated that additional alloying elements may be included to tailor the final alloy properties. Specific areas of interest include:

• Processing mining ores (and/or scrap waste streams) into high purity Sc compounds (ex., Sc-oxide) feedstock for production of pure Sc metal, Al-Sc alloy, master alloys, etc.
• Commercial production of high purity Sc metal (domestic feedstock preferred)
• Commercial production of Al-Sc alloy powder and wire for additive manufacturing
• Demonstrating additively manufactured Al-Sc alloy parts for DoD weapon systems.

DLA seeks opportunities that include strong industry supply chain collaboration with established materials companies relevant to the above areas of interest in Sc materials processing, as well as strong collaboration with traditional or non-traditional DoD weapon systems suppliers. DLA similarly desires SBIR opportunities that include collaboration with interested DoD weapon system program offices and/or relevant DoD RDT&E organizations.

PROJECT DURATION and COST: Proposals exceeding these limits will not be evaluated.
PHASE I: Not to exceed a duration of 12 months and cost of $100,000.
PHASE II: Not to exceed a duration of 24 months and cost of $1,000,000.

PHASE I: Phase I will demonstrate proof of concept in one or more of the above areas of interest in scandium materials and processing. A technology development and commercialization roadmap will be produced along with a preliminary business case analysis for transition and industrial scale up. Strong industry supply chain collaboration with established materials companies relevant to the above areas of interest in scandium materials and processing is expected, along with involvement of one or more traditional or non-traditional DoD weapon systems suppliers. Strong support from one or more interested DoD weapon system program offices and/or relevant DoD RDT&E organization required.

PHASE II: Depending on Phase I results, Phase II will consist of establishing pilot scale or low-rate production of technologies that are successfully demonstrated in Phase I. Additional activities may include further materials and processing testing, characterization, and data base development of related materials and processes that can be used by future producers of scandium materials of interest (e.g., compounds, metals, alloys, and master alloys as well as related additive manufacturing powders and wire, and fabricators of aluminum scandium end-items). Development of a detailed business case analysis and commercialization plan will be required.

Strong industry supply chain collaboration with established materials companies relevant to the above areas of interest in scandium materials and processing, along with involvement from traditional and/or non-traditional DoD weapon systems suppliers, is required, along with strong support from interested DoD weapon system program offices and/or relevant DoD RDT&E organizations.

Innovative materials and processes, and commercially viable sources of their supply, shall be developed with the goal to readily transition to production in support of DoD and its supply chains.
PHASE III DUAL USE APPLICATIONS: Phase III is any proposal that derives from, extends or completes a transition from a Phase I or II project. Phase III proposals will be accepted after the completion of Phase I and or Phase II projects.
There is no specific funding associated with Phase III, except Phase III is not allowed to use SBISTTR coded funding. Any other type of funding is allowed.
Phase III proposal Submission. Phase III proposals are emailed directly to DLA SBIR2@dla.mil. The PMO team will set up evaluations and coordinate the funding and contracting actions depending on the outcome of the evaluations. A Phase III proposal should follow the same format as Phase II for the content and format. There are, however, no limitations to the amount of funding requested, or the period of performance. All other guidelines apply.

Transition Plan

1. Period of Performance: TBD
2. Budget: $ TBD

This Phase of the project should include:

1. Delivery of a production level product to J68 ready for integration into the overall DLA Enterprise system.
   
2. Develop a sustainment plan to support the delivered system for the lifetime of the program.
   

REFERENCES:

1. Mineral Commodity Summaries 2024, U.S. Department of the Interior, U.S. Geological Survey

Jones, R.; Peng, D.; Ang, A.; Aston, R.W.; Schoenborn, N.D.; Phan, N.D. A Comparison of the Damage Tolerance of AA7075-T6, AA2024-T3, and Boeing Space, Intelligence, and Weapons Systems AM-Built LPBF Scalmalloy. Aerospace 2023, 10, 733.

