I recently caught up with Altech Chemicals CFO, Shane Volk to learn more about how this company is positioned to benefit from new technologies such as LED lights, electric cars and renewal energy storage battery systems.
What do you do?
Altech Chemicals is seeking to become one of the world’s leading producers of High Purity Alumina (HPA 4N) which has a purity of 99.99% or greater. This compares with smelter grade alumina which has a purity of 99.5%. Through a complex chemical process, HPA is converted into synthetic sapphire which is used in the manufacture of substrates for LED lights, semiconductor wafers used in the electronics industry, and scratch-resistant sapphire glass used for wristwatch faces, optical windows and smartphone components. It is also used as a coating in lithium-ION batteries to ensure that they don’t combust. This process increases the economic value from around US$400 per tonne for smelter grade alumina to between US$27,000 and US$40,000 per tonne for HPA 4N.
The company has secured a kaolin deposit near Perth as the source rock which will be shipped to a processing plant in Johor, Malaysia. This plant is currently under construction with commissioning expected during 2021 with a three-year ramp up to full production.
What is the business case?
The business case is driven by a very positive demand outlook and considerable competitive advantages from a unique process with production costs estimated at up to one-third lower than the traditional process.
It is expected that the consumption of HPA will exceed 46,000 tonnes in 2020, more than twice the level in 2015. This has been driven by the rapid growth in LED lighting as well the demand for HPA in powder for by lithium-ion battery manufactuers. Consumption has been forecast to grow by more than 80% between 2020 and 2024 with the growth in the lithium-ION battery market (think battery power storage units for renewable energy and electric cars) being the key driver. These batteries are prone to spontaneous combustion due to the heat they generate. As a consequence, the components need to be separated and shielded to prevent this occurrence. With the power density of the batteries increasing sharply, driving up the displaced heat which increases the fire risk, HPA is replacing polymer film as the separator. As batteries become larger and more powerful, the demand for HPA will only increase.
Altech has built its technology to extract alumina from kaolin and produce high purity alumina via a chemical process that was established in the early 1900s. This process will deliver an enormous cost advantage to Altech and if current prices of around US$40kg (ex. Japan) are sustained, a gross margin of about 74% has been forecast by the company.
What have you achieved?
The challenges in bringing to life a major engineering project are enormous, especially one involving an innovative process that disrupts existing technologies and cost structures. Altech now has a commercial sized plant under construction in Malaysia having proved the technology, secured all required certification and regulatory approvals as well as a long life source of rock to feed the plant. Just as importantly for investors, key project risks have been mitigated by a lump sum, turnkey contract with the German contractor and a 10-year offtake agreement with Mitsubishi for all production. Debt funding has also been secured.
What are the investor risks?
Whilst Altech has mitigated most of the corporate risks with the turnkey and offtake agreements, investors still face a number of risks that will impact valuation and the share price. Leaving aside global risks such as overall market performance, possible trade wars and interest rates for example, there are risks regarding the timing of the hand-over of the plant to Altech management, the speed of the ramp-up and the sale price of the output to Mitsubishi. There is also risk regarding future capital requirements and pricing of this funding. These risks will reduce as plant construction proceeds towards final commissioning.
The financial interest in Altech is primarily in the financing associated with the development of the processing plant in Johor. The company has no operating income and will not generate any meaningful income for another 3 years and accordingly, will generate operating cash flow deficits and operating losses for a while yet. However, at full operations annual revenue, based on a sale price of US$40 per kg, will exceed A$200 million with an anticipated gross margin of about 74%. Even in the early stages of ramp-up post commissioning in 2021-22, revenue is likely to be significant and if not profitable in that year a pathway to profitability will be clear.
So, the immediate financial focus is on the balance sheet and funding. As at 31 December 2018, total assets amounted $51 million of which about $47 million was attributable to plant and equipment and development expenditure. Over the course of the next two years, US$300 million will be invested in the project and the balance sheet will increase in size to over A$400 million.
A primary debt facility of US$190 million, out of Germany, has been secured and a US$90 million mezzanine debt facility is being sourced. To underpin this debt A$18 million in new equity was raised from predominantly German investors in the June 2019 quarter. Further equity will probably be required. Accordingly, the balance sheet will undergo major transformation over the next two years as plant construction progresses and debt is drawn down.
What do I think?
I am usually wary of companies built around major engineering projects. The technical, timeframe and funding risks are enormous. However, the worst of these risks have been mitigated by Altech and a commercial project is now on the horizon. Assuming, financial performance aligns closely with financial metrics published by the company, it is conceivable that Altech’s enterprise value will be heading towards if not through $1 billion in five years compared with around $50 million currently. This points to potentially big returns to patient investors in due course
Market dynamics are very positive, a plant is under construction which will deliver major cost advantages, a 10 years offtake agreement is in place and debt funding has largely been locked-in. This is great for investors. But additional equity will almost certainly be required so the key remaining risk for investors is dilution from the issue of new shares and the impact of potential returns over the next few years.
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