Bass Metals - Zero or 100x
I am always looking for a good risk-reward ratio. It’s not always easy to find but it is possible. Bass Metals is a large-flake graphite producer that has taken over an existing mine in the tropical island of Madagascar.
To make it clear from the very beginning, there is a high chance that Bass will not survive. But I made extensive research and came to the conclusion that I am ready to take the bet. Bass Metal will find additional financing and survive.
If this turns out to be true and if other factors play into this bet as expected then it is very likely that the market capitalization will be hundred times bigger than what it is today. And this may happen faster than some investors think.
The reason is the following:
We are talking about an existing mine. Bass Metals is not an explorer that is drilling some holes for a ‘Pre Feasibility Study’ or some initial 'test drilling'. It’s not a paper dream. The Graphmada mine in Madagascar is operated by Bass Metals and was up and running until last year, after being in production for over 18 months.
First, the production was stopped only temporarily due to a period of exceptional bad weather that was expected during the monsoon season . After it became clear that Covid-19 turned into a pandemic Bass metals shipped the remaining tonnes of graphite to its customers and then fired 75% of their workforce.
What is Bass doing now?
Bass Metals quickly decided to go back drilling and therefore expanding their total resources under its control. I heavily support this decision. Graphite prices are still low and there was no point in producing on those levels. But I will explain this in more detail a little later.
Let’s jump a step back. Originally, Bass was a gold and base metal exploration company. In 2016 they acquired the above-mentioned Graphmada mine from LSE-listed Stratmin Global Resources and therefore fully moved to Graphite.
Bass introduced a new management, completed a capital raising, rebuilt and recommissioned the mine with new equipment and invested into supporting infrastructure like roads and new facilities.
Bass Metals has implemented a number of improvements to the Graphmada operation itself. For example they installed a ‘vibrating magnetic separator’. I am not sure what Stratmin used before. The objectives of the work, however, was to increase throughput, recoveries and purity, while reducing operating costs.
All mining and processing infrastructure, including roads, bridges, power, camp, tailings dams are in place, along with 40-year mining permits and 20-year landholder agreements.
Is the Graphmada mine good enough?
The main national highway is very close and leads in 110km to the country’s only deepwater port at Toamasina.
The mine is soft rock (regolith-hosted) that is characterized by greater than 90% large flake graphite.
Large flake graphite (greater than 180 microns) hosted in soft rock allows the large flake to be mined cheaply and processed economically without the use of drilling, blasting and crushing.
Graphite hosted in hard rock (also known as ‘fresh rock’) requires higher cost drilling, blasting and crushing operations, which significantly reduces the size of the graphite flakes that are recovered.
All hard rock graphite mines have a majority of their production in the fine flake category (less than 180 microns).
Fine flake graphite concentrates do not attract the same premium pricing as large flake concentrates due to the unique applications of large flake.
The percentage of concentrates that can be produced and sold above 180 microns (large flake) directly impacts the average price received for concentrates produced and sold, sometimes referred to as ‘Basket Price’.
The focus is on growing the percentage of large flake graphite production to increase the overall ‘Basket Price’ and therefore the cash margin of the business.
Graphmada has consistently produced clean, high purity large flake concentrates, maintaining a 42% large flake concentrate production average, with periods over 60%.
Consistent supply of high quality large flake graphite from a low cost mine such as Graphmada is essential to the future of the global supply of specialty carbons, and as such is often referred to as a ‘Critical Mineral’ in strategic supply discussions.
Bass metals presented a two stage plan to their investors with the first target at 6,000 tonnes per year and a second phase of 20,000 tonnes per year.
In the first year, Bass modernized Graphmada. There was a wood-fired rotary dryer in place, which dries the final graphite concentrates. Bass Metals replaced that and switched to liquid propane gas (LPG) for heat generation. I don’t know if this saved money but it has significantly reduced the operation’s environmental impact.
After the take-over Graphmada transformed into a significant supplier of graphite for traditional markets. And it would be possible to expand into high growth markets as well.
On April 4th, Bass Metals announced that they have delivered on all of its Stage 1 objective:
Graphmada production highlights to date:
✓ Achieved successful production ramp-up
✓ >96% fixed carbon grade achieved
✓ 42% average large flake concentrate production
✓ Irreplaceable intellectual capital gained
✓ Zero tonnes penalized or rejected to date
The market cap at the time of this announcement was 12x higher than today. Although Bass announced at the same day that they will now prepare phase 2 (20,000 tonnes per year) and phase 3 (production of expandable Graphite) some investors realized that something was wrong.
Bass didn’t manage to generate a positive cash-flow. And investors started to realize that with those numbers it will also be difficult to do so during stage two. What then followed was the ‘excuse’ of ‘bad weather’ and later the even better excuse of the ‘global pandemic’.
In the following months the share price went only south - to AUD 0,002.
Other mining companies in Madagascar have been producing all the way through the monsoon and the pandemic. Bass could have done the same. But to be clear, I support the decision of stopping the production and fine-tuning the business plan.
What went wrong?
In simple words Bass didn’t earn enough money. They destroyed too many of their large graphite flakes during the mining process. Unfortunately, this is exactly where the margin is to gain. When it comes to graphite there are different flakes in the ground. The biggest one are the most expensive and the most rare in the world. They sell for a large premium when compared to smaller flake sizes.
Luckily, the Graphmada mine is only one of a very few mines worldwide that can deliver those flake sizes. The quality of their resource is undoubtedly of exceptional high quality.
Bass Metals has delivered to various customers all around the world and was never penalized for lack of quality. In fact, the carbon percentage is extremely interesting. I am 100% convinced Bass will have no problem in the future finding more customers and bigger customers for it’s quality graphite.
The problem, however, is not the quality of the graphite but the grade in the ground. The average grade of the Graphmada mine is only around 3-4% while in other areas of Madagascar it can go up to 20%.
This means that the total mining costs are high - although it's cheap and simple mining without ‘drill & blast’. Bass struggled in its first attempt to make a profit and even struggled to operate with a positive cashflow.
Investors quickly turned their back after realizing this. Share price is now at AU$ 0,003 while Market cap has been as low as AU$ 7m. Basically, the venture was declared dead. But I disagree.
Is it really the end for Bass Metals?
My opinion is the following: The market cap is extremely low and the stock seems to be totally forgotten or overlooked even from professional investors. Many investors burned their fingers already. Since the stock itself is not even worth a penny anymore, many investors will not even look at it. This is great for new investors. It is the best time to buy stocks when people are too skeptical because of past failures.
However, I would like to reiterate my message that this bet only works if Bass Metals manages to stay alive. I started to look at Bass Metals more closely in summer of this year right after I found the market cap down so much. I also spotted some interesting behavior in the chart with volumes up again which made me wonder what is going on.
I have covered another Graphite play for many years. The stock is called Talga Resources and their story did show to me that a team with no experience in graphite/graphene can be successful in this sector.
What are the differences between Talga and Bass?
Talga came from gold to graphite in 2011. Bass came from gold to graphite in 2016.
While Talga’s mines are still in early stage the Bass team technically has a producing mine. It's not a paper dream anymore. The market cap of Talga today is 500 million AUD while that of Bass Metals is 5 million AUD.
However, there are also some major differences. Talga’s mine is in a tremendous location (Sweden), has the highest grades in the world and some in-house R&D. Bass has very low grades which makes it difficult to be profitable.
On the positive side, Bass has very interesting carbon percentages and large flakes. I will explain later why this is so important. And Bass has an existing facility, logistics, and sales channels already in place.
Based on only those information mentioned above I would probably still not invest in Bass Metals - even at those low prices. If it is too hard for a company to earn money then we should not invest at all. However, I am speculating on something bigger.
Will there be a graphite boom?
I speculate that Graphite prices will increase over the course of the next decade. Prices have been low for almost the entire past decade but have started to rise in the past 52 weeks. If nothing will change with the current battery mix itself we will see an unprecedented demand for graphite in batteries. There is more graphite used in a Lithium-ion battery than lithium itself.
Although there are many graphite mines in the world only few have the right carbon mix and are in high enough quality to be a major supplier to this paradigm shift of electrification.
Bass Metals graphite is highly suitable for batteries as those two links show:
My bet will bet that we are entering the ‚Age of Battery‘ and the Western world will need to secure those critical metals. China already controls big parts of the global supply chain. If the West doesn’t want to fully rely on China they do need to build their own supply chain. And it starts by securing big mines that are in operation and capable of delivering high quality graphite.
Can this spark a new run for critical minerals?
In October 2020, US President Donald Trump issued an Executive Order declaring a “national emergency” to deal with the threat to US security, foreign policy and economy from its “undue reliance” on supplies of critical minerals from “foreign adversaries”—specifically China.
In November 2020, the Biden campaign tells miners it supports domestic production of EV metals.
In the same month, the European Commission officially launched the European raw materials alliance.
And earlier this year, Simon Moore, the Managing Director at Benchmark Mineral Intelligence said:
„By 2029, demand for nickel will double, cobalt will grow three times, flake graphite and manganese by four times, lithium by more than six times. The tectonic plates of this industry have shifted."
If this is true, this is big.
If a potential shortage would occur earlier than expected Bass would suddenly find itself in the spotlight again.
Bass has a proven track record of shipping quality graphite. The only problem was that the mining itself was too expensive. If Graphite prices go up sharply Bass will be profitable.
But still, I wouldn’t invest in Bass based on this assumption only. I asked myself if they can change something in the mining process itself to be profitable even on those levels.
Looking into the presentations and announcements it seems that Bass is working on something.
Can Bass improve the mining technique?
As mentioned above, Bass destroyed too many of their large flakes. The mix between large ones and smaller ones gives miners a basket of different flakes. Eventually, all have to be sold.
In the past, they didn’t manage to constantly secure a high percentage of large flakes and ended up with a basket full of smaller flakes.
Ironically, quality small flakes are the ones used for batteries. They got all the attention. But prices are still low. I bet that this will eventually change.
Now, Bass is looking into a different mining technique. Hydraulic mining is a form of mining that uses high-pressure jets of water to move sediment. I am not an expert on that so I can comment if this is going to work.
But if this works, Bass will maybe have very different baskets and therefore very different numbers for their DFS.
Therefore, we already have two potential game changers for Bass. Higher graphite prices and the new mining technique. And there is a third one I found.
Originally, phase 3 of Bass Metals business plan was to process the graphite in Madagascar itself. The production of expandable graphite.
Can Bass go downstream?
To produce expandable graphite, natural graphite flakes are treated in a bath of acid and oxidizing agents. Bass could do this for example in a facility near the port and later ship it directly to the customer. This would increase the margin dramatically since the biggest premium is paid for this expandable graphite.
What is expandable graphite?
One of the main applications of expandable graphite is as a flame retardant. When exposed to heat, expandable graphite expands and forms an intumescent layer on the material surface. This slows down the spread of fire and counteracts the most dangerous consequences of fire for humans, the formation of toxic gases and smoke.
Changes in Chinese and European building regulations and a macro shift towards environmentally friendly products is a driving force behind potential future demand. And the good thing for Bass is only large flakes can be used for this.
Demand for expandable graphite for use in flame retardant building materials may exceed demand from electric vehicles. And it’s said that Chinese domestic supply will not be able to meet demand. However, the likelihood of this is difficult for me to judge.
If we are very lucky, we will see prices for larger flakes (expandable) and smaller flakes (batteries) go up while Bass even manages to not only sell the raw graphite concentrate but the processed graphite, thus, resulting in a significantly higher margin.
Can it go into battery?
What we know is that the quality of the Graphmada Graphite is excellent and can go into batteries although in past company presentations Bass did usually target the expandable market more prominently.
Even though analysts expected a shortage in Graphite for years - so far only expandable graphite has gone up in price while large flake graphite prices itself have remained rather low.
There is one indicator showing this month that graphite electrode prices have hit a 52 week high in China. If true this would benefit the entire sector. But prices are not traded in a central exchange. Usually, it’s a matter of negotiations and buyers are entering off-take agreements with suppliers and miners of graphite. We do have price indications but it is not as transparent as in other commodities.
Does Bass have in-house R&D?
For a long time Bass has been a pure miner. They managed to take over the mine in Madagascar, modernize the facilities and went back into production on time. They also managed to sell high quality graphite to various customers around the world.
What they didn’t have is any in-house R&D team. Or at least I am not aware of that.
However, in late April 2020 Bass announced to have signed a MOU with Swinburne University to advance carbon material research and product development.
„The combination of the unique qualities of a weathered resource and clean large flake concentrates leave Bass well placed to participate in the development of advanced graphite applications.
Swinburne and Bass will seek to explore opportunities for collaborative research activities, including relevant funding opportunities.“
And earlier, in October 2019, there was another announcement from Bass Metals that we will need to look at closer.
„Australia-based Bass Metals has entered into an initial agreement with US-based Urbix Resources to develop downstream graphite products.
