Royalty speculation

"the royalty rates associated with technology licensing, if disclosed, could prejudice future commercial negotiations with potential customers. This is not in the best interests of shareholders."

"Royalties are typically annualised payments made on either installed capacity (plant output capacity in
tonnes per annum) or annual production. In regard to Coldry and Matmor, ECT has established a global
benchmark for both Coldry and Matmor that is linked to a percentage of the thermal coal and coking coal
market index prices, respectively.

This mechanism acts as a base above which further royalty amounts can be applied, dependant on the comparative economic advantage that Coldry and Matmor offer over existing technologies in that location or specific market.
By example, in countries with a relatively low lignite price, and high availability of iron ore material, it is
likely that a royalty fee will be above the global base amount."

"The royalty rate is determined by a formula, set against global benchmarks, and governed by a clause in the RCA. The SPV, and its equity holders will be bound by that clause."
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The above quotes are all from ECT's Ann yesterday or the Q&A. I realise ECT above state the royalties are based on inputs. I'm going to work some figures on 8.5mtpa billet steel sale prices. I reckon most serious investors will do similar research as I have below... whether it's inputs or billet sale price.

So, ECT state that the capacity targets of an initial 8.5mtpa billet steel in 8 years are attainable. That's reasonable IF the tech successfully scales up. Obviously NLC/NMDC have the financial resources/markets to make it happen IF the scale up works.

http://www.meps.co.uk/BilletPrice.htm

So how much is a tonne of billet steel selling for? It's down a fair wack lately to about AUD$680. I'll use $650.

What royalty can we expect? Read the initial quotes above from ECT. One quote is particularly interesting.
"The royalty rate is determined by a formula, set against global benchmarks". So ECT haven't been negotiated down to near nothing because we are coming from a perceived position of weakness as a microcap.

Ok, Google some of that from ECT eg  "Global royalty benchmarks" & it will take you to industry publications like the below.

https://www.businesswire.com/news/h...alty-Rate-Benchmarking-Guide-20172018-Edition

For US$299 you can get detailed info on "The royalty rate is determined by a formula, set against global benchmarks" type info. Assuming financial close takes place - some serious deep pocket investors will likely pay the $299 & make buying decisions based on the possible royalty rates as well as the obvious other factors that need to be considered before buying a spec like ECT.

Now have a look through this very interesting file below from KPMG. The whole article is a great read, but I'll direct you to some points I think are deeply applicable to ECT. Go to page 12
"Profitability and royalty rates across industries" Read page 12.



"In other words, sectors that
are technology-intensive and produce
differentiated products generally
register high gross margins and hence
can afford higher royalty rates"

If you read ECT's revenue Ann yesterday, it's clear that Matmor has enormous potential profit advantages over traditional steel making (Dastur did the figures - giving the figures increased credibility imo). So, according to KPMG page 12, the ECT SPV would definitely fall into the high gross profit category. That would mean the SPV "should" fall into the higher royalty category of 8% or so. Notice the page 12 chart - that auto, chemicals etc are the amongst the lowest royalty (on sales) groups of about 5%. Food is the lowest at 4%. I'm going to use the most conservative royalty rate of 4%.

So I've stated the billet sale price AUD$650. I'll use the royalty rate of 4%. We are told 8.5mtpa is believable in 8 years. What else do we need for a rough valuation is ECT market cap? How about P/E ratio.

https://m.moneycontrol.com/india/stockpricequote/steel-large/jswsteel/JSW01

Scroll down & it says standalone steel makers in India have an average P/E of 15.9. Elsewhere I've read 13.5.

https://finance.yahoo.com/news/tata-steel-limited-nse-tatasteel-062700221.html

"For example, if you compared higher growth firms with TATASTEEL, then its P/E would naturally be lower since investors would reward its peers’ higher growth with a higher price."

This quote/article from Yahoo above is interesting because it highlights the general criteria for the market awarding a higher P/E. Basically.... Higher growth/higher profit = higher P/E. I think all here will agree ECT will fit into the higher P/E catagory. However, again I will be conservative - go for P/E  14.

