WAK Notes

WA Kaolin is a high trust group of people who have spent c $42m of largely their own $ working out how to do things better so as to build a multi generational industrial minerals business. WAK acquired the Kaolin deposits in Western Australia in 1999 from Rio Tinto and since then there has been significant investment to date that has delivered a de-risked project. Innately conservative they have a 3 stage sequential brownfields expansion program that matches demand with supply to calibrate risk in what is a very low capital intensity endeavour. At the 3rd stage of production it’s a c 31 year Life-of-Mine (LoM) but with a modest spend its easy to imagine 100 years plus based on the size of the resource they have which is being valued at just 9c/t into the IPO. The Owners have signed on to a proposition that involves working towards large and sustainable dividends @ a 66% payout and keeping the balance sheet free of institutionalised debt. In production now, with offtake and clients wanting product, the $22m IPO giveS WAK a market cap of c $55m. The DFS shows a NPV for the first 2 stages of $256m, an IRR of 47% , average EBITDA of $29m and average profit after tax of $21m……..this doesn’t include stage 3 that takes it from 400k tpa to 600k tpa…….anecdotally that should add 50% plus to some of those numbers. In April 2020, WAK signed a ten-year offtake agreement with a subsidiary of Stanco International Corp who have also invested $1.5m into WAK and are major shareholders. In the first three years of production at Wickepin, the sum of the targeted sales in Stanco’s offtake is 271kt, coupled with non-binding letters of intent of 280kt from other customers, amounts to 551kt. This represents 83% of targeted production of 664kt for those years. There is an emerging domain on the ASX, much like the way the market backed the early iron ore stories in the 2000s, and on every metric WAK looks very attractive. Domains emerge in minerals groups as do winners. Fortescue in Iron Ore, Lynas in Rare Earths, Galaxy in Lithium. WAK seems to be the likely winner in Kaolin because it’s already in production with a DFS in hand. It occurs that as a hybrid industrial/resources business that it could come to be a significant cash generator for investors. The way we are conceptualising it and why we are investing is that delivery on the low cost expansion and the attachment by the market of PERs of 10 to 12x and a yield of 6% franked ex stage 3 open up a $250m to $350m style market capitalisation target where what might become $20m or so of dividends suggests investors might come to enjoy a 20% to 30% franked yield. Throw in further blue sky will be where WAK explores HPA and potential Halloysite applications. That’s the Owners proposition. They have been patient, committed and have hooked much of their vend to delivery. As a strong testament that the owners/board members are committing to build a multi generational industrial minerals business, it is worth mentioning that their shareholdings are in 2 year escrow plus they have signed on for an additional 3 years voluntary escrow on top of that for 75% of their holding. Have a look at SUV.ASX ($70m market cap) and ADN.ASX ($700m market cap) who are both going very well in the market and operate in a similar space to WAK. WA Kaolin compares very well on peer metrics and its EBITDA multiple is very low based on initial LoM production. It is the most advanced out of any Kaolin play on the ASX and the clear standout in the sector. Plenty of room for upside when the company continues to scale up. 40c-60c valuation more then justified to start with for a company at this stage of production with significant further upside to come.