My take on the announcement and AUZ going forward.
Please note, this is my opinion only and I tell it like I see it. If you want only positive sentiment then you may as well skip this post. I am posting my opinions, both positive and negative, to try and offer an outlook with as little bias as possible. Seldom have I seen a HC forum with more sky high sentiment based misinformation. Don't get me wrong, some of the posters on here are excellent, particularly those that work in the field. I am NOT an expert in the investment or mining field, however many posts on here have stood out to me as being flat out wrong IMO.
Starting with the announcement: Signed off-take agreement term sheet with leading global electric vehicle battery manufacturer SK Innovation for 100% of the cobalt and nickel production from Sconi Cobalt-Nickel-Scandium Project in Queensland
As other posters have mentioned: I was disappointed to see this was a term sheet and not the binding off-take agreement as suggested in both the trading halt/voluntary suspension announcements. While still a huge load off the mind having a company of SKI's calibre sign a term sheet, this isn't a done deal yet. While unlikely, there are some POTENTIAL areas we could run into trouble:
1. Sample validation delays - as I understand the situation with batteries, the cobalt/nickel sulphate for batteries needs to be very pure. If we have any trouble with producing an acceptable purity then there could be potential delays. Even if this happens it is unlikely to be long enough to cause any problems on its own, however if combined with other delays that could be problematic.
2. I don't foresee any problems getting finance for the project before 31 December 2018 (yes this can be extended by mutual agreement however remember SKI are building a huge battery factory, I can't imagine they will want to extend much beyond this point). However if finance wasn't obtained until that late in the game, I would imagine that would make it difficult to get the mine up and running prior to 31 December 2020. Provided SKI are happy with the BFS (which I think is very likely) I expect they will exercise the share purchase option around the same time. This gives 30 months or so to get up and running by the 31 December. Given Flippa has indicated the claves COULD take as long as 28 months to order and install, this is cutting it fairly tight. As Flippa also noted though, with SKI assisting us I expect we will have the claves in place much faster than is usually the case.
Initial agreement for 7-year period with a further 6-year extension option with quantities of agree offtake volumes of 12000 tonnes per year of cobalt sulphate and 60000 tonnes per year of nickel sulphate.
Fantastic, the initial 7 year period gets us well past the ramp up and any initial teething problems, and well into full production. I would have thought this alone would make finance pretty easy given that revenues over this period will well and truly cover paying back finance.
Collaborating with SK Innovation to optimise Bankable Feasibility Study on the Sconi Project.
This is great news, the only downside being the delayed BFS (the risk with time frames covered above).
Assistance from SK Innovation in optimization of Sconi's processing plant and mining operation through sample validation at battery level for hybrid and electric vehicles (xEV) is expected.
The wording "through sample validation at battery level" is open to interpretation. Does this simply mean that the samples which we are expected to be shipped prior to the end of February will be used to validate our processing plant in SKI's batteries, or are they saying that we may need to modify our pilot plant in order to provide samples to SKI's specifications... Not sure on that one.
Australian Mines' Sconi partner, Korean-headquartered SK, is the world's 57th largest company with annual revenue in excess of US$120 billion.
I agree that SKI is a great partner for us, no doubt. I was excited by the prospect of partnering with BMW however SKI is actually a much better match for us, and their help optimizing our plant and mining operation is invaluable. The size of the company however does nothing to excite me, plenty of massive companies have left small companies like ours crushed in their wake. I absolutely DO NOT expect this to happen, it is just one of a million unlikely possibilities that make small cap companies like ours high risk.
Option agreement for SK Innovation to acquire up to 19.9% of Australian Mines' ordinary shares.
As I had mentioned in earlier posts I completely stuffed up in my research before buying AUZ in regards to further dilution. I had misread a quote from an interview with BB where he mentioned that there would be no further need for capital (dilution) in 2018 after the last CR. I had written down notes suggesting that no further dilution was needed, period. My bad, and I apologised for my misguided posts in that regard. So further dilution is a given - I am still not necessarily a fan of the way ours has/is going to play out.
