My notes from the very good conversation with Dirk Treasure, Founder and CEO of C79. I walked away with a much deeper understanding of the business, financially and operationally, which has made me further appreciate the quality of the business in terms of TAM/customers, moat and economics.

One new risk that crystallised for me is geo-political risk. Some of the units are being deployed in nasty reas of the world - if trouble brews, the carefully laid out deployment schedules and associated revenue impacts will be impacted.

Discl: My conviction on C79 has increased further and I topped up IRL a bit after the meeting as the price dipped closer to $6 today. In topping up, I was taking a leaf from Ian Cassel's wisdom where he said that he has fared better when he averages UP on his high conviction companies then averaging down. Have held C79 since Dec 2022, price has done very well since, so averaging up is not as painful now vs starting a new position altogether.

HISTORY

• Bought IP and the background know-how of that technology - C79 packaged and commercialised the technology
• Analysis is a non-discretionary spend for the mining industry
• Incumbent technology is Fire-Assay, 2,500 years old
• Photon Assay (PA) is a faster, greener, safer, more accurate, more precise X’Ray-based technique, larger sample, non-destructive

OVERVIEW OF PHOTON-ASSAY UNIT

• System has 7m x 6m footprint, weighing 80-90 tonnes - fixed infrastructure at site
• System can do 40,000 samples per month, size of a reasonable-sized mine, 15-20% Additional Assay Charges extra per month upside
• Lease-take-or-pay model, pay on a per-sample basis, pay roughly aligned to what they are paying for FA today but with all the benefits of PA over FA
• Deals have a fixed lease cost with a minimum contracted sample volume, then additional per-sample charge once contracted volume is exceeded 
• Lab deals have tiered rates, higher volume, higher discounts to incentivise the customers to run more samples - intent is to incentivise labs to move from FireAssay across into Photon Assay to improve Lab profits as volume increases. Lower price per sample for C79 but higher overall revenue for the unit is higher
• Running costs are generally fixed - higher the sample volume, higher the revenue, higher the profitability of the unit
• $3.7-$3.8m capex to build 1 unit
• Once deployed, Annual ROIC is 50-80%, with payback period of between 1-2 years
• 20 year lifespan - refurbishment is expected after 10 years, and is depreciated over 10 years - aligns to very long life of a mine site

TOTAL ADDRESSABLE MARKET

• 610 TAM is the ACTUAL addressable market, made up of 2 parts
• Labs that run a Fire Assay business with volumes at least that of 1 PA unit - 200 customers, hub-and-spoke approach
• Mining companies which can benefit from equal or better economics from use of PA technology, onsite - 410 mines
• The more Labs and Miners use the Photon-Assay technology, the less technology risk there is for new customers - feeds into sales cycle
• 1st unit took 3- 5 years to sell
• Volume has since leapfrogged as PA is used by 3 of the 4 big labs and the top 2 gold miners - global adoption of the technology
• XRF - not a competitor - their machines can analyse base metals and have been around for a long time, but they cannot analyse gold quantitatively

PATENTS, TECHNOLOGY/IP MOAT

• Main patents run to 2036 but incremental improvements have also been patented, meaning that there will be a raft of patents that will run quite a bit past 2036
• Keep a very close watch on competition - see nothing on the horizon
• Alternative technology options during the patent protection period will likely be inferior, plus, it will take at least 6-7 years to get the technology to the point of inflection point of global mass adoption of PA - this is the time it has taken C79 to get approvals, certification, ISO accreditation etc
• C79 sees itself within mining and within the assay-space, being an analysis company that has novel, new ways of undertaking analysis
• Need to be in a dominant market position that when new technology emerges, the competition is competing with C79’s PA technology, not archaic Fire-Assay
• Horizon 2 opportunities to leverage very deep counterparty relationships and deep company knowledge in the nuclear physics space

