This is my personal DD on WAK.
I would anticipate the share price to be between $1 and $2.50 at Year 4. See point 10 for the numbers and reasoning.
1) What is Kaolin and what is it used for?
Kaolin is a platy white clay derived from the mineral kaolinite, an aluminium silicate and it is formed by hydrothermal weathering of igneous rock, such as granite and it’s used in paper, ceramics, paint and coatings, fiberglass, rubber, plastics, pharmaceutical and medical products, and cosmetics.
2) What is the demand of Kaolin?
In 2019 the global kaolin market was valued at US$4.76 billion and is projected to reach US$6.28 billion by 2027, which equals a compound annual growth rate (CAGR) of 3.5% per year from 2020 until 2027.
It is anticipated that the total market registered demand by volume will increase from 29 million tonnes in 2019 to over 37 million tonnes in 2027.
3) How long is the mine life for WA Kaolin?
The Wickepin Kaolin Project contains a current Mineral Resource (prepared and reported in accordance with JORC 2012) of 644.5 million tonnes of high-grade premium kaolinised granite.
This operation has a mine production life of approximately 31 years.
4) What makes WAK special compared to competitors?
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. The directors spent 42 million of their own money to develop the K99 process.
This process delivers an ultra-bright kaolin with a low cost of production, compared with other processes used by competitors that use chemical bleaching and multiple wet mechanical and magnetic separation methods.
WA Kaolin has one of the largest known remaining kaolin premium primary resources in the world.
5) What was the IPO money for?
The Kwinana plant has a capacity of up to 5 tonnes per hour and is currently operating on a 16 hour per day, 5 day per week roster (approx. 20,800 tonnes per annum currently).
The IPO money is for them to expand. They intend on construction of a scaled-up processing plant in East Wickepin, utilising the K99 Process.
They intend on progressive increase in production to circa 200,000 tonnes per annum production through the plant which is planned to be operational by the end of 2022 and then expansion of production capacity at the Wickepin plant to 400,000 tonnes per annum by the end of 2023.
After 2024, the Company's objective is to continue to add on 200,000 tonne modules with the implementation of each subsequent stage subject to a range of factors, including demand, funding and approvals.
6) Shares in Escrow
At Listing, the Escrowed Shares subject to mandatory escrow arrangements of 24 months and are expected to represent approximately 26.54% of the Shares on issue.
After the 24 months, 75% of those shares that were escrowed are going to be voluntarily held for another 3 years. This works out to be approximately 17.35% of the shares on issue will be held for another 3 years.
7) Future dividends
The Board has adopted a dividend pay-out policy that will be applied when the Company is in a position to pay dividends (the CEO verbally stated they intend to start paying dividends in 3 years). This policy is to apply up to 66% of distributable earnings to shareholders by way of dividends. The level of payout will be determined at the discretion of the Directors depending on the availability of distributable earnings, future capital requirements, and other factors considered relevant.
8) How much is the company aiming to make ($)?
The Asia Pacific region is the Company’s target market and the target sector during the first three years of its operations are the ceramic, fibreglass, paint and rubber markets. Sales revenue from these three applications in2017 was US$630 million, being 37% of the Asia Pacific kaolin market. This revenue is forecast to grow toUS$1.6 billion by 2025. Paint is also a major target market for the Company.
9) Yeah cool, that’s a lot of money, but how much of that is profit?
A definitive feasibility study was completed by BDB Process Pty Ltd in September 2020 (DFS).
LINK:https://assets.website-files.com/5d71bdc1972e9711a3aee822/5f60678a30961d54ad56f8a5_WAK-1004-DFS%20Report%20V5%20Issued.pdf
The P&L for the initial and expansion phases of the Project are included on page 138.
NOTE: By Year 2, they will be making a profit (2022).
I’m going to look at Year 4, purely because they intend on paying a dividend in year 3 (arbitrarily that could be the end of Year 3), so with buffer room Year 4 is most appropriate.
In Year 4, the cumulative P&L is anticipated at $37,257,000.
The company has said, they intend on paying dividends, and the policy is to apply up to 66% of distributable earnings to shareholders by way of dividends.
So, let’s assume they pay 66% of to shareholders so $24,589,620
Total number of Shares on issue following the Offer = 282,821,885
Total number of Options on issue following the Offer = 167,232,813
Total number of Performance Rights on issue following the Offer = 27,500,000
So, rounding up for simplicity, let’s say there are 500,000,000 shares in the company.
