What has changed since the price drop?
ASM essentially has two parts to its business, the Korean Metal Plant (KMP) and the Dubbo potential mine. The share price is down from a peak of ~$13-14ish.
There are a few things that have changed since the share prices were at all time highs. Essentially, the Korean Metal Plant is 1 year behind schedule. Given there has been a 1 year delay, further delays are possible. Looking at the expenditure in the quarterlies, I don’t believe the capital expenditure is running over budget.
The second is that the Korean Consortium (Cerritos Holding co., Ltd, Kamur Partners LLC and ACE Equity Partners LLC) framework agreement to buy 20% of Dubbo for 250m USD has been substantially changed. The details are below. It feels like a bit of an odd agreement and seems to favour the investors more than the previous agreement, but is probably acceptable/good all up if it were to proceed. I think the market has concluded that funding for Dubbo won’t proceed. I’m not convinced either way and think there is still a reasonable chance of it proceeding.
The revised framework agreement and was on a non-exclusive basis. The agreement is for a :
- An immediate equity investment of 15mil USD @ $8.9 (This was well above the price).
- 10% stake in Dubbo for 125mil USD
- 105 mil USD investment in ASM (currently 164 AUD).
- 50 million USD convertible bond for a 30% stake in the KMP. (This gives an indicative value of 167 mil, or 262 mil.
My reading of this at the time was that there was some trading within this deal - probably taking a bad deal on Dubbo for a good deal elsewhere. This deal, apart from the equity investment, however, has not occurred yet. They are targeting this for mid 2023 when Hyundai finishes the Engineering Procurement and Construction (EPC) plan.
There are probably good and bad things to this. The bad is that there is less of a direct investment in Dubbo and a larger investment in ASM itself (more dilution). In addition to this, a 50 mil convertible bond isn’t a vote of confidence in the KMP and the value of that is considerably lower than I think it’s worth and as suggested in the scoping study. The positive of this is that putting in 15m USD at well above share price is a real vote of confidence. Some Korean investors now have a stake in ASM and that the further investment would give them a direct interest in all parts of the company. I assume that ASM would retain the rights to build further metal plants overseas. This would presumably help with securing funding for Dubbo. I do wonder how ASM’s declining share price affects this as a 105 mil USD investment in ASM would now be ~165 mil.
- Further details of the revised framework agreement are here - https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02521866-6A1091784?access_token=83ff96335c2d45a094df02a206a39ff4
Current Capital
As the last quarterly 3 months ago the cash position was $60.2 mil.
The estimated capital cost for the KMP was ~$40 mil for the initial capacity and ~$80 mil for the expanded capacity, though profits may help finance the expanded capacity. Approximately 24.3 mil has been put into the capital of the KMP already, leaving very approximately 17-57 mil more.
The deal with Hyundai was for 46.7 mil. There was, however, a “notice to proceed” requirement in the announcement, which I haven’t heard further on yet. I haven’t seen a notice to proceed announcement and ASM I think has the option of backing out of the contract. $46.7 mil is a pretty substantial investment for ASM given it’s current market cap, so you would think that they would only do this if there was a pretty decent chance that Dubbo would proceed (unless they felt backed into a corner regarding a lack of confidence if they don’t proceed).
There are some debt facilities available to ASM. There is some additional cashburn for the cost of directors, etc. So in terms of capital, they might choose to do a capital raise, but I don’t think that it’s forced at this point (they could choose to delay the KMP expansion or Hyundai deal).
Valuation - Key things to watch
The valuation for ASM this is a probability estimation game and I’m fairly unsure of this valuation - it’s my best guess, but so much is contingent on what happens in the next 2 years. This is a highly speculative and the key things I am watching are these:
- Will the KMP be fully operational within 1 year and will its economics reflect the scoping study?
- Will ASM proceed with the EPC plan with Hyundai?
- Will Dubbo get funding?
- What sort of dilution and sale of assets will be required to get everything done?
Dubbo - Valuation (AUD)
The NPV is approximately 1.581 bil @ 8%. (IRR was around 23%?) The main question is whether this will be funded, though this is a complex operation, so there are also likely considerable operational costs.
Points in Favour of Funding
- Highly strategic resource, critical to national security - Korea does not want to be dependent on China. This is a significant argument in favour of it proceeding.
- Some backing from Korean and Australian Government groups.
- The Hyundai contract if it goes ahead is a large commitment of resources.