The agreement will see the two companies work over the next six months to set up a joint venture for the processing of high-grade graphite from Bass’ Graphmada mine in Madagascar into value-added downstream graphite products, including expandable graphite.
The proposed joint venture will combine Bass’ high-grade large flake resources with Urbix’s environmentally-friendly purification methodology that is not reliant on hydrofluoric acid treatments.“
So I made some research on Urbix.
It is hard to find enough information but what I found does indeed look promising. I believe that there will be a time in the future when customers (and car makers) want to have clean graphite in their batteries.
The traditional way of purification is not sustainable. This could be a future USP for this Joint Venture. However, Urbix is still a startup and needs to prove that their technologie works for large scale processing. Also, the planned six months negotiation period turned into one year.
However, this month Bass Metals announced the following:
„Bass has recently concluded a series of advanced tests with prospective alliance partner Urbix Resources (Urbix), a leading US technology firm in the critical minerals and battery materials space that specializes in advanced energy storage cell designs and materials.
Bass and Urbix are continuing discussions to establish a critical minerals supply chain for the US energy market, and other technology applications, with test work continuing as Urbix begins to scale up production from their newly commissioned facility located in Arizona, USA.
Bass is positioning itself to be a participant in the emerging advanced materials and critical mineral technology sectors, having proven it can produce and sell premium concentrates to specification from its operations in Madagascar.
With a well-developed customer base for its premium concentrates, the Company can confirm its concentrates have already been used in the manufacture of specialty carbon products including expandable graphite, nanographite, and maturing graphene technologies.“
What can we expect?
The recent development seems highly attractive to me. Although we do not know if this Joint Venture will actually happen, and we do not know the terms of the deal, there is still some potential in Bass Metals.
When looking at the quality of the Graphmada resource it makes total sense to me that the team is now postponing phase two of their original business plan. It makes more sense to work on those partnerships and on downstream activities until graphite prices start to pick up.
At the same time Bass is, as we speak, expanding its mineral resources, conducting an ongoing and significant drilling program.
Numbers so far show again predominantly large flake graphite. Or in other words - more of the same. No positive and no negative surprises so far.
The bigger resources does help to underpin a new ‘definitive feasibility study’. And at a later point in time this might help the valuation of the company and eventually the share price when the Graphmada mine is compared to other Graphite mines in the world.
In Summer 2020, CEO Tim McManus said in an interview with Chris Brown from ‚Morgan Financials’ the following: „It would make us the largest large-flake graphite producer in the world“
After this interview I looked at the share price again. I looked at the market capitalization of Bass Metals. With a share price of AUD 0.002 the MC is currently 8 million AUD (6 million USD).
There is huge upside for Bass Metals. Considering the low market cap and the existing infrastructure in Graphmada all the Bass team needs to do is to take the findings of their previous attempt, keep drilling and expanding their resource, change the mining technique for the new DFS and move downstream in production.
That is what they do and I believe it is possible to make it happen. We are entering the ‘age of battery’ and Bass is sitting on a high quality mine that is up and running.
Will this really work out?
I have touched a lot of points that may or may not work. And there are a lot of unknowns. Many things need to turn into Bass Metals favor to keep the company alive and to make this mine profitable.
But the stock would be trading 10x higher if there are less 'what ifs'.
The managing director of Bass Metals is Peter Wright. He is also executive director at the fund management and corporate advisory firm 'Bizelli Capital Partners' in Brisbane.
He has been helping with the funding already multiple times and will most likely not let the company down at this stage after taking such a huge bet.
Here is my risk/reward game plan:
I believe Bass will get money from Bizelli Capital and/or others.
If true --> I believe that drilling results will confirm more of the same quality.
If true --> I believe Bass can improve on the feasibility study taking into account the new mining technique and a bigger resource.
If true --> I believe there is a real chance that graphite prices will be higher in the near future.
If true --> Bass will be back in the game. A big part of the infrastructure is already in place and some sales channels are already established.
Where could the market cap be?
Market cap could easily be between AU$100 million - 500$ million with more upside depending how the EV story unfolds and depending also where graphite prices go.
Bass has a proven track record of delivering high quality graphite. None of their deliveries have ever been penalized. They could be in production in a matter of months if prices allow them to be profitable or if they successfully change the mining technique.
There are also other potential catalysts like:
And as always there are a variety of things that can go wrong:
At the end of the day I probably wouldn't invest into Bass Metals at this stage if the market cap is AU$ 100m .
Although all points listed above would still be true it's just the risk-reward ratio that wouldn't look interesting. But one should consider those levels Bass is trading now.
The 'Age of Batteries' is about to start
The 'Age of Batteries' is just about to start with graphite poised to be one of the hottest - if not the hottest - resources in the next decades.
Some other interesting developments in the graphite and graphene sector are just about to find the eyes and ears of mainstream investors. I believe it is rare to find a very high quality mine (although expensive to mine) for a market cap below US $7m
It's all about risk/reward. If I find 10 stocks with this risk/reward ratio of Bass metals one of them will probably do 100x.
Otherwise, I can invest in already established players that will still benefit in the years to come if the battery story should unfold in its full form.
In preparation for this research report I have also spoken to some old commodity investors - many of them have never even heard of Bass Metals. One has to consider Bass has only entered the market in 2016. They are not very well known even in the industry itself. Those are fantastic opportunities for new investors that want to participate in a potential turnaround story.
One day, Bass will be in the spotlight if graphite prices go up sharply and/or if they deliver on what they are working on right now.
In June 2020 Bass Metals raised another $3m million to stay in the business and to keep drilling in Graphmada. Bass said the money will also be used to progress a definitive feasibility study to increase production capacity.
Suspicious moves in the chart
In the last couple of months we can also spot some interesting trading activities in the chart. A sideways channel (From March 2020 until November 2020) is not just going sideways but there are some days where there is (increasing) volume on the buy side.
Since the volume is (with few exceptions) still fairly low it does indicate that some speculation is going on. It's not a killer argument for Bass Metals but there might be something building.
Is it lasting? We will see. Bass will have to deliver anyways. The increased volumes can be dumb money from people just playing lottery with an almost dead stock or it can be smart money from people that have some insights.
This movement does not necessarily need to turn into a spike in the share price - but it often does.
Today (24th of November, 2020) - a record volume of 57 million shares have been traded in Australia. Something is going on here.
Other interesting considerations:
On pitch decks of other graphite mining companies, on those slides on which they compare the different grades of different mines in the world, Bass is never even mentioned. It's like Bass and its Graphmada mine don’t exist.
It's literally perfect. Bass is not on the radar of most investors.
There is tremendous upside potential for this stock - if only they survive.
Update: January 14th, 2021
Since I wrote this research report, two major announcements were made:
1) New screening machines
Bass receives outstanding test results from alternative screening process to Stage 1. • Utilizing hard data from Stage 1 production Bass continues to refine Stage 2 studies. • Screening improvements and future availability of hydro-electric power represent significant improvements to the governing parameters of the expansion of the Graphmada Mining Complex. • Bass has begun the search for strategic investment for its Stage 2 expansion for large scale mining and processing operations.
2) The switch to grid power (saves around 30% of cost)
The Government of Madagascar’s is progressing a major electrification project between the capital Antananarivo and the port city of Tamatave, electrifying areas along National Road 2, immediately adjacent to the Graphmada Mining Complex. • Upon completion of the electrification project, valued at EUR 203 million, Bass plans to access mains power via the construction of a 20-kV power line from the nearest substation to deliver cheap and clean baseload power to service an expanded Bass’ operation with a materially reduced operating costs.
Power was the largest C1 production cost in Stage 1, contributing 47% of operating costs in 2019, equating to $0.30/kWh. Access to grid power from 2024 could halve power costs to approximately $0.15/kWh, effectively reducing C1 operating costs by 30%. The opportunity to utilize grid power allows the Company to consider Dredging or Hydraulic Mining to potentially realize further cost savings for the Project. The delivery of clean power to the Project will provide the added benefit of significantly improving the quality of life in the local rural community surrounding Graphmada.
“This is a paradigm shifting development for Bass and its stakeholders, with the introduction of clean energy via hydro-electrification having the potential to significantly reduce operating costs for Stage 2.
This has a material impact on the economics of the Project and confirms Stage 2 operating costs will be in the lowest quartile of graphite production globally. The Company will incorporate this latest development into its expansion studies and will align its strategic goal of Stage 2 large scale mining and processing operations with this development."
Enwave Corp - Amazing risk-reward ratio
It was July, 2010. I remember it very well. I woke up on a beautiful, sunny and clear morning.
I turned 20 some months earlier. This was my first summer after my teenage years. Great memories.
Already back then, the stock market was my biggest passion. I was almost addicted to it. And I started to feel that I was getting better and better with every year of trading.
I grabbed some breakfast and opened the financial newspaper hoping to find new trading ideas. The stock in the spotlight that day was ‚Enwave Corp.‘ - a small Canadian startup trading in Toronto.
Is this the Breakthrough?
The title of that article was ‚Is this the breakthrough?‘.
I learned early that if you think it is the breakthrough - it probably is not. And if it is, it's probably priced in already. Luckily, I didn’t invest in Enwave back then.
It’s extremely hard to find companies for a reasonable price with an acceptable risk-reward ratio. I was well aware of that even at a young age. However, at the same time I was unbelievably scared to miss the train.
Back then Enwave signed a Research and Development Agreement with Nestle SA - the largest food company in the world. Nestle is headquartered in Switzerland and that was probably also the only reason why they even made it into a Swiss newspaper.
Enwave has created a new way for food companies to dry food (f.e. for snack products or muesli) in a fast, gentle and cost-effective way while preserving flavour, colour, and nutrients. Enwave says the process is cheaper and six to ten times faster than other processes in place.
The agreement between Enwave and Nestle turned into - nothing. Today, we are in year 2020 and I finally believe Enwave has broken through. And not only that. The valuation has come down massively.
Enwave is commercializing a new method for dehydrating food.
It sounds a bit boring, I agree - but don’t get tricked here.
The technology is called Radiant Energy Vacuum (REV).
In simple words, it is a rapid and low temperature drying method.
The big advantage is that it maintains the product’s colour, flavour and nutrients a lot better than other drying methods like ‚air drying‘ and ‚freeze drying‘.
Examples of products
Here are some example of products that you can place into the REV machines:
- Food cultures
- Vaccines and antibodies.
Disruptive technology can show up where you least expect it. Let’s have a look into the cannabis sector. For the most part it is air dried.
Enwave believes there is a new way. And they claim that it is possible to retain 100% of the THC and 100% of the CBT in the plant.
In the most simple form we can say Enwave’s machines use a combination of microwave energy and vacuum. Through this way it is possible to dehydrate food, change or maintain its structures and provoke chemical reactions.
By removing water at lower temperatures it is possible to:
I learned that if you put water or organic material into a vacuum environment that water will turn into gas and then you can pull it away through a vacuum process and remove the water quite cleanly.
However, when you dry things, things dry from the outside in. So when you introduce some microwave into that vacuum environment you can help the water molecules jump out.
The game changer
Brent Charleton, the CEO Enwave Corp., said in an interview in 2018:
„We think that we have been a game changer in the industry by accelerating the time between growing and sales. The processing time for REV is dramatically less. It is approximately 1-2 hours in comparison to 16-24 hours for freeze-dry or 6-8 hours for air-dry.“
The most significant financial benefit to cannabis industry customers is that Enwave's technology can reduce drying time from 5-7 days to less than two hours.
But for Enwave it is much more than just speed. Things can either be simply dried as they are, hence room temperature, or heated up first. But it’s also possible to start with frozen materials. The output can be highly detailed and designed. The process can have different components. And this gives so many opportunities for new products.
Enwave is actively supporting other companies to discover new innovative products.
And of course there is a reason for that.
They want to build up a huge royalty stream over the next decades.
Royalty tied to the success
Those royalty agreements will lead to an interesting and steady cash flow in the future.
Enwave has machines deployed to numerous companies spanning Europe, Australia, South America, Central America and North America.
Businesses have secured rights to use Enwave’s REV technology for the exclusive production of specified products within a defined geographic region.
In exchange for these exclusive rights, each commercial licensee has agreed to pay a modest royalty tied to the success of their REV-dried products back to Enwave.
John Budreski, the Executive Chairman of Enwave Corp., said that the plan is that the machine sales should pay the entire cost of the company while the royalty payments will be for the investors.
Today, Enwave has an impressive number of customers all over the world with 37 active royalty partnerships ongoing and dozens more in the pipeline.
The history of Enwave
The market capitalization of Enwave now is around 70mio USD. They have 10 million in cash and assets worth over 20 million USD.
They own 100% of the company behind ‘moon cheese’ - a snack product that is a huge success in the United States.
10 years ago, when I read about Enwave the first time, they were making 0,1 million USD in revenue. Today it is over 30 million USD.
And that’s why I want to find out more about this company. And as always - I will never stop asking.
How big is the market?
Food and Cannabis are two huge multi billion dollar markets. It is possible to create a wide variety of unique new products in both fields.
