The risks associated with ADN's aspirations have been covered in some detail over the many posts in this forum, however, it never hurts to review and revisit the topic.
Set out below is a summary of some of the "key" risks that I have identified in so far as ADN's current primary endeavour is concerned; i.e advancing to halloysite-kaolin production at Poochera and commercial sales of that product.
By risks I am referring to failure at that endeavour, and not covering other issues such as take-over (I previously covered this matter in an early post specifically about Imerys - and in my view take-over is a different category of issue) or the impact of "Black Swan" events (CV-19 was and I suspect still is such an event, and let's face it - if there is something else of this nature waiting in the wings for us at any time in the near future, all bets will be off and we will likely have bigger issues on our plate to worry about).
This is all for the purposes of discussion and sharing, and I certainly invite the views of others:
Key person - James MarshAs I suspect we all know, James Marsh is the absolute lynchpin for ADN and its halloysite-kaolin play at this critical time of its development, noting he is:
- Highly experienced in the industry (e.g over 30 years in the industrial minerals space, 15 years at Imerys, worked at joint venture partner MEP, etc). In my view, this experience is invaluable for ADN and likely filters through in some form to every aspect of its day-to-day operations, strategy and the excellent progress it has made thus far. In particular, the world continues to turn based on "who you know" and not just what you know, and accordingly the importance of the various contacts James will no doubt have acquired and networks built (amongst colleagues, potential customers and competitors alike) cannot be understimated.
- Highly knowledgeable about the subject matter. Again, this knowledge is critical and is likely to provide ADN with the edge required to succeed and excel within a competitive industry.
- Passionate about halloysite-kaolin and all things related. His quiet confidence and excitement about the topic is, in my view, infectious and consistently apparent in interviews and presentations. He is a great public figurehead for the company.
My feeling is that losing James before ADN is well settled into production at Poochera would likely have a severe impact.
Fortunately, my understanding from previous commentary (and his own comments in prior interviews from which inferences can be drawn) is that ADN in effect represents a potential "career opportunity of a life-time" for James. So much so that he uprooted himself to move interstate to pursue the opportunity. Hence my overall assessment, on balance, is that the risk is low.However, we cannot discount out of hand the potential impact on James' tenure such as family / personal issues, health problems and so forth. Obviously this would largely be unforeseen matters and certainly we would all hope none of them will arise.
Customer off-takesThis topic continues to garner significant attention in discussions within this forum and elsewhere, and rightfully so in my view.
By way of commentary:
- As@Scarpa and others have commented at some length previously, binding off-take agreements (BOAs) are likely to be a key catalyst for the company, not least in terms of an appreciation of share price. In short, ADN will need to enter into BOAs at some stage to progress.
- Rightly or wrongly, the execution of binding off-takes of a material nature before production will likely provide the market with the surety and "legitimacy" it requires to adopt the view that ADN is now indeed a "serious" business in the making and that forecasted profitability is real. Flow-on benefits may include significant institutional investment in the company, attraction of reputable joint venture partners, impetus to exercise ADN options sooner rather than later, more favourable options for funding (if required) and the like.
- Diversification of customer off-takes beyond China may well be a factor of some importance for reasons. While, in my respectful view, there is no tangible evidence available as of yet that there will be any actual commercial or operational impediment for ADN in a heavy reliance on China buying its product going forward (take FMG and its recent activity through CV-19 as an example), it follows as a matter of common sense that risk will be mitigated in not placing all of their eggs in one basket. The company has already identified and responded to this potential risk, and in addition to potential custom in Japan we have seen that the Middle East and Europe now commonly feature in ADN's commentary regarding markets actively being pursued for customer off-takes. For instance, I recall from a recent James Marsh interview that product wet-processing trials have been or are taking place in Germany (and as a point of interest, I refer to my earlier posts about BASF).
Having regard to ADN's clear and repeated statements over a long period of time as to what appears in effect to be intense interest in the product; combined with the existing LOIs already in place for an absolutely vast volume per annum of future product, my overall view is that the risk of ADN failing to secure BOAs of a material nature is low to negligible.
I suspect that the risk issue with off-takes is not really about potential failure of the project, but more so about timing and the adverse effects that may flow from what the market may perceive as "undue delay".
