This is the bear case for ASM - I've been having trouble coping the images from google docs. Snipped these, so hopefully this will work.
Hey folks,
I've had a go at evaluating ASM (Australian Strategic Materials, not metals). I'd really like some feedback before I put a straw up as I'm not certain on a number of the assumptions I've made and they really do matter for the company. My full document can be read here: https://docs.google.com/document/d/1LdG56Dcte5nwX8LP3mik4USjVVq3q2S-WtlRwxjYVfg/edit?usp=sharing
My spreadsheet notes are here, but they're a mess, so avoid them - https://docs.google.com/spreadsheets/d/1RNW9qF7Bq71X1hlG_hE-cclJ1aaaBrsS2lSKwdQapRI/edit?usp=sharing
I've just put the executive summary, questions, and strengths/risks here. Would love some feedback!
- Disclosure, held in rl, may offload some or all at some point depending on price and how I'm feeling (it's turned into my largest RL position except for a managed fund) -
Executive summary
A demerger from Alkane, this company is darned hard to value and I think the volatility in its share price reflects that. ASM started trading at $1.27 per share and has hit a maxium value of $14 per share (currently sitting at $9.88). Note that information in this sector is patchy and there may be errors in my figures. I feel like I need another week to properly analyse this business, but I’m also keen to not spend too much time on one company! I’m also particularly unsure if I’m valuing a scoping study for a plant and unbuilt mine reasonably and would value feedback on this (See Dubbo Project Valuation and Korean Metal Plant Valuation in this link https://docs.google.com/document/d/1LdG56Dcte5nwX8LP3mik4USjVVq3q2S-WtlRwxjYVfg/edit?usp=sharing ).
Lots of information in this sector is not available, and the information available is sometimes unreliable. Broker reports cost thousands of dollars. Please note that any figures in here may be incorrect - I’ve found multiple different figures listed from different sources in my research.There are two main businesses within the business and three drivers of value.
The Dubbo Project, which is ASM’s rare earth project and probably soon to be a mine. (It looks like it’s going to be funded)
The Korean metals plant, which has ASM’s real competitive advantage, which is ability to metalise outside of China Rare Earths, Zirconium, Niobium, Titanium, and Hafnium (and powder), and Titanium (and powder).
I’d strongly advise you to have a read my full thoughts https://docs.google.com/document/d/1LdG56Dcte5nwX8LP3mik4USjVVq3q2S-WtlRwxjYVfg/edit?usp=sharing before putting any weight in these assumptions. I’m really not sure how accurate my valuation is and would appreciate feedback.
I’m estimating the Dubbo Project to be worth somewhere between 400 mil USD (at worst, it’s a strong optionality play in an industry with the potential for major supply disruptions) and an upper value of 1250 mil USD. I’m estimating 750 mil USD for the Dubbo project.
For the Korean Metals project, I think it’s worth somewhere between 250 mil and 1000 mil (with both significant upside and some downside potential). I’m estimating 750 mil USD for the KMP.
Totalled, 1.5bil USD and 2.07 bil AUD.
There’s 143 million shares on offer, with about 3 million options, (don’t know exactly with the options, probs should work that out, annual report released soon), so dividing 2.07bil by 146 we get a target price of $14.185, but it’s quite speculative and hasn’t accounted for dilution through capital raising.
Questions outstanding
What is the exact size of the rare earth’s industry? Does this include just metals and powders, or also magnets?
Can ASM create these plants as quickly and as profitably as they are suggesting?
Can the market handle ASM massively increasing metalisation without a collapse in prices? How many plants and how much production can it handle, and will there be sufficient supply for raw materials?
What is the impact of China dumping the market in one of many areas going to be? Will it destroy value in the company, or result in a positive re-rating through Government support for our industry against hostile threats?
How quickly are ASM’s competitors likely to be able to metalise rare earths? Will they be competitive with ASM’s process?
Are the Korean backers going to go through with their commitment to purchase 20% of the Dubbo project?
Is ASM’s rare earth’s mine really feasible without even stronger government backing?
What is the likely price of metals, including ferro-niobium, and Chemical Zirconia?
ASM Strengths and Opportunities
A significant headstart in metalisation against competitors outside of China.
What looks like an efficient metalization process.
Very strong incentives for Western companies to de risk their supply chain.
Rare earth mining is a commodity with a moat in some ways - the deposits just don’t exist in mineable grades.
Strong partnership with South Korea. ASM seems to be setting itself up to be the strategic partner to Korea that Lynas is to Japan.
In the current climate, China’s hostile actions may actually result in a stronger position for the company as it receives Australian and/or South Korean government backing.
The Korean Metals Plant capital costs are very small, payback is quick, there is a high IRR and the potential for the company to capture a significant portion of the titanium market. These plants can be duplicated overseas.
In my view it’s quite likely that both the industry size and value ASM is offering will increase in value - there are strong tailwinds.
Risks
There is a significant risk that China may dump the market at one of a few points (concentrates, oxides, metal, powder, magnets) to disrupt western industry. This is a significant risk given their actions in the past (essentially putting Molycorp out of business and nearly Lynas).
The optimisation study for this mine might come out with an unfavourable result - ie., with changes in metal prices, the project is borderline to build.
We are a few days from when phase 1 should be completed of the agreement with the South Koreans. Why is it not out yet? A negative go ahead there would create a negative re-rating.
Financing is still required for Dubbo, even though a solid start seems to have been made.
Bringing a mine into production, especially a complicated one like this, has significant risks. The ASM/Alkane board have been working on this for some time though and have experience, so I think the risk is lower than normal.