And since the technology is heavily patented Enwave does have something in hand to grab a big market share if they have superior technology to offer.
In 2010 Enwave estimated that the market for dehydrated products will be around 217 billion USD in 2018. Unfortunately, I didn’t find the actual number for 2018 myself.
However, I found the following quote:
“The international market size for dried products, in general, is estimated at $400 billion. Demand is expected to be driven mainly by the food processing and pharmaceutical industries, while the cannabis and biotechnology markets are expected to be the fastest growers. The legal cannabis market in which Enwave is becoming a big player is forecasted to grow at a CAGR of almost 30% to about $60 billion by 2025.”
There is plenty of competition for drying equipment. Enwave seems to be best in class with regards to drying times. This might be a big advantage, because it saves customers time and money.
Based on the estimation from 2010, assuming a market penetration of 5% and a royalty of 2% Enwave would generate a yearly royalty stream of 217 million USD. A market penetration of 15% and a royalty of 5% would result in juicy revenues of 1,6 billion - per year.
As always, this is speculative and it will take many years or even decades to reach those numbers. But technically, it is possible. And it is huge.
My question is only, how much of a game changer is Enwave’s machinery really?
What machines does Enwave sell?
Let’s look at some older company presentations and announcements and see if and how the company has changed over the last decade.
The technology was originally developed in conjunction with the University of British Columbia.
In 2010, Enwave was developing 4 different technologies:
- Powder REV
Today, Enwave’s focus seems to be on two technologies:
If I am correct, I believe the PowderREV technology is also available. But I am not 100% sure about this.
However, it seems that FreezeREV is also back in the spot light.
Earlier this year Enwave announced that they signed a further agreement with a company called 'GEA Lyophil' to help sell the FreezeREV technology. FreezeREV allows rapid dehydration of pharmaceutical vaccines.
GEA Lyophil is a global manufacturer and marketer of freeze-dry units for the pharmaceutical and biotech industries. Enwave will contribute know-how for the potential scale-up while GEA will lead the project.
The machines sold in the pharmaceutical industry will be built and sold by GEA and a royalty will be paid to Enwave based on revenue. This allows Enwave to focus on core competencies in the food and cannabis industries.
In an interview (September, 2020) with Jochen Staiger from Swiss Resource Capital Enwave's CEO Brent Charleton revealed the following:
"We feel pharmaceutical has a higher likelihood of success in medium to long term than maybe we thought a year ago. Our view has changed in that way only because we have made some very important strategic partnerships. "
What is the difference between NutraREV and QuantaREV?
The NutraREV machine has the shape of a drum. It looks like an oversized laundry machine where you throw all the food inside and wait until it is dried. See the picture below.
With QuantaREV, on the other hand, you put the food on trays first. This is ideal for products that are more fragile or have a higher liquid content.
In 2017, Enwave wrote:
“In regards to our REV platforms, freezeREV and powderREV are still in the developmental phase and both are focused on pharmaceutical and biological material processing.
Our core competency is food processing. We offer nutraREV (drum-based system) and quantaREV (tray-based system) as variations to transport the organic material through a highly-controlled vacuum-microwave environment.”
Where is the focus?
Enwave mainly focuses on those three fields:
- Food & Ingredients
- Flower & Industrial Hemp (Marijuana)
Enwave also writes:
“Other innovative near-term commercial products include bean-based cluster snacks, meat-based ‘chip’ snacks and starch-based, puffed fruit and vegetable snack products.
REV’s unique ability to remove moisture homogeneously from foodstuffs at low, controllable temperatures allows for novel and varied product attributes to be created.”
What are the Benefits?
Here are some benefits of Enwave’s technology:
In my opinion, the biggest benefits are new product opportunities that come with Enwave’s machines. Those would not be possible in the same quality with alternative drying methods like ‚air drying‘ and ‚freeze drying‘. Or at least not that I know. Somebody might come up with a superior technique at some point in the future.
In addition to that, companies can heavily reduce energy costs due to its rapid drying times. At the same time, it is possible to massively increase the output - something that is fairly important in the low margin food industry.
Currently, Enwave sells two types of machinery in different power classes:
- 10 KW Machine
- 60 KW
- 100 KW
- 10 KW
- 60 KW
- 120 KW
NutraREV is suitable for the dehydration of organic materials that don’t break while QuantaRev can transport product loads either via a belt or try system. Both types come in different sizes ranging from 10 kilowatt to 120 kilowatt.
Where was this technology invented?
The technology was originally developed by Dr. Tim Durance. 15 years ago he was doing research at the University of British Columbia when a revelation hit him.
To him it was apparent that microwave-drying's only significant problem was high temperatures that could potentially damage the product.
Dr. Durance made the logical inference that the use of vacuum in the process would reduce the temperature and thus remove the biggest obstacle to large-scale use.
It was originally only designed for food products. The company has since then signed development agreements with various Tier 1 pharmaceutical companies. Today, they have an ongoing partnership with Merck.
On the official website Enwave lists the following benefits using the REV technology:
In August, 2018 Mr Brent Charleton was appointed President as Chief Executive Officer of the company, replacing Dr. Tim Durance due to differences in corporate strategy and direction.
I read that Brent Charleton was a major contributor to the company's commercialization success and has been leading the proactive licensing strategy and deployment of Enwave's REV technology.
Tim Durance has been the guy behind Enwave's technology, and also the co-author of the majority of Enwave's patents.
However, for me it is impossible to judge the track record of those people inside the company.
Move into Cannabis market
In 2018 Tilray, one of the largest and most sophisticated producers of premium medical cannabis in the world, bought three REV machines from Enwave.
Tilray first purchased a small-scale 10kW REV dryer for testing and later ordered a 60kW REV machine for large-scale commercial production.
Under the terms of the deal, Enwave will receive royalties based on the amount of cannabis that is processed using Enwave's technology.
The sub-license rights granted to Tilray allow for the sub-licensing of the technology to additional Canadian licensed producers, with sub-license royalties to be shared between Enwave and Tilray on an undisclosed basis.
In April 2018, Tilray and Enwave expanded their agreement to include rights for processing legalized cannabis in Portugal (Europe). Tilray also submitted a purchase order for a 60 kW REV machine for the Portugal medical cannabis production facility. This was Tilray's third purchase order.
In 2019, Tilray signed a royalty-bearing commercial sublicense with the Green Organic Dutchman Holdings, a major Canadian producer of medical and adult-use cannabis. As part of the agreement, TGOD has purchased a large-scale 50kW commercial REV machine.
Focus on sales
Over the last years, Enwave has also made huge progress in improving its sales process.
The REV machines are scalable from small machines to huge - several meter long - monsters.
However, I detected a big improvement in marketing efforts over the last few years. It is now possible to send samples directly to Enwave’s research lab.
A company can send between 1 kg and 20kg of its raw product to Enwave and Enwave's food science team will produce dried samples in a 10kW pilot scale machine.
This is very convenient for potential customers who are thinking about experimenting with new products.
The company will support startups or established companies with a variety of options. It’s even possible to rent the machines for a trial period of several months to test new products live in local markets.
If this goes well a buyer can scale all the way up to 120 kilowatt machinery or more.
First positive signs
Enwave has managed to sell a lot of those machines lately. But here comes one of the strongest arguments for this stock:
Many of the customers actually upgrade their machines from smaller machines at the very beginning to bigger and stronger ones later on.
Some customers even expand to different markets or fields and make use of the patented technology protection under Enwave’s royalty agreement.
This is a very strong argument that customers are happy.
The pipeline of potential new customers is also growing fast. For some investors maybe not fast enough but there is a clear uptrend visible.
And only during the last 3-4 years Enwave is closing deals in bigger numbers.
However, those machine sales are only one of three pillars of Enwave’s business strategy:
1) Machine sales
Machine sales usually happen once.
However, as described above, it is likely that customers upgrade or scale up at a later point in time. Machine pricing ranges from $230K to $2MM
2) Royalty Revenue
With the second pillar Enwave tries to build a diverse royalty stream portfolio by licensing patented technology to food and cannabis processors.
Third party royalties generated from licensing are based either on a percentage of sales or units produced by the licensee.
Today, Enwave has signed 37 licensees to businesses operating in 16 countries.
3) NutraDried Food
The third pillar of Enwave’s revenue stream is NutraDried Food Company.
It’s a wholly-owned company that might be sold to a major food company at some point in the future.
What is the 'Moon Cheese' story?
Enwave’s flagship product is Moon Cheese, which is available at Starbucks.
It’s a ‘healthy’ snack product made of 100% cheese and full of proteins - thanks to Enwave's drying technique. .
The formation of ‘NutraDried LLP’ and the launch of Moon Cheese was originally an experiment which turned out to be extremely successful.
How did 'Moon Cheese' start?
In 2013, Enwave had only a few installations of REV machines and there was a need to de-risk the technology. Enwave had to build out its own successful production facility to convince potential partners to license REV technology.
Luckily, Moon Cheese was a huge success with annual revenues growing over the past three years from less than $300k to several millions today.
Moon Cheese is now also available in Starbucks, Costco, Whole Foods and many more.
In total Moon Cheese is available in over 25’000 stores across the United States. Enwave claims that they are in discussion with another 61 retailers representing an additional 7’000 stores.
In 2013 the company was established to commercialize ‚Moon Cheese‘ as a proof-of-concept, together with the joint-venture partner ‘Creations’.
On February 21, 2018, Enwave decided to purchase the remaining 49% non-controlling interest in Nutradried from Creations for a total cash consideration of 1.8 million USD.
Since 2019 the business is 100% owned by Enwave.
Will it be a take over?
My prediction is that eventually Enwave will sell this business to a big food company like Kraft Heinz Co., Mondelez International or Nestlé.
Some investors calculated that the price for NutraDried could be around 30 million USD. This number is based on pre covid-19 numbers and doesn’t take into account potential future growth in 2021-2024.
The cash could be fully or partly paid out to investors as a special dividend. Also, the sale could lead to an estimated 4 million USD annually in royalties for the usage of the REV technology.
However, this is also a matter of negotiations. The numbers are highly speculative but in my opinion rather conservative.
Considering Enwave’s current enterprise value of 60 million USD I believe risk / reward is getting more and more interesting.
My question remains, how much of a game changer the REV technology really is? And is Enwave able to find enough buyers?
Looking at the sales in the last three years I believe there is a chance that Enwave is now breaking through.
It could be an interesting long term play in the portfolio and the Covid-19 dip could be an interesting entry point for investors.
However, the stock and the company is also dependent on the overall sentiment and economy.
And there is a danger that the stock gets diluted by a capital increase deal next year if the overall situation doesn’t improve much.
There is one more important thing to mention.
Who owns the intellectual property?
Enwave can keep (in most cases) only 85% of the royalties they receive.
And it seems that this royalty sharing is not going away anytime soon.
You can skip the following part if you are not interested in the details of this agreement.
“INAP is a technology holding company controlled by Mr. Hoen and the Binder family for the primary purpose of generating royalties and licensing fees for the MIVAP™ technology. With the exception of a restrictive MIVAP™ license previously granted to a small plant operator in Germany, under the Licensing Agreement Enwave will secure exclusive global rights for the future licensing of MIVAP™ technology.”
This goes back to 2010 when the following announcement was published:
On December 6, 2010, the Company entered into an Asset Purchase Agreement (the “INAP APA”) to acquire the patents and know-how for the MIVAP vacuum microwave dehydration technology.
On March 28, 2018, the Company renewed its INAP License for the exclusive worldwide rights to the know-how related to the MIVAP Vacuum microwave technology, and agreed to pay minimum annual royalties.
The agreements with INAP cover the US, Canadian and worldwide rights. Pursuant to the INAP APA and INAP License, the Enwave Corporation Company agreed to pay a portion of the license or royalty fees collected from the Company’s customers who purchase Enwave equipment that makes use of the acquired patents and know-how.
For usage in North America, the Company remits 25% for food applications and 12.5% for non-food applications, and the agreement expires on February 3, 2019.
For usage outside of North America, the Company remits 25% for food applications and 12.5% for non-food applications, and the agreement expires on October 15, 2022.
Additionally, the Company agreed to pay INAP a fee equal to 2.5% of the net purchase price of each machine sold that makes use of the acquired patents and know-how
And more detail in the annual report:
"On March 28, 2018, the Company renewed its Patent and Know-How Licensing agreement (the “INAP License”) with INAP GmbH (“INAP”) for an additional five years ending October 15, 2022. The INAP License grants the Company exclusive worldwide rights to INAP’s MIVAP technology, a microwave vacuum dehydration technology.
Pursuant to the INAP License, the Company will pay INAP a 25% share of the royalties received from the Company’s customers making use of the MIVAP technology for food applications outside of North America, and 12.5% of the royalties generated from non-food applications outside of North America. The Company has committed to pay undiscounted minimum annual royalties to INAP during the term of the agreement totalling $617 (US $479). The present value of the expected royalty amounts equal to $511 was recognized as an intangible asset and a corresponding other liability in the consolidated financial statements. The intangible asset is being amortized over the useful life of the INAP License."
