DYOR. Not advice. No specific recommendation is intended.
Analysis is based on my own research and calculations.
Sum of the Parts Valuation
In the absence of a Research Report here’s my perspective on the “intrinsic value” for Andromeda.
November 2020 Valuation
Speculative valuation of $0.138 fully-diluted assuming majority of catalysts below achieved.
Share issue conservatively assumed at 2.3B shares by end of 2023.
Implied value of the options would be ~ $0.128.
Share price catalysts
- HPA Test work - expected April
- Halloysite Application Test work - ?
- Poochera PFS - May
- Mining License Application - June
- Potential $3M Research Grant
- Increase in Resource at Kaolin/Halloysite Resource at Poochera ( Carey’s Well and Condooringie Well )
- Exercising of options - the sentiment around $8M+ added to the kitty
- Poochera DFS - December
- Mt Hope JORC Resource - December
- Decision to Mine
- Offtakes (conversion of existing Letters of Intent)
- Mining Lease Approval
All the catalysts above de-risk the project or future parts of the project and should support a significant re-rate. Awareness of the project should improve once the PFS is completed in May, particularly amongst institutional investors.
Breakdown of the speculative valuation. Each component explained in some detail below this summary.
Valuation Approach
To value the business we need to look at the sum of the parts. What the business has in terms of assets and their strategy to progress the assets to provide meaningful value for shareholders. Value of a business is ultimately driven by the potential for that business to generate future cashflows as it is the relationship between anticipated future after-tax earnings and sentiment that drives share prices.
For this I will just focus on the potential value of Kaolin/Halloysite business at Poochera and Mt Hope. I’ve excluded the gold and copper assets that are under farm-out arrangements.
We have enough information to speculate on the potential value of Poochera and Mt Hope. I’ve excluded Camel Lake since there is not enough information to determine the potential size of the resource. I’ve also excluded the potential from HPA production since this is part of their longer-term strategy.
For any component of the business we first need to determine potential cashflows. We then apply a “margin of safety” as a risk-buffer to the speculative value to arrive at an “intrinsic value” for what the business should be by the end of 2020, based on most if not all of the catalysts above being achieved.
I've either used NPV information from studies to extrapolate a value or created simple cashflow models.
The following are the parts to the valuation:
- Poochera - the Premium Refined Kaolin Business described in the Scoping Study
- Poochera - upside to the Premium Refined Kaolin Business from increase in resource and increased precision of Andromeda’s estimates as they progress the project through to Definitive Feasibility Study at the end of the year.
- Poochera - producing and selling High Purity Halloysite
- Mt Hope - a similar operation to Poochera for Premium Refined Kaolin
- Cash - value of cash in bank to progress the projects, predominately from conversion of the options
In the valuation I have used an estimated share issue of 2.3B after all listed and unlisted options are exercised plus allowing for smaller raise that may occur closer to production. Current fully-diluted share issue is ~ 2.26B shares.
Listed options will raise ~$8M by end of 2020 and unlisted management options will add another $5.5M by end of 2023.
So what else is key about the value of Andromeda?
Andromeda is unique in that for a very low start-up cost it will be able to generate quite nice after-tax cashflows in the order of AUD $40M from their 75% share of the project. They will be able to do this with very little or no debt and potentially funded from off-take pre-payments. The options that will be exercised in 2020 should fund ongoing working capital requirements through 2021. Assuming ~ $9M in the bank by end of 2020 the company would comfortably be able to spend $1M to $1.5M per quarter through 2020, however this should be well above what they need as the focus of effort will shift to Offtakes and mine approvals in 2021.
The project as scoped at Poochera achieves payback within 15 months of start of site works. They will use this to self-fund a processing plant on site. This means that within ~ 3 years of onsite works commencing they will be able to use the cashflow from this initial operation to fund development of High Purity Halloysite and Mt Hope operations. At a later point they will be able to look at a JV or toll-processing arrangement for High Purity Alumina production.
Link to Optimised Scoping Study: https://www.asx.com.au/asxpdf/20200406/pdf/44gqw5xj1j1xpc.pdf
Andromeda has Measured and Indicated Resources that underpin the Scoping Study. This significantly de-risks the project since the resource is of sufficient rigour/quality to use as the basis for the PFS due in May and the DFS due by the end of the year. Normally a project would need to embark on expensive drilling before completing a DFS.
Link to Resource Upgrade: https://www.asx.com.au/asxpdf/20191223/pdf/44cv03fbd3xgm7.pdf
For any mining operation associated with specialty minerals bulk-sampling is key for de-risking the project and for marketing of samples to potential customers. Andromeda hit the ground running in 2018 just months after picking up the project from MEP. In 2018 the company completed bulk sampling and this provided 215 tonnes of material that was used in commercial-scale processing trials. 140 tonnes of this was shipped to China and was the basis of both wet and dry-processing trials by potential end-users.
It's rare to have so much done after completion of a scoping study - bulk sampling, resource definition completed, customer sample provided, blue-sky opportunities explored through research partnerships.
The management at Andromeda through the Managing Director JM have intimate knowledge of the Kaolin/Halloysite business both technically and from a business / market perspective. Through Chairman RG Andromeda have great mine development and corporate experience. JM has several decades experience in industrial minerals and RG has several decades experience in mine development and operations.
So Andromeda’s primary asset is Poochera. It is the one that is most advanced as it has Measured and Indicated Resources the underpin the production targets in the scoping study. They have completed a large amount of test work during the last 2 years that de-risks the project. The test work also gives them a basis from the bulk sampling they completed as the basis of providing make.
