Canaccord update:
Altura Mining Limited
Specialty Minerals and Metals | Lowering Target Price
Ganfeng comes to the rescue
AJM-ASX | Price A$0.25 | Market Cap A$450M
HOLD Unchanged
PRICE TARGET A$0.26↓
from A$0.28
New offtake agreement: AJM has executed a binding offtake agreement with Ganfeng, with supply to commence in 2018. Terms include a minimum 70ktpa concentrate from 2019-2021 (8kt in 2018), with an option for a 5-year extension (at Ganfeng's election) and an additional 5-year extension by mutual agreement. Pricing is based on a formula linked to published prices for Li2CO3 and LiOH, with a floor of US$550/t and ceiling of US$950/t. Ganfeng is also granted an option to 50% of offtake from the Stage 2 expansion.
The agreement offsets variations to the offtake with J&R Optimum (JRO; 17% major shareholder), which sees supply reduced to 50ktpa (from 100ktpa), with no tonnage commitment in 2018. The Lionergy offtake is unchanged. We note JRO is yet to complete its financial restructuring, presenting some risk to the remaining 25% of AJM's offtake, but we see the Ganfeng deal as removing a significant amount of uncertainty going forward.
Attached prepayment alleviates near-term balance sheet concerns: The supply agreement also carries a US$11m prepayment, amortised over 2018 deliveries. This injection should ameliorate AJM's tight working capital position following a capex blowout at Pilgangoora (~A$190m vs DFS estimate of +US$130m), and ahead of an increase in operating cash flow and initial interest payments due on the company's US$140m in debt in Q1'19 (total interest of +A$52m to maturity). Longer term, we estimate that AJM will require an average concentrate price of ~US$725/t to internally fund debt maturity in SepQ'20.
Production ramp-up underway: AJM produced 7kt of concentrate in the SepQ, ahead of our expectations on higher plant throughput. The company plans to achieve a nameplate exit rate (~220ktpa) in the DecQ, against our more conservative modelling of ~65% of capacity (DecQ 37kt).
Product sales & pricing: The maiden shipment was achieved in early Oct'18, with a total of 10kt in sales being achieved by end Oct'18. We note that shipment sizes will initially be limited to ~8kt, meaning that sales volumes in the 6 months will likely be impacted by shipping cycles (1 per month). We have revised down our spodumene concentrate pricing assumptions from US$880/t to US$725/t for 2019 following recent weakness in China post chemical prices.
Plant expansion off the cards for now, in our view:Construction of AJM's planned expansion to 440ktpa was originally scheduled to commence in Q1'19 with commissioning in Q1'20. However, with delays on Stage 1 and balance sheet constraints (Senior Secured Notes mature in SepQ'20), we now expect any expansion plans to be deferred.
Valuation & Recommendation
Model revisions include lowered concentrate pricing, a deferral of the Stage 2 expansion (risked to 25% in our NAV), and inclusion of the Ganfeng prepayment in our cash flows. Net of the changes, our target (NPV10% for operating assets, risked expansion) falls slightly to A$0.26 from A$0.28. We maintain our HOLD rating.