66% profit returned to shareholders in the way of dividend would be equal to $0.049.
10) Okay, so a dividend of $0.049 per share in year 4. What does that mean for the share price in Year 4 and what about Year 12?
The typical dividend return is between 2%-5%.
Assuming both parameters, I would anticipate the share price to be between $1 and $2.50 at Year 4.
The remaining 34% of the profit (assuming 66% is going to shareholders) is going to be reinvested into the company, so the company can keep growing and expanding by adding on more 200,000 tonne modules subject to demand.
Fast forward to Year 12 (so far away, I know!). The cumulative P&L is anticipated at $256,720,000.
66% of this = $169,435,200
Assuming no capital raises (they’ve stated that they believe they will get additional money from the options being excised, so they will likely have no need for any CR -yay!) and that there are still 500,000,000 shares in circulation…
Then the dividend would be $0.339 per share.
Again, assuming a dividend payout between 2%-5%, this would make the share price between $6.8 and $17.
Now to sound like Motley Fool, if you invest $2000 at 25c, you’ll have 8000 shares. In 12 years, those shares could be worth $134,000 and paying you $2712 per annum!
11) What about the real numbers like NPAT and PE ratio? Do you get the same SP results?
The All In Sustaining Cost (AISC) for one tonne of WA Kaolin is $220.99. (End of Page 6 in the DFS).
In Year 4 they anticipate producing 400,000 tonnes per annum.
Therefore, at an average sale price of $316 (DFS page 123) = $95/t EBITA.
Taking off tax, that give roughly $66/t NPAT.
Therefore profit = $26,400,000
These rough calculations lined up pretty well with what is in the P&L table in the DFS. The DFS has the Anticipated Net Profit After Tax (NPAT) in Year 4 is $25,565,000.
So, a $25,565,500 NPAT x 20 PE ratio (mining industry average in about 13-15 but I’m allowing a bit higher for growth) = $511,300,000 market cap.
With roughly 500,000,000 shares, the SP would be approx. $1.02
This is at the lower end of what I anticipated in point 10, but I’m pretty happy it’s within what I anticipated by working out the dividend payments!
Note, the SP may be higher though because the director’s shares until still in escrow for another year.
12) What about ADN, aren’t they better?They have Halloysite!
ADN isn’t processing Kaolin or Halloysite yet, they’re still in what’s considered the exploration phase.
WAK on the other hand, in May 2020, they formalised an offtake agreement with one of its key customers, Dak Tai Trading Limited, for the supply of 338,000 tonnes of kaolin over six years. It also has in place informal arrangements with other key distributors and customers which further support the Company’s targeted production of kaolin. I believe it equates to roughly 75% of their supply accounted for, for the first 2-3 years of production.
The market cap for WAK will be approx. 56 million on listing (SP at 20c), whereas ADN is currently 631 million (SP at 32c).
Therefore, as WAK is already producing, and I personally like the promise of dividends in the future.
***But halloysite sells for more than cocaine!***
I watched the investor presentation for WAK last week of particular note though was the last Q&A question. Someone asked if WAK would consider mixing Halloysite with Kaolin?
The part of the response that I found interesting was Andrew said that they are currently looking into being able to synthesise Halloysite from Kaolin.
So, I wouldn't discount WAK for not having halloysite just yet, particularly because WAK have developed the K99 process which means they're big on R&D, so I wouldn't be surprised if they do actual synthesis Halloysite from Kaolin in the future.
At this stage they aren’t intending on mixing halloysite with their Kaolin.
13) Company debts
WA Kaolin currently has in place:
loan facilities with related and unrelated parties (which, as at 30 June 2020, are to the value of approximately $27.2 million (including interest));
a promissory note with Stanco International Corp., the parent company of DTT (which, as at 30 June 2020, is to the value of $202,000 (excluding interest)); and
deferred payment agreements with creditors (which, as at 30 June 2020, are to the value of approximately $2.16 million).
NOTE:They’ve anticipated being cashflow positive as of the end of the second year.
14) What do I think is a fair price?
Personally, I’ll be trying to buy shares under 25c for the next year. It really just depends how tightly it’s held as to how the SP will react (obvious point, sorry). But, at this stage, I don’t think anything over 30c is a fair price, but the IPO was significantly oversubscribed so it might be hard to get shares below 25c.