How has this deal originiated?
This all dates back to 2007, when co-CEO John McNicol moved Enwave Corp to a royalty and license model that would allow the company to custom-design its technology for corporate partners.
The German company Hans Binder Maschinenbau was the only other microwave-drying technology with commercialization potential in North America.
In 2012, Enwave acquired the company to consolidate with its intellectual property and to drive machine sales.
The IP end of the deal did cost Enwave $2.5 million in cash and shares.
Is Enwave losing money?
Enwave is currently still making losses on both EBIT and EBITDA levels.
However, for 2018 Enwave managed to report positive EBIT numbers for the first since its founding.
In 2016, 2018 and 2019 Enwave reported positive numbers on EBITDA levels.
From the moment Enwave sells a machine until the products are in the stores it can easily take 2-3 years.
Royalties will kick in only at a later point in time and are tied to the success of the product.
Their recurring income stream is very attractive and is mainly based on their customers' revenues with minimums. In other words it is unlimited upside but with a floor.
Cash on the bank
With no debt and over 10 million USD cash in the bank and some assets in hand I am confident Enwave will survive this crisis.
Sales have been picking up all the way until the pandemic hit. Personally, I feel more comfortable investing in a company that has been hit hard hard by outside factors than when a company struggles with home-made problems or industry challenges.
However, outside factors can eliminate a company, too. That’s why we need to be sure that this company survives.
International travel restrictions
In most cases, Enwave’s staff can’t travel overseas and is therefore unable to install the machines for their customers.
For the installation of smaller machines, it is possible to advise some customers remotely but it remains an uncomfortable issue for Enwave.
Potential customers are hesitating to finalize orders for new REV machines and 'Moon Cheese' sales are down as Starbucks and other shops are closed or work on limited capacities.
Enwave pushed online sales for 'moon cheese' which resulted in a 130% increase in revenue. At the same time overhead costs for the mother company reduced by 30%. And lately, many potential deals that were 'on hold' for months are now starting to be reactivated and signed.
There might be some light at the end of the tunnel.
Low revenue big loss
I believe Enwave has enough cash to survive and enough of an interesting technology to secure financing - if needed.
I believe that business will pick up again once the pandemic is over, therefore, I feel fairly comfortable that Enwave will make it through the storm.
However, revenues will be low for some time and the losses big in the next few months.
In regards to the stock and its valuation the question remains how much of the bad news is already priced in?
Between 2017-2019, the company booked major progress in all areas of the business.
Enwave has built a strong foundation and managed to attract many new customers in the cannabis space.
I am confident that Enwave will heavily profit from those new partnerships at some point in the future.
Enwave targets a large addressable market and the deal pipeline seems to have gained momentum - until Covid-19 hit.
Looking at 2010, with only a handful of customers and almost no revenue, Enwave’s technology was not proven.
Today, Enwaves technology works fine and has created a “hit” product with moon cheese.
The valuation today is similar to 2015 and well below 2010. But the risk/reward ratio is substantially better today.
Is it the breakthrough? I believe we are already past the breakthrough.
I will wait for a good opportunity to build a position.
Only a side note in a newspaper
The first time I read about ‚Graphene‘ was in a Swiss newspaper in early 2016. It was only a side note, which for some reason attracted me a lot more than those full double page reports about ‘the next big thing’. Those double pagers in popular newspapers usually indicate the end of a hype cycle - not the beginning.
Finding inspiration on the basis of side notes in financial newspapers is something that has worked for me in the past. Very often game changing moments are starting just like that. The next big thing never comes overnight and it almost never comes straight as a headline. Most of the time, the majority of people don’t see it coming. There are always a handful of people and blogs that were predicting it. But they got popular only in hindsight when everything became much more clear.
The same pattern happened also during the financial crises in 2007/2008 which can be traced back to many side notes referring to the beginning of something much bigger. Theoretically, everyone was sitting on the same information but only a few managed to read between the lines and realized that something much bigger was about to happen.
It's a wonder material
When I read that side note about this Australian company called Talga Resources, the newspaper described the material Talga was working with as a ‘wonder material‘.
Usually, I don’t fall for those buzz words. Therefore, this was definitely a reason to be extra skeptical. But it was enough for me to skip the weekend plans and to start doing a little more research in this sector.
For two days straight I dived into a huge amount of articles and reports and scanned well over one hundred companies that had ties in the graphene and graphite market. A complete new world opened for me. Eventually, I ended up throwing some stocks into my watch list.
Today, more than 4 years later, I want to see what happened with Talga and the graphene revolution. And as always, I will never stop asking.
What is Graphene? What is Graphite? And what is the difference?
In very simple words, take this grey or silver stone called Graphite. You probably already have heard of that. Now, take one very, very small layer from it and you will end up with a material called Graphene. And this Graphene has some very interesting characteristics.
To make it short:
Almost every product currently existing could somehow be improved by adding or replacing it with Graphene. In addition to this, an unbelievable amount of new products could be created. Because of its thinness, this material is considered two-dimensional. It is the only material that can remain stable at just one atom thickness. When mixed with other substances it could get even better.
This really does sound like a wonder material, doesn’t it?
But if it is so good, why hasn't it taken over the world yet?
First of all, when a new material is discovered, it takes many years to find out its exact characteristics and how it reacts in a certain environment.
Graphene was only discovered in 2004 by Konstantin Novoselov and Andre Geim. Those two british scientists later earned a Nobel prize in physics for their work. After the initial discovery, research and many long-term studies have to be completed about the material itself, the potential products it could be used for and everything related to it. Studies about health effects have to be made as well. What, for examples, if the material is poisoning?
The spider experiment
In one experiment a scientist from the University of Trento added graphene and carbon nanotubes to a spider’s drinking water.
Afterward, some of the spiders produce silk as they normally would, but the silk was up to five times stronger.
Although the spiders passed away during the experiment the scientists believe that there is massive potential since the silk of millions of enhanced spiders could produce webbing to make parachutes, rope, cables, and more products so thin but so enormously resistant that the net could hold a human body.
Path to market
Brave entrepreneurs need to risk bringing graphene and graphene enhanced products out from universities and its research labs to the actual market. They have to convince investors that there is something very new and exciting that potentially will improve current products not only a little bit but massively. Investors will look at different studies and they will surely do their own research and due diligence. It will take years for all the players and stakeholders in this new field to learn, grow and mature together and eventually create companies all along the value chain.
Upstream, Midstream and Downstream
If you want to build a lasting company you will eventually need to sell something, to someone, at some point. There are many options where you could enter the value chain. You may set up a mining firm to bring Graphite out of the ground. In mining this is called ‘upstream activities’.
However, you could also specialize in processing it or to add value to the material itself. Doing so by actually buying the graphite from a mining firm, improving it and then selling it to someone else. This is called ‘midstream activities’.
Alternatively, you could create entirely new products for the end consumer. Or you could improve existing ones by using graphene that you buy from a midstream company. This is called ‘downstream activities’.
The value chain
In commodity markets the price is determined by supply and demand. Once new companies pop up on the supply or demand side, it is likely that the price of the material gets fairly volatile. Then again, in the very early stages of a new material’s discovery the price is a matter of negotiation between companies that have it and companies that want it.
This is a whole other story but absolutely crucial to understand when investing in financial markets. You can have the greatest product and the most amazing team but if the timing is wrong it might not be enough to survive.
As some companies will fail to find further funding and will fail to continue to finance their operations, new companies will enter the game a little later. The landscape is therefore ever changing. Winners may appear at every stage. The right timing to those investments is therefore extremely important. So let’s look at Talga’s timing.
From Gold go Graphite
Talga Resources was founded in 2009 and listed on the australian stock exchange in June 2010. They raised 5mio and the share price back then was around 20 cent. Today it is around 60 cent with the market cap a little over 150mio dollar. All numbers are in AUD (September 2020: AUD 100 = 73 USD) .
The company's original plan was to build a gold and iron-ore mine. The company name back then was Talga Gold.
It was in 2011 at a Hong Kong mining conference when managing director Mark Thompson dropped his plans for a gold mine to pursue a fortune in graphite.
Among many, he studied old drilling records in Sweden and found at one location graphite more pure than what came from low-cost producers in China.
The previous owner of that mine was Teck Resources, a Canadian company that was looking for copper and gold. Talga Resources got in contact with Teck and ended up acquiring the mine.
Natural Freak Deposit
Thompson later described his discovery near the Swedish town of Vittangi as a "natural-freak deposit". The graphite is so concentrated that it can be sliced easily into blocks. Arguably, those blocks are easier and cheaper to process then what top producers work with in China. This is something I could not verify.
There are many existing companies who have their eyes and ears on every new trend and will invest millions or billions of dollars to be at the forefront of a new revolution. Their goal and their interest is not always very clear. In commodities markets dirty games are played on a regular basis.
Some players may want to create a shortage of a certain resource to force other players out of the market - only to sell the same commodity later for an even higher price. However, most of the time it is very straight forward. Big players want to earn money directly by speculating on supply and demand or by betting on promising companies. Sometimes, commodities can also become a strategic interest for certain nations or interest groups. I will come to that later.
Looking at the battery industry, current estimations predict a huge shortage in graphite for the second part of this decade. The driver behind this is mostly the electric vehicle market which needs a massive amount of batteries that include huge amounts of graphite. However, this will only happen if the EV revolution will happen at the pace that analysts expect it to happen.
Some of the big players in the industry already have plenty of experience with other battery materials. They are better positioned and have more resources and knowhow than Talga has. Also, they have access to a greater talent pool and they are financially less under pressure. However, even for them it remains a challenge to create something from scratch.
If they find startups which they believe are well positioned and can add value to their business they will simply try to buy it, form a joint venture - or knock it out of the market somehow.
If you bet on a startup with no existing products there is a huge risk that it will never make it to the market. History has shown that less than 5% of game changing startups will become a major player itself.
Therefore, be careful when considering investing in companies like Talga.
Korean companies securing essential patents
Some investors say, Graphene was one of the most investigated materials in the last few years. So I tried to do some research here. Huge companies from various sectors all around the world have already been working on it for years. Korean companies are securing essential patents related to the commercialization of graphene. The website graphene-info.com writes that between 2005 and 2013 nearly 3000 graphene-related patents have been applied for alone in Korea. On the forefront of this are Samsung, followed by LG.
Graphene was already used to create bending displays for smartphones and TV’s. The media jumped on those news. Graphene also received increasing media attention when prototypes of transparent devices were circulating through social networks. So let’s look at the other side of the story.
The risk of graphene
Because it is so thin and lightweight and at the same time very tough, the very nature of graphene might be cause for health concerns. What if we breathe in these particles? It is often looked at asbesto or the danger that comes when coal dust gets into the lungs because we are talking here on the level of nanomaterials. Therefore, a lot of research has to be made to really understand the effects this material will have - also when recycling it.
Companies that would want to replace plastic for graphene would require the product to be 10 times better than the old one. If it is only a little bit better, it's not worth the risk of switching from an existing, well-established product to a new less tested one.
Real life products?
Graphene is stronger than steel, conducts electricity better than copper and is so light and flexible that companies like Samsung Electronics are using it to develop new devices. But let’s have a look at other graphene products that exist today.
In the year 2013 the company HEAD started shipping graphene-enhanced tennis rackets. Maybe you remember the moment when you were holding your friends ultra-light tennis racquet for the very first time. The same goes for some shoes, helmets, ski equipment or bicycle frames that are so light that you actually can’t believe it when holding it the very first time. The sport industry has been an early adopter of graphene enhanced products. Today, graphene is widely used in consumer electronics. However, it is not as visible as in the sports equipment.
Some articles stated that automotive company Ford is mixing graphene with foam constituents, and the resulting parts are said to be 17% quieter, 20% stronger, and 30% more heat-resistant.
The future batteries?
And since we are just talking about numbers let’s go through another wave of claims that I can not verify but that do sound very promising:
No doubt, graphene is very exciting but producing high quality materials is still difficult. Many companies around the world are producing different types and different grades - ranging from high quality single-layer graphene to graphene flakes produced from graphite in large volumes. The market is controlled by privately owned companies and they tend to be very secretive.
So what is Talga doing?
As stated before, Talga used to be a gold miner. In simple words, they were about to dig gold out of the ground. Today, Talga owns 100% of five graphite projects in Sweden and is digging graphite out of the ground.
Here are the five graphite projects:
Highest grade in the world
From a total of 25 deposits the one with the highest grade is called „Nunasvaara“ and is located within the Vittangi Project.
In total, Talga owns 3 of the Top 10 grade graphite resources in the world. That is quite an impressive number.
Also, in the early days Talga was not shy pointing towards the advantages of having its operations in Sweden:
In an investor presentation some years ago Talga highlighted that the EU consumes 20% of the world's natural graphite production and imports 95% of it.