My preferred scenario was- we waited until the BFS is finalised (April I think). I was expecting the metrics on this to look pretty impressive and was expecting a re-rate at that stage. Then we get a partner who provides a chunk of funding, we take out a loan with a bank or export credit agency etc, and if further funds are needed we issue shares at a significant premium to our current levels.
A lot of people are throwing around the idea that this is only an option and SKI may not take it up... I am sure as part of their DD on our company they already have a fair idea of how the BFS will look. I expect that they will take up their option to buy shares, and we will then have 3.347B shares on issue.
Now a lot of people are throwing around some wild valuations for AUZ in the short to medium term. IMO one of the reasons we haven't seen the wild increases in SP most seemed to expect for today (I expected a bit more than we got however nowhere near the levels some punters were talking about) is that investors are already including those shares in their calculations. And they will be including future dilution as well I would imagine.
OK so a lot of posters have mentioned figures of between $700M-$900M AUD CAPEX for Sconi. Just a hypothetical look at how that might be funded, taking the lower $700M (I expect some significant savings from SKI's optimisation).
$80M from SKI option exercise.
Lets say SKI also kick in a further $100M funding as a pre-payment for initial production.
Bank loan (including interest paid over the construction phase) of $220M
Shares issued for remaining $300M: this will happen after BFS so I will give the issue price a valuation of 25c (meaning AUZ MC before issue is $837M). Many will comment that this valuation is way too low, however given that we will still be 2.5yrs or so from production I think this is pretty fair.
$300M at 25c a share equates to 1.2B new shares, giving total script on issue of 4.547B shares.
New market cap at this point is now $1.14B
Given the number of shares on issue, to get to the $1 valuation that is thrown around so regularly (and some even mentioning $2 plus), at a PE of 10, we would have to be earning 454.7M, Given my rough calculations for revenue in an earlier post of $554M, AT FULL PRODUCTION (yr3 and beyond as per announcement) the earnings will be nowhere near $454.7M. This does not of course take into account Scandium, which will greatly change the economics of the project, however this is not a given at this stage and as such will be heavily discounted by the market. Given what we currently know (and of course we know bugger all until the BFS comes out in June) I am guesstimating our earnings at closer to $200M after OPEX and tax etc, giving us EPS of $0.044 and with a PE of 10, a SP of $0.44.
For those jumping in at current prices, this is a long way from the lofty valuations being thrown around, and this makes your risk/reward look much less appealing. For those that got in at SP's around 1c etc on the other hand, completely different story.
HOWEVER, as everyone will point out, this is for Sconi only. And does not include Scandium at Sconi. I believe this is closer to how the market is valuing this stock however, and until proof that the picture is better than this, I wouldn't expect crazy valuations to eventuate.
Confirms Sconi Project's status as Australia's most advanced project of its type and Australian Mines as a leader in the Australian cobalt sector.
A leader in the Australian cobalt sector? Absolutely. Australia's most advanced project of its type, maybe a bit of poetic licence being taken here. I still believe that CLQ's project is more advanced (yes I know about the mining licence), their BFS will be out any day now and I believe their advance purchase of autoclaves will see them in production well before AUZ (even taking into account Flippa's opinion that their plant will take much more work to optimise). That doesn't take anything away from AUZ's project, I believe there will be more than enough demand for both companies to do very well.
No need to comment on the final dot point.
Final comments and brief summary:
I believe AUZ has a bright future. I am not down ramping as many will claim (I hold shares, why on earth would I do that). I have however identified several POTENTIAL risks associated with the term sheet from SKI, and as an amateur investor I am sure there are others that professionals would pick up. I like to invest with knowing perceived risks, rather than flying blind, and one of the main reasons I am on HC is to help me keep a level head. I find it VERY easy to get ahead of myself.
Furthermore, I try and maintain realistic investment goals/targets. I have a number of stocks that have a MUCH higher risk/reward profile - why not invest all my money in them you might ask? Because I like to spread my risk, and while the reward might not be astronomical for AUZ, I see minimal risk investing in the nickel/cobalt sector at the moment, their timing is great for production to come online as the battery demand sky rockets, and I see a bright future for scandium - however I believe this will take years to build.
As always, this post in its entirety is all IMHO, and PLEASE, DYOR and don't believe all of the hype without crunching some numbers yourself.
(20min delay)