The purpose of this post is to put into one place as many facts as possible about MHM's aluminium project, management, contracts and expansion prospects. Silica and minerals are ignored.
I've tried to source everything. Those who are not fans of the company are welcome to debate the facts as set out.
I believe that after reading this, it will be hard to justify an assertion that MHM is some sort of smoke and mirrors operation with no real future. Nothing is certain, but MHM is clearly a real company with real technology and a real shot at huge earnings.
Sorry about the length and any errors contained.
Some key points regarding MHM:
1) MHM through their subsidiary, ALRECO have acquired the rights to ALNAK salt slag processing technology and first rights of refusal to the related technologies for NMP and SPL processing. MHM directors own the tech, it will stay with MHM 2) Alreco's proprietary technology, the ALNAK technology, processes salt slag and separates it into its individual components of aluminium metal (10-20%), aluminium oxide (30-40%) and a salt and potassium chloride blend (50%). The technology results in total waste treatment and production of aluminium and other saleable products. The technology removes the need for any portion of the salt slag to be sent to landfill 3) The salt slag technology has been in operation in Australia for several years. 4) Australia produces around 25,000 tpa of salt slag. 5) There is significant opportunity to expand the business overseas, particularly in the United States where in excess of 40-times the volume of Aluminium Salt Slag is produced compared to Australia For the aluminium project, the Company expects to earn $230,000 per month before completion of the upgrade, then increasing to A$8.6 million per annum thereafter. This is from 60% of Australian processing of Salt slag alone. 6) The technology is proven and viability accepted by Alcoa. See excerpts from RB Milestone report, below. Also referenced in the 2010 Annual Report - Review of Operations section 7) MHM has processing contracts with Alcoa Australia and SIMS Metal. See below 8) MHM has a very strong relationship with ALCOA as evidenced by their contract and Alcoa lease deal with MHM, where they are leasing 9 hectares of Alcoa owned land for $1 per year. http://www.mhmmetals.com/_content/documents/727.pdf 9) MHM is involved in a feasibility study with SSC Smelter Corp (See below). A major U.S aluminium entity. SSC are in the process of establishing a landfill in Tennessee. MHM director Ben Mead has moved to Tennessee to oversee the expansion of MHM in to the U.S. this has progressed to the stage where landfill testing will take place from the 15th March. http://www.mhmmetals.com/_content/documents/733.pdf 10) The processes are already profitable. See cash flow summaries below. 11) No other company, in the world is known to be able to produce similar profitable results from aluminium waste processing, giving MHM first mover status 12) Directors have considerable stake in the company. 13) Managing director Frank Rogers has spent over $100k on market in the last six months.
The global potential for aluminium waste processing earnings is in the hundreds of millions. See key points 4, 5, 6 and 7. Full Australian profit for salt slag processing would be around $14m p.a. NMP would nearly double that amount, maybe $25m. The U.S market is 40 times that of Australia. The global market much larger again. Simple multiplication means that the potential profits are massively higher than for Australia alone.
In total there are approx 146m shares plus listed and unlisted options, meaning that if the expansion is debt funded, or minimal dilution takes place, contract based revenue even if it is only from the Moolap plant and SSC would, on normal P/E rations justify a much higher SP than $1.00.
Moolap Upgrade
This has been slower than expected. Original estimate of completion was 2nd quarter 2010. This was revised to Sept 2010 in this announcement http://www.mhmmetals.com/_content/documents/688.pdf The physical upgrade apart from evaporation ponds was completed in September, however council approval for the ponds has run on and on and was only obtained last week. This is a critical milestone in that allows for completion of the plant and full capacity operation, which in turn will produce the full predicted $8.6m per year EBIT. It is also a pre-condition for Alcoa's visit to Australia to view the operations. This visit was originally planned for October. The company has stated that were not advised of the need for a cultural heritage (CHMP) study to be included as part of the process. As far I'm aware no council person whom a hotcopper poster has spoken to has ever disputed this, however, with hindsight, it seems that it might have been better to get the council application process moving earlier. Even so, in the long run this delay, while frustrating, has no effect on the viability of the process or its attractiveness to global clients.
