American Pacific (ABR)Market Cap: $360mCash: $30.8mFirst Full...

American Pacific (ABR)

Market Cap: $360m

Cash: $30.8m

First Full Year ramped up EBITDA: US$438m

Post Tax, Unlevered NPV: US$1.97bn

We have made a lot of money backing Australian listed resource companies where the project is on the other side of the world. We flew to Piedmont in North Carolina when it was 8c, Riversdale Resources when they had a failed coking Coal IPO and we ended up getting Hancock in and Champion Iron north of Quebec at <$1 and in resources you make your most money getting off your backside and going to see interesting projects 99% of locals are too lazy to visit.

We also love looking at commodities that aren’t household names. Li Ka Shing made an absolute fortune owning a Niobium mine in Quebec in a duopoly type global supply structure. We also think the business we write about below has leverage to a range of long term growth themes such as green technology metals but also on the food production side of things.

Borates in a great jurisdiction like California could be something similar. Most people know zero about Borates even though Rio Tinto has a very large Borates business (30% of global supply, down from 40% 10 years ago) based in the town of Boron in California around 1 hr down the road from where this company we are backing has their assets. Rio barely mentions this business which is we are so attracted to ABR because the commodity is under the radar. And Rio makes 40%+ EBITDA margins on their Borates business.

We think Rio`s best 2 long duration under the radar businesses are Dampier Salt and this Borates business and they hardly mention either of them.

The Borates business reminds of the slightly obscure commodities like vanadium, Molybdenum and the like where nobody knows much about them they have tight market structures and prices can really rip hard when they move.

Rio`s borates mine near Boron in California (red dot), most people would have never been to this area and Edwards Airforce Base was where the Space Shuttle used to land occasionally

American Pacific Borates (ABR) is the 100% owner of the Fort Cady borate and SOP project in California. This is the largest Borate project not controlled by RIO or Eti Maden and would equate to 6% of global supply at full production. Around 55% of revenues will come from borates and 45% from SOP in this company over time. Rivals who supply SOP into the US market are from Belgium and Germany and think about the cost of getting that SOP to areas like Idaho in the USA vs ABR sending it from California.

ABR market cap, zero global investment bank research, no insto ownership -going a lot higher

Phase 1 of the Fort Cady Project is fully funded and set to commence production in Q3 CY21. We like the production ramp up plan that the company has taken in terms of splitting the project into 4 phases to reduce financing risk but also enables them to use cash flow from the earlier phases to minimise overall dilution to equity holders.

The Turks are over 60% of world Boron supply and Rio is around 20% so this is a great market structure. Much like in Fortescue when BHP/RIO told everyone nobody needed a new supplier the big 2 were simply talking their own book as they didn’t want a new competitor. Borates feel the same as per below

What are Borates?

• Micronutrient used to increase crop yields and over 3.5bn people rely on rice which is lacking in boron

• Also key element in manufacturing EV’s

• Borate production is a duopoly controlled by RIO and Eti Maden (Turkish Govt.) who produce ~80% of global production.

The Californian Agricultural industry is approx 30% of current US SOP demand and forecast to continue to rise with population growth and food security. As we know, higher food demand and less arable land means that production eifficiency and yields are becoming more and more important. This will be a tailwind of demand for many years to come in micronutrients like Borates and SOP in the fertiliser space.

Remember in the USA the best Potash markets are impossible to access like the mid West as too far from coastal ports. We see ABR having a well positioned SOP production stream close to the markets who are 60% of USA SOP demand below.

Economics

Phase 1A capex is US$50m which is fully funded to get them into production in Q3CY21 and generate approx US$20m per annum in EBITDA.

At full production, this is a globally significant project with forecast EBITDA of US$438m

ABR’s ‘Enhanced DFS’ realease in April 2020 projected;

• Unlevered NPV of US$1.97bn

• Unlevered IRR of 39%

Interestingly, Compass Minerals is the only producer of SOP in the USA and they got a received price of US$725 per tonne for their SOP and they are the only US producer and are 50% of the US market. We have zero interest in the WA SOP producers because we don’t like the way they extract the SOP and think the capex risks are enormous as are the pricing risks for their product and ABR`s SOP is produced by a totally different process and has a totally different captive end market.

When we look at MP (NYSE) US and its $4bn USD market cap and trading on 30x EV/EBITDA trying to ramp up production from their Mountain Pass rare earths mine in California (around 140 miles away) the market thinks they can deliver 10x earnings over the next 3 years to US$250m and remember that assumes MP is successful moving from selling concentrate to China to add value to the ore, to processing their own ore and refining it into a value added product and my own view is that sounds a lot easier than it will be. But if that stock sits here on around 30x EBITDA and ABR can make US$438m EBITDA if you accelerated the project to do Phase 1/2/3 all at once. Our point is very simple, ABR can make more EBITDA than MP ramped up, doesn’t have large capex and has a similarly strong market structure in its core commodities.

MP Materials US$4bn mkt cap on consensus in 2023 for earnings to 10x to circa US$250m (mkt cap of MP in recent months bottom right in USD)

Peers

There are no real peers to ABR in Australia which is why we think it is a good idea that they are progressing with a secondary listing in the US potentially.

US peers in the Ag Chemical and Industrial metals and specialty chemicals pace trade on 8-15x EBITDA with an avg. of 11x…and if you plug that into US$438m of EBITDA at full production you get some astronomical share price returns of 15-20x the current stock price as stupid as that first sounds as a comment.

Why you should take a look at ABR

• A lot of money can be made investing in lesser known commodities like Borates. Li Ka Shing made a fortune investing in a similar duopoly in Niobium.

• Simple, low cost mining process.

• Strong tailwind for SOP and Borates

• Longer term demand for permanent magnets and batteries.

Board

The project has attracted a solid group of Executives invluding;

David Salisbury (Chairman) is US based former RIO executive who has been directly responsible for the development of 4 major mines.

Michael Schlumpberger (CEO) is a mining engineer with experience at Potash of Saskatchewan and Highfiled

Anthony Hall (Exec Director) was a big driver in the value creating at Highfield which grew from $10m to over $800m fully diluted market cap under him as MD.

We feel this company is going to produce products they are in the sweet spot for the global electric vehicle and related green energy revolution and in our view this mine would be amazing complimentary to a rare earths producer or the like.

We also feel over the next 5 to 10 years you are going to see the oil majors migrating to specialist products like ABR`s businesses. Did you ever think 10 years ago you would see oil majors buying offshore wind farms or solar farms? These guys need to 100% pivot their business to the green future and this is no different to a speciality chemicals type of business that sits within Exxon, Occidental or Chevron or the like.

So right here the register is tight, we love that no major instos are on there in size as they are the registers that can re rate the most over 3 to 5 years. We can see how this could be a $15-20 buck stock over time but we think saying it can be $5 per share which would imply a $1.5bn mkt cap is a fair and conservative starting point on ABR.

This isn’t a stock to compare to a stale larger cap like IPL or the like we feel this stock is fully permitted can easily finance stage 1 and also accelerate the growth here over the next 3 to 4 years and create a world class speciality chemicals type business that will be highly attractive to corporate buyers and also generate a large amount of cashflows.