DYOR. Not advice. No specific buy or sell advice is intended.
This post provides my perspective of near-term, value for the project, prior to the company further de-risking the project (by securing offtakes, mining approval and funding the project).
Summary:
- Rubber is starting to hit the road with potential for offtakes for high-value concrete strengthening applications for a Halloysite-Kaolin blend in Australia
- Marketing Services Provider appointed to convert letters of intent to offtakes (Asia-focus)
- My risked 4-month perspective of value is $0.26 to $0.35 in the lead-up to DFS (risk margin of 40% applied to extrapolated per-share value of post-tax NPV)
- Share price catalysts through resource updates, Standards Australia testing, completion of DFS, mining approval application, offtakes
- Significant self-funded growth potential via additional projects and applications ( Mt Hope, HPA JV, HNTs )
- ADN could well become the Northern Star of the Industrial-Minerals space due to the cash-generating potential of their unique high-value resources (NSTs exceptional growth has been self-funded from cashflows)
An incredible move today. The market is really starting to catch onto the potential value of the Great White Project after the Share Cafe Webinar last week. That presentation followed quite promising news on a high-value application as a strength-additive for concrete and the market seems to have latched onto the potential for offtakes from this.
Recent news/announcements:
Hammerhead Drill Results and Potential Construction Product Application:
Webinar Presentation:
Appointment of Internationally-experienced Marketing Services Provider
PFS (June 2020):
So via the webinar we heard a metric that we can expect the DFS value-wise to be worth 4 to 5 times the PFS numbers. See screenshot below with closed captions.
Full video is available here (appears to have been posted to Youtube by another shareholder - make sure you watch with closed-captions!):
The company already has a mining reserve that underpins the PFS. The PFS was also based on pricing of $700 per tonne with margins around 50% and the company expects to lift margins to the 80% ballpark alongside a price improvement across their production. Pricing is indicated to sit between $1,000 to $5,000 tonne depending on purity.
The PFS resulted in a pre-tax Internal Rate of Return (IRR) of 175% ... for context a good result would be about 25%. 175% IRR means that the project is incredibly capital efficient. Total project NPAT over life of mine is AUD $1,389.0 M (100%-basis) and total startup capital of $28M (100%-basis). Breaking that down, every $1 of capital invested to get the project up and running generates $50 of after-tax profit. I expect an uplift in startup capital for the DFS, however I think improvement in cashflow will enable them to maintain or improve on IRR for the DFS. The company may proceed directly to building a process plant on site (current plan in the DFS is to use ore processed through a toll-refinery in Asia to generate the cashflows to self-fund the plant).
By my calculations ADN's current fully-diluted capital (including unconverted ADNOBs) sits at just over ~ $210M. Their share of startup capital is just $21M (on PFS figures) so the market cap to startup capital ratio is 10:1 so ADN should have no trouble achieving funding for the project.
From my analysis of the four to five multiple given on PFS to DFS I think this will mean basket pricing somewhere between AUD $1,800 to AUD $2,200 per tonne (basket pricing is an average price across all product grades sold). This assumes annual production and Life of Mine (LOM) remains the same as for the PFS at 233 kt and 26 years respectively (although change in Life of Mine or annual production rate could through out my analysis here).
So how do we put a risked valuation on that potential?
The company has previously given us after-tax Net Present Value (NPV) figures for the PFS. The project has a post-tax NPV of AUD $511M post-tax, discounted at 8%. ADN's 75% share of this will be AUD $383M. Due to the low start-up capital of $28M (ADN's share $21M).
I've assumed startup can be achieved with a fully-diluted share structure of 2.613B shares (current fully-diluted is 2.25B). The company has $3.4M cash with an additional $5.7M expected to come in from remaining unexercised ADNOB options which combined will comfortably cover operations for at least the next 12 months. The company will need to fund the project, one potential scenario for this is debt-funding supplemented by an equity component. Due to the expected short timeframes to achieve production, offtake pre-payments could be an arrangement attractive to some potential customers to secure their place at the front of the offtake queue.
Cashflows in NPV valuations are already discounted 8%, however we should apply a risk margin until offtakes are secured and we have decision to mine, mining approval and the project funded. I'm using a risk margin of 40%.
Under the assumptions above the per-share value of ADN's share of post-tax NPV for the PFS when risked 40% is $0.09. This valuation excludes the value of Mt Hope project and the Hammerhead prospect which will shortly have a declared Halloysite-Kaolin resource.
We have been told the company expects the DFS to be 4 to 5 times the PFS figures (in the webinar). So applying simple multiples to the figures given in the PFS I can arrive at a potential range of values for the DFS.
The company has indicated a multiple of 4 to 5 times, however a more conservative valuation would be 3 to 4 times the PFS figures. This allows me to set a risked 4-month valuation/target at $0.26 to $0.35. My scenarios indicate a Net Profit After Tax (NPAT) share to ADN of $120M to $160M ( which is 3 to 4 times the PFS annual figures at $40M ).
I have also calculated in-production valuations below. My analysis is that P/E for this sector starts at 20.0 and runs to an average of 35.0. Risked targets above sit at around a 60% discount to my in-production valuations. I am super-bullish on likely price-sentiment for this project due to this P/E peer analysis (see bottom of this post).