Criticisms of management are unjust, it has to be acknowledged that: a) The council has played a major part in the delay and b) MHM has not been idle in any sense. The plant upgrade which was within their control was completed in September. Once aware of the need for a CHMP it was progressed quickly and a backup plan was in place. Since approved. They have also moved Ben to the U.S to facilitate the U.S expansion.
Expansion
Alcoa have stated that they intend to end land filling of Aluminium waste by 2015. They are a global company with plants on every continent. Land filling of salt slag is illegal in many countries and faces public opposition in others. Tennessee is an example of such opposition.
U.S Expansion costs are anticipated to be around $20-25m per plant, with annual profit per plant, from salt slag alone of $30m+. See RB Milestone report. This also corresponds with current contract rates. It is anticipated that the SSC feasibility study will result in the construction of a plant in Tennessee and that the relationship with ALCOA will lead to plants in the U.S and hopefully worldwide.
It is speculated that the expansion will be debt financed. However, if it has to be equity funded, that will happen after contracts are signed and cash flow is clear. It is reasonable to expect that the SP would be much higher after such announcements and dilution would not be major.
It is that expected expansion which attracts shareholders as it will bring with it many millions of dollars per year. The probability of OS plant builds with Alcoa is the holy grail for holders. Agreements for two U.S plants would see an immediate, large spike in the SP. If the deal is for global expansion and several plants, it will provide an astronomical kick.
In my view the SSC feasibility study is about how to, not whether to, build processing plants in Tennessee. Millions of dollars would not be spent and the executive director would not relocate there, if this was a 50/50 proposition. The president of SSC (William Toler) is also a board member of the U.S aluminium association, which must be helpful for MHM in terms of opening doors into the U.S aluminium industry. http://www.aluminum.org/AM/Template.cfm?Section=Weekly_Briefing&Template=/CM/HTMLDisplay.cfm&ContentID=30534
Origin of ALCOA Three party JV contract
In January 2005, Alcoa of Australia Pty. Limited, trading as Alcoa World Alumina Australia (Alcoa), and the Three Party JV entered into a contract that permitted up to 2,000 tons of Salt Slag and aluminium dross from Alcoa's Moolap landfill site to be used to determine the feasibility of full-scale recovery and remediation of all Salt Slag and associated material at Moolap. This contract included the intention that, should the initial trial be successful and approved by Alcoa, the Environmental Protection Authority (EPA) and Council, the parties would negotiate an agreement for the recovery and remediation of all Point Henry Salt Slag landfill areas on the same principles. In April 2006, the results of the initial trial were presented to Alcoa and Alcoa agreed with the viability of the ALNAK technology. In October 2007, the Three Party JV executed a formal agreement with Alcoa regarding the removal of the Salt Slag at the Alcoa Moolap landfill, containing around 160,000 tons of Salt Slag.
Risks
They don't get any contracts,or a competitor beats them to it. This seems unlikely given the stage of work they are at with SSC and Ben's relocation. Alcoa's desire to cease landfilling by 2015 means that if a competitor was to usurp MHM, they would have to be involved in testing right now. Remember that Alcoa accepted the viability of the ALNAK process in 2006 after a 2000 tonne trial. MHM has first mover status. Other companies (Befesa) process waste but not profitably for the waste disposer. Legislative and environmental pressures make the continued use of land fill unrealistic everywhere and illegal in many in countries.
However these risks exist and are the reason that the SP is not higher than $1. On the other hand the belief that the contracts will be granted is why the SP is trading well above current earnings value.
In my opinion as someone who has bought in heavily, the risks are low and the reward exceptional.
Cashflows
The processes are profitable. The cash flow reports demonstrate very good margins, especially when volume is up. Output has been impacted by plant closures and upgrades.
Operations affected by plant modifications to allow NMP technology implementation in anticipation of NMP contracts. Cash at end of quarter - $11.7m.