https://doi.org/10.3390/aerospace10080733

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1. Conclusions Noting that AA7075-T6 is widely used by both fixed- and rotary-wing military aircraft, as well as in space structures, the initial objective of this study was to directly compare crack growth in identical AA7075-T6 and Scalmalloy specimens tested in the same servohydraulic facility under the same stresses and by the same operators. The experimental data reveal that Boeing Space, Intelligence, and Weapons Systems AM-built Scalmalloy appears to be more damage tolerant than the conventionally built aluminium alloy AA7075-T6. As a result, Boeing Space, Intelligence, and Weapons Systems printed Scalmalloy would appear to be particularly attractive for use on a range of military aircraft, as well as for space applications. It also highlights the potential for Boeing Space, Intelligence, and Weapons Systems Scalmalloy to be used to extend the operational lives of military aircraft through the on-demand printing of limited life Scalmalloy replacement parts. The results of this initial test program have led to the hypothesis that the da/dN versus ∆K curves associated with Scalmalloy and conventionally built AA2024-T3 should be similar. This hypothesis was, subsequently, validated by comparison to AA2024-T3 da/dN versus ∆K curves taken from the Nasgro database. This observation subsequently led to the conjecture that the small crack da/dN versus ∆K curves associated with Scalmalloy and AA2024-T3, which are needed for a durability analysis, should be similar. If this hypothesis can be confirmed, then given that: (i) Scalmalloy has a yield stress significantly greater than that of AA2024-T3; (ii) AA2024-T3 is widely used in both fixed- and rotary-wing aircraft; (iii) MIL-STD-1530D mandates that there must be no yield at 100% DLL and the US Joint Services Structural Guidelines JSSG2006 states that there should be no yield at 115% DLL, the use of Scalmalloy for both fixed- and rotary-wing aircraft, and drones would appear to be very attractive. As such, the next stage in the study will involve the determination of valid upper bound da/dN versus ∆K curves for the growth of short cracks in AA2024-T3.

GIVEN ONCE FINANCED:

ON Sept. 28, 2023~ NioCorp ANNOUNCES Plans to Produce Made-in-USA Scandium Master Alloy to Supply Lightweight Parts to Vehicles

NioCorp Plans to Produce Made-in-USA Scandium Master Alloy to Supply Lightweight Parts to Vehicles NioCorp Developments Ltd.
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NioCorp Now Working With Automakers To Develop Aluminum-Scandium Vehicle Parts That Are Stronger, Lighter, Higher-Performing, and Fully Recyclable
Prototype Aluminum-Scandium Alloy Parts Have Dual Uses in Commercial and Military Applications
EV/Hybrid Sales Forecasts Predict Tens of Millions of Units Globally By 2030^\1]), Underscoring the Importance of Bringing New Sources of Non-Chinese and Non-Russian Scandium Supply Online, NioCorp Says
CENTENNIAL, Colo. (August 14, 2023) – A phased program to establish U.S. commercial production of aluminum-scandium (“AlSc”) master alloy took another step forward recently as NioCorp Developments Ltd. (“NioCorp” or the “Company”) (NASDAQ:NB) (TSX:NB) and its development partner Nanoscale Powders LLC (“Nanoscale”) successfully produced scandium metal at pilot-scale at a facility owned and operated by Creative Engineers in Pennsylvania.
The next step in the pilot-scale program is to produce kilogram-sized ingots of AlSc master alloy for independent testing and commercial product samples. The first of these AlSc master alloy ingots is expected to be produced in the coming weeks.

Three-Phase Commercialization Program

NioCorp and Nanoscale are pursuing a three-phased development plan for commercial production of AlSc master alloy. The goal of this program is to achieve full-scale AlSc master alloy production at approximately the same time as the Elk Creek Critical Minerals Project (the “Elk Creek Project”) achieves commercial operation and planned production of approximately 100 tonnes per year of scandium oxide.

1. Pilot scale batch production of 10 kilogram master alloy ingots**. Master alloy produced will be fully analyzed (metals and gases) at independent test facilities. Ingot samples will be available for third-party examination and prospective customer testing / sampling.**
2. Commercial demonstration production of 100 kg ingots**. NioCorp expects to perform this work at a third-party ingot casting facility, which is expected to significantly reduce development timelines and cost as well as leverage existing facility permits and operator experience. The objective of this stage will be to optimize the production process and operating conditions.**
3. Full scale commercial production of master alloy**. Assuming successful results at the pilot scale and commercial demonstration stages, and once project financing is obtained, NioCorp intends to secure an Engineering, Procurement, and Construction contractor to construct, start up, and commission a full-scale production facility with the capacity to consume up to the Elk Creek Project’s projected scandium production of approximately 100 tonnes (Sc metal contained in master alloy) per year. NioCorp intends to co-locate the full-scale production facility with the Elk Creek Project in Nebraska in order to take advantage of the infrastructure (i.e., low-cost power, water, and natural gas) that will be in place for mining operations.**