Approvals and regulatory issues
As we know, ADN is now entering into the "pointy end" of its advancement of the Poochera project and hence it will need to: (a) deal with environmental impact matters; and (b) lodge its proposal to the SA Department of Energy and Mining for necessary mining approvals.
Obviously a key risk for the company is that, for some reason, it does not receive the regulatory approvals it requires to proceed with its mining operations at Poochera (or should I say, "quarrying"). Needless to say the effect of this event would likely be rather severe for ADN (albeit the company has a number of other irons in the fire - not the subject of this discussion). By the same token, it follows that regulatory approval also likely represents another key catalyst for ADN's share price moving forward.
However, by way of commentary as to some relevant matters: - It has been stated on prior occasions that ADN is allegedly on good terms with the private owner of the freehold where the proposed operations will take place. This gives me some degree of comfort that land access agreement can be negotiated and finalised without serious difficulty.
- The project also seems to have genuine local support, not least given a mine workforce of "30-40 people" will be sourced mainly from the surrounding area and will thus create jobs and hopefully bolster the local economy. There has been coverage of the developments in the local (for example: https://www.westcoastsentinel.com.au/story/6524370/poochera-project-on-track/). Again, there are earlier posts that deal with this topic in some detail.
- The South Australian government has invested and continues to invest significant effort and time (and no doubt money) on overhauling its mining approvals processes, statutory and regulatory framework, and improving engagement with the community and mining industry. This resulted in the amendments to the Mining Act 1971 (passed in October 2019) and the current work on the Mining Regulations 2020 (expected to be finalised and in operation by January 2021 when the revised Mining Act will commence) - which is conducting a consultation process for the draft regulations between 3 August and 11 September 2020: http://www.energymining.sa.gov.au/minerals/mining/update_on_mining_regulations_2020
- It is my understanding that underpinning the statutory and regulatory overhauls mentioned above was a desire to simplify and streamline mining approvals processes in South Australia, against the background of the SA government: ".. working on new ways to responsibly unlock the value and opportunities offered by the State's wealth of minerals.":
- There are also other matters that will need to be attended to and which were identified in the 10 July 2020 company announcement, including access to roads and environmental approvals; undertaking an Aboriginal heritage survey noting the cultural interests of the Wirangu No 2 Native Title Claim in which the Poochera area lies (NB: the Carey's Well land falls within freehold agricultural land where native title has been extinguished, however, the surrounding area is relevant to the claim group mentioned).
On balance, my overall view to date has been that ADN: (a) is certainly at no greater risk than any other mining project of failing to hurdle the regulatory approvals processes, and indeed it is arguable based on the matters outlined above and other sources that its apparently simple and low-impact proposed operations have better prospects of approval than most; and (b) I have some degree of confidence that relevant stake-holders are right behind the project and want it to come online a.s.a.p.
Funding of activitiesFunding must, of course, receive at least a passing mention. If ADN fails to secure the necessary funding to proceed (irrespective of BOAs and mining approvals) then we have a serious problem.
Thankfully, all of the signs would appear to suggest this risk is somewhat low:
- As has been canvassed at length in this forum, the lion's share of the capital ADN requires to commence DSO operations at Poochera can be provided by the exercise of ADNOB. Given those options are significantly in the money it would appear to be somewhat of a "lay down misere" that most of those options will be exercised (barring something disastrous happening to the share price between now and the end of November 2020).
- MEP will also need to stump up its 25% stake in due course, and given the relatively modest nature of this anticipated contribution, there would seem to be limited risk that it will be unable to comply.
- I also recall the company has previously mentioned significant interest from third parties in terms of funding offers / options (including potentially a product customer who could also become a "cornerstone investor", or otherwise customer pre-payments for product).
- By way of general comment, the operational startup capital requirements for ADN at Carey's Well pale in comparison to other projects such as in the gold and lithium spaces (as highlighted again in yesterday's Noosa Mining Virtual Conference presentation), and in my view this remains a significant draw-card for ADN and derisks its aspirations inherently.
ConclusionNone of us possess a crystal ball and hence the above is purely speculative, whatever plays out will play out and you should not rely on it as advice in any form.
However, for me personally, the upshot of this analysis is that the overall risk for ADN is on the low end of the scale, and this personal assessment has underpinned my ongoing investment case for ADN in no small part.
Best wishes to all.
(20min delay)