SCALABILITY

• Company has doubled in size every year in terms of revenue, headcount, units deployed
• C79 thinks of growth in terms of 3 growth pillars:
• Manufacturing capability/capacity, capex
• Demand/Pricing - control demand through pricing
• Operational Capability - focus of last 18M 
• Market is very concentrated to the 4 Lab companies and top 2 miners - each customer thus has the potential to be a repeat customer - want to give customers the best experience, need ecosystem in each operating region to support this - people on the ground, sales capacity, marketing etc - build the foundation for future growth 
• “Clustering Strategy” - position the units as close to each (200-300km) other to optimise the support team for that location to support other deployed units in the area
• Headcount trajectory - based on 3 scenario’s:
• Open New Region - most complex, need headcount to establish
• Open New Country - need country-specific administration support for payroll, tax etc.
• Incremental growth, each additional unit in established country - 1-2 direct FTE per unit, maintenance engineers
• Trends move from headcount growth related to the number of units to incremental growth for everything else, apart from the growth per unit
• Do not expect to double headcount this FY, but expect fair amount of increase in headcount still because of increase in manufacturing capacity

FINANCING

• Current ~$70m will see C79 through to FY25
• Tier-1 Australian bank has appetite to lend a fair amount of money after looking at Tier 1 counter-parties, contract risk etc - have access to that debt channel on an ongoing basis
• C79 is a cashflow positive business excluding growth capex - all the cash generated is going to growth capex

R&D IMPROVEMENTS

• Do not need to grow the TAM at the moment as it will take ~30 years to work through the TAM at 18 units per year - within the TAM how do you upsell, cross-sell, increase profitability
• Focus is on iterative improvements to ensure that the PA technology remains the absolute best in what C79 does ie. analysing gold
• Then looking at adjacent's, analysing other elements in and around the analysis of gold - currently can analyse copper, silver and moisture (for quick turnaround of process control samples), looking at other elements that co-present geologically that could benefit the customer

UTILISATION OF TECHNOLOGY

• Prospectus forecasted FY23 utilisation at 55%, final FY23 utilisation was 56%, in line with expectations 
• Ramp up period when rolling out new units in new regions - low utilisation, creeping up to higher utilisation 
• Do not expect miners to reach 100% utilisation on mine-site units - these are treated as critical mine site infrastructure - miners have much better visibility of future volumes from longer-term planning of say drilling campaigns - focus is thus on revenue/return on unit instead of utilisation. Miners generally have a lower committed sample but higher price per sample. More consistent revenue model where utilisation is not as important
• With labs - expect much higher utilisation but lower price per sample, utilisation is also overlayed by macro factors - increase exploration spending drives more samples through labs etc
• Returns end up being roughly on par between the 2 customer groups
• There is thus a fixed downside from take-or-pay, but have exposure to increased exploration spend through the increase of samples through labs

MACRO INFLUENCES

• Mining exploration has trended upwards, influenced by the price of gold, exploration volume has increased
• Exploration spend in Australia is trending upwards again after contracting about 30% in the last 18 or so months - despite this, PA sample volumes have grown via increased PA adoption above and beyond the amount that industry spend has contracted

DEPLOYMENT CYCLE

• 18M out - order long-lead-time equipment
• 12M out - order machine
• Factory Acceptance Testing, then 1M shipping, 8 weeks installation
• A lot of capex payments are back-ended - only pay significant chunk of the capex cost when the units commence earning revenue

RISKS

• Biggest risk and focus area - building the right team of people around the world to support customers where there is no competition. 
• Want to grow as fast as possible, but in a sustainable manner around the world, in some challenging regions

KEY TAKEAWAY THAT MARKET STRUGGLES WITH

• Market struggles to wrap its head around the longevity of the units deployed, the creation of a 20-year long-term annuity revenue stream for each of the deployed units - ~$2m profit per unit deployed per annum over 20 years step increase
• Essentially becoming an infrastructure asset post deployment, but earning very good returns on those assets