NioCorp and Nanoscale also plan to develop recycling approaches for scrap alloy, including work-in-process material and post-production scrap.
Qualified Persons:
Scott Honan, M.Sc., SME-RM, COO of NioCorp Developments Ltd., a Qualified Person as defined by National Instrument 43-101, has reviewed and approved the technical information and verified the data contained in this news release.

***SEE RESPONSES FROM NIOCORP/JIM SIMS FROM AUGUST 14, 2023 ~Good morning - Jim!

While waiting for Niocorp’s 2023 F.S. Release… The announcement for Scandium Alloy Production & Scandium alloy funding are most welcome!

Leading me to add to my line of questions regarding Scandium & (Niocorp).

A) Would Niocorp qualify for a portion of this recent funding once approved by Congress? Moving forward.
RESPONSE:

"This funding was placed in the FY24 DoD Appropriations bill at the request of Nebraska Senator Deb Fischer, a member of the Senate Appropriations Committee, for the purpose of helping to fund NioCorp's effort to establish domestic commercial production of AlSc master alloy. There is always a process within the DoD to select appropriate projects with funding provided to it by Congress. In this case, however, the House and Senate Armed Services Committees provided additional guidance to DoD on this topic in their respective National Defense Authorization bills, including prioritizing domestic production of such materials. "

Next Question ~ For context:

(Imperial mining, CleanTech, & Scandium International all have patents on Scandium & Sc aluminum alloy products. Rio Tinto has established a North American domestic supply(@15 tons/year with expansion capabilities) & has established a working relationship with Boeing.
Niocorp has produced Scandium aluminum with both IBC (under Chris Huskamp now with Jabil) & with Ames Lab, but has yet to patent any process or materials.
Niocorp has established a working relationship with Nanoscale to produce patentable Scandium Aluminum products in the years ahead…)
Jim-
B) How Does/will Niocorp’s expected Scandium production & future patentable Scandium materials be utilized by management moving forward? Once realized…. ; and How do/would they compare to those materials & alloys already developed or patented?
RESPONSE:

"Latent markets for scandium oxide and aluminum-scandium master alloy – both commercial and military -- are quite large, and we are working with a number of potential scandium consumers and related technology companies interested in scandium. We will make announcements in this area as developments require. In general, we don’t comment on detailed commercial business strategies except in the course of necessary announcements and/or public filings. "

C) In addition to Niocorp’s collaboration with NanoScale. Is Niocorp currently working/engaged with other entities such as (Ames Lab, DoD, DoE, Chris Huskamp/Jabil & others) on Scandium Materials/patents?
Or on Niobium, Titanium, or Rare Earth future products (Oxides, Magnets…)
Please comment where possible.
RESPONSE:

"There are multiple such engagements ongoing now for each product in our planned product offering. In general, we don’t comment on commercial business strategies except in the course of necessary announcements and/or public filings. "

D) Are other Entities besides EXIM Bank and Stellantis still interested as possible Debt/Equity finance or Anchor Investos partners moving foward?
Leading to a Final Elk Creek Finance package?
RESPONSE:

"YES!"

FOLLOWING THE TRAIL....

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NIOBIUM, TITANIUM, SCANDIUM & RARE EARTH MINERALS: ~H.R. 2670 - NATIONAL DEFENSE AUTHORIZATION ACT FOR FISCAL YEAR 2024~ The urgent need to diversify the United States Defense Industrial base to advance domestic capability, production, modernization, and resilience!

