Ann: WAK - Commissioning Completed at Wickepin - Kaolin Shipped, page-39

Sorry for the delay. My laptop has become erratic in its dotage (it's about 16 years old), and I could not finish a draft that I wrote yesterday. I too added to my personal portfolio at a smidgen below 17 cents. I now hold 530,515 shares. I call my personal portfolio “The Playpen”, because that is where I take intuitive punts. My SMSF portfolio is much larger, and more conservative with a bias to dividend payers.

WAK is difficult to value

WAK is not an easy stock to value, because it is:

1. too embryonic to apply the usual FA reasoning (there is no financial history on which to base the usual FA calculations);
2. too illiquid, IMO, to apply TA (TA is based on herd behaviour, so it requires volume to represent the thoughts of the herd, Mr Market); and
3. I do not think WAK can be valued in the way that embryonic mines are often valued (time-value of the ore over the life of mine (LOM)), because 644.5 million tonnes of resource would last over a century.

Consequently, I view WAK as a gut-feel punt, which by its nature would be unique to each punter, and hence not a basis for others to apply without layering it with their own gut-feel. My punt is that it would take some three years for the facts to emerge to allow a normal FA valuation, and unless the stock liquidity increases, WAK may not suit a TA valuation methodology.

WAK as a punt

WAK is a punt that could go either way, but the upside-downside possibilities, for me, favours the upside in the next three years (maybe sooner). Simply put, assuming the SP is circa 20c there is an unrealistic chance that the SP could drop to zero, and a realistic chance it would hit 60c. The reason why zero is unrealistic is because the founding directors are unlikely to have invested a reputed $40 million on a venture that is so bad that nothing can be redeemed on a liquidation of the company. The reason why 60 cents is realistic (note that I have not ventured a probability) is that the market for Wickepin-quality kaolin is there, and growing East Asia market is there, while East Asian supply is declining. Exporting from WA gives WAK an edge over US, Brazilian and European competitors. Related to that business-has-potential reason is that the likes of Imrys would quickly appreciate the value of the Wickepin resource and the IP that WAK owns that is specific to extracting value from the specific nature of the Wickepin kaolinised granite.

Management

The business intuition of the prime mover, Alf Baker has form – a long history of business success. There are negatives to this family dominance, on which I'll not comment for the sake of brevity. We need to be mindful of the ethics of Management. In that regard, the Prospectus was very subdued – it simply based its promise on the current reserve of 30.5 million tonnes and a LOM of a few decades, not the 644.5 million tonnes of resource. Also, Management did not harp on about ultra-high purity battery-grade alumina, like a few other kaolin stocks have done, despite having a grade of ore well suited as an HPA feedstock.

Virtually everything that was mooted in the Prospectus to happen in calandar years 2021, 2022 and 2023 (so far) has happened reasonably on time and reasonably within budget.

Other pluses

Government has announced that the rail link being reconnected circa 1925 calendar year, which Management has assumed would be about mid-1926..

The macro picture has improved, with the demand for kaolin and its pricing exceeding what most economic-cum-marketing reports predicted, especially in East Asia, WAK's favoured export destination.

The shipping crises has favoured WAK relative to US and Brazilian suppliers.

The Ukraine war has inhibited Ukrainian supply, and I cannot see the world switching to Russian sources of kaolin. This European aspect is not very important to WAK, but the problems that Spain and Italian ceramics producers now have securing kaolin may benefit WAK by making Europe a better export market for WAK's competitors.

The Prospectus mooted nothing about metakaolin and other calcined products. The mention of metakaolin in the recent Announcement is significant, as is the fact that BGC is a WAK customer, and the party to whom the first consignment of Wickepin-produced kaolin was shipped.

Postscript

The investment could be a lemon, or the chance of a lifetime, but we must wait a few years to see what happens. That includes the likes of Imrys cutting some deal to horn in on the value of the Wickepin reserves and the IP that WAK owns, as augmented by what is now under development (processing technology for metakaolin, for instance). It is ridiculous to think that a 644.5 million tonnes of primary kaolinised granite is going to be depleted at the rate of circa a million tonnes a year. Something dramatic must happen, and I expect it would be significantly positive for shareholders – a golden-swan event.