Operating surplus for the four quarters was approx. $2.8m. People may be surprised to see that exceeds forecasts for pre-upgrade profits
Management http://www.mhmmetals.com/directors.asp
MHM Directors Frank Rogers and Peter Robertson were the creators of this technology. They stand to benefit significantly from the success of MHM worldwide as they have retained royalties in the processing and shares in the company. Frank Rogers has in total, over 19m shares and options in the company. Frank has purchased over $100k worth of shares in the last six months. Ben Mead over 4.9m shares and options
An increase of the SP into the dollars will make these people very wealthy. This is universally considered a good thing. All director holdings are included in this post.
They have experience across, mining, commerce and banking. Frank Rogers has been a CEO of public and private companies. Contrary to suggestions there are no black marks against them.
Director buying and holdings, shares and options
Basil Conti:
456,250 ordinary shares in 682,500 options
Total 1,138,750
Frank Rogers: 10,631,256 (indirect). 8,512,503 options (indirect).
Has purchased over $100k worth of shares in the last 6 months
Ben Mead: Interests in shares 1,900,000 (indirect). 40,001 (direct). 3,000 (indirect). 20,001 (direct).
Total 4,960,002
Dr N R Allen: Interests in shares 225,001 (direct). 450,000 (direct).
Total 625,001
Peter Robertson: Interests in shares 250,002 (direct). 62,500 (indirect). 300,001 (direct). 125,000 (indirect).
To view the RB milestone report you'll probably need to join as a free member.
In my opinion this report is not a brilliant effort. It does not value NMP or SPL both of which have the potential to earn more than salt slag processing. However the earnings figures do correspond to current contract fees of $300 per tonne. The multiple applied to earnings does not make sense. If MHM build plants in the U.S at a cost of up to $25m each, either on their own or in partnership, they will want long term contracts. These contracts would then guarantee income and shield against fluctuation in the aluminium price. A share price of $3.92 would value the company at just $800m if there are up to 200m shares on issue and approximately $600m if there are still under 150m shares on issue. Fully diluted. Based on the target NPAT of around $90m, they would be getting a multiple of around 6 to 8 for a company with long term contracted income and which is still very much a growth stock. That seems low.
If I'm right, the SP based on the use of salt slag in the four plants referred to would be higher. If you factor in NMP and SPL it would be multiples higher. If there is a global deal with Alcoa, it would be multiples higher again. Depending on dilution and possible JV terms, if that is how the expansion is funded. However MHM have stated that they intend to keep dilution to a minimum and that they will seek debt funding.
Summary
The diversification into the aluminum industry has provided important income and growth opportunity to the Company. The operating model largely insulates the Company from fluctuations in the aluminum price and currency.
We value the Company based on PV of cash flows that would be generated from its Aluminum project in Australia and the United States. We assume that, MHM would set up three plants in the U.S. with an initial investment of about US$70 million, discussed in detail in the Valuation & Investment View; section of the report. Assuming a discounting factor of 13.4% and a span of 30 years of production, we have arrived at a new target price of A$3.92, which provides an upside potential of 188% to the current market price.
Alreco acquired the exclusive global rights to the ALNAK technology during January 2010. Prior to this, the technology and associated relationship with Alcoa was developed through a Joint Venture of three companies (the Three Party JV) including two companies associated with two Directors of MHM (Frank Rogers and Peter Robertson). In January 2005, Alcoa of Australia Pty. Limited, trading as Alcoa World Alumina Australia (Alcoa), and the Three Party JV entered into a contract that permitted up to 2,000 tons of Salt Slag and aluminum dross from Alcoa's Moolap landfill site to be used to determine the feasibility of full-scale recovery and remediation of all Salt Slag and associated material at Moolap. This contract included the intention that, should the initial trial be successful and approved by Alcoa, the Environmental Protection Authority (EPA) and Council, the parties would negotiate an agreement for the recovery and remediation of all Point Henry Salt Slag landfill areas on the same principles. In April 2006, the results of the initial trial were presented to Alcoa and Alcoa agreed with the viability of the ALNAK technology. In October 2007, the Three Party JV executed a formal agreement with Alcoa regarding the removal of the Salt Slag at the Alcoa Moolap landfill, containing around 160,000 tons of Salt Slag. During 2009, the Independent Directors of MHM approached the two Directors associated with the Three Party JV to consider an acquisition of the rights to the technology and to the ability to process the Moolap landfill and ongoing Salt Slag produced by Alcoa. The Independent Directors appointed Grant Thornton to act as corporate advisor for the transaction and further commissioned the Carnot Group to provide an independent technical report regarding the ALNAK process. Concurrently, the Independent Directors engaged in negotiations with Sims Aluminum Pty. Ltd. to acquire one of Sims; businesses in Moolap that held the necessary permits for the processing of Aluminum Salt Slag. Sims had been attempting to develop a closed-loop, landfill-free solution for Salt Slag without success and the Independent Directors identified an opportunity to acquire this business from Sims and upgrade the operation to the specifications of the ALNAK technology. In January 2010, a simultaneous transaction occurred whereby MHM acquired the Sims Salt Slag business; the exclusive global rights to the ALNAK technology; the rights to process the Alcoa landfill at Moolap; the rights to a contract with Alcoa to process ongoing Salt Slag production; a contract with Sims to process Aluminum Salt Slag and Aluminum Dross; and the first right of refusal to acquire two additional technologies under development for processing Spent Pot Lining and Non-Metallic Product (two additional aluminum industry waste streams).