My in-production estimates for the DFS (at 3 to 4 x PFS ) scenarios start at $0.90 to $1.23 at P/E 20.0. My risked valuations $0.26 to $0.35 effectively work out at ~ 60% risk margin against these in-production estimates. From my P/E peer analysis I think much stronger in-production price sentiment could well be the likely outcome (see figures below). Assuming this 3 to 4 x PFS multiple for NPAT is on the mark, from current share price my opinion is that ADN could easily turn out to be a 10 to 20-bagger in production (even more if the multiples given in the ********* webinar are accurate).
The company is quite upfront about their strategy towards rewarding shareholders through payment of dividends. My analysis includes anticipated dividends at a Dividend Payout Ratio of 50%, which essentially assumes the company retains 50% of earnings to fund growth and the remainder is then paid to shareholders. I would envisage the company would take at least 2-3 years to bed down production before paying dividends so assuming first sales in 2022, that might mean 2024 to 2025 before any dividends would be likely to be paid ( and the board would need to make a decision at the time ).
So what are the short-term catalysts?
- News is imminent for a resource for the Hammerhead prospect (we already know their are confirmed zones of high-grade Halloysite-Kaolin)
- DFS in-progress and likely to be completed in December - January timeframe
- Completion of DFS will allow the company to submit a mining approval application
So why else am I bullish on ADN?
Well, the low-capex and the strong cashflows of the Great White Project will be the company-maker that will then self-fund the significant upside beyond the Great White project! I can see ADN being the Northern Star of industrial minerals microcaps.
This is the upside that could be self-funded:
- Blue-sky applications for Halloysite Nanotubes or HNTS ( applications with value at $1,000's per gram of HNT )
- ADN has the 100%-owned Mt Hope project which will allow them to diversify their revenue streams to products focused on additives for the paint / coatings market. Cashflow from their first project should allow ADN to self-fund the final stages of development of this project.
- The material from the Great White Project has great potential as a feedstock for High Purity Alumina. The grade and purity of the feedstock means that only a single processing stage is needed to achieve 4N levels of purity. ADN are pursuing a partner for this opportunity.
- Pursuit of additional industrial minerals opportunities to further diversify the business (the company is actively looking for opportunities)
I can envisage scenarios where Mt Hope and the HPA potential alone could add greater than $100M NPAT to ADN's future cashflow in a 4-5 year timeframe.
Peer Analysis of P/E Ratio
I have used spreadsheet market lookup functions to obtain P/E data for a number of peers that produce industrial minerals. The average of this set excluding outliers sits at ~ 35.0 and bottom-end around 20.0. Note FY2019 NPAT figures for these businesses, the average excluding outliers is just $35M. My analysis above indicates ADN could quite generate well over $100M NPAT based on extrapolation of cashflow figures given for the PFS ( based on the multiples given in the ********* webinar ).
Imersys
From NPAT figures above you can see that Imersys NPAT is around AUD $200M ... hold on ... I forecast above that ADN could generate $100M to $200M NPAT if the PFS multiples given to us are accurate.
ADN could really become a Nymesys for Imersys lol (although in reality they are each serving different segments of the market and ADN has a niche-focus).
So why the comparison with Northern Star?
Some people might think I am drawing a long bow comparing an Industrial Minerals company to a gold company.
For context, this is my analysis of the growth in annual after-tax profit for Northern Star.
Northern Star bootstrapped their growth with the acquisition of the Paulsens mine about 10 years. Over time they progressively grew that cashflow and used the cashflow to largely self-fund growth through acquisitions.
NSTs growth starting from $16M of after-tax profit. Looking at their current DPS $0.17 and EPS $0.37, NST have a payout ratio about 45%. That means 55% of after-tax profits are retained to growth the business and the remainder are paid out to shareholders.
... just imagine what ADN could do to bootstrap growth with $100M+ of after-tax profit (that's over 5 times the after-tax profit that NST started their growth with). For ADN that would be at least $50M pa retained earnings to kickstart growth. So I think we will see ADN self-fund further after-tax profit streams in the region of $100M to $200M within 4-5 years of operations starting at the Great White Project ( say $40M NPAT from Mt hope, $50M to $100M NPAT from HPA, and so on ... ).
Have a look at what NST's growth achieved for shareholders! The specific values aren't important but it's the stable growth in interim and final dividends. Although in some years specific circumstances might lead to a special dividend.
Now the problem with the gold price is it is very erratic and goes through savage bear markets, so quite impressive NST have been able to maintain their growth through the bear market (healthy profit margins is key).
Since Halloysite and Kaolin have every-day applications driven by regular consumer/industrial demand the price growth is much more stable. That set's ADN up for a robust business and a profitable future, no matter what the world economy does ( consumption didn't stop because of the pandemic ... ).
We also know that ADN's initial business is expected to have profit margins somewhere in the 60% to 80% range, robust enough to weather any occasional dips in the Halloysite Kaolin market.
ADN's premium Halloysite Kaolin also allows them to establish a buffet-style economic moat. That just means a significant edge that prevents competitors being able to chip away at their business. They also have a plan to diversify their revenue streams ( Halloysite-kaolin, HNTs, HPA, other industrial minerals ), which is important for creating a robust business.
(20min delay)
