moolap - recent site visit

The following is a joint report (of a general nature) by 2 of 14 brokers who visited MHM's facilities at Moolap earlier this week.

Please do not ask any questions of me in relation to the following, I am merely sharing with other MHM true believers!
I trust that this might fill in some of your questions anyway.
*****************************************************

MHM Moolap Site Visit

I attended a broker site visit to MHM's facilities at Moolap, near Geelong, on Tuesday 17 January.



There were 14 attendees and 10 booked for the following day, representing around 6 broking houses, including analysts, corporates and advisers.



Introduction

We were hosted by Executive Director, Ben Mead, Managing Director (and the brains behind the company's recycling technology), Frank Rogers, and Operations Manager (and Frank’s son), Mark Rogers.



Not surprisingly, the facilities were very "industrial", with a strong smell of ammonia (no wonder there has been such a backlash against landfilling of the aluminium salt cake in the US) and a huge amount of dust in the air, both from the ground around the facilities (it was very windy) and the crushing of the salt cake before processing. This just illustrates that MHM is cleaning up what has been a very dirty industry in the past.



US plant

Settlement on the site in Kentucky, where the first US plant will be built, is expected by the end of the month. The design/engineering work, budgets and the associated approvals processes for the first US plant have commenced. Once complete, financing will be put in place (either a capital raising or bank funding) and the plant then is expected to take 9-12 months to build. If all goes to plan, the US plant will be operational by June next year at the very latest.



While on financing, the build has been budgeted at $20-25 million, however, the company expects the final cost to be below this. With a payback period of 12-15 months, under normal circumstances, this would satisfy lending requirements of banks and other lenders. If a loan proves difficult and it comes to a capital raising, at worst it will be around 20% of the company’s market capitalisation, remembering there will be positive cashflow from Moolap and income from option conversion (24 mill options at 20c brings in $4 mill) between now and when the need arises in 5-6 months’ time. A capital raising might also provide an entry point for an interested institution or fund.



Moolap plant

Since purchasing the Moolap plant in January 2010, the company has been upgrading its facilities, as well as building a new dross recycling plant and AL80 plant. These works have had some adverse effects on predicted throughput and therefore cashflow.



MHM has been expensing the upgrade expenses through its Profit and Loss rather than putting them on its balance sheet and depreciating them. The result of this accounting treatment, together with the fact that processing landfill has yet to commence (gross $4mill per year), is that gross profits have not reached the predicted $8.5 mill figure. While some might be disappointed by this, the fact is the company has been able to pay for its significant upgrades through cashflow generated by part-processing the salt slag while the upgrades were taking place. To keep the plant operational during the upgrades has been testing for management and employees, but has paid dividends for shareholders.



MHM is predicting that the June quarter this year will be the first quarter that these issues will be behind the company, and also the first quarter when cashflow from processing Alcoa's nearby salt cake landfill will be received (annual EBITDA of $4 mill). This will thus be the first quarter when market observers will be able to see the $8.5m EBITDA per annum previously predicted from the Australian operations, which will be a significant milestone for the company.



MHM has been recycling dross for Sims Metal. Recently, Sims has changed to a non-salt secondary recycling method, so now do not want their salt blend (mixture of sodium chloride and potassium chloride) returned to them as was part of the original contract. However, Alcoa are still using this salt blend in their secondary recycling and have expressed interest in buying this salt blend from MHM (likely to be a value of 10,000 tonnes x approx. $200 per tonne = additional approx. $2m in the bank for MHM to fund future expansion, etc). This will be a one-off income.



MHM has decided to defer the purchase of the salt crystalliser for the Australian facilities (approx. $2.5m capex) until next year and stick with evaporation in the meantime. To cope with the volume of solution produced by the plant, they have decided to build two new brine ponds. They will use the next 12 months to assess the salinity levels of the brine mixes that come from the wet process of recycling their customers' salt cake to ensure that the salt crystalliser they choose can cope with the maximum level of salinity it will face going forward while ensuring the process remains economic.



