Good, better, best, FYI Resources (WKN A0RDPF /ASX FYI). Looking at the new economics data FYI has just presented for its HPA project, one soon runs out of superlatives. The figures represent yet another significant increase over the already excellent feasibility study. The company has managed the feat of improving the relevant metrics in almost every respect.
They are tongue-in-cheek numbers: planned annual production increases from 8,000 to 10,000 tons, with 1,500 tons of 5 N material now scheduled to be produced in addition to 8,500 tons of 4 N; annual EBITDA increases from $133 million to $186 million; total net operating cash flow for the project (calculated over 25 years) increases from $2.2 billion to $3.3 billion. Nevertheless, capital expenditures (CAPEX) increase only marginally from USD189 million to USD202 million, with the investment payback period actually shortening from 3.6 to 3.2 years. Operating costs (OPEX) per ton of HPA also increase only marginally from $6,217 to $6,661 per ton. They are thus likely to be less than half the cost of conventional HPA producers, assuming they can produce 5 N of material at all.
In total, the net present value of the project increases by 87 percent from USD 543 million to now more than USD 1 billion (USD 1,014 billion), after taxes mind you. The internal rate of return (IRR), which quantifies the average mean annual return on an investment, rose from 46 percent to 55 percent. The discount rate used in the calculations was moderately reduced from 10 percent to 8 percent, which seems only logical in view of the findings from the extensive pilot tests. Even an 8 percent discount rate is still prudent.
The real addressee of the new data is Alcoa Ltd.
As a publicly traded company, FYI is making the new profitability calculations available primarily to its investors, but also to all of its competitors. However, the real target of the data released today is likely to be Alcoa Ltd. (NYSE: AA). Last September 8, FYI and Alcoa had signed a memorandum of understanding (MOU) for a possible joint venture. Among the conditions precedent to the subsequent due diligence was, first, that further tests on the variability of the HPA pilot plant be successful. This condition is now likely to have been met.
Second, more generally, was to determine whether the collaboration would yield commercial benefits for both parties. On this point, the new commercial viability data probably provides the pertinent answer. It is hard to imagine that anyone on the Alcoa’s board still doubts whether a collaboration will bring “mutual benefits” in view of the glittering figures. Rather, Alcoa is likely to see the opportunity in joining forces with FYI: Alcoa would instantly be the market leader and quality leader in the fast-growing HPA industry. The importance of HPA to the battery sector is likely to carry particular weight. This is because the main driver of HPA demand will be the battery industry, where Alcoa has had little presence to date.
As a global leader in the production of bauxite, alumina and aluminum, as well as cast and rolled products, Alcoa cannot afford to miss out on important innovations. Alcoa also prides itself on its corporate culture: since the development of the aluminum industry more than 130 years ago, Alcoa has built a legacy of breakthrough innovation and best practices. Alcoa of Australia Limited is 60 percent owned by Alcoa Corporation and 40 percent owned by Alumina Limited. The Australian operations represent one of the largest integrated bauxite mining, alumina refining and aluminum smelting systems in the world, adding value at all levels to Australia’s local, state and national economies.
Intangible improvements of FYI’s HPA project
For Alcoa, the “intangible improvements” around the project that FYI can now demonstrate are probably not the least important. These include advanced discussions with key industry participants and potential customers, as well as the recognition of HPA project status by the Western Australian government and the resulting public sector support. Alcoa is also likely to look favorably on FYI’s efforts with respect to environmental, social and corporate governance (ESG) compliance. The ESG aspect is becoming increasingly important because, after all, kaolin-derived HPA significantly reduces CO2 emissions compared to bauxite-based HPA.
Figure 1: According to CRU Group calculations, HPA demand will increase by 18.7 percent annually between 2021 and 2028.
Conclusion:
The updated DFS confirms the robustness and quality of FYI’s HPA project. There are a number of other catalysts ahead for the company that could lead to a reassessment, if necessary. First and foremost, these include the possible conclusion of a joint venture agreement with Alcoa, as well as the completion of the detailed design of the HPA project and the final investment decision. In addition, investors are waiting for letters of intent from customers as well as concrete financing agreements. FYI suggests in today’s news that there may be surprising new growth sectors for which HPA demand could become relevant. So the stream of news is not going to stop. It is a joy to be present at the birth of a new industry. Goldinvest will keep a close eye on further developments.
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