Bottom line: When we looked at the HPA companies almost two years ago, the biggest question was where the money was going to come from. The sector was populated by a number of young companies facing the common problem of raising hundreds of millions of dollars, many times their market capitalization. FYI has managed to square the circle by enforcing a 35% (almost free) participation.
As FYI made clear in its recent presentation, the development of the HPA project to a capacity of 9,000 tons per year can be broken down into three phases with a total capital expenditure of 257 million US dollars.
- Phase 1 - US $ 7 million for the completion of the technical studies - Phase 2 - US $ 50 million for the construction of a demonstration plant - Phase 3 - US $ 200 million for a commercial plant with 9,000 tons per year
At first glance, you might think that FYI is responsible for 35% of the $ 257 million, or $ 90 million. Alcoa is taking on a large portion of this, however, so the total cost to FYI will be only $ 14.8 million, or 6% of the $ 257 million. The bottom line is that FYI retains 35% of the shares until production takes place at a net cost of just $ 14.8 million, or 35% for just 6% of the capital cost. That seems very good business to us. Why the market responded the way it did is a mystery.
Phase 1 will begin now and will take 4-6 months to complete. Phase 2 will take another 6-7 months to reach a capacity of 1,000 t / a HPA. It is worth noting that phase 3 will be carried out simultaneously with phase 2 rather than sequentially, and it will take 18 months to reach 9,000 tpa capacity. That's unusual. The logic that can be seen is that the demonstration plant will enable the delivery of products to the market before the larger capacity is commissioned. The construction of both phases at the same time instead of one after the other brings efficiency advantages and enables a rapid expansion of the delivery capacity. We assume that before phase 3 goes live, the company will determine if there are any marketing issues.
If you take a closer look at how FYI managed to find such a strong joint venture partner on attractive terms, you find that Alcoa carried out 16 months of due diligence to check the chemistry, the technology and evaluate the profitability. The company came up with its own figures, which were a little more conservative and included a safety factor of 20%.
It appears that FYI's 35% stake could generate EBITDA in the order of A $ 74 million to A $ 83 million a year if the model assumptions are correct. The current rate would thus correspond to an EBITDA multiplier of 2x. There is still a lot of room for improvement. The current A $ 13 million cash balance means FYI is essentially fully funded.
FYI Price at posting:
43.0¢ Sentiment: Buy Disclosure: Held