CRPT-118hrpt125.pdf (govinfo.gov)

Page #251~Secure Supply of Niobium Oxide

Page # 232 & 233 ~Extraction and Processing Methods of Rare Earth Elements and Critical Minerals

Page # 223 -224 Aquisition of Titanium

Page # 225-26 ~Aluminum-Scandium Master Alloy Production

The committee recognizes that China is a major producer of high-purity scandium oxide, which has many powerful applications in defense technologies, including strengthening and light-weighting defense and commercial aviation systems. As scandium oxide pro-duction is established in the United States, a missing supply chain component is the conversion of scandium from its oxide form to aluminum-scandium (AlSc) master alloy. This process step is required for utilization of U.S.-mined scandium by many defense applications. At present, production capacity of AlSc master alloy is limited to one facility in the United States. The committee recognizes that the United States may soon become a major producer of highpurity scandium oxide by virtue of a proposed mine and mineral processing project in Nebraska. The committee recognizes the defense-wide importance of a vertical domestic supply chain for both Scandium Oxide and AlSc master alloy and the critical importance of both materials for the production of air-, land-, and sea-based combat systems.
NIOBIUM, TITANIUM, SCANDIUM & RARE EARTH MINERALS: ~H.R. 2670 - NATIONAL DEFENSE AUTHORIZATION ACT FOR FISCAL YEAR 2024~ The urgent need to diversify the United States Defense Industrial base to advance domestic capability, production, modernization, and resilience!
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AUGUST 9, 2023 ~Nebraska’s U.S. Senator Deb Fischer and Congressman Don Bacon Secure $10 Million in Federal Funding for U.S. Aluminum-Scandium Master Alloy Production~

Nebraska’s U.S. Senator Deb Fischer and Congressman Don Bacon Secure $10 Million in Federal Funding for U.S. Aluminum-Scandium Master Alloy Production NioCorp Developments Ltd.
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FORM YOUR OWN OPINIONS & CONCLUSIONS ABOVE:

IMHO- "I think the DoD is still interested! plus...."

All the above BODES WELL FOR NIOCORP & for all the Goodies they will produce -(The Critical Minerals Niobium, Scandium, Titanium, Terbium, Dysprosium, Praseodymium, Neodymium, {lus BYPRODUCTS ~CaCO3, MgCO3 & some IRON STUFF~) should Financing be achieved.... !

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FULL STEAM AHEAD NIOCORP! Waiting with many....

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Chico

From the prior DD in this series [1], we know that ComputerShare can “give” the DTC registered DSPP shares to hold onto for operational efficiency which are then “given back” as shares beneficially owned “for the benefit of” (“FBO”) DSPP Plan Participants at ComputerShare, as illustrated in this diagram:
From The Prerequisite DD
It’s time to explore what “operational efficiency” benefits may be gained by DSPP shares going around this roundabout. At first glance, shares are basically just going in a big circle from DSPP Plan Participants with registered ownership DSPP shares at ComputerShare heading to the DTC, who hands shares to ComputerShare’s broker who maintains those shares for the benefit of ComputerShare who holds those shares for the benefit of Plan Participants. While I think it’s unlikely that shares just go around in a big fat circle for no reason, I do remember people getting onto flights to literally go nowhere a few years ago [CNN, NYT]; so maybe these operational efficiency shares simply miss hanging out at the DTC?
Let’s look more closely… While title is held by a registered DSPP Plan Participant, ComputerShare is giving the DTC possession [1] of registered DSPP shares to the DTC to hold for operational efficiency which then ultimately end back in the possession of ComputerShare’s broker (who isn’t lending out shares) for the benefit of ComputerShare for the benefit of Plan Participants. If we treat the DTC’s operations as a big black box, we see registered shares going into the DTC black box and beneficially owned shares coming out of the black box to ComputerShare for Plan Participants.
DTCC Black Box: Inputs vs Outputs
Investopedia says that shareholders have rights, with a list of 6 main rights including:

1. Voting power on major issues.
2. Ownership in a portion of the company.
3. The right to transfer ownership.
4. Entitlement to dividends.
5. Opportunity to inspect corporate books and records.
6. The right to sue for wrongful acts.

By contrast, beneficial owners only need to have or share 2 of those rights (bolded) according to the definition of beneficial owner in Rule 13d-3: the power to vote and the power to dispose of the security (e.g., sell).

§ 240.13d-3 Determination of beneficial owner.
(a) For the purposes of sections 13(d) and 13(g) of the Act a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares:
(1) Voting power which includes the power to vote, or to direct the voting of, such security; and/or,
(2) Investment power which includes the power to dispose, or to direct the disposition of, such security.

