"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)
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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