Andromeda - the bread and the butter (the mature markets and applications)
DYOR. Analysis is highly-speculative. The analysis assumes offtake capacity for the Great White JV and HPA Projects are filled by the time the project stages start production. You must do your own research and analysis. Consider seeking independent advice and make your own investing decisions.
To be conservative this analysis does not consider the value of ADN/MEPs other resources that form part of the Great White Joint Venture (JV) or ADN’s other projects including Mt Hope. Blue sky upside associated with the Natural Nanotech 50/50 JV with MEP is also not considered. This analysis focuses on the bread and butter of ADN's plans (the mature markets and applications).
DCF as way of factoring in project risk
Using Discounted Cashflow (DCF) analysis and adjusting discount rates for maturity of project stages to apply a level of risk to the analysis, my opinion is that the proposed production from the Great White JV (233kt pa) and HPA activities alone have a risked value of $0.36 ($0.24 excluding HPA). This is based on a discounted post-tax NPV value to ADN of ~ AUD $1.15B.
DCF has been used for the analysis as it allows discount rates to be used as a mechanism for adjusting the valuation to deal with project risk. It's a method that considers the startup costs to be incurred and the time value of money. For more on DCF go here - https://www.investopedia.com/terms/d/dcf.asp
Unwrapping the risk (reducing discount rates to a less conservative 2% for example) results in an approximate tripling of NPV. This indicates the significant potential value that could be unlocked for long-term shareholders if ADN successfully puts this project into production in the timeframes and at the production capacities they are planning for the project.
Andromeda's Timeline and Plans
My interpretation of the information shared by the company is that they plan for Stage 1 of the Halloysite-Kaolin mining/processing/refining operation to be in production from mid 2022 and Stage 2 from mid 2024. In parallel to Stage 2 they are considering starting a HPA operation producing 2,000 tpa of 5N HPA using the premium feedstock ADN can use as input. For this ADN would be constructing their own HPA 5N plant in Australia based on a design being completed by AEM technologies for a plant in the UK. Both plants will be derived from the design for the currently-operating Cap-Chat Plant in Canada.
We wait for the DFS to provide more details on the Halloysite-Kaolin Mining/Processing/Refining operation. That's now planned for Q4. Long-lead items are now being ordered following the recently completed cap raise of $30M (with additional $15M SPP underway). Onsite works are planned to start in H1 of 2022 and commissioning in H2 of 2022. In the meantime we are waiting for due diligence to be completed for a HPA agreement (due diligence is to be completed by late August).
Great White JV Project
For the Great White Kaolin-Halloysite project (75% ADN) a Discounted Cashflow Valuation (DCF) is applied to estimates of after-tax profit for production of a premium feedstock for the Paints & Coatings market and a premium feedstock for the Premium Ceramics market. An 8% discount rate is used for Net Present Value of Stage 1 and a more conservative 12% is used for Stage 2.
AISC estimates from the June 2020 PFS are used. Price assumption for ceramics is from the Binding Offtake, price assumption for Paints & Coatings is from data released by Andromeda in November 2020.
To be conservative I have assumed total startup capital costs for Stage 1 at AUD $115M and an additional AUD $65M for Stage 2. Noting the PFS uses All-in Sustaining Costs I have assumed depreciation, amortisation & interest at no more than 3.5% of total EBITDA. I assume a gradual 2% year on year increase in after-tax profit on the assumption that offtake agreements will include a price-variation formula approximately indexed to inflation. For the purpose of the DCF calculations I have apportioned CAPEX based on share of EBITDA for each product.
HPA Project
For the HPA Project (100% ADN) I have applied a DCF valuation for production for 2,000 tpa of 5N HPA. I have used a more conservative discount rate of 15% for this project since ADN is at Scoping Study Stage, however has an Ore Reserve with mining proposal submitted and 3 stages of HPA testwork have been completed with additional due diligence testwork underway with AEM Technologies. I have assumed USD $100M CAPEX for a 2,000 tpa HPA plant. By this stage I estimate ADN will have generated > AUD $80M post-tax from stage 1 (noting this has not been adjusted for tax savings due to accumulated losses expected to be ~ $60M by end of FY2022). This level of cashflow I think would enable debt-funding for a plant with the equity covered by ADN’s cashflow from the Great White JV.
Given the 3 stages of HPA testwork already completed by ADN and the planned Halloysite-Kaolin operation (with mining proposal already submitted), ADN are quite mature in their activities to complete studies to define the project to a Scoping Study level. I speculate that due to the MoU with AEM Technologies, a Scoping Study including plans for a HPA process plant could be completed within 6-9 months of a formal commercial agreement being established. This would allow the necessary feedstock demands needed for HPA to be factored into offtake and production planning for Stage 2 of the Halloysite Kaolin Project.
Background Info
Read the following announcements for background:
- Investor presentation - https://www.andromet.com.au/assets/02389506.pdf
- Placement ($30M) + SPP ($15M) - https://www.andromet.com.au/assets/02389505.pdf
- Diversified Product Strategy - https://www.andromet.com.au/assets/20210621-Project-Update-FINAL-v2.pdf
- Binding Offtake (Paints & Coatings) - https://www.andromet.com.au/assets/..._Offtake_Agreement_Signed_for_Great_White.pdf
- HPA MoU - https://www.andromet.com.au/assets/Documents/ASX-releases/20210528_AEM_HPA_MOU_FINAL_for_ASX.pdf
- Binding Offtake (Ceramics) - https://www.andromet.com.au/assets/20210317_First_Offtake_Agreement_FINAL.pdf
- Mining Lease Submission - https://www.andromet.com.au/assets/20210301_Mining_Lease_Submission_FINAL.pdf
- Coatings application pricing - https://www.andromet.com.au/assets/...gs_Application_FINAL_for_ASX_incl_Table_1.pdf
- Prefeasibility Study - https://www.andromet.com.au/assets/20200601a_Careys_Well_PFS_FINAL.pdf
- HPA testwork Feb 2019 - https://www.andromet.com.au/assets/20190204_HPA_test_results_FINAL.pdf
- HPA testwork August 2018 - https://www.andromet.com.au/assets/20180829_Second_Round_HPA_Testing_4N.pdf
- HPA testwork May 2018 - https://www.andromet.com.au/assets/20180530_HPA_met_test_results_Final.pdf
The CRUX most recent CRUX investor video should also be watched (links to some videos are provided below).
DCF Model
This analysis focuses on the bread and butter of ADN's plans (the mature markets and applications).
Video Interviews
Refer to the following thread if you wish to look at earlier videos:
https://hotcopper.com.au/threads/james-marsh-md-interviews.5646651/#.YOkKgRMzbm8
(20min delay)