On one hand, this sounds very promising because the EU has classified graphite as a critical raw material. There might be a strategic interest to support quality graphite projects inside its own territory - like Talga’s.
On the other hand, it also means that Talga is directly competing with its Asian counterparts in a competitive worldwide market. In mining - but also in other areas of business - this has proven to be devastating for european companies since cost of operations almost never can be as low as in Asia. China plays every card they have and they will do so also in the future.
So, what makes Talga special?
Mining graphite is only one side of the coin for Talga. Graphite is made from layers of graphene so in theory anyone can produce graphene in a laboratory - but the big question here is at what volume and cost?
And here comes the story: Talga’s ore is different. Talgas ore is conductive straight out of the ground (!). It’s like an electrode.
In addition to that, Talga came up with a unique process to liberate large quantities of graphite and graphene directly from ore (in 2 of the 5 core projects). They can cut out entire bulks of the stone and process it in only one step. The process actually drives molecules between the layers of graphite to liberate pristine graphene in a single stage.
The world's biggest graphene producer?
Since natural graphite is already made of graphene, to separate graphite to graphene it is very expensive and hard to scale up. Due to the world's highest grade resource in the world and the new processing method Talga claims they will be a game changer and will ultimately be the world's biggest graphene producer.
Graphene is no doubt an extraordinary material whose commercialisation pathway has been constrained only by volume and cost of production, not applications. Over EU$2.5B in graphene research funding has been launched in the EU (Sweden) alone in 2014. But at some point, somebody will have to deliver the volumes once graphene finds its way into more products.
I believe there might be a chance for a European miner to compete with the Asian counterparts. But Talga has more to offer.
Looking back in the history of the company we can see some interesting twists and turns.
In 2013 and after its gold ventures in the early days Talga still described itself as a ‘mineral exploration & development company’
In 2014 Talga tried to get rid of the old gold and iron-ore projects.
In 2015 they started to call themself a ‘Technology company’. This was after they added ‘strong technology capability with over 20 PhDs and Engineers with energy product experience including: ex-Toyota, Tata, Dyson and Cambridge University alumni.’
The company moved from metallurgical breakthroughs in the lab to benchtop scale in their demonstration plant.
In 2016 Talga called itself an advanced materials company. And stated that they are a ‘Technology minerals company commercialising the world's highest grade natural graphite project to mass produce graphene and related products’
High volume / low cost graphene.
In February 2014 Talga announced exceptional results from graphene testwork on the Nunasvaara graphite project.
‘Graphene can be directly taken from unprocessed, unpurified Nunasvaara graphite ore in a onestep environmentally friendly process. In other words, no crushing or grinding or purification was required. Something that is unique in the world.’
This announcement has sparked some attention in the investment community. By making use of this ultra-high grade deposit and patenting its own processing mechanism, some believed there actually may be a real chance for Talga to break the chicken and egg problem.
In Talga words: ‘Talga aims to enable large commercial graphene applications which have to date been impeded by absence of bulk supply and prohibitive pricing.’
Talga also said they would be able to produce high volume for low cost. Talga assumed $55/kg ($55,000/t) for future bulk pricing in its scoping study. Something that analysts said will be very hard if not impossible to achieve.
Focus on four markets
The media at time was excited by future ‘hi-tech’ applications like bending smartphone or TV screens, however, Talga repeatedly pointed out that they believe the main driver of near term graphene commoditization is additives.
Talga decided to focus on four core markets that they believed were easy to access and would need huge volume of graphene.
Personally, I was triggered with the concrete and coatings examples. I read that if you add just a little bit (0,5% - 5%) graphene to concrete, UK scientists have found that it will be more than twice as strong and four times more water-resistant than existing concrete. Maybe also worth to note, by including graphene the amount of materials required to make concrete can be reduced by around 50 per cent – leading to a significant reduction of 446 kilograms per tonne of carbon emissions.
Considering the amount of concrete that is used worldwide this alone would make graphene demand skyrock. And Talga is sitting on a huge pile of it.
On top of that, I heard that Talga was also working on electrically conductive concrete.
If you make concrete electrically conductive it becomes one big underfloor heating element. So you can run a weak electric current through it and heat the ground up. This could be used for roads on airports or bridges that you want ice free in winter.
However, driveway heating already exists. They work with water pipes, gas pipes or electrics. But the copper cable roasts and causes problems. The water pipes may break and need costly maintenance where in some cases the concrete has to be opened again.
Ice free wind turbines
Graphene can also be mixed into other materials. In winter time wind turbines are cleared from ice with helicopters pouring chemicals over the blades. With talgas material you can make the blades electrically conductive and head them slightly up.
In more futuristic scenarios cars might be able to charge wirelessly while driving (!) on roads that use Talga’s graphene mix.
Potential Market for coatings
Graphene coatings could be found in applications where water-repellent surfaces are required. For example ship hulls, glass surfaces (mirrors, windows, windshields) and textiles.
Coatings with superior chemical, moisture, corrosion, UV, and fire-resistance properties could also be use cases for Talgas graphene. On medical devices, these coatings would provide a biocompatible surface that is resistant to degradation.
There are potential applications for graphene coatings in nearly every industrial sector, from aerospace to personal care. Examples include: more efficient and flexible solar cells, nano-electronic devices, supercapacitors, high-sensitivity gas sensors, molecular separation, and medical implants.
Talga started shipping samples
In 2016, first samples were shipped to end users. Talga also announced a collaboration with Tata Steel UK. In the months and years that followed a huge amount of partnerships and collaborations were reported. Most of them were so-called NDS, non-disclosure agreements.
In a company presentation they described it as follows:
‘Talga has evolved into a high tech advanced materials and technology company with a unique vertically integrated graphite to graphene product supply chain.’
However, in the last two years Talga’s focus shifted again. This time the focus is a lot more on batteries. Talga started to call itself a ‘a vertically integrated producer of advanced battery anode materials and graphene additives’.
There wasn’t much news about the graphene additives anymore. Does this mean that potential customers didn’t bite on the samples? Well, this is hard to say. Talga has a lot of partnerships but for most of them we don’t know what the deal is.
Pablo Alto rumours
Talga has created a research and product development team in Cambridge and presented some impressive test results.
On social media managing director Mark Thompson was seen flying to Pablo Alto only days after releasing some spectacular result for their anodes. He commented his tweet saying ‘Pablo Alto is calling’.
This was music to the ears of investors. However, there wasn’t too much news that followed in the months after.
Talga in a nutshell
Their main graphite product from Talga is called Talnode. The main graphene product is called Talphene.
Talga is targeting commercial production in 2023 and is currently engaged directly with a range of major battery manufacturers and automotive OEMs. Personally, I believe 2023 is too early for a commercial production.
Today, Talga has 36 commercial engagements for Talnode underway including one to supply to Daimler.
In-house research and development
Talga has built an in-house R&D team of 35 mining, technology and product professionals. Some are ex-Toyota, Tata, Dyson and Cambridge University alumni who are leading the Company’s creation of ready-to-use products.
In November 2019 Talga launched a commercial-scale trial of graphene coating on a cargo vessel. The product is an on-site dispersible powder that adds graphene to paints and coatings.
In December 2019 Talga announced a second commercial scale graphene coating on a ship. Since then we have not heard any news regarding this trial.
In May 2020 Talga announced that it will supply coated anode products to lithium-ion battery giant Farasis for evaluation.
Some time ago, a board member who happens to be a managing partner of Talgas 4th biggest shareholder, has resigned from the board. It’s worth noting but probably not worth speculating since there could be various reasons for that.
The dance with the mine approvals
For mining companies, mine approvals are always a big deal and can make or break a venture. Stage 1 of Talgas flagship mine is already approved and Talga is working and producing there.
Mine approvals for stage 2 were scheduled to occur between Q3 2019 and the end of 2020. In the latest company presentation it was moved to Q2 2021 and the first quarter in 2022. We have seen some of those delays over the last couple of years already.
Are the numbers holding up?
Talga is moving in the right direction, however, maybe slower than they should be. Some investors are wondering if the numbers maybe are not holding up to complete the definitive feasibility study. Only this week, the company announced it will release the DFS in the first quarter 2021. At the same time they announced in a press release some „Outstanding detailed feasibility study results“
The total cash position as of 31. March 2020 is 6,6 mio. They will again need more capital since the cash-burn rate has gone up massively since they invested a lot into research and development. I am optimistic that they will manage to find capital but investors should be careful not to take it for granted. Ultimately, they will also need to finance the next expansion step for their mine. The company still has to design and engineer mining and refinery facilities before it can sell anodes on commercial scale. This will take years before potentially big revenue will be visible in the books.
Edit: Talga just announced that raised AUD 10 mio and saw ‘significant investor interest’.
Talga Managing Director Mark Thompson said: “This strategically sized placement will enable Talga to execute the next steps in building it’s Li-ion anode production facilities in Europe, while maintaining a tight capital structure to provide shareholders best leverage to project success. The raising also strengthens our position as we enter deeper finance discussions with multiple potential project partners.”
Bet on the future
For potential investors this means (as always) you need a lot of patience.
Samples of both graphite and graphene products have been sent to various companies all around the world over the last 4-5 years. However, so far no major deal could be closed and only minimal revenue from those samples was generated.
The agreements and the news flow, however, look promising and are getting better with every year. Before nothing is announced it remains highly speculative. To me the rating for Talga Resources is still ‘hold’.
But it’s worth to keep an eye on both Talga and the graphene market.
Because remember, it’s a wonder material.
"We will continue to progress the 3Q Project into advance development stage in record time."
Waldo Perez, CEO of Neo Lithium Corp | Official Website
I have to admit, I am fairly attracted by confident CEO's and prefer to invest my funds in companies that are run by a management with a proven track record. Neo Lithium Corp, a junior lithium miner, is exactly one of these companies. However, this does not prevent me from having an extra skeptical view on the company. When stocks are trading on surprisingly low levels, very often there is a good reason for it. So, I will simply never stop asking.
Earlier this year, when an interviewer from 'Proactive Investors' asked the CEO of NLC why investors should take a position in Neo Lithium Corp now, Waldo Perez responded by saying it should happen before they actually strike a deal with a major and/or a strategic partner, and added, that the appreciation of the stock is going to be huge. In the companies presentations, the financing is scheduled to happen around Q3/Q4 2019. Of course, this is highly speculative. In the following research report, I dig into the details to find out the likelihood of this deal occurring.
It's all about batteries these days. Every smartphone contains between 5 and 7 grams of lithium. A notebook already needs 20 to 45 grams. Batteries for electric cars require between 40 and 80 kilograms. Battery storage for electric grids, which is already taking off, will only further increase the need for lithium. Such a solution may need around 1.5 tons of lithium. With hundreds of millions of smartphones, notebooks, e-bikes and electric vehicles (EV's) to be produced in the coming years, lithium production is probably going to increase rapidly, and very soon.
For many years, there were three big companies that produced most of the worlds Lithium:
The above mentioned companies are all publicly traded at the New York Stock Exchange and seem to be a rather safe bet to invest in, especially when considering current prices. There are dozens of juniors or lower cap companies on the sideline, seeking financing. However, only a handful of them will survive the current bear market and make it into production.
In recent years, China has entered the market in a big way. Australia’s largest mine, the Greenbushes, is now 51% controlled by China’s Tianqi Lithium and 49% owned by Albemarle.
The market share of the 'big three' has dropped from 85% some years ago to about 53% today. Chinese companies now control about 40% of the world’s lithium market. The two biggest from those are:
From discovery to production in record time
Between 2009 and 2013, Waldo Perez served as president and CEO of Lithium Americas Corp, and he managed to bring the Cauchari lithium salar project through all the permitting stages, to full feasibility and eventually closed a deal for a joint venture. Today, it is one of the largest lithium brine resources in the world. With Neo Lithium Corp, he is now probably trying to do exactly the same thing.
In late 2015, after his time at Lithium Americas Corp, Perez discovered what today is called the 3Q project in the Province of Catamarca, Argentina. Perez took samples from this area and could not believe what he had found. Right after the discovery, in December 2015, he approached Constantine Karayannopouulos, who was, between 2010 and 2015, also at Lithium Americas Corp. Perez said to him: "This is what I found, I think it is very good, what do you think?"
In an interview with Andrew Scott from Proactive Investors, Karayannopouulos later revealed that if he didn't knew Perez from the time at Lithium Americas, he would have thought he had made it up.
"If you had the top 10 attributes of the ideal lithium deposit, this thing would tick off every single one. That's why I said to Waldo, you know, this is almost too good to be true. Positive surprise, it is only getting better. I'd like to call the deposit a freak of nature."
Constantine Karayannopouulos, Director at NLC
So, what makes it a freak of nature?
First of all, we have to distinguish between the following:
Lithium hard rock mines
Lithium found in hard rock forms in crystals that are embedded in Pegmatites. These Pegmatites form when mineral-rich magma intrudes into fissures in continental plates. Rock minerals resources are fairly evenly distributed on Earth with deposits located on each continent. Most mines are currently operating in Canada, Australia and China.