ComputerShare basically confirms this list (except for the right to sue as that’s probably not one their issuer customers would emphasize) and adds that beneficially held shares may be lent by brokers generally (but not by ComputerShare’s broker).
Registered Shareholder Rights vs Beneficial Owner Rights
Maybe you’ve had different experiences from me, but I’ve never known Wall St to deliver more than the bare minimum they’re contractually obligated to. Which means the DTC black box is very likely watering down shareholder rights from the 6 that go in down to the 2 which come out. (And yet, we’re supposed to believe that all shares are equal. 🙄)
Dividends (#4 on the list) [2] may be the clearest example of a watered down shareholder right. Registered shareholders have the right “to directly receive share dividends” [CS FAQ] which means if a company (e.g., GameStop or OverStock) issues a dividend, registered shareholders have the right to directly receive the dividend as issued. If the company issues a crypto dividend (as OverStock tried to do), registered shareholders have the right to directly receive the issued crypto dividend. Beneficial shareholders would get an issued dividend, if available, or a cash equivalent if not. Historically, stock and other dividends to beneficial shareholders could easily be delivered as a cash equivalent, a watered down form. Crypto dividends don’t scale well with shorts (both naked and legal via, for example, share lending and borrowing) because crypto tokens are unique which makes it abundantly clear why a crypto dividend was nixed for a heavily shorted idiosyncratic stock like GameStop; especially given GameStop’s particularly active shareholders.
Ownership (#2 on the list) may be the second clearest example of a watered down shareholder right as more security interests to shares exist in the DTC’s beneficial ownership system than there are shares; with the SEC saying beneficial shares get a pro rata interest in the securities of that issue held by DTC. [See End Game Part Deux: Problems at the DTCC plus The Bigger Picture, particularly the section “The Pie Is Shrinking: Get Out (And DRS) While You Can”]
Voting (#1 on the list) is also an example watered down shareholder right; this one having a long history on this sub with, for example, BroadRidge tossing 7B votes and bragging about it. (Beneficial owners only need to get shared voting rights per Rule 13d-3 above so those 7B “shared” votes just lost out to who they shared with.) Unlike other beneficially held shares, voting rights for DSPP shares are not watered down as ComputerShare sends registered holders their voting forms.

Operational Efficiency Shares, Whatcha Doing In There?

A big black box is a pretty good description of the DTC which does not want us to know the ins and outs of what’s going on. Black holes are a pretty good example of a big black box and, most importantly, we know a lot about black holes even though they can’t be directly observed. Just as we learned about black holes without direct observation, we can similarly learn a lot about the Operational Efficiency shares even though we can’t directly observe them in the DTC habitat.
Even though we can’t look inside the DTC’s big black box, it turns out we don’t really have to in order to identify some benefits from these operational efficiency shares taking their roundabout trip to nowhere.
Locates A few commenters have suggested that OE shares could be used for locates so I’ll address this first. Possible, yes. But I don’t view this as the most interesting use for OE shares. Brokers are supposed to “locate” securities available for borrowing before short selling. [Wikipedia)] Basically, before selling short a broker is supposed to find a source to borrow. The “locate” requirement does NOT require the security to be borrowed before short selling which can result in a legal naked short.
You may be wondering why I don’t view “locates” as particularly interesting for OE shares if short sellers need to locate shares to borrow before shorting. Well, market makers are also exempt from this requirement as long as they’re market making. 🙄 On top of the market maker exemption, remember House Of Cards? In House Of Cards 3 [SuperStonk], we learned about the now 🤦‍♂️ hilarious F**3 key **- yeah, the one on a keyboard. Brokers like Goldman found the locate requirement simply too much work so they would press the F3 key and their system would auto-approve the locate requirement based only on the number of shares available to borrow at the beginning of the day; regardless of whether those shares were still available to borrow or not.
House Of Cards 3
Meaning as long as there were some shares available to borrow at the beginning of the day for their share copying system, brokers could just smash the F3 key to make as many copies of shares as they need. Even if only 1 share was available to borrow at the beginning of the day, a broker could simply smash the F3 key 100 times to approve the locate requirement for 100 shares.
So while OE shares could be used for locates, they wouldn’t need many shares each day to make an unlimited number of copies - even just 1 is enough.
Lending shares on the other hand…
Rehypothecation Rehypothecation is the reuse of customer collateral for lending. Per a 2010 IMF Working Paper, The (sizable) Role of Rehypothecation in the Shadow Banking System,

Rehypothecation occurs when the collateral posted by a prime brokerage client (e.g., hedge fund) to its prime broker is used as collateral also by the prime broker for its own purposes.