- The revised framework agreement seems to be trading some of the benefits of the KMP to help fund this. Essentially, trading the benefits of the KMP for an increased likelihood of getting this funded.
Points against funding
- FEED optimisation study wasn’t as good as could be hoped.
- The market cap is now very much down, which hugely increases the cost of equity funding.
- We are probably entering a recession, which will make capital tight.
- The revised framework agreement did indicate some weakness on
- We have not received news of the notice to proceed regarding the Hyundai contract.
- It’s a huge capex.
- Cost of capital is higher with higher interest rates.
So how to value this? The stated NPV is 1.581% at 8%, but I like 10%, so let’s say 1.2 bil. I’m going to apply a 20% risk adjustment to 960 mil.
Given the immense cost of funding, it seems that ASM won’t be able to extract the full value out of this (or will need to trade the value in the KMP for it). I’m going to estimate that ASM can extract 40% of the value after debt funding (which may include the value traded in the KMP under the revised framework agreement).
This gives a value of $384 mil.
I’m going to estimate the chance funding in 2 years at 33%. This gives a value of 384*.9*.9*.33 (discount for time applied) = 102 mil.
I’m going to estimate another chance of funding after 7 years at 33%. This gives a value of 60 mil.
I’m going to give the project a residual value of 38 mil (at the very least it’s an option play on rare earth metals) to even things up to $200 mil AUD.
KMP - Valuation (US Dollars)
With ASM at this price, the numbers on the scoping study (which were based on the pilot plant) are very good. The question is really whether they are accurate.
Running a few DCFs at the current timeline I come up with a value of around $400 USD mil over 10 years, or $600 mil over 20 years, but further capital investment would likely be required that far out.
Assuming a 20% discount for risk and that the plant is running for 10 years, this will end up with a value of $320 mil.
Note that part of the framework agreement may sell off a significant part of the KMP fairly cheaply in my estimation.
Additional Metal Plants
In addition to this, however, I do think the possibility of opening additional plants seriously needs to be considered. If the economics are as the scoping study suggests, they will very likely be built and the capital cost is quite manageable. There is a problem of the total addressable market being fairly small (ie., the KMP is quite significant in worldwide supply).
Assuming there are new plants starting 4 and 6 years out, running a dcf on these plants for 10 years each (including capital costs), I’m getting a value of roughly 255 mil for the first and 200 mil for the second. I’m going to assign a high risk factor since this is so far out and the first plant hasn’t been brought to full production yet and just make an arbitrary estimate of a value of 150 million for these. Note that poor implementation of the KMP doesn’t necessarily follow through to these plants - there are usually teething problems the first time something is done.
A substantial risk here is from competition and my knowledge here is a bit patchy - almost all metalisation happens in China, but the USA and I think Europe are looking to fix this strategic gap. I know Lynas is building something in the USA and need to look into that more, though I’m not sure it covers all the metals ASM does - one of the advantages of ASM is that it seems like they can switch between producing different metals (or at least they did with the pilot plant).
Adding this all in together
Dubbo - 200 mil AUD
KMP - 320 mil USD = $425 mil AUD
Future Metal Plants - 150 mil USD = 267 mil AUD
Total = 892 mil
The ASX is listing 143m shares on issue, there may also be 1-3 mil in performance rights, will need to check that. Assuming 143m shares, this gives a target price of $6.24
Target Price - $6.24
What are the weaknesses in my valuation?
- I might be overestimating the funding chance of Dubbo.
- I might be placing too much value on the scoping study for the KMP and overestimating their chance of success.
- ASM seems to be valuing the Dubbo project significantly higher than I am and the KMP significantly lower than I am (see the revised framework agreement). I am wondering if this is trading the potentially profitable part (KMP) for the riskier (Dubbo).
- There is a bear case from someone who has worked in Korea. I'll post this up and am not fully sure what to make of it.
I don’t have a high level of confidence and so much is determined by what happens in the next two years, but $6.24 is the rough value I come up with, which is well above the current share price.
I also think that in terms of a probability distribution, there is a decent chance of a left tail result (total disaster) or a right tail result (massive success - ie., Dubbo funded). It’s a stock that you could be wiped out or make several times your money. I think Van Eck is mostly out now, so there is also the potential of them re-entering and shooting the share price back up like they did before.
Events could vary this valuation substantially and very quickly in either direction.
Obviously DYOR.
- Disclosure - I own a small amount of ASM shares and bought more yesterday.
Bear Case From Hot Copper