Lithium brine projects
Lithium brine deposits are accumulations of saline groundwater that are enriched in dissolved lithium. The brine is pumped to the surface and collected into pools which heat up under the sun, and in this way, through evaporation the brine is then concentrated. After a few months to about a year, depending on climate, the concentrate is further processed in a chemical plant.
There is a lot of lithium all over the world, but only a few regions gather brine in this way - using pools, or basins, where lithium salts are then extracted. Neo lithium controls a total of 350 square kilometer in the so-called lithium triangle. This dry desert area is spread between Argentina, Chile and Bolivia, and it's estimated to hold about 54% of the world's lithium resources.
High grade, low impurity, big resource
With 35*6km in size, the 3Q from Neo Lithium is now the 6th largest brine project worldwide on a total resource basis, and of those it's the only project with low critical impurities that is not in production yet. To have low impurities is important because there is a very direct correlation between impurity content and cost of production. Put simply: the higher the grade, the smaller the ponds required, and therefore the less capital needed. The 3Q project has the lowest combined critical impurities worldwide.
It is the 4th highest grade project worldwide. The high grade core in the north is the second (!) highest grade resource in the world. Therefore, NLC will have the ability to start to mine in the northern part first. Waldo Perez said the lifespan of the northern mine alone, which contains the high grade lithium, is about 20 years. For decades to come, NLC will be able to use both the high-grade product in the north and then the average grade product in the south.
In terms of size and quality, this project is simply outstanding.
Recyclable mineral deposit
Basically, what Perez found is a recyclable mineral deposit. When we look closer at the resource we find springs that are literally feeding lithium brine into a so-called lithium lake. There are only two lithium lakes currently known in the world. One of them is in China, the other one is now on NLC territory. The brine on the surface makes up only 2% of the total resource, the rest is under the ground or inside the salar. In the lake, the brine continues to evaporate. It could be seen as a recyclable mineral deposit. But realistically, NLC would mine much faster than the lithium could flow into the lake.
90 million raised
In early 2016 Perez and Karayannopouulos joined forces and started the company, naming it Neo Lithium Corp.. After a couple of financing rounds and a little bit of work in Argentina they listed the company in July 2016 at the Toronto Stock Exchange through a reverse takeover (RTO). In total, they have raised over 90 million and moved it from discovery, to resource estimation, to preliminary economic assessment, to an updated resource estimation and to pre-feasibility study in a little over three years.
For investors not familiar in the mining industry, before a project becomes a mine, several technical studies must be completed on a deposit before the real operation begins. All of these studies analyze and assess the same geological, engineering and economic factors but with different levels of detail and precision.
With more drilling on different spots and down to different depth levels, the estimation of the entire resource becomes increasingly more accurate and further economic and engineering factors are added to the study. These reports figure as continuing base line material for negotiations to finance pilot plants first and eventually full mine construction when numbers from pilot plant operations are confirmed.
The way into production
During this process, with no revenue and a high cash burn rate, many companies are under constant threat of running out of money. When results of new drilling campaigns are not confirmed later on or the deposit turns out to be less promising than originally expected, investors hesitate to provide further money, as it is not economically feasible or promising enough.
There are many factors that can bring a project down, starting from commodity prices that change too fast in the wrong direction or political factors, like additional forms of taxation or costly environmental permit requirements.
However, it is also possible that once the price of a commodity suddenly appreciates, a projects, once completely terminated years ago, becomes lucrative again for investors.
Finally, there are many ways to go into production. Often, a promising project is taken over by a big player in the industry. This can happen early, or after all the technical work has been done, all the permitting is in place, and the full feasibility study confirms the deposit and the economical feasibility.
However, many times a strategic partner comes on board in a joint venture and develops the project together with the original team that discovered the resource. There are many ways a project can go from discovery to production. In some cases, banks and institutional investors simply provide the money through further funding rounds to have the original team go into production themselves. This also depends on the background of the team.
In the case of NLC, the team are experts in discovery and the ability to lead it through the technical work to full feasibility. In an interview, the chairman has said they would have some knowledge to go into production themselves, but maybe not all of what's needed. To me it seems that they are trying to close down a deal in a joint venture.
Several factors to be considered
With cash burning fast, and financing rounds that usually only provide money for the next phase, companies are under constant pressure. If drilling campaigns fail to deliver on their promises, it gets hard to find new money for the next step. There are several factors that can kill a project before it goes into production. Share prices usually follow certain milestones, but with the usual hypes of the stock market - up and down.
When companies do further drilling and discover more or better resources, the project becomes more valuable and share prices often go up. When companies receive approvals for mine construction or if environmental studies get approved by the authorities, the risks of a project failing goes down, which makes it more likely to earn money in the future. This usually also leads to a stock price boost.
On the other hand, bad drilling results, approval delay for mine construction applications, or anything related to political head wind is usually seen as big risks, which puts pressure on the stock price. It is therefore a constant valuation between risk/reward.
One of the most important factors is obviously the underlying commodity. If demand is expected to increase over the next decade and supply from other mines will struggle to deliver, then it is more likely that the price will stay high and the project, becomes, or remains, feasible and profitable. In the case of lithium, the question is this: How much demand will there be in the coming years, and what is the supply relative to this.
Lithium is not a commodity.
The biggest problem is, that lithium is not a real commodity.
Yes, it could be seen as a commodity since it is taken out of the ground, but it can't be immediately loaded on to a truck and sold. It is more of a chemical product.
We have to distinguish between the following:
- Lithium carbonate
- Lithium hydroxide
Lithium carbonate usually comes from brine projects, like the ones from Neo Lithium. It is used in most of the current batteries that power EV's. However, some analysts see and predict new types of batteries, which require more lithium hydroxide, growing faster. Lithium hydroxide is usually produced by hard rock projects.
New battery type 811
There are huge innovations happening in the battery sector and composition of the perfect battery is probably still far away. However, there are a lot of talks about the NCM 811 (cathode with nickel, cobalt and manganese in a ratio of 8:1:1) type of battery.
The main stream battery - NCM - began to gain popularity shortly before the first iPhone from Apple was released. NMC 111 or NCM 333 (⅓ Ni, ⅓ Mn, ⅓ Co) was the first to become commercially successful. Today, NCM523 (nickel/cobalt/manganese in a ratio of 5:2:3) and NCM622 (nickel/cobalt/manganese in a ratio of 6:2:2) are widely used in EV's.
But new EV models in China have started to use the NCM 811, and also other big auto manufacturers are shifting to it. Despite speculation that this type of battery would quickly reach mass adoption, most analysts don't see the shift happening that fast, due to safety concerns and costs challenges.
Total market share of NCM 811 (by capacity deployed) was in May 2019 at 2% at global level, and 4% in China. However, it is important to keep an eye on it, because this would shift demand more to lithium hydroxide.
Is Neo Lithium mining the wrong lithium?
This is up for discussion. Forecasts indicate that demand for both types of lithium is about to increase heavily in the coming years. While hydroxide will grow faster in percentage, in absolute numbers lithium carbonate demand will still be higher over the next decade.
Gabriel Pindar, chief operating officer of NLC, said in an interview that:
"You could also go from carbonate to hydroxide. The advantage of this way is that the quality gets assured. It's a little bit more expensive to get there but you don't have impurities. You are almost guaranteed not to have impurities in the hydroxide."
To me, it seems that if the 3Q project can be operated as low cost as the management believes, especially in the first years by starting mining in the very high grade zone in the north, they should be able to adapt to changing market environments whatever form of lithium is needed. However, Pindar did not reveal how much more expensive this 'little bit' is. If anybody has numbers here, please contact me.
High in the mountains
The 3Q project is located 30km from the Chilean border and has direct road access to pacific ports. The paved highway, which the company states is 60km of all-weather road, sounds attractive. But because the project is in the Andes mountains, at an altitude of 4000 meters above sea level, there are still complicating factors to get their product to coastal ports. Weather conditions are difficult and can stop or delay production. On the other hand, big players have profitably been operating lithium mines inside the lithium triangle for years.
Constantine Karayannopouulos, who is also chairman of Neo Performance Materials, a company in the rare earth sector and trading on the Toronto Stock Exchange, said in an interview that they were a little bit in a hurry at the beginning of the project as they needed to prove the resource fairly quickly. In the Andes, at 4000 meter altitude, with seasonal weather patterns that impact progress, the window for drilling campaigns are between October and April, which is the Argentinian summer. Once they had some numbers, they could build on that and obtain further financing. After new drilling the next year, they found even better resources. And recently, they released a press statement reporting a resource upgrade of another 227%. The project seems to get even bigger and better, in terms of size and quality. And in the last update, they stated that they could still drill deeper.
A race into production
However, it was important to hurry up. Waldo Perez described it as 'a race into production' between all the companies trying to ship lithium to the market. Analysts are therefore trying to find out if this could lead to an oversupply, although demand is likely to sky-rocket soon.
For me, it is impossible to calculate the numbers here. Currently only about 1-3% of all new cars registered are EV's, a number which I find still very low. I do believe that once this number reaches maybe about 20-30% it could lead to a hockey stick growth, meaning that the time it takes from 30% to 60% market penetration is a lot faster then it took from 1% to 30%.
As soon as prices for EV's are down to comparable levels in the range of current gasoline cars and charging stations are widely spread over the countries, customers would feel a lot more comfortable to finally shift to electric vehicles. This number could then go up quickly to maybe 90% or more. Governments worldwide are supporting and incentivizing this transformation.
China, for example, wants to have all its cars to be EV's by the year 2040. Also, big car manufactures are pouring in literally billions into the development of new EV models and are announcing new EV models on a regular basis. It's hard to see this transformation stop or reverse.
Therefore, the transformation looks to me almost inevitable. However, we have to keep an eye on the battery technology itself to be ready to change positioning in case batteries come to market that do not require lithium anymore, or less of it. However, so far I only see the shift away from lithium carbonate to lithium hydroxide.
Supply side of the story
What about the supply side?
There are big names in the game that have mines up and running not far from the 3Q project. In May, the second biggest lithium producer SQM said it would delay a key expansion of production capacity from the Atacama salt flat until the end of 2021.
This means, SQM does not believe demand will pick up sharply before 2021 when considering also the supply side of it. For NLC the question is, if they can find a JV partner that wants to invest now, signing a deal which is financially good for NLC, when supply and demand is still fairly even. With USD 40 million in the bank, they should be able to survive for at least two or three years, although they have accumulated a workforce of nearly 100 people today. NLC is operating a camp high up in the mountain, internally referred as the lithium city.
Pilot plant is up and running
Constantine Karayannopouulos said about himself that, as a chemical engineer with his experience and background, he knows how to start with an idea, using sophisticated engineering and technology aspect to develop it into a cash flow project.
Perez has assured investors that every tool they use in the operation is proven from other lithium mines close by. There is nothing new, and therefore, there is no risk from a technical standpoint. They are now fine-tuning the pilot plant to take the new numbers into the feasibility study.
Gabriel Pindar, director and COO, said they are using proven technologies that have been utilized by major companies in the region to minimize operational and construction risks.
Neo lithium has now already over nine ponds and pumps in operations. The pilot plant was commissioned to operate with a designed capacity to produce 50 tonnes of lithium carbonate per year.
In my opinion, I believe the team should not run into major problems from a technical perspective since they have done it before and proved themselves, when leading the technical work at Lithium Americas.
For investors, there are just three big questions. Who will help them finance to go into production, how will the deal look like for shareholders and when will it be announced?
Last year, Karayannopoulos said:
"We are having a number of discussions with potential strategic partners who would bring, in addition to a balance sheet and the ability to help us finance the project to construction and startup, they perhaps would be bringing market skills and technical skills. We are waiting to decide on who are partner will be, before we start formally the full scale feasibility study, which is not a cheap thing to do. So we are making sure we get it done right."
Now, a half a year later, in march 2019, NLC have presented the PFS, the pre feasibility study, with updated numbers:
"The robust project economics generated from the PFS further validates our view that the 3Q Project is an exceptional project, particularly when our industry faces unprecedented growth and it needs predictable, long term, low cost producers. We are not short of options, and the next step is a careful analysis of how to maximize value for our shareholders.”
Neo Lithium believes that they need a total CapEx of USD 318,9 million (before PFS - USD 490 million), in a conservative estimation, and ??? (before PFS - USD 320 million) to go into production. Cost of production is at USD 2914 (before PFS - USD 2791.-) dollar a tone per lithium carbonate equivalent but is likely to be further optimized.
Their goal is to produce 'battery grade lithium carbonate' and in a phase 2 and 3 'lithium hydroxide' and other products.
In November 2018, Perez said:
"I am hoping that by the end of next year (2019) the FS (feasibility study) should be complete. As you notice I always deliver what I say and I have been keeping a very good record so far. I don't want to fail on that one."
Only to add:
"Engineering is always a complex task. Our objective is next year but a time lag in between is always possible".
