Ann: Investor Presentation - RIU Explorers Conference, page-5

RIU Explorers Conference is a forum for the exploration & mining resources sector. I do not understand what WAK hoped to gain by giving a presentation to that audience, and I am not surprised that the presentation was mainly hackneyed boilerplate material.

K99 kaolin's purity is superb, but its particle-size distribution (PSD) is ordinary. That means WAK must sell into markets that tolerate an ordinary PSD – products like K99C for specific ceramics subsectors. The WAK-Stanco offtake agreement for K99F for the continuous-filament fibreglass subsector missmatched WAK's ability to meet the demanding PSD specifications of that subsector, and the classifier improvements to produce a tight PSD-specified K99F was only effected in the closing days of calendar year 2023.

The belated marketing initiative to sell K99Cdoes not have that narrow and low-end PSD problem, because pressure-cast ceramics subsectors (toilet bowls, for example) prefer a relatively coarse kaolin to allow for quick drainage, and hence high output in a mass-production setting. This subsector market may only start to make a meaningfull financial contribution in 2024. This subsector blends silica sand, kaolin, ball clay and feldspar, which suggests WAK could monetise its silica sand in that subsector.

I'll confine what follows to the Stanco-WAK relationship, and whatever comments (some fairly cryptic) in the RIU Explorers Conference presentation relate to “the PSD Problem”.

A. Stanco

Stanco is WAK's exclusive distributor of K99F to the fibreglass sector in Taiwan and China. In earlier years, WAK tended to mention a Stanco subsidiary, Wak Tai Trading Limited (DTT) as its distributor, but it now tends to refer to Stanco as both a major WAK distributor and a holder of 15% of WAK's shares. Stanco is also a non-exclusive distributor of all K99 products in geographies within WAK's target market.

The 2021 Prospectus gives the gist of that distribution agreement with DTT. Part of the agreement detailed in the 2021 Prospectus states: “The pricing for the product to be sold into the fibre glass market is set for 2020 and 2021. Thereafter the price is negotiable subject to a floor of 90% of the previous year’s price. If the parties cannot agree on a price, DTT may still submit purchase orders to WA Kaolin for it to either accept or reject. If WA Kaolin rejects DTT’s purchase order, it is possible DTT may consider negotiations were not conducted in good faith and refer the issue to arbitration for determination.”

Offtake agreements tend to have loopholes, and the parties must rely on each other's goodwill to transact mutually attractive deals, and the current relationship gives WAK hope that Stanco would assist it by ordering product that WAK can profitably produce. Stanco's 15% shareholding suggests it may strive to find markets for kaolin products that suit WAK.

B. Relevant points in the 13/02/24 RIU Presentation

I'll comment on points in the RIU Presentation that relate to the PSD Problem. Some would not be recognised as such by the casual reader.

1. “Operational improvements were made over the Xmas/New Year shutdown period.”
   
   This relates to resolving the K99F Problem, but no attention is drawn to the problem
   .
2. “Contracts and orders growing steadily including largest Chinese fiberglass producer ordering 600t February.”
   
   I assume this order was placed in February 2024, and Stanco would be the customer. Stanco specialises in the fibreglass sector, especially continuous-filament fibreglass that has demanding PSD specifications.
   
   As a goodwill gesture, Stanco may have specified a less demanding PSD than it did for the large 2023 order that flushed out the PSD Problem. Alternatively, by using the newly installed secondary classifier, WAK may now have the ability to meet a tighter PSD specification. Both reasons are good news.
   
   
3. “Company is setting up additional equipment for finer grades to boost market share.”
   Notice the positive spin on what in reality was a rearguard action to resolve the PSD Problem.
   
   
4. “WAK Wickepin No 2 Pit mining campaign will yield circa 140,000 tonne of kaolin ore. At the end of January approx. 50% complete.”
   
   This could relate to the PSD Problem, because WAK has two ore domains, one being a finer grain than the other. No 2 Pit may be in the fine grain domain, and its ore would be better suited for a fine-grain K99F product.
5. “Installing and commissioning new US sourced classifiers to reach nameplate capacity of finer grades”.
   
   This is the essential solution (installing a secondary classifier) to the PSD Problem.
   
   Classifying to a finer and narrower PSD always occasions plant output to decline, which means that the equivalent-nameplate-tonnes factor can decline fairly dramatically. When WAK refers to nameplate capacity it refers to a standard product like K99S, so all K99 products have an equivalency factor, which WAK tends not to mention, thus making references to tonnage of output ambiguous. The equivalency factor is an area about which I would like to know more, because products that must meet stringent PSD specifications could have a very low equivalency factor (say, 0.2), and competitive pressure could negatively affect the target margin that Management would like to get.