AAM Research Piece, page-36

Hi MellowYellow.

You posted on the A4N thread recently.
I have been researching A4N quite thoroughly and as part of that research I have been comparing A4N to ATC.
Some readers here might be interested in my thoughts on ATC.

A quote from the research note at the beginning of this thread;

“Just two years ago, the material was traded at prices of USD27 per kilo. Meanwhile, it is understood that USD40 dollars and more is being paid in Japan for HPA. In Europe, HPA is even said to be worth a little more.”

I wouldn't use $40/kg as any sort of benchmark. The HPA price is usually set by negotiations between an individual supplier and an individual customer. There is no price that can be used as a benchmark in the way that a gold price or iron ore price can be used. The HPA price will vary markedly depending on the size of the order, the purity and the quality. I have no doubt about the US$40 price being achieved but was this for a single small sized order of perhaps a few tens or hundreds of kilo that needed to meet a tight specification on grade, grain size, etc.? For a supplier like ATC (or A4N), hoping to be producing larger quantities and selling much of that in bulk, the price is likely to be closer to and perhaps below $25,000/t rather than $40,000/t. As a potential investor, I’d be running numbers as low as $15-20,000 per tonne and making sure the project is sustainable and attractive as an investment at those prices as well. If an average price of $25,000 is achieved, that would be great. I wouldn’t invest if I had to rely on higher average prices across the full expected HPA output. We don't know for sure how much new supply might come on and then if something else eventually replaces HPA in batteries. That seems unlikely in the foreseeable future and the future looks bright for HPA but best to play it safe on price assumptions.

ATC’s own forecasts using the not so conservative $26,900/t HPA price is for A$101mill per year cash flow. They assume a higher HPA price in earlier years. I think that is risky. If they retain 51% of the project, then their share of cash flow is A$51mill. That sounds OK but what about debt? Total debt is likely to include KfW IPEX-Bank debt of US$190mill (A$280mill) and the Macquarie US$90mill (A$132mill) for a total of A$412mill. At this stage I’m not sure if ATC is liable for 100% of the debt or is the debt jointly liable to ATC and AAM? Someone here might be able to answer that question. For now, I’ll assume that ATC is only liable for 51% of the debt. I’d expect that the Macquarie debt will be at a much higher interest rate but for the exercise, I’ll assume an average interest rate of 3%. 3% on ATC’s share works out to $6.2mill/year. From $51mill/y, that leaves around $45mill/y. I’d think you would need to deduct another $3mill for ATC’s corporate overheads leaving $42mill per year. ATC’s share of debt is $206mill. With around $48mill free cash before interest, it would take around 4.5 years, at full production, to repay debt (so perhaps 6.5 years from commissioning) - if there are no dividends to shareholders and no cash spent on anything else. That seems OK at the HPA price of $26,900/t assumption and an investment here looks like it could have reasonable upside.

However, what if a more conservative price of $20,000/t is used? ATC’s share of project cash flow falls to around A$28mill. Less interest expense leaves $22mill and less $3mill ATC’s corporate overheads leaves $19mill/year. With around $25mill/y before interest, that would require around 10.5 years to repay debt assuming no dividends to shareholders or any cash for anything else over that period. Not as attractive. It gets less attractive at prices below $20,000. What HPA price are investors assuming when deciding whether or not to invest in any capital raising? With a more conservative HPA price assumption, upside appears very limited and the chart below appears to reflect that.

Based on my comparisons, A4N is far more attractive especially at HPA prices down to US$15,000/t. Mainly because of lower capital costs requiring far less debt, with much higher HPA output and much lower cash costs. The respective charts suggest I might be right. A4N is less advanced than ATC but already has a higher market cap and the chart shows a strong uptrend. Why would that be? If you want to come over to that thread again and ask why, I'll be happy to discuss in more detail.

The ATC sp has fallen thanks to a cr and could bounce back 10-30% soon after but I wouldn't be looking for a lot of upside unless there is reason to expect that bulk 4N HPA sales can attract prices above US$25,000/t. I don't think the market is making that assumption. That may change and that would be excellent for all HPA developers and producers. ATC could then have multiples of upside. However, I prefer to see that sort of upside on the conservative assumptions as well.

ATC chart immediately below and A4N below that.