{australien_flagge}Today almost certainly marks the beginning of a world career for the formerly niche HPA (high purity alumina) product. FYI Resources (ASX: FYI; FRA: SDL) and Alcoa (NYSE: AA) have agreed on a joint development path to build significant HPA production after months of negotiations. The parties intend to proceed with the parallel development of a large-scale demonstration plant (with a capacity of ~1,000 tpa of HPA, at a site to be confirmed) and a large-scale production plant with a capacity of ~8,000 tpa of HPA. If the cost estimates are within the range set by DFS, Alcoa would contribute a total of $194 million, and FYI Resources would have to spend just a maximum of ~US$6 million until large-scale production is realized. According to the agreed term sheet, any cost overruns or underruns would be allocated proportionately to the partners.
If everything goes according to plan, the formal conclusion of the joint venture is expected to take place in 2023 when the large-scale production facility is commissioned. For now, the parties have agreed on a binding term sheet that will serve as the basis for the subsequent formal formation of the joint venture between Alcoa and FYI on a 65% to 35% basis. Both parties expect the joint development to unlock significant project value by combining Alcoa’s technical expertise and experience in building and operating refining facilities with FYI’s innovative HPA processing process and industry knowledge and customer contacts. Both partners intend to advance the long-term HPA strategy as outlined in FYI Resources’ March 2021 Final Feasibility Study.
FYI Resources’ Managing Director, Roland Hill, stated, “The agreement on a joint development path for our HPA project is a transformative event for FYI. The strong agreement between the parties and the resulting HPA business case are outstanding. Today’s agreement brings the possibility of production closer to reality without further diluting our shareholders. FYI believes that a future JV will form a robust structure that will allow DFS’ goals to become a reality. At the same time, the international HPA market is forecast to experience significant growth in tandem with the global upsurge in electromobility and new HPA applications. FYI believes the project has the potential to increase production in multiple jurisdictions, including North America and Europe. FYI would like to thank Alcoa for its professional and dedicated work during the due diligence phases and business discussions. We look forward to working together to build an essential HPA business and realize our vision for HPA.”
Bottom line: You can tell from the press release that Alcoa lawyers were instrumental in writing this. Lawyers are concerned about hedging, and they therefore distinguish between the initiation (“entering”) of a joint venture and the formal consummation (“forming”) of a joint venture. However, the spirit of the agreement now reached between Alcoa and FYI is different: Alcoa, together with FYI, wants to become the dominant player for HPA worldwide. To that end, Alcoa is providing US$194 million. FYI would need to raise just US$6 million by the time it reaches large-scale production, assuming DFS’s estimated costs are met. That, as Managing Director Roland Hill rightly says, is the best solution for FYI shareholders because dilution remains minimal. In the end, FYI shareholders could become a 35 percent shareholder in a billion-dollar global company whose growth would likely be just beginning with the first 8,000-ton facility.
However, the market reacted to today’s news with a share price slide of more than 30 percent. This is partly due to disappointed expectations that FYI could claim a larger share in the joint venture. The criticism is: Is FYI giving up control with 35%? Moreover, there is no immediate conclusion of a formal joint venture. Theoretically, things could still go wrong. The cryptic wording of the announcement then did the rest to ensure that the good news was ill taken. But if Roland Hill is to be believed, the spirit of the agreement is quite different. He believes he has negotiated the best possible deal with the worlds leading alumina producer to bring the project into production. After all, he no longer needs to worry about complex loan financing, because Alcoa will pay 97 percent of the capex – if everything goes according to plan and the Company progresses towards production and receiving up to US$80mpa in pro-rata EBIT.
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