Their intended path to production gives as a set of stepping stones to growth. Funds from options covers ongoing development and offtake work in 2021. Theirs great potential for an Offtake pre-payment (and this is foreshadowed in the Scoping Study). That gets Andromeda to production which then funds the construction of the wet processing plant on site. Ultimately cashflows from the project will then drive the other opportunities. The timeline itself is achievable within a 5-year window.
1. Valuation of Poochera (Premium Refined Kaolin)
In the Wet-Processing Scoping Study, Andromeda calculated a pre-tax Net Present Value (NPV) of AUD $544M (8% discount) on a 100%-project basis. The NPV figure gives us a discounted value of the future cashflows for the full 15-year mine life.
Using a rule-of-thumb 65% conversion factor, the Poochera project has a discounted Post-tax value of ~ AUD $353M (@ 8% discount). So Andromeda's discounted share of after-tax cashflow would be approximately $265M. Per-share value is $0.115. After applying a 50% margin of safety as a risk buffer to the valuation gives Poochera a risk-adjusted value of ~ $0.058 fully diluted.
I have calculated the speculative value of Poochera in production below using averages for production, price and AISC given in the Optimised Scoping Study. I’ve assumed average depreciation at 7% pa ( straight line method ). Given the growth profile of potential cashflows from High Purity Halloysite and upside such as Mt Hope I have used a P/E 20.0.
Note - the below provides perspective on future value and is not used in the Sum of the Parts Valuation.
2. Valuation of Resource & DFS Upside Poochera (Premium Refined Kaolin)
The portion of the High Purity Halloysite Zone underpinning the Optimised Scoping Study was already increased in December 2019 Resource Upgrade. Further drilling at Carey’s Well and Condooringie Well is expected to further increase the resource. For the currently scoped project I am expecting this to extend mine life into the 20 to 25 year range ( from the present 15 years in the Optimised Scoping Study ). This increase in mine life will increase the project NPV and hence upside for shareholders.
Further increases to NPV are expected to come from greater precision in the assumptions undermining the economics of the project and these will be factored into the DFS. The low AUD relative to the USD provides further upside since offtake pricing is generally negotiated in USD. During the conference call on Wednesday, JM identified that the wet-processed product that will be produced at the mine site may be able to be sold as a final product, potentially improving margins by eliminating costs associated with toll-refining overseas.
I’ve valued upside at 20% of the value of the risked valuation for the Poochera Project (see Sum of the Parts breakdown at the top of this post).
3. Valuation of Pure Halloysite Business (Poochera)
For the Halloysite Business I have assumed a 10 kt pa business starting in approximately 2025 and eventually growing towards 40 kt pa. This business will grow more slowly since the test work is more complex associated with commercialisation of new applications. I see the test work as mainly a customer-driven effort, with Andromeda fine-tuning the product specification of raw material to suit the customer application. Andromeda in the Coffee with Samso video identified margin of ~ AUD $4,000 per tonne. Given the more speculative aspect, I’ve applied a 75% margin of safety and used this in the sum of the parts valuation.
Larger proportions of demand in terms of tonnage are expected to come form Water Purification, Environmental Remediation and Carbon Capture applications. Blue sky comes from the higher purities and hence higher margins expected to be required for battery, drug delivery and other medical applications.
It is expected that the production of High Purity Halloysite could be added to the wet-process plant by applying a particle-size cut a 2 micron using a centrifuge (which is standard equipment in the industry). A relatively low capital expenditure funded from cashflow is assumed for the plant upgrade. I’ve assumed capital intensity per tonne to be lower so applied a lower 5% as the basis of annual depreciation as a proportion of EBITDA.
Whilst highly speculative at the moment, each 10kt of production is anticipated to add ~ $21.5M of after-tax profit to Andromeda’s cashflow. 20kt would add ~ $43M, 30kt would add approximately ~$64M and so on.
4. Valuation of Mt Hope (Premium Refined Kaolin)
Andromeda are currently awaiting results from a 1,400m drilling campaign at Mt Hope to support conversion of the historic 12.6 Mt resource to a JORC 2012 compliant resource. This work is expected to be completed by the end of 2020.
The historic resource was defined in the 1970's by a company that was pursing a paper coating application for the Kaolin. Further exploration in the 1980's and significant analysis by South Australian Government geologists and the CSIRO gives Andromeda a significant degree of confidence in terms of what is below the ground. The have full access to historic drill hole data and other exploration results and this gives Andromeda some great information for to guide their drilling and the resource upgrade.
Analysis of historic data indicates the presence of Halloysite which may support a similar type of operation to that planned at Poochera focused on Premium Refined Kaolin. The quality of some samples may eventually allow production of Pure Halloysite. This sample below is 80% Halloysite.
Andromeda own 100% of the Mt Hope project and based on the NPV for Poochera I have extrapolated a potential NPV for a similar project at Mt Hope. A 75% margin of safety has been applied. A low production target of 10 kt has been assumed for use in the sum of the parts valuation. The largest Halloysite operation in the world has a capacity for 30kt pa but this material has carcinogens which make it unsuitable for life-science applications.
5. Expected Cash Balance - December 2020
At end of December quarter, Andromeda had $4.4M in the bank and $1M planned spend for March quarter, which should leave $3.4M in the bank at the end of the March quarter. With drilling completed at Mt Hope and Poochera I’m expecting the company to spend no more than $1M each in June and September quarters. Leaving $1.4M in the bank in addition to ~ $8.4M to be made through exercising of options in 2020 ( ~ $323k already exercised in calendar year 2020 ).
I’m expecting cash balance to be ~$9M at the end of 2020 following the exercising of all the options. This should comfortably cover their remaining activity towards commencement of onsite works (currently expected to be end of 2021).
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