First real opportunity to properly analyse this announcement. As this has been my career (large scale projects & project financing across power, energy & mining), I am looking at this through that experience lens.
Offtake & Economics
First off, this is very much a bankable offtake. It is a take or pay, fixed (15,500t minimum) tonnage, fixed price and minimum term from a highly regarded counterparty who is investment grade. The very fact that the AAM project has advanced to an offtake of this size and scale is significant.
My take on the basic economics presented with this offtake are below. I have assumed that Tesla would have extracted a “great deal” for being the bankable cornerstone to this AAM plant, so whilst some quarters are talking AAM prices of US$18,000 to US$22,000/t, I am guessing that it is likely a low-teens fixed price:
Revenues: 17,500tpa @ US$13,000/t = US$227.5m
Expenses: 17,500tpa @ US$5,000/t= US$87.5m
Annual EBITDA= US$140.0m
Cost to construct (my estimate) is ballpark US$250m based on the US$175m cost for the 11,750tpa plant being constructed by Syrah.
Again, the economics are very bankable. The important thing here is that this take or pay offtake, coupled with the guaranteed long term graphite supply (Nachu) presents this as a significantly de-risked project. Normally you have one (input or output) tied down but are still in market for the other. Here we now have both sides locked in.
I acknowledge that there is short term supply risk via Nachu (where they are similarly progressing a pilot operation which presumably would be of a scale to supply this facility), but with this offtake, Nachu also now becomes a much more bankable deal. See also my additional comments under funding.
Risks
Next, we have technology risk. They have been proving this technology for the past 7 years and importantly it is reportedly less complex than existing technologies – less steps, cleaners, etc. This is something that Tesla would have gone through in detail via its due diligence prior to signing.
On the subject of Tesla, executing a binding offtake is a major deal. I have seen some comments suggesting that Tesla is signing these like paper confetti, which is a crazy proposition. As a Tier 1 investment grade rated counterpart, if you start doing that such that you look to use “conditions” to then back out such that your offtake is not worth the paper it is written on, you lose all credibility as a counterpart very rapidly. You go into these things having invested considerable time (many months) in product testing, validation, technology due diligence, etc and with the full expectation that the project will deliver as required. In this case, the conditions are quite straightforward and appropriate:
-Securing a location by 30th June 2023. Not onerous, MNS is well advanced, and I suspect this will be sorted well in advance of that deadline.
-Pilot plant producing by 31/3/24. They would have been negotiating this offtake with Tesla for the past 3 months and have been planning this AAM facility since at least mid-2022. Indeed, they have had the benefit of operating a mini-scale anode pilot plant at Binghampton Universityfor the past 6 years! I suspect that again, (with a particular nod to David Taylor’s experience), this is very well in hand with equipment ordered and they know exactly what they are getting into based on 6 years with the Binghampton pilot plant.
-Commercial Production by 1/2/25. This is possibly the only real risk element. You can plan until the cows come home, but you sometimes get caught out by the most basic elements. I am associated with a new under construction plant in Australia, where everything was lined up (all the big items with long lead times) and it was all systems go for completion by July this year after a October 2022 start (not a new build building, so big time saving there). They are now delayed by 4 months because of the inability to source the approx. 250 units of what is normally off the shelf electrical automated machinery switches – 6 month wait on these!!
In summary, my view of this announcement is it is bankable and doable. They have established real value in the AAM project via this offtake which opens many doors on funding.
Funding
So, this brings us to the core issue of funding. I have seen a number of assertions that a capital raise is imminent for MNS to fund this deal. I completely disagree as that to me would be the most unlikely route to fund this.
First up, as a stand-alone project, AAM now has significant value “as is”. I have financed many a project where all that exists are “pieces of paper” but it is those that create the initial value and AAM< is now no different. If my earlier summation of economics is correct, on a 65% revenue risk adjusted and +30% cost risk adjusted basis, my DCF assessment (35% discount rate) is that AAM has an “as is” value of circa $280m. You can run any number of assessments and come up with different figures and I am not saying my figure is “correct”. It is just illustrative of the quantum of value in the AAM project “as is” and so the funding and deal opportunities now available.
Hence. MNS could conceivably sell down less than 50% equity for a very large one off $ amount that would fully fund its AAM funding commitment, or otherwise do a deal for a very large “earn in” funding commitment from a JV partner that would fund the project without a dilutive capital raise at its current share price.
Thus, MNS now has a number of doors it can enter to finance the project, comprising a mix of any of - JV partnerships, partial equity sell down of the project, potential non-dilutive grant funding, “soft” government loans and traditional senior debt project financing. David Taylor’s comments earlier this week suggests they are well into the discussions across a number of these options and it would not surprise if we see relevant announcements on that score before 30th June.
Lastly on Nachu, the announcement this week also adds to the economics and value of that project and again would broaden the options for MNS to fund that project. With a current market cap below $400m, but investments in projects with a combined value way north of that, it is not surprising that MNS is pursuing funding on a project by project basis rather than a market raise at current share price. It also allows strategic investors to get into the areas they directly want involvement, in a sector that is very attractive.
(20min delay)