So, let's put a rough valuation together.
$650 (billet sale price) ...4% SPV royalty = $26. ECT share = ~AUD$13

Multiply $13 by 8.5mtpa =~$110,000,000 royalty income pa for little microcap ECT.
Now let's apply the P/E of 14.
14 × $110m= $1.54 Billion market cap or ~30 cents per share with 5 billion shares.

That figure is based solely on the Indian Coldry-Matmor "attainable" 8.5mtpa in 8 years. Success breeds success. What other royalty income is possible even before that 8 year period?

Already since finalizing the Matmor commercial terms........Neyveli were immediately on the front foot with a standalone Coldry proposal a few days ago. The income/royalty potential there from fertilizer etc is huge obviously. Ditto for a Coldry plant in Victoria. Interesting how ECT a few days ago Ann a feasibility study jump from 170ktpa to 600. Now what could have prompted that? I'm guessing the Kawasaki hydrogen project that is gathering steam. In my mind there can be no other trigger for such an enormous jump. Remember, for Kawasaki to proceed - an economic drying solution is essential & the obvious criteria is largely low pressure/low temp which Coldry is the standout according to that J-Power chart. Coldry has a track record in Victoria - sales are happening.

ECT have mentioned Clive Palmer's Qld 90mt above ground nickel tailings nightmare opportunity for Matmor. It's an environmental nightmare with no present solution. Once proven, Matmor can liberate the ~$14,000 tonne nickel, make a fortune & become an environmental white knight. There are many many above ground resources like that world wide. Then there is Indonesia, Poland & Germany.

How will the market put a value on the potential for these types of royalty streams? Needless to say, there will be enormous interest in the construction once it commences. Will it scale up?

Now, it's all nice & fluffy to throw around the above market cap figures - but will the market see them as believable...if so when? Obviously, financial close & construction must occur pronto. Only then will serious number crunchers take notice & buy. ECT have consistently employed "world best practices". Eg: Arup, Dastur, etc etc. World class partners NMDC/NLC paying the entire Capex. Australian/Indian Government backing. Approx 50% less Capex costs compared to traditional, approx 50% less input costs, 50% less CO2 emissions. Etc etc.

The Dastur head of technology Ms Tarafdar   - 28 years with Dastur - in Sept she went to the Dubai conference for one purpose...to spruik Coldry-Matmor. Dastur are the world's "go-to" for steel related tech. People like her don't do things like that unless they have a high level of confidence in the scaling up potential. Also, look at today's Ann page 8.

Ambitabh Ray
Deputy Chief Engineer at M. N. Dastur & Co. (P) Ltd

https://www.linkedin.com/in/amitabh-ray-b7b8b423/?originalSubdomain=in

This guy is tbc the new Chief General Manager of the India project. Again, this calibre of professional don't throw their career away on a project like this. Also, $30m is an enormous amount of money even for Indian firms like NMDC/NLC. The directors signing off on this are putting their careers on it imo.

What ECT are about to embark on is unprecedented on the ASX. A microcap backed by majors attempting to revolutionise the steel industry & maybe hydrogen production etc etc. The figures I've speculated on above are IMO conservative as to what can eventuate. Some on HC rattle on daily about how the ECT share price won't react until profits actually come. I reckon statements like that show a lack of understanding how valuations work. We will soon see. However, I believe will ECT fall into the Tesla type catagory. There are many examples of market caps running wildly ahead of actual profits. Basic stuff. The market will value ECT on believable profit potential & growth potential as the articles above clearly indicate.

Should we be surprised if ECT achieved a market cap of say $1.54 billion if 8.5mtpa was achieved or was believably on a path to being achieved? Not at all imo especially with all the possible other projects gaining credibility as they progress. I've been very conservative with the above figures imo.

Get the $3.5m bond sorted, financial close & then construction. If ECT achieve these with minimum more delay then - "build it & they will come" comes to mind.

All imo...tick tock...