Additional Technologies
Aluminum Oxide Processing MHM has acquired the exclusive rights to a technology under development for the conversion of the aluminum oxide residue from the Salt Slag technology into aluminum metal! In Australia, over 50,000 tpa of NMP is produced, which would produce nearly 25,000 tons of aluminum metal with a value of $50.0 million at today's prices.
USA produces 10 times the volume of NMP produced by Australia.
SPL Processing MHM has acquired the exclusive rights to a technology under development to process Spent Pot Lining (SPL) into valuable commodities. Australia produces 38,000 tons of Spent Pot Lining per annum while USA produces some 230,000 tons. The process to be used by MHM converts SPL into carbon, fluorine products and refractories for reuse in the aluminum industry. The revenue potential from the treatment of SPL is substantial.
aluminum scrap requires only 5% of the energy required for primary smelting.
Basis for Revenue Projections The key assumptions made in forecasting revenues are as follows: We have done the revenue projection (2010 onwards) for the Company based on its Aluminum project For the aluminum project, the Company expects to earn $230,000 per month from January 2010 to October 2010, then increasing to A$8.6 million per annum thereafter Alreco Pty Ltd contributed revenues of $2,735,528 and a net profit of $1,008,021 to the group for the period January 15, 2010 to June 30, 2010 Going forward, once the interests of the Three Party JV are acquired, this would increase again to ~A$11.0 million per annum Lately, the Company entered into an agreement with Smelter Service Corporation (SSC) to conduct a joint feasibility study to conduct salt slag processing in the US. SSC produces around 90,000 tonnes of slat slag per annum. The Company has also been approached by several aluminum companies from Canada to conduct a joint feasibility study to conduct salt slag processing We estimate that the Company may able to generate revenue in between US$120 million and US$140 million, and EBITDA (Earnings before Interest, Tax, Depreciation and Amortization) in the range of US$90 to 100 million starting FY2013 We expect the Company to incur capital expenditure budgeting US$50.0 million over the next 2 years on the Aluminum project Apart from the above, the Company would incur US$12.0 million for the feasibility study agreed to conduct along with SSC scheduled to conclude it by June 30 2011, to progress opportunities with Alcoa and for the purposes of working capital
Planned Capital Expenditure We have estimated a planned capital expenditure of US$70.0 million for the three plants in the United States. For the aluminum project in Australia, MHM expects to earn $230,000 per month from January to October 2010, increasing to A$8.6 million per annum thereafter. Once the interests of the Three Party JV are acquired, this would increase again to ~A$11.0 million per annum.
We value the Company based on PV of cash flow which is expected to be generated from its Aluminum project in Australia and the United States. Assuming a discounting factor of 13.4% and a span of 30 years of production, we have arrived at a target price of A$3.92, which provides an upside potential of 188.5% to the current market price. We foresee tremendous growth potential for the Company's technology in Canada and some European countries, such as Germany, where the dumping of salt-slag in landfills are banned. Though the project offers substantial returns, there is high uncertainty associated with the production and anticipated cash flows. In light of this, the investment is of a high risk investment nature.