This IMF paper defined a “churning factor” to measure how many times an asset may be reused; and then estimated a churning factor of 4 noting that it could be higher because international banks (e.g., HSBC and Nomura) were not sampled. This IMF paper found a single asset may be lent and borrowed 4 times, or more; an average which could be higher globally.
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Churn Factor Could Be Higher Globally
How much higher? We may have seen a churn factor as high as 10 for a less idiosyncratic meme stock per my prior post, Estimating Excess GME Share Liquidity From Borrow Data & Churn Factor. Presumably, the idiosyncratic meme stock would have a higher churn factor (but not that important for this post).
More recently (2018), the Federal Reserve published this Fed Note on ​​The Ins and Outs of Collateral Re-use studying how often collateral is reused (i.e., rehypothecated) for Treasury & non-Treasury securities [3] with a beautiful figure illustrating how “for any given moment in time, one security can be attributed to multiple financial transactions” where a share could be posted multiple times through Security Financing Transactions (SFTs) and sold short. [4] Sounds familiar, right?
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Figure 6c of this Fed Note shows a Collateral Multiplier over time illustrating how “PDs [Primary Dealers] currently re-use about three times as many securities as they own for non-Treasury collateral and seven times as many securities as they own for U.S. Treasury securities”.
AKA \"Money Multiplier\"
The Fed Note describes their Collateral Multiplier as a “money multiplier” (Seriously, I couldn’t have made this up in a million years.),

In a sense, our Collateral Multiplier is akin to a "money multiplier," as it compares private liabilities created by a firm with the amount of specific assets held to create those liabilities. [​​The Ins and Outs of Collateral Re-use]

And, of course, the Collateral Multiplier aka “money multiplier” ratio goes up when there’s less collateral available and down when there’s more collateral available. (Can I get one of these multipliers?)

Intuitively, we expect the ratio to increase when collateral is scarce and to decrease when collateral is more abundant.

Which means Primary Dealers [Wikipedia has a list of familiar names including Deutsche Bank, JP Morgan, Morgan Stanley, Nomura, BofA, Citigroup, TD, UBS, and Wells Fargo; amongst others] can simply kick securities around a few extra times (e.g., with SFTs and short sells) to effectively multiply the amount of money and/or collateral they have any time they need it. (Within limits, I hope…)
Thus, rehypothecation is a very interesting use of Operational Efficiency shares from ComputerShare as various primary dealers can simply “multiply” the number of shares they have – a concept that we’re already quite familiar with. As rehypothecation, short sells, and securities financing transactions are all perfectly legal, rehypothecating more GameStop shares provided to the DTC via operational efficiency satisfies Ground Rule #2 [defined in (1/n) in this series],

1. All parties involved are all generally attempting to operate within the bounds of the laws and regulations wherever possible. (I know we often scream “crime”, but why break a law when money can simply [re]write laws to make activities legal. Regulatory failure is the reason why something that should be criminal, isn’t. And regulatory failure happens when armies of lawyers are paid to create and exploit loopholes so that actions which should be criminal, are instead legal.)