NLC has almost every permit so far:
The last permit which is missing, is for mine construction. This could only have been sent after the pre-feasibility stage. In an interview earlier, Perez said it will take about 1-2 quarters after submission to get the last permit for construction of the mine. This would mean that the permit could be granted between July and October 2019.
NLC owns 100% of the 3Q project. In Argentina there are two mines already in production. NLC believes they will be the third.
The upcoming election in Argentina is a factor to watch out. It currently looks like Mauricio Macri, who has been generally supportive of the mining sector, could again win the national election.
There is hardly any junior miner with a shareholders base like that of NLC. The reason is the quality of the project and the experienced management team. JP Morgan, Blackrock, Royal bank of Canada, and big funds have been buying into the stock at around one dollar. The current price is much lower.
In an interview with 'Proactive Investors' at the end of November 2018, four months before NLC published the new updated PFS (pre feasibility study) with the new numbers and the updated valuation, Waldo Perez was asked how it is going regarding the talks for a potential partner.
Perez responded by saying: 'Very well, very well, actually there are even more partners lining up on the discussions. '
In the months before, new drillings have been made and this data was about to find its way into the new study.
'It is very important, in order to guide this discussion, to have this pre feasibility study. Because otherwise, it is more difficult to have discussion based on an outdated original economic evaluation as we had. which basically was from the year 2017. It is very important that now we update with all the information with what we have been producing.'
When asked about what he is looking for, in particular, from potential partners. What they need to have, Perez responded:
'Honestly, it's a combination. What we are looking for is full financing. I am looking to finance the lithium project to production. Now, different partners have different qualities. Some of them are related to the mining industry. Some of them are related to the lithium business. Some of them are related to distributing or selling the product worldwide. And those are the type of things that match what we need. We are basically very good in mining lithium, finding and discovery. But others are also end consumers. Considering that there are different partners in line, they have also different objectives. "
Andrew Scott, the interviewer from 'Proactive Investors', then asked Perez about when, realistically, he might be looking to have some deal done?
'Well, it is a dance of two. So, one thing is my wish. As you and many shareholders are probably aware. I was trying to close a deal this year. Now I know, it is going to go to the next year (2019).
But Andrew, it's better to have a good deal with the right valuation as a not so good deal with an old valuation. So, patience sometimes is important and pays off. So, I ask the shareholder just hold on, let's get the new valuation and get a better deal.'
NLC remains a speculative buy since they are still missing one permit and have no financing nailed down yet. SQM, Albemarle and Livent are probably the lithium stocks to go with at current levels.
However, risk/rewards seems to be getting more and more attractive at NLC and the next months could finally bring further clarification. The final permit may be granted soon and discussions might now be going to the final stages since it is already 4 months after they published the PFS.
If the offers in the current market environment are not good enough, NLC does have enough cash to wait for better offers. That is a luxury not every junior miner has. In their back, they have a strong shareholder base with names like JPMorgan, BlackRock and others. NLC own 100% of one of the biggest and highest-grade lithium resource in the world.
Interestingly, only two months ago in early May 2019, diversified company Westfarmers offered AUD 776 million to take over lithium developer Kidman Resources. According to Benchmark Mineral Intelligence, Wesfarmers could be the first in a wave of large diversified conglomerates that move into the battery metals space.
Today, on 19th of July 2019, Waldo Perez bought additional NLC shares worth around USD 55'000.- at a price of CAD 0.63 and at a market cap of CAD 70 million.
Yes, I have to admit, I am fairly attracted by confident CEO's.
Share price today at 19th of July, 2019:
CAD 0.61 (Toronto, Canada)
Update: 20th January, 2021
I have taken profits at CAD 3.80.
If it will cool down a bit I am ready to buy back the same amount of shares. I am still a huge believer in the project and in the NLC team. In the meantime I will move the money to a company called Bass Metals: bass-metals-zero-or-100x.html
The CEO believes ODH is undervalued. Is he right?
To test this claim, we will take a deeper look at the Swiss company, its history, its founder, its financials and at everything that could have an effect on the stock price. And, we will never stop asking. The easiest way to start the research with is probably to quote the CEO and try to find out if he is right or not.
It was Sunday evening, October of last year, when Khaled Bichara, the CEO of a unique town builder called Orascom Development Holding (ODH), and his team published a press release. Months before, they hired an external property valuator to value their assets in one of their operational destinations called 'El Gouna'.
"We believe our assets are not adequately reflected in ODH's stock price."
CEO Khaled Bichara (Sunday, 21 October 2018)
The outcome of the report was not that much of a surprise for many long term shareholders since it was always clear that the company owns many assets with substantial value. However, the extent of it was for many investors still a peachy surprise. The remaining land, CBRE wrote, is worth USD 1.82 billion and therefore 170 times its current book value.
Stock price should be up 4.1 times to reach fair value
Here is Khaled Bichara's full quote:
"I am pleased with the completion and publication of this valuation report performed by CBRE. The report reiterates our earlier conviction that our Group owns many assets with substantial hidden value kept at book value in our financial statements. Moreover, we believe our assets are not adequately reflected in ODH's stock price. The 17 hotels in El Gouna alone plus the remaining land would make up more than 4.1 times the current market capitalisation, using CBRE's market value."
CEO Khaled Bichara (Sunday, 21 October 2018)
Since 1989, Orascom is building entire towns which include marinas, hotels, villas, golf courses, shops, businesses, restaurants and everything a town requires. The company owns the land and controls everything on it. In the destination of El Gouna thousands of people are living permanently in the city and the company earns on every dollar what the residents and tourist spend there.
The CBRE report was only covering the town of El Gouna in Egypt. However, CBRE will look at the other 8 operating destinations, too:
How is it possible that the remaining land and hotels at one single destination, El Gouna, could exceed the market cap of the entire company by a factor of four?
Fortunately, there are indicators we can look at to better understand why ODH is trading at such low levels.
The Sawiris Dynasty
Orascom Development Holding is headquartered in Switzerland, trading mainly at the Swiss Stock Market and also at the Frankfurt Stock Exchange in Germany, with fairly low volume. Despite trading at exchanges in mainland Europe and several European operations, ODH fundamentally remains an Egyptian company, with its roots in the country, and most of its revenue still coming from there.
Behind the company is a business man and billionaire called Samih Sawiris. He founded the company exactly 30 years ago, is a Coptic Christian, and comes from a very wealthy family.
Samih Sawiris's father, Onsi Sawiris, was born in 1930 and has three sons that now run his legacy business:
The Sawiris dynasty is very influential in the country, and although they own and control some of the biggest corporations in the region, it is said they are very well respected throughout the nation.
Born in Cairo in 1957, Samih Sawiris studied in Berlin and is fluent in German. Father Onsi Sawiris was making sure that all of his sons could benefit from a decent education and sent them to international high schools in Cairo, and later, abroad for studies in Switzerland, Germany and the United States.
Back in Egypt, Samih Sawiris created his first company in his twenties with a loan of around USD 50k from his family. He was selling newly upcoming fiberglass boats and enjoyed a juicy first mover advantage and a monopoly for quite some time.
Speaking about his past he says that it was a huge help that he could use the well-established Orascom brand from his father which opened him many doors at the beginning.
Sawiris can't collect taxes, but fees
His passion for boats then lead him to the idea of finding a quiet and peaceful spot on the red sea coast to build a second home for his family, friends and himself to enjoy time at sea and away from the noise of Cairo.
From here, his next move was to found a quiet, seaside town called El Gouna. It is Orascom's flagship destination and looks a little bit like a tropical Venice. Today, well over 20k residents and tourists are permanently living in a place what only 30 years ago was nothing but desert.
Orascom Development Egypt, which is 84,79% owned by Orascom Development Holding in Switzerland, owns and controls everything inside the destination. This ranges from hotels, golf courses, schools, shops, businesses, a hospital and even its own football club in the Egyptian Premier League. There is an international film festival happening once a year, an international squash tournament and entertainment all year round.
Since they can't collect taxes, they are free to collect fees. Shops and businesses have to pay fees and Orascom Development earns on everything from electricity to its waste management service.
Since it is run more efficiently than other towns in the country, El Gouna has lately turned into a startup hub where new ideas can be tested more quickly compared to other cities.
Orascom is in full control of its destination and currently won't allow fast food chains to enter the town. Sawiris also makes sure to not only attract the rich, but also a good mix of people from all classes and countries.
Samih Sawiris repeatedly needs to remind admirers of his creation that the successful development of El Gouna was nothing but planed. He started small and added part for part, step by step. And as El Gouna quickly grew and became successful, Sawiris then became an expert in building towns, and from there, used his expertise to build more successful towns across the world.
Buy land for nothing and start building
The strategy is similar in almost every country he steps in.
He buys land for almost nothing, usually a symbolic dollar per square meter somewhere remote but in a beautiful landscape. The place must be within a 2 hour reach to an airport - one of his few essential requirements.
Then, he starts building basic infrastructure: A hotel, real estate, villas, a marina, shops, a golf course and leisure facilities. The cash flow from operations is reinvested into the town, which, in turn, makes it more popular, attracts more visitors and increases real estate demand. Average selling price per sqm goes up, and what once was a worthless piece of land slowly becomes increasingly and exponentially valuable. And the bigger and more attractive the town gets the more valuable the land becomes.
According to the CBRE report, the land is now worth 170 times what it's currently worth in the books.
So, how much is the land worth today? Well, that is difficult to nail down since for many years Samih Sawiris simply didn't care too much. The land was not for sale and his vision and business model is for the next generation. This all started to change in the last couple of years. During the Arab spring and the fight for survival, ODH needed to sell land for cash. And last year, the management actively approached a property valuator to conduct a fair market value study with the goal to show investors how many assets they actually own. Here it is again:
"Orascom Development Holding (ODH) assigned CBRE Group Inc, one of the best-known international property valuators with more than 450 offices worldwide, to conduct a fair market value study for its remaining land bank and its 17 hotels with 2,654 guestrooms in El Gouna, Egypt.
CBRE's report valued the remaining 22.9 million sqm of undeveloped land in El Gouna at an aggregate market value of USD 1.82 billion, 170 times its current book value which stands at USD 10.7 million."
Press release (Sunday, 21 October 2018)
Why these numbers are not in the books?
If they would put these new numbers from the valuation report into the financial statements, it would result in massive gains and would therefore be taxed heavily. For ODH, and its daughter company ODE, it is not exactly a good time to realize these gains now since they need the cash to pay back debt and invest into the destinations. Therefore, the management decided to leave it hidden in the books. Investors looking at the balance sheet won't see it directly but it is real value inside the company and should therefore be taken into account when valuing the company.
IPO price at CHF 152.-
Historically, most destinations and therefore most of the revenue and profit came from Egypt. However, Samih Sawiris always had a conservative approach and tried to avoid risk and debt. When the massacre in Luxor killed 62 people in 1997, Orascom survived. Having no debt at the time of the attack saved him even though the Egyptian tourism market dried out.
In 2008 he took the company public through an IPO at the Swiss Stock Exchange. The IPO price was set at CHF 152.- and went up to CHF 175.- during the first couple of days. The goal was to finance the international expansion, to de-risk the business model through geographic diversification, and to better protected his assets from governments. A wise step that probably saved the company from losing land a couple of years later during the Arab spring.
But let's take a step back again, to 2008, when things turned very ugly for the company.
Disasters of biblical proportions
The business model of ODH is extremely long term. It may take up to 10 years until a destination is profitable. In the very first years, planning is costly and infrastructure has to be built first before people can settle down.
Right after the IPO in year 2008, and just when they kick started new projects outside of Egypt, ODH and its share price faced substantial pressure during the big financial crises that crashed real estate markets worldwide and heavily challenged emerging markets like Egypt.
Only three years later, in 2011, the Arab spring happened. The first wave of the revolution dried out the tourism sector, putting heavy pressure on earnings and consequently also on the stock price, again.
ODH's flagship destination El Gouna in Egypt was still profitable during those times, showing how robust the business model actually can be when not reliable entirely on tourism but also on permanent residents living in the destinations and spending money year-round.
Selling land to save the company
But since many destinations abroad were in the ramp up phase, cash from Egypt could not be sent to the new projects anymore as ODH's cash cow was severely hit. The new destinations in Montenegro, Switzerland and Oman desperately needed money to keep building their towns. To perform and to be able to contribute revenue to the group, it was crucial for them to quickly reach critical mass.
The holding company and its daughter companies suddenly found themselves in massive trouble. One solution in those years was to sell land, something that Samih Sawiris and Orascom Development generally tried to avoid, believing that value creation on their own is clearly more valuable for shareholders.
Arab spring, first revolution, second revolution
Just when tourism was about to recover and the share price finally was picking up again, the second wave of the Egyptian revolution in summer 2013 again put heavy pressure on the tourism sector. When Mohammed Mursi was removed, Abdel Fatah al-Sisi came to power.