*This report did not value NMP, SPL, Silica or Mineral assets.
Environmental Benefits Landfilled salt slag causes significant environmental problems releasing ammonia into the air and metals into groundwater. No landfill means no contamination issues. MHM's technology has significantly reduced energy consumption by producing aluminum from Salt Slag waste, as compared to primary sources. Aluminum from Salt Slag production requires 95% less energy than that required to produce aluminum from bauxite. Australian Aluminum Council states that primary aluminum production results in 3.1 tons of CO2 per ton of metal. Alreco Process uses 95% less energy and, as such, will reduce CO2 output by approximately 2.945 tons of CO2 per ton of metal. The Alcoa landfill alone contains between 16,000 and 32,000 tons of aluminum, resulting in a savings of between 47,000 and 94,000 tons of CO2 from emission. When the Alcoa processing agreement and Sims processing agreement is taken into consideration, this figure increases further. The Australian Aluminum Industry has been promoting the Green Can; concept an infinitely recyclable product with no resultant waste. This is only achievable due to the technology being implemented by Alreco. Alreco is looking to implement an evaporation plant into the circuit that will utilize Alcoa's waste heat from the Point Henry Smelter to produce a crystalline salt from the Salt Slag treatment (as opposed to the use of evaporation ponds). This will result in the saving of approximately 120,000,000 liters of water per year.
Alreco's proprietary technology, the ALNAK technology, processes salt slag and separates it into its individual components of aluminium metal (10-20%), aluminium oxide (30-40%) and a salt and potassium chloride blend (50%). The technology results in total waste treatment and production of aluminium and other saleable products. The technology removes the need for any portion of the salt slag to be sent to landfill.
Rights to the proprietary technology for international applications MHM has negotiated to acquire the exclusive rights for the use of the technology for all international applications, and must pay the Technology Providers a 5% gross income royalty for this right, subject to compliance with the Listing Rules. The Technology Providers are entities controlled by Frank Rogers and Peter Robertson, Directors of Macquarie Harbour Mining Limited.
First right of refusal for global right to two additional technologies MHM has negotiated for the first right of refusal to acquire the exclusive global rights to two additional technologies that treat other significant waste streams from the aluminium industry. Non-Metallic Product (NMP) Processing Technology is a proprietary technology under development to process NMP that results from the primary aluminium industry and from salt slag processing, and convert this NMP into aluminium metal. In Australia over 50,000 tonnes of NMP is produced, which would produce nearly 25,000 tonnes of aluminium metal per annum. In the USA more than 10 times the volume of NMP is produced as compared to Australia. Spent Pot Lining (SPL) Processing Technology is a proprietary technology under development to process SPL into valuable commodities. SPL is a highly hazardous waste that results when the lining of the aluminium smelter pot lines are replaced. This waste can not be placed in landfill in Australia, resulting in significant quantities being stored above ground. Australia produces some 38,000 tonnes of SPL per annum and the technology converts SPL into carbon, fluorine products and refractories for reuse in the aluminium industry. The revenue potential from the treatment of SPL is substantial.
Processing Contracts
Processing agreement with Alcoa - http://www.mhmmetals.com/_content/documents/659.pdf
Highlights ' Aluminium Salt Slag processing agreement finalised with Alcoa ' Three year contract for between 33,000 and 39,000 tonnes of material ' $300 payable per tonne of processed material, with Alcoa retaining ownership of recovered metal and salt, aluminium oxide to remain the property of Alreco
The Third Party has access to a landfill owned by Alcoa containing 160,000 tonnes of aluminium waste, from which an estimated 16,000 tonnes of aluminium is expected to be recoverable. The Third Party has acquired from Alcoa the rights to 100% of the proceeds of materials recoverable from the landfill. In addition, the Third Party has negotiated a three-year tolling contract with Alcoa for the processing of Aluminium Salt Slag.
Alreco will receive 60% of the EBIT profits from the Alcoa processing contract and has the first right of refusal to acquire 100% of the rights, subject to independent valuation and shareholder approval.