This change of plan is unlikely to impact the design of the first US plant, because, with this plant being about three times the capacity of the Australian plant, they will install the biggest crystalliser available - one that can deal with all possible levels of salinity.



AL80 (previously called Alox80)

The AL80 (aluminium oxide) product that they are selling through Impex Minerals is a high grade product that the end customers (Chinese) are using to blend with alumina (approx. $300 per tonne) in primary aluminium production. While MHM was silent on the price they receive from Impex, the company will be releasing a business valuation model in the near term.



MHM expects that the export issue with AL80, because it is a new product, is expected to be resolved soon. It has been an issue with the end customers (the Chinese), which means that once AL80 is in the system and recognised as a product in China, there will be no problems with exporting the AL80 from the US to China when the first US plant is up and running.



Protection of IP

MHM attributes its success in solving the secondary aluminium industry’s waste problem to being able to draw on their skills and experience outside of the aluminium industry. The probability of someone working out the secrets to the MHM process is minimal because the process involves a series of steps (including chemical and physical) that are interdependent. In addition, competitors’ aluminium salt cake recycling technologies (over which MHM's technology has both a capex and opex advantage) are chemical processes, whereas MHM's process is hydrometallurgical.



The keys for the success of this stock are keeping the technology a secret (al la Coca Cola), and, just as importantly, securing first mover advantage, ie getting as many plants as possible set up in desirable locations around the world as quickly as possible. MHM is well placed to achieve this.



New technologies

The long term future of the Australian plant seems secured by the potential of the company's SPL (Spent Pot Lining) recycling technology. SPL is a bi-product of primary aluminium production and the Australian market produces approx. 35,000 tonnes of SPL per annum. The SPL technology is now finalised and the company could recycle 30,000 tonnes of SPL per annum with a greater return than recycling aluminium salt cake.



The SPL technology won’t be incorporated into the US plant but some news may be forthcoming on an alternative. There is less SPL production in the US than salt cake production, but SPL is still produced in very large quantities and, like salt cake, represents an environmental problem.



Silica

On one of MHM’s other projects, its silica deposit in Tasmania, has attracted interest from a number of parties over nearly two years. At the moment, it seems that MHM is playing a lead role in trying to bring a silicon refinery to Tasmania. Such a project is highly capital intensive ($100s of millions) and would require joint venture partners, large capital raisings and/or an IPO.



Given that aluminium is clearly MHM’s core business, I can imagine a spin-off of its silica assets might be in management’s mind.



Marketing

In terms of generating interest in the stock, Ben plans an investor roadshow in the US in late February, followed by one in London in early March and Hong Kong in late March.



The presence of the corporates and analysts at the site visit indicates there is interest in initiating research coverage.



Quality of Management

I was impressed by the creativity, energy and work ethic of management.



For example, Frank is on-site for the first 2 hours of every shift to ensure employees are on track – that’s 3 shifts a day, including 11pm – 1am. Outside these hours, his role is product development - the company is not resting on its laurels with the salt slag process and continues to develop new processes (like SPL mentioned above), aimed at keeping it ahead of the pack and increasing its revenue streams. He also keeps a very close eye on expenditure!



Ben is the corporate strategist and has been prepared to relocate to the US and has succeeded in building the launching pad for the first overseas plant. He is also travelling widely to promote the company.



The future of the company’s product development is secure, with Frank’s son Mark having similar qualifications and a lifetime of learning from the boss and his previous mining roles!



When assessing any company’s potential, there are only two things to consider – quality of management and quality of product/service – and in my view MHM has both in spades.



In summary

In this difficult share market, MHM’s share price is dependent on it continuing to meet targets and generate news (eg funding of the first US plant, new US contracts).



When the earnings are flowing from the first US plant next year, the market will be forced to take notice and I believe long-term shareholders will be greatly rewa