In the first three years The issue is when does the three years...

In the first three years

The issue is when does the three years start. If an investor starts it before October 2022, then that is too early – the plant only became partly functional then. Some date between then and 30 June 2023 would be more realistic. All the off-take agreements and LOIs only have meaning when the kaolin can be delvered to Perth for the likes of BGC Plasterbaord, and to the harbour for the export trade.

$42 million

This is a recent statement, “Since then and prior to the Company’s IPO in November 2020, WA Kaolin co-founders and owners invested over $42 million to develop and progress the Wickepin Project. Through extensive R&D of product and processes, the Company has spent significant time and funds in optimising its proprietary dry processing method for kaolin (“K99 Process” ) to build and extend on its success as a kaolin producer and exporter to global markets.”

That the K99 process is a considerable asset, is plausible, and I'll be generous and say it is phenominal. Even if we put it on par with the general theory of relativity that Einstein put forward, he certainly did not spend $42 million develping his theory. Brilliant ideas spring from brilliant minds, not dollars hurled at a problem. That sum has always caused me some dissonance, but I'll remain generous and suggest that if the K99 technology is as good as I can imagine, then it would be worth $42m if it generates a “super profit” well in excess of $42m, which could happen. I'll not develop this arguent - this post is already too cluttered.

Sales commitments and promised revenue

The off-take agreement and LOIs are probably factual, and there would have been some basis to set the price to account for changes over time. Although WAK has obtained better prices compared to the Prospectus, the average does not appear to compensate for the declining purchase power of the AUD. Also, although WAK may sell some product at a better price that accounts for the decline in purchase power of the AUD, that may only apply to new buyers, and Dak Tai Trading (DTT) is being supplied at a discount price.

Again, I'll be generous and say that it was a good idea to get that off-take agreement. There is, IMO, no better sales story that WAK could have than the fact that DTT (read Stanco International, its parent company) buys K99F, and I am fairly sure, K999 recently. This is because making continuous folament fibreglass requires exacting standards in terms of non-polutants, especially carbon and iron, in that order, and the kaolin must be fine-grained. Andrew Sorensen attributed the recent order of a global European-based distributor for delivery to Korea to the “halo effect”. It took three months from first sample to product being ordered – a very short time in the kaolin trade. There may be a built in discount for DTT, and we will just have to live with that until the off-take agreement has run its coarse.

Focus on ceramics – K99C an ideal product

WAK has definitely switched its sales focus to thhe ceramics sector – that is to sub-sectors like bathroom tiles and sanitaryware. The war in Europe has cut supply from Europe, and producing K99C is better suited to WAK's ore and the basic K99 process. Kaolin in those sectors can tolerate a modicum of silica sand, so the K99 settings can be fairly loose, and there would be little need for much attrition grinding. In essence, low carbon, low iron and low anatase (impure titanium dioxide) does the trick. This switch to ceramics has the added advantage of not having off-take-agreement pricing concessions.

20kg packaging

The 20kg bagging facility should now be available, so that also offers a new market at a price premium. It may sell well in Australia too.

Production is the bottleneck

The problem for WAK was the late start, then the teething probelms. WAK was not going to hire employees to sit around when the plant had to be commandeered to fix the teething problems. Only after that could WAK hire the plant hands, and drawing in employees who could and would commute to the mine may not have been easy. Anyhow, the plant is said to be running 24-hours a day, but I suspect not weekends. I have not read anything to suggest that for now, transport is the problem.

Summary

I am not happy, but I'll reserve judgement until I see what happens in Q1 of FY2024. I do not expect other shareholders to be as relaxed about WAK as I am, and I may change my tune in the next six months.