The treatment of Aluminium Salt Slag as provided by Alreco is critical to the ongoing viability of the secondary aluminium industry for Alcoa. Alreco is confident that there will be significant opportunities to work in partnership with Alcoa on a global basis and is continuing to explore other opportunities including two potential processing plant in the United States.
Agreement summary: Alreco is paid $300 per tonne as a processing fee. Alcoa will own the recovered metal and salt, thereby having saleable product returned to them
Alreco (MHM) own the oxide. Aluminium oxide is worth approx $350 per tonne. http://www.alu.com.cn/enNews/NewsInfo_10924.html or valued at $200 according to MHM investor presentation http://www.mhmmetals.com/_content/documents/668.pdf Aluminium is worth approx $2600 per tonne.
Processing agreement with SIMS - http://www.mhmmetals.com/_content/documents/661.pdf
Alreco will receive 60% of the EBIT profits for performing these services, and has the first right of refusal to acquire 100% of the rights of the Third Party, subject to independent valuation and shareholder approval.
Agreement with SSC for feasibility study - http://www.mhmmetals.com/_content/documents/708.pdf
SSC alone produces nearly four times the 25,000 tonnes per annum salt slag that the entire Australian secondary aluminium industry produces. Alreco processes 100% of the salt slag that is produced in Australia and aims to achieve a similar outcome in the US, and ultimately globally.
More broadly the parties will also explore opportunities for salt slag processing in the US and discuss a potential partnership to capitalise on the 1,000,000 tonnes of salt slag produced each year. The feasibility study will assess issues such as plant location, permitting, availability of grants and government concessions, regional salt slag production, a comprehensive testing program of SSC's salt slag production on an ongoing basis and availability for reclamation from landfill. The agreement also provides a framework for the parties to discuss a more general partnership to capitalise on the salt slag produced by other parties throughout the US. The feasibility study is scheduled for completion by 30 June 2011
Australian operations are progressing well with MHM on track to earn an anticipated $230,000 EBITDA per month during the technology upgrade, increasing to an anticipated $8.6 million EBITDA per annum when the upgrade is complete. While the economics of the potential SSC salt slag operation will be determined by the feasibility study, it is believed similar profit margins can be achieved. It should be noted that Alreco owns 100% of any international salt slag operations and does not have to share profits as it presently does in Australia.
http://www.mhmmetals.com/_content/documents/723.pdf - Aluminium Project Update 25 November 2010
Alreco processes all of the Aluminium salt slag produced in Australia under contracts with Alcoa Australia Rolled Products Pty Ltd, a wholly-owned subsidiary of Alcoa, Inc. (NYSE:AA), and Sims Aluminium Pty Ltd, a wholly owned subsidiary of Sims Metal Management Limited (ASX:SGM). Alreco also processes other wastes for Sims including non-salt slag and aluminium dross.
Alreco has signed an agreement with US-based Smelter Service Corporation to conduct a feasibility into the construction of America's first closed-loop salt slag processing facility. Smelter Service Corp produces approximately 90,000 tonnes of salt slag per annum and has a 350,000 tonne single-purpose (mono-fill) landfill that appears to be suitable for reprocessing. It is also believed there are additional sources of salt slag in the region.
Alreco acquired the exclusive global rights to the ALNAK technology during January 2010.
CONTRACT FOR THE FIRST RIGHT OF REFUSAL TO SPENT POT LINING AND NON-METALLIC PRODUCT TECHNOLOGIES MHM has entered into a contract with the Technology Providers that secures the first right of refusal for the exclusive rights to two additional technologies that are under development. These technologies relate to the treatment of Spent Pot Lining, an additional toxic waste stream from the aluminium industry, and a value-adding technology for Non-Metallic Product, an industry by-product and residue of the ALNAK technology
From the commencement of operations to 30 June 2010, Alreco processed 13,627 tonnes of Salt Slag and Aluminium Dross under the contracts with Alcoa and Sims. Gross revenues for the period were $2,735,528, with a net profit of $1,008,021. Profitability was affected by once off land filling costs of $545,829.
MHM Price at posting:
99.0¢ Sentiment: Buy Disclosure: Held
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