We can update our conceptual model to include rehypothecation to more clearly illustrate how Operational Efficiency shares held in the DTC can be rehypothecated (e.g., with SFTs and short sells) until a watered down share is delivered to ComputerShare’s broker to hold FBO ComputerShare, who holds the watered down share FBO DSPP Plan Participants.
https://preview.redd.it/bt3gnx99si0d1.png?width=4764&format=png&auto=webp&s=7b0b72b935f740e8a3036f88e1a4e1dfb57dd46c
You might notice from this illustration that ComputerShare has been telling the truth satisfying Ground Rule #1 [defined in (1/n) in this series]. Neither ComputerShare’s nor their broker lend or need to lend shares. All the rehypothecation happens “upstream” amongst other DTCC and NSCC Participants until shares are finally delivered to ComputerShare’s broker at the end of the “Churn Chain”. ComputerShare has made no representations about what the DTC can or can not do with the shares in their possession. And, realistically, ComputerShare is in no position to make any representations about what happens within the DTCC system – ComputerShare is only responsible for themselves and, to some extent, their broker.
The Fed Note and IMF paper found assets may be churned and reused 3-4 times (overall market average) which means the end of the chain is typically around D3 or D4. (If my prior DD estimates are correct, there were signs a less idiosyncratic meme stock may be churned up to 10 times ending the chain at D10 which suggests a potentially longer chain for GME, the idiosyncratic meme stock.) If there is no collateral reuse for an asset, the chain would have zero length meaning Operational Efficiency shares go straight from the DTC directly to ComputerShare’s broker. (Programmers almost certainly understand zero length chains very well – go find one if you need an explanation.)
GameStop is idiosyncratic, thus atypical. Per the IMF paper, collateral reuse increases when collateral is scarce and decreases when collateral is abundant (quoted above). If we consider GameStop investors have been direct registering shares (i.e., DRS) and registering shares (e.g., DSPP) thereby removing title and/or possession of shares from the DTC/DTCC/Cede & Co, then GameStop share availability has been becoming more scarce and the “Churn Chain” for GME should be longer than average representing a higher collateral multiplier and churn value.
While we may not know the exact length of the Churn Chain for GameStop shares, we can pretty well surmise that it’s not a zero length Churn Chain where there is no collateral reuse based simply on scarcity. After all, a shortage of available shares is, by definition, required for any short squeeze (including MOASS). Requests by brokers to enable Share Lending [5] is another example indicator that GameStop shares are scarce.
In addition, according to Investopedia [6], “Banks, brokers, or other financial institutions may navigate a liquidity crunch and access capital by rehypothecating client funds” and we’ve seen indicators showing us banks are in deep trouble:

• SEC FTD-ing FTDs Because A Clearing House 🪦 and Big Banks Bankrupting Soon
• Banks On The Brink Of Bankruptcy since March 2023
• Fed & FDIC 🦵🥫 can't hide unrealized losses
• Bank Term Funding Program: The Not-A-Bailout Can Kicking Bailout

The downside to rehypothecation is the higher leverage increases risks of default and a single collapse can start a chain reaction knocking down others like dominos.

There are also leverage considerations that increase that risk of default. Overleveraged investments often face covenants; when specific conditions are met, trading accounts may receive a margin call or face debt default. As a row of dominos fall after a single collapse, a single margin call may cause other debts to fail their account maintenance requirements, setting off a chain reaction that places the institution at higher risk of overall default. [6]

This risk for rehypothecation sounds exactly like what the Options Clearing Corporation was complaining about to the SEC when the ​​OCC Proposed Reducing Margin Requirements To Prevent A Cascade of Clearing Member Failures [SuperStonk] early 2024. If the OCC can eliminate margin calls, then no dominos get knocked down. (Thankfully, apes have done a phenomenal job in convincing the SEC that this OCC proposal is a very bad idea. Support the SEC’s rejection of this as Simians Smash SEC Rule Proposal To Reduce Margin Requirements To Prevent A Cascade of Clearing Member Failures!)
Most importantly, it may be tough to regain possession of an asset when someone in the rehypothecation chain defaults. Remember from the prior DD the expression about possession: Possession is nine-tenths of the law.

Clients must be aware of rehypothecation as it is technically their own assets that have been pledged for someone else's debt. This creates complicated creditor issues where an investors shares may longer be in their possession due to their custodian's default. [6]

We know assets are rehypothecated 3-4 times on average, GameStop shares are scarce, banks are in trouble, stock loan volume is skyhigh, and the risks of rehypothecation are real. So it’s pretty clear that rehypothecation is happening generally with pretty darn good reason to expect GameStop’s Churn Chain is at least of non-zero length (i.e., GameStop stock is being rehypothecated).

