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 each of the project stages start production. You must do your own research and analysis. Seek independent professional advice and make your own investing decisions.
To be conservative this analysis does not consider:
- the value of other resources that form part of the Great White Joint Venture (JV) or ADN’s other projects including Mt Hope
- the DSO opportunity which is expected to improve cashflow
- the higher cashflow expected from a cosmetics application
- the halloysite rheology modifier opportunity for concrete applications
- Blue sky upside associated with Natural Nanotech. 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 has a current risked pre-DFS post-tax value of $0.34 ($0.23 excluding HPA). This is based on a combined risked/discounted post-tax NPV sum-of-the parts value of ~ AUD $1062M for Stage 1+2 Great White plus the HPA activity.
Per share value is estimated based on post-tax NPV to be conservative and uses fully-diluted share structure post-merger calculated as follows. I have assumed all MEP options will be exercised pre-merger to be conservative and arrive at ~ 3.1B shares on issue fully-diluted:
I have used a steady growth in NPAT at 2% per annum, assuming that offtake agreements will include price variation terms indexed to inflation.
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
Discount rates:
- For Stage 1 I have used a discount rate 8% which is the discount rate in the PFS.
- For Stage 2 I have used a more conservative discount rate 12% to arrive at a more conservative value for Stage 2.
- For the HPA project I have used a 15% discount rate to be conservative since the project hasn't been formally scoped, however we have been given indicative production capacity, pricing, OPEX and timeframe for production.
I think ADN will move to using a 5% discount rate for the DFS (versus 8% in the PFS) due to the increased maturity of the project resource definition, project test work and plans.
I have used the PFS figures for AISC ($354) and pricing information from Offtakes or prior announcements. I expect the company to improve on this AISC figure for the DFS, with aggressively conservative discount rates ensuring analysis is still conservative. OPEX figures for HPA are guided by company interviews however I have been more conservative to allow for cost of feedstock ( USD $10,500 used for OPEX versus a range USD $6,000 to USD $7,000 given in interviews ).
Unwrapping the risk (reducing discount rates to a less conservative 2% at point of each stage and HPA being in production) results in an approximate tripling to quadrupling 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.
Speculative In-production Market-cap
Speculative estimate of ADN in-production market cap based on combined value for Stage 1, Stage 2 and 2 kt of 5N HPA is $2,435M at conservative P/E 15.0. This assumes Stage 1 at full capacity from FY2024, Stage 2 at full capacity from FY2025 and HPA at 2 kt of 5N product from FY2025. I have used estimates for NPAT (ADN share) multiplied by a conservative P/E of 15.0 ( conservative due to mine life 30+ years and growth pipeline of blue sky opportunities ).
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.
So in summary timeframe to achieve full-production modelled in my analysis is 4-5 years.
We wait for the DFS to provide more details on the Halloysite-Kaolin Mining/Processing/Refining operation. That's now planned for release post-merger with MEP. At the end of the last quarter ADN had $46M cash in the bank and this is planned to be used to fund purchase of long-lead items as well as supporting working capital requirements requirements for project startup.
Onsite works are understood to be planned to start towards the end of H1 of 2022 and commissioning towards the end of H2 of 2022. In the meantime we are waiting for due diligence to be completed for a HPA agreement and further details are expected to be released post-merger and the progress of this activity into feasibility studies.
Great White JV Project
For the Great White Kaolin-Halloysite project 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 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 $60M post-tax from stage 1. 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.
The Big Picture (speculative)
The below is my highly-speculative view of the big-picture for the next 5 years. In this analysis I use adjustments to discount rates as project stages and HPA are expected to mature towards full operations as outlined in the table below. This allows a risk-adjusted view of future NPV to be calculated.
Background Info
Read the following announcements for background:
- Presentation 16 July 2021 - https://www.asx.com.au/asxpdf/20210716/pdf/44ycl5v23002mn.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
(20min delay)