A (NASDAQ) Valuation of FEAM

Apologies for a new thread but I find it easier to read a forum when there is some specificity to the subject.

New to this particular equity but not to ASX or NASDAQ or "electrification" theme. I did initiate a (long) position on ASX and will also be looking to open a long on NASDAQ. Spent a great deal of time going thru all the prior material and DFS, eDFS stuff and read many many posts here on HC. It is the NASDAQ listing IMO that makes or breaks 5EA (eventually) I think at present 5E leads on ASX and NASDAQ follows (simply because the are more shares on ASX) but that will change over time and NASDAQ will lead as there will be more shares there.

Anyway that aside, one of the first things I noticed on this forum is the "referencing". Got to remain up to date. A good example is the research provided by B.Riley ... a US (smallish) Investment Bank and a securities broker (and also importantly a dealer on the NASDAQ making a market in FEAM).




I just take it that all have read this, right? So this should not be a surprise. I've highlighted a couple of things to draw attention to.









If you follow the link this is "today's view"




Important to understand the math and logic here that keeps B.Riley's 12m TP at US$20/sh

(50% x NAV8~$1,800M + Net Debt) / 45.6M SOI = ~(US$900M +( - $5.1M)/ 45.6M = ~US$20 (US$19.625) initially
and then
(75% x NAV8~$1,346M + Net Cash) / 63.5M SOI = ~(US$1009.5 + 246.1M/ 63.5M = ~US$20 (US$19.77) now.

So B.Riley, an investment bank expecting to do business with 5EAM in the short term is telegraphing:

1. An equity capital raise of ~US$ 251.2M (net cash to 5EAM) selling ~17.9M shares. I'm going to guess this takes place at ~US$15/share (or better) to allow for expenses of the offer.

2. To me this is confirmed by the difference in their statements of
Initially "a target P/NAV ratio of 50% which largely reflects our expectation of equity (or project) dilution as well as project execution risk"
to
now "a target P/NAV ratio of 75%, which largely reflect project execution risk"
So,
they that assumption is refected in the increased share count and cash. The other change is the NAV has been reduced from US$1,800M to US$1,346M. Don't confuse with the increase of P/NAV ratio from 50% to 75%
The project's NAV has gone down from US$1,800M to US$1,346M (close to 25%) AND the ratio has gone up from 50% to 75% (so to US$1010M)
Need to be comparing the "risked" NAV of $900M to what is now $1,010M which has increased because project risk has decrease due to stronger balance sheet from equity raising.

3. The more pertinent question is what dropped the NAV. If that remained the same at $1,800M you would get a target price of US$25/sh. Calculated as (0.75 x $1,800M + $246.1M) / 63.5M = US$25.13/sh
Since the discount rate in the NAV remained the same at 8% then either price or volume (or both) was reduced over the time period. My guess is volume.


BTW, got nothing against B. Riley (actually like their stuff). Also got nothing against 5EAM raising capital via a secondary offering - not saying its a sure thing but I would not be surprised were it to occur, and in fact would welcome it as it really does strengthen the company. Be aware though, it will only be available to US clients of the book runners. Been through it a few times ... worked well for Piedmont Lithium when they redomiciled to NASDAQ via IPO (so that there is different to 5EAM direct listing not raising capital) and converted to CDI on ASX.

Of course one could simply use a future EBITDA (discounted to present time) based multiple.
Say the 2026 EBITDA of $273M, and if that is discount back at 10% to present day we get ~$200M. If you are happy to pay 6x for this EBITDA you could make the argument the companys EV is ~$1,200M and at 63M SOI it is $20/sh. Amazing!

I do have a long position in INR, acquired ages ago. The interesting thing there of course is the primary product is 22Ktpy LCE with a co-product of 174Ktpy of Boric Acid. From the DFS $710/t for Boric Acid and $13,423/t for LiOH ... which at the time of the DFS puts the revenue split at about 29% Boric Acid and 71% LiOH. Today's pricing heavily favors Hydroxide and the split at $60,000/t LiOH is 91.5% to LCE and just 8.5% to Boric Acid.

This is in contrast to too 5EAM who in todays pricing world, at full development, with 6.4Ktpy of LCE at $60,000/t ($384M) and 454Ktpt Boric Acid at say $1,000/t ($454M) the revenue split is 54% Boric Acid and 46% LCE. So a true co -product . And thats before SOP is included.

There is of course the whole "decarbonisation/electrification" change that hasn't yet been fully recognised in the commodity price. If we are truly talking about 30% or more of new vehicle sales being electric by at least 2030 thats at least 20M vehicles. At 50Kg of Boron per vehicle thats 1,000,000 tonnes of Boron which is around 5.7Mtpy of Boric acid ... so 5EAM could supply about 8.7% of that (globally). If we use about 20% of that EV demand being USA (and I think that's conservative) is would be about 40% ... so 100% of 5EAM Boron Acid output satisfies about 40% of possible Boron demand from EVs ... yep sure looks like a supply deficit is likely to happen.

I bought in because I think 5EAM is mispriced and if what I'm reading about Boron requirements in just the electification theme then a supply deficit similar to what has occured with Lithium is a real possibility.

I've done my own variant of a (simplified) DCF based-model taking into account:
1. The increased SOI noted by B.Riley
2. revised cash position noting $246.1M and adding DoE Loan NOTE (so 10yr T-Bill 4.25% interest and principal repaid at maturity)
3. For modelling purposes make the assumption all cash ($446.1M) available at beginning of model
4. The "Discount Rate" I'm using is not WACC thing. It is meant to be a "risked" required rate of return - so its notably higher than this NAV8.
5. The normal sensitivity to price and volume comes into play trying to figure out what is and what is not reasonable. My assumptions are shown in the details if you're interested.

The net of this particular model is the midpoint "fair value" ... as in what today's cash plus risked future FCF less debt calculates out to US$23
(so not so far from B. Riley estimate)


$100








Hopefully some of this has been useful. Don't read it as "upramping" because I think its a buy because of a supply deficit or as downrampling because I think there will be a equity capital raising that Australia based investors are unlikely to be able to participate in. Read it as an opinion on a stock the poster holds. Nothing more or less.

Good fortune to us all as 2023 is going to be challenging (recessions are typicaly not good for stocks).