Breaking The Chains

While some may like chains and being tied up, I’m not one of those apes. Especially as a Churn Chain waters down my shareholder rights and may make regaining possession of DSPP stock difficult in the event of a cascade of defaults, as warned by the OCC. (If you like chains, feel free to skip this section.)
As it turns out, we don’t need to know exactly how long the Churn Chain is for GameStop stock. Simply knowing a Churn Chain exists with non-zero length means there is a chain. Where there is a chain, it’s possible to break the chain. (Even if you don’t know how much health) your enemy has in a game, you still try to take your enemy out. Right?)
A churn chain that starts from ComputerShare holding DSPP shares in DTC for operational efficiency can easily be broken as “[a]n investor can, at any time, withdraw all or part of their shares in DSPP book-entry form and have them added to their DRS holding”. [ComputerShare] See also [7]. Quite possibly one of the easiest chains in the world to break as the Churn Chain is weak to DRS. Simply DRS the DSPP shares to take away the head of the chain and the rest of the chain falls apart. (And, DRS-ing "street name" shares cuts chains into pieces too!)
One side effect of breaking a Churn Chain is that all shares attributed to transactions in a broken chain (e.g., SFTs and short sells) need to be reallocated to other chains, effectively making other chains longer and increasing the risks from a default.
Analogy: Think of the shares as a deck of cards. If you deal 52 cards to 4 players (A, B, C and D), each player gets 13 cards. Each stack of 13 cards is basically a Churn Chain. But if you take out a stack by removing the bottom card from A and distribute the remaining 12 cards from A to B, C and D then B, C and D each now have 17 cards. If at any given time a card can cause a player to lose the game, it's better to have fewer cards than more. And, the players who get out early won't lose.
Any party in the Churn Chain who defaults will make it hard for the original owner to regain possession. Longer chains include more transactions and more parties so there’s more risk of default on longer chains than shorter chains. Thus we see another vicious cycle setup where incentives are aligned such that DSPP and beneficial shareholders may want to avoid the impending default and rehypothecation risk from their shares being held in DTC. In order to avoid the impending default and rehypothecation risks, shareholders are incentivized to Directly Register shares to ensure having both title and possession. (Shares held in “street name” have little or no protection from rehypothecation risk and simply registering shares in DSPP doesn’t guarantee possession [1].) As with the other vicious cycle, any remaining shareholders in DTC share a shrinking pie of diluted ownership so it is in their best interest to get out and DRS; thereby shrinking the diluted ownership pie even more which is more reason for remaining shareholders to get out. These vicious cycles will eventually leave few, if any, remaining shares at the DTC for beneficial shareholders. Nobody knows what will happen if this ♾️🏊 happens.

Footnotes

[1] If you haven’t already, please read the prerequisite DD in this WalkThrough Series to understand how ownership of property is separated into two concepts: title and possession. [See, e.g., StackExchange] Understanding the differences between title and possession are particularly important here where it’s worth being extra careful identifying how an entity is in control of an asset.

1. DSPP is technically different from DRS [WalkThrough] (1/n)
2. Definitely DIFFERENT "DRS Counts" [WalkThrough] (2/n)

[2] Dividends have been heavily discussed on SuperStonk with many DD posts, including for OverStock and the precedent OverStock set which would have allowed GameStop to issue their own crypto dividend, possibly as an NFT.
[3] Footnote 16 of the Fed Note itemizes various classes of non-Treasury collateral which includes equity which, per Investopedia, is a synonym for stocks.
[4] While short selling is pretty well known, Security Financing Transactions (SFTs) may be more obscure despite discussion of them in the past so here’s some historical SuperStonk links for you (where you may notice some well known OG DD apes):

• Visualization of how SFT trades could prevent shorts and/or naked shorts from becoming reported FTDs per DTC-2021-010 filing
• SEC Comment Against Proposed Rule NSCC-2021-10 because SFTs Will Be Used To Obscure Abusive Short Selling
• How market makers, broker dealers and the DTCC game the markets: Why lending and short interest data to evaluate the true number of shorts is plain useless: Revisit SFT clearing to avoid Fail to Deliver, Reg-Sho, Forced-Buy ins and ALD altogether
• Let's talk RRP, SFTs and DOs
• DTC-2021-014 Settlement for SFT Services Risk Control Management

[5] Simply search SuperStonk for share lending. Don’t make me Google That For You.
[6] https://www.investopedia.com/ REMOVE_FOR_AUTOMOD terms/r REMOVE_FOR_AUTOMOD /rehypothecation.asp
[7] Withdrawing whole DSPP shares into DRS seems to make a lot of sense as doing so guarantees possession. Selling fractionals, less so. If you intend to keep buying, I would think adding to the fractionals to later withdraw whole shares makes more sense. As for the concern about fractionals tainting the whole account, I’ll cover that in another post. For now, you do you.