Share price forecast
With the current share price sitting at 8.4 cents and a market capitalisation of around $135m now is a good time to look forward and consider where the share price might be heading both over the medium and longer term.
Using lithium producing companies as a comparable guideline, a price-to-earnings ratio of around 15 is a reasonable expectation.
Following the successful completion and commissioning of the 1000 (1k) tons per annum (tpa) expected by June 2023, there will soon follow expansion in magnesium production to 10k tpa.
Latrobe Magnesium eyes commissioning of magnesium demonstration plant in Q2 2023
Based on the current magnesium price this is expected to produce a revenue of $110m and earnings of$42m EBITDA.
With the number of shares on issue around 1.6b and earnings of $42m, a P/E ratio of 15 gives a market capitalisation of around $600m which is 5 times the current market cap. Therefore the share price would be expected to be around 45cents. The most recent market announcement suggested that production could actually be up to 20k tpa. Consequently expected EBITDA would be approx $84m and a P/E ratio of 15 translates to a share price of around 90 cents.
The timeline for that level of production should be around June-September 2024.
There is also an expectation that the Yallourn flyash plant will eventually increase its production capacity to 40k tpa with an EBITDA of $168m which equates to an expected share price of approximately $1.80.
This should be achievable by around 2026-2027.
Furthermore, also by 2027 the proposed 100k tpa offshore plant is expected to be completed with an EBITDA of $500m on its own. Latrobe Magnesium have already flagged that this will be a joint venture project with LMG holding around 80% (my understanding of the business plan given that LMG will put in an initial $100m and the JV partner will outlay $200m and the remaining $700m required will be funded by LMG in the form of loans and off-take agreements). Again working off a P/E of 15, that alone would equate to a share price of over $3.50. Add in the expected 40k tpa contribution from the Yallourn plant and a share price of at least $5 is possible. These calculations assume that there is no share dilution due to further capital raisings. CEO David Paterson indicated in his interview in June this year with Kerri Stevenson on Small Caps that funding won’t be done through capital raisings so no further share dilution is to be expected.
It is highly likely that once the demonstration plant is up and running and the technology is proven, there will be a major rerate in the share price especially by institutional investors who are currently sitting on the sidelines and waiting for proof of the technology and business viability. They will generally prefer to pay a premium price for a proven product rather than take a risk on unproven technology. They also prefer to invest in companies with a market cap greater than $200m which equates to a share price above 12.5 cents.
There has been a very long period of intensive research (including by the CSIRO) leading up to this point such that it is very unlikely that the technology will fail. It is also very unlikely that the price of magnesium will drop significantly given the forecast CAGR of 5.5-6.5% with global magnesium demand expected to double by the end of the decade.
With global inflationary pressures likely to persist, the US dollar is likely to remain strong in the short to medium term. This should also increase the expected revenue as magnesium sales will be in US Dollars.
None of this factors in the additional value of the other products that will be produced by the hydromet treatment of brown coal flyash by LMG. In particular, the byproduct of supplementary cementitious material (SCM) could add significant value. This can reduce the use of Portland cement by 30%. Portland cement production is one of the highest CO2 producing industries on the planet being responsible for around 8% of total CO2 emissions globally. The environmental benefits of using SCM is obvious.
LMG tick many of the boxes that you want in an investment :
High growth industry✅
High earnings potential✅
Low entry price✅
Environmentally friendly✅
Clear business plan✅
Low competition✅
Solid and experienced management team✅
In summary, in my view LMG represents an outstanding investment opportunity in the medium to long term.
These are my conservative share price targets :
12 months (commissioning of 1k tpa demonstration plant complete, commissioned and producing magnesium)
25-30c
2 years (10-20k tpa plant in production )
60-75c
4 years (40k tpa plant in production)
$1.20-1.50
5 years (offshore 100k tpa plant in production in addition to 40k tpa from the Yallourn plant) $5
This assumes :
- technological success of demonstration plant
- stable or growing magnesium price
- successful venture partnership for 100k tpa offshore ferronickel plant
- High USD to AUD
- No or minimal share dilution
- No nuclear Armageddon!
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