{australien_flagge}Unmissably, the market is already betting on the successful completion of a joint venture between FYI Resources (ASX: FYI; FRA: SDL) and Alcoa Australia. According to the deadline set by both parties themselves, a contract to that effect should be in place by September 4, which is Saturday of this week at the latest. However, a joint stock exchange announcement by the two partners would certainly come later this week if the worst came to the worst.
FYI’s stock is anticipating this event in joyful anticipation, closing at a new all-time high of A$0.86 at the end of Australian trading today. Including the alternative Chi-x market, more than 4.5 million shares were traded, well above FYI’s average trading volume. The market value of the company now stands at AUD 282 million.
Either way, FYI shareholders should see an end to the wait by the end of this week, unless the partners need another extension, which we think is unlikely. In anticipation of a positive outcome, one may already ponder the significance and consequences of an agreement between the unequal partners. Alcoa, the industry leader, is the world’s largest bauxite miner and alumina refiner in terms of production volume. Each year, Alcoa mines about 37 million tons of bauxite, refines about 9 million tons of alumina and produces about 300,000 tons of aluminum. Alcoa produces nearly 45 percent of Australia’s alumina and about 19 percent of Australia’s aluminum. Alcoa’s current market capitalization on NASDAQ is $8.2 billion.
So the deal with FYI is certainly not about mass for Alcoa, but about a new grade of high-purity alumina (alumina) that the company has not had on offer to date. Consider the ratio: FYI plans to produce 10,000 metric tons of HPA annually, mostly in 4N grade, meaning 99.99 percent purity. Alcoa produces millions of tons of 99.5 percent alumina. So it’s just a matter of improving it by a few hundredths behind the decimal point. But that is exactly what is difficult to do in the traditional way and therefore expensive. Also, in many applications, achieving the utmost purity did not play a major role. In the past, from Alcoa’s point of view, this market was probably neither large nor high-growth enough to justify its involvement. HPA was considered a niche product for LEDs or sapphire glass. Precisely because it is so costly to produce high-purity HPA based on bauxite, they preferred to leave this small business to others.
Two things have changed recently: First, FYI’s alternative process shows that kaolin-based HPA can be produced better and more economically than from bauxite, and second, there is a huge new demand for HPA in the battery industry. In this industry, extreme purity really matters, because the purer the HPA, the lighter and more powerful the battery. Alcoa’s joint venture would put its foot in the door of battery manufacturing. Alcoa/FYI could become the leading supplier to the booming separator business for Li-ion batteries. That’s because as batteries get more powerful and hotter, the separators that separate the anode and cathode in a battery need to be more resilient.
Battery separators are perceived by the industry as something of the cellar child of the battery industry, rarely getting much attention alongside the media stars of lithium (electrolyte), anode and cathode. Yet it takes all four components to make batteries. Separators are basically thin elastic walls with tiny holes that separate cathodes, the positive terminal, from anodes, the negative terminal. When batteries are charged and discharged, lithium ions move back and forth between cathodes and anodes through these tiny holes. Separators prevent cathodes and anodes from reacting directly with each other and causing short circuits or fires. Battery manufacturers such as LG Chem coat the separators with nanoscale ceramic particles that cannot be penetrated by ions. Thanks to this coating, the separators retain their shape even in extreme heat of 180 degrees Celsius. The “nanoscale ceramic particles” are nothing more than a euphemism for High Purity Alumina!
Conclusion: the deal between FYI Resources and Alcoa would, in our view, have consequences for the entire HPA industry, as Alcoa’s involvement would authenticate the legitimacy of the entire HPA industry and raise awareness of the importance of high-end crude among many investors for the first time. In this context, there is a curiosity to note: So far, almost exclusively Australian companies are active in the HPA business. In North America, on the other hand, the topic is still heavily underexposed. Imagine what will happen when investors across the board realize that the future of Li-ion batteries is tied to HPA. Actually, FYI would then have to be valued at least as much as some lithium companies already are today. But let’s wait and see what the exact terms of an agreement are, if it comes. It remains an exciting week!