The chaotic weeks and months before and after these events sent shockwaves through the entire world. Orascom Development found itself in even bigger trouble. When debt on the balance sheet grew to unhealthy and dangerous levels, investors bolted. The Billionaire Sawiris became a one-man bank, self-funding his sinking ship, as banks became wary of funding his projects.
In 2014. the losing streak continued when first a bomb exploded inside a tourist bus in the region of Taba Heights, very close to one of the Orascom destinations, killing Korean tourists. Later heavy flooding destroyed some Orascom hotels also in Taba Heights and forced the group to shut down most operations, a destination that was once the second biggest revenue contributor to the group, right after El Gouna.
However, it did not have a major effect on ODH's financials, as these destinations had good insurance coverage. And as the tourism industry was in a depression anyways, for ODH it was almost a relief that the flooding occurred at that time and not once tourists were back in full numbers.
Russian airliner crash over Sinai in 2015
But with other destinations still desperately in need for cash, Samih Sawiris took over the CEO position in 2014 from Gerhard Niesslein, an international manager he hired only three years earlier. Leaving the board of directors to manage the daily business again himself is not something Sawiris is good at or enjoys, a statement that comes from Samih Sawiris himself.
Four years after the initial spark of the Arab spring and after many years of reported losses, some of them over hundred million dollars, tourism in Egypt finally rebounded. At the same time destinations outside of Egypt started to slightly mature. But the long-sought tourism recovery wasn't supposed to happen yet.
A Russian airplane leaving a popular tourist destination of Sharm El Sheik, close to the Taba Heights destination, was shot down by terrorists on the Sinai Peninsula, killing all 224 people on board. Almost every country announced travel bans, often applicable for the entire country of Egypt, and today some countries have yet to lift their bans on the southern Sinai Peninsula.
The following year was devastating for the Taba destination and the biggest tourism crises Egypt has ever faced. In 2016, the company started the year with a new CEO. Khaled Bichara took over and the share price in the following months fell to as low as CHF 4.40.-, bringing the market cap down to around CHF 200 million (USD 200 million).
Considering this, the company at that time was still controlling the 100 million sqm of land spread over various countries and with infrastructure and marinas in place, or under construction, at many destinations.
Europe’s largest leveraged buy-out
Ironically, Samih Sawiris hired Khaled Bichara in January 2016 to clean up his own mess when stepping down as the CEO and moving back to the Board of Directors.
Bichara might not be very well known internationally, but he does have an impressive track record. Samih Sawiris knew that very well as Bichara has worked for Samih's brother Naguib at Orascom Telecom Holding.
In contrast to Samih Sawiris, who is very conservative and tries to avoid risk if possible, Naguib Sawiris is not afraid of risks. He is constantly looking for opportunities to expand his empire, sometimes in some of the most dangerous places on earth like Iraq and Pakistan.
In 2005 he found a target in Italy to expand his Orascom Telecom Holding by acquiring Wind Telecomunicazioni for about 15 billion dollar, at that time one of Italy's leading telecommunication providers. Two-thirds of the transaction was financed by debt, and the deal ranked as Europe’s largest leveraged buy-out in history. The corporate world took a second-glance at this deal because, usually, it is Europe buying in Africa. This time the Egyptians went shopping in Italy.
After the takeover, Naguib Sawiris installed about five Egyptian managers. Bichara was executive chairman of Orascom Telecom Holding and became chairman of Wind Telecommunication in Italy. He revitalized the company in just three years.
When Russian operator Vimpelcom agreed to acquire most of the telecoms assets in a $6.5 billion deal, creating the world’s fifth largest mobile network operator (MNO) by subscriber base, Bichara became the president and COO of VimpelCom Ltd.
Three Pillar Strategy
Today, it looks like Khaled Bichara has revitalized Orascom. For three years, between 2016 until 2019, much of his salary was directly linked to the ODH share price. Now, as it became obvious that the compensation plan was fairly explosive, and could have cost the company a substantial amount of money if the share price had sky-rocked to old levels, Sawiris made a new deal with his CEO.
The share-based compensation will take the form of restricted share awards, which provide for a staggered allocation of a total of 2.5% of the outstanding ODH shares over five years.
At the same time, Khaled Bichara will be awarded 2.5% of the outstanding ODH shares in a private transaction from the holdings of majority shareholder Samih Sawiris. These shares are subject to a five-year lock-up period.
ODH press release
After spending three years at the company Bichara seems to have gained the full trust of Samih Sawiris as he basically becomes a partner during the next five years. He was hired to clean up the company and transform it from an Egyptian company to a well structured international company.
And after three years with Bichara at the steering wheel, Sawiris, who owns 70% of the Group through himself and his family, seems to be very confident that he has found the right man for this job.
Three years earlier, in June 2016, the new management communicated a three pillar strategy to the market:
He wanted to take out the necessary impairments on the investments that did not generate value, reduce the debt balance in Egypt, restructure the company’s debt in other destinations and monetize non-core assets and minority stakes in certain destinations.
He himself wanted to enter the first home market in Cairo, a project that he was very convinced would be a great success. He pitched it to the ODH board of directors and got approval. He moved and installed some of the company's best managers to develop the destination with the name 'O-West'.
Three years later, O-West's pre-launch phase was completely sold out in a matter of weeks and, a few months ago, the first phase of the launch was reported as almost sold out. As revenue recognition will start to kick in during the beginning of 2020 it is already one of the biggest destination in the Orascom portfolio.
Bichara has ticked almost every box of the earlier mentioned three pillar strategy. And last year he communicated a new goal:
"The next goal is to focus on shortening timeline to profitability"
ODH presentation (2018)
In the first quarter of 2019 Orascom Development Holding reported a net profit of CHF 1 million. However, for shareholders it was still a loss.
He put his house at stake
Early in his career, in the 90's, Bichara asked the banks for a loan to start his internet venture. The bank had so little faith in his startup’s venture that he had to take a loan for the business out against his house. Bichara co-founded LinkDOTnet, the first internet service provider in Egypt.
"Starting a business around the internet, people weren't sure if it would be something. It took us a whole year and a half as a company to do our first transaction."
When it comes to management skills or managers he looked up to when he was studying in the United States he mentions the legendary General Electric CEO Jack Welch. Bichara describes himself as a team player that is very result oriented, gives power to his team, but expects results in return. His strengths are said to be his analytic skills and his focus on numbers. Something that Orascom Development was lacking in all the years before.
Khaled Bichara himself told a Swiss newspaper that he is not as kind as Samih Sawiris was as a CEO, referring to the Orascom destination managers who could ask for more money whenever they needed more - and usually got it somehow.
He and his team are strictly following the path towards profitability, and budget discipline is one big part of it. After three years with Bichara in power, financial results are starting to shine, with 2019 targets well on track.
Floating of the Pound
In 2016, during Bichara's first year in charge at Orascom, Egypt's central bank floated the pound in an attempt to stabilize its economy. Almost overnight the pound lost 50% of its value. Orascom's balance sheet was still overloaded with debt, unfortunately mainly due in USD. The run of bad luck for ODH continued and Bichara needed to act fast.
In 2016 and after almost a decade of trouble, Net Debt to Adjusted EBITDA was at a factor of 14.5 (!). Bichara then sold non-core assets and restructured debt. In September 2018 it was down at a factor of 3.5.
On a positive note, the low prices for holidays in Egypt have attracted many tourists during the last three years. Today, El Gouna and Orascom Development Egypt is reporting the most profitable year in the history of the company as visitor numbers are increasing and the town is growing fast with real estate sales also at record levels.
Yet, hotel room prices in USD have not reached old levels and have therefore still room to grow to heights before the EGP was floated. This would further increase ODH's margins and profits.
Ferociously, step by step
After all trouble-filled years, something has happened that many investors might not fully realize yet. Orascom Development Holding has ferociously worked on its diversification. The projects that were launched in Oman, Montenegro and Switzerland in the years before and after the IPO are now contributing revenue to the group's results. Many destinations are already profitable or at the brink of it.
The resort of Hawana Salalah and Jebel Sifah in Oman have contributed almost 32% to the revenue of the group in the first quarter of 2019, while Egypt still accounts for a little over 50%.
Last year, the new destination in Montenegro contributed already 10% to the group's revenue. Even the Swiss destination will finally be consolidated in the course of the next two years, adding more revenue and maybe future profits to the holding company.
Looking at the growth rate in the last couple of quarters, something to mention is that the quarterly revenue growth is at about 30% and has been so for quite some time now. Tourism has almost dried out, and therefore this growth comes from very low levels.
Some of the revenue growth is not visible in the financials of the holding company because the devaluation of the EGP has resulted in lower numbers in CHF. However, there is a fair chance that we will see a growth rate in the range of 20-30% or more for another couple of years.
At this point, even though a market capitalization of CHF 660 million looks extremely low for a company of this proportion the number to look at is the enterprise value since it is equally important to look at the debt side of the balance sheet, too. And with around CHF 400 million there remains still a lot of costly debt on the ODH balance sheet.
So far, CBRE has only taken a closer look at two destinations.
Today, ODH owns 49% of ASA, the company behind the Andermatt project, but will buy back 1% and one share to consolidate it during the next two years. Samih Sawiris will forgive CHF 150 million in debt that ASA currently owes him.
Since he is, with about 70%, majority shareholder of ODH he will 'only' lose around 20 million, something he said in an interview with the Swiss financial portal 'cash.ch' he is ready for since it brings clarity to ODH shareholders about the future of the project, something that will lead to a stock price boost and benefits him financially as well.
"The transaction would take place at a purchase price of CHF 3.2 million, valuing ASA equity at CHF 320 million. This enterprise value was determined by way of an independent third-party valuation."
Press release (09 January 2019)
Let's do the math
Orascom Development Holding owns:
More value from other destination to be added on top
Alone the remaining land in El Gouna and the hotels that CBRE looked at are worth 3x the current market cap. CBRE did not value other buildings or assets Orascom owns inside the destination.
At this point, we have to remind ourselves that ODH owns and controls an entire city with hundreds of building, its own infrastructure and everything that comes with it when over twenty thousand people (permanent residents and visitors) are living there all year round.
I expect that the valuation of remaining land and hotels in many other destinations of the Orascom portfolio will add at least another billion on top of the current valuation, with more hidden value still hiding inside the towns.
If ODH keeps growing the towns, the remaining land and its assets will become even more valuable over time. CBRE might have to look at it again in 10-20 years.
Business model in a nutshell:
In the 2009 annual report, the company described the business strategy as follows:
"The Group controls the entire value chain, exercises influence on prices and profit margins and is able to deliver stability through its unique business approach and has therefore a much stronger position than any regular real estate developer. Since Orascom Development manages each building phase, planning will be in line with client demand and, more generally, demand will meet supply and prices will remain well controlled.
This is achieved by securing vast stretches of undeveloped land at low cost, thereby limiting the financial risk, via purchases, leases and options, against relatively small amounts of money which is then developed into a year-round destination. The main advantage of such a procedure is to limit the related carry cost of an undeveloped portion of land bank, given the relatively low price paid, which limits the revaluation downside but at the same time provides a buffer for a high revaluation upside.
To illustrate, the value in El Gouna increased from approximately CHF 2/m2 in 1989 to at least CHF 68/m2 in mid-2008, according to international real estate realtor ERA. "
ODH Annual Report 2008
In 2018, the CBRE report valued the remaining land already at USD 80.- per square meter.
And this is of course only the average, while some plots closer to town or the beach will be sold for a multiple.
While this may sound too good to be true there is also the risky side of it.
As we have seen over the last decade, the tourism sector is a fragile plant that can grow very fast but, in the wrong conditions, shrink even faster. A terroristic attack or any problems in Egypt could bring real estate sales and tourism numbers down again.
If we then look at the CBRE report and the valuation, we could not argue anymore that anybody would be ready to pay USD 1.82 billion for land and hotels where nobody wants to be anymore. Valuation is always just a number. If anybody is ready to pay for it when it matters is a whole different story.
Theoretically, Sawiris could give the green light to his management to start liquidating core assets or land reserves. This would fill up the companies bank accounts very quickly and would send share price sky high. However, it is probably not going to happen. For the company and its shareholders it is more attractive to control the entire destination and make use of the increased land prices later.
There is an unprecedented amount of hidden value in ODH's company valuation. For many years a combination of bad luck and company errors have ruined almost every bit of hope and trust that was left.
All the land that has quietly increased in value over the last decade since infrastructure was put in place is not adequately reflected in the balance sheet. Therefore, the true value of the company is currently not being represented, neither in the financial statements, nor in the stock price.
It is very hard to argue that the company is worth so much less compared to the last decade when ODH has been building so much and diversified to different countries, ultimately de-risking the business model in the process.
Comparing 2007 and 2019
Full year (Target) 2019:
"We believe our assets are not adequately reflected in ODH's stock price."
CEO Khaled Bichara (Sunday, 21 October 2018)
Share price today at 25. June 2019:
CHF 13.70 (Zurich, Switzerland)
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