I struggled with getting my head around this “its good, BUT ...”, set of results.

Discl: Held IRL and in SM

SUMMARY

Impressive results when compared to 1HFY24 (+54% revenue growth, +152% EBITDA), but not so, when compared HoH with 2HFY2 (+15.0% revenue growth, -15.4% EBITDA).

As revenue steps up with each unit deployed, prior corresponding period comparisons are almost always going to be impressive if there are new units deployed in the 12 months period prior to the current reporting date from (1) full revenue contribution of all units deployed at the end of 1HFY24 (2) plus the large partial revenue contribution from the additional units deployed in 2H24 and (3) the small partial revenue from 1H25 units.

The samples processed volume continues to grow very nicely - the quarterly growth trajectory seems to be increasingly steeper, a really good indicator of both industry & customer adoption and Additional Assay Charge revenue upside. Dirk mentioned that there is still latent capacity for additional samples in the deployed units - revenue upside is huge - if units run at 100%, sample volume can increase 2x.

5 units deployed in the half - this is now about the BAU run rate of 2-3 units per quarter, these are to newly signed agreements - the 13 units in the shed (14 at EOFY24), suggests that there are still issues preventing the deployment to the older contracts - would like to understand why this is still the case and what is actually holding these units up.

Costs continue to incrementally rise as more units are deployed - this is expected. But need to keep a watch on operating expenses in 2H25 as the growth in expenses in 1H25 over 2H24 was higher than revenue growth - point to note for questions.

Capex is still elevated (1HFY25 $37.9m), elevated due to the timing of payments to major suppliers for long lead time items in alignment with payment terms, expect to normalise in 2H25 - normal capex cadence is expected to be $10-$12m per quarter. No concerns with this.

Cash from operations was positive and fully funded the first unit - a really good sign, $18m of the $95m CAB debt facility drawn down - funding looks comfortable for another year at least.

US is a very small market and have already shipped units to the US prior, so not expecting any US tariffs to have any financial impact

FY2025 guidance was a dampener (1) tracking at lower end of revenue guidance $60-$70m (2) EBITDA tracking below midpoint of $9m to $19m - current half-year run rate should see this being met, suspect management is building in some buffer for delays in deployment of 1-2 units into the back end of 4QFY25 - need to watch out for this in the 3QFY25 Appendix 4C in April.

Overall

No change to C79’s overall growth trajectory, moat, industry adoption, revenue growth/quality/sustainability etc. But the pace of that growth has slowed from the deployment frenzy of 18-24 months ago to a steady 2-3 units per quarter cadence. This slower pace is probably driving the range bound share price movements and today’s muted reaction to the results.

The rewards should await long-term patience as the business does it thing, one unit at a time, but patience is absolutely needed ....

Things to Look Out For/Ask in March Appendix 4C Call

• What the hell is still holding up deployment of units to the older contracts
• Expense growth vs revenue

Revenue guidance requires at least a repeat of 1HFY2025 revenue which should be comfortably met from (1) MMAP from current units in production (2) contribution from the 2 units currently being deployed from 4Q25 (3) revenue from continued AAC growth trajectory. This guidance suggests that the deployment of the next 2-3 units in 4Q25 may not be completely deployed come EOFY 25 or is heavily back-ended such that any revenue contribution in FY25 will be negligible - Dirk said that “guidance was reflective of deployment timing ...”

To meet ~$13-$14m EBITDA, ~$7.3m EBITDA will be required in 2H25 - this should be achievable given the revenue trajectory 

C79—a speculative investment---changing gold assay sampling

First, C79 is a speculative investment. Broadly, I define these as having a likely large dispersion of outcomes around my base case, which could include permanent capital loss. For this reason, the positions are below 1%, usually well below, and could be described as tracker positions. The story will become more certain as we get more data points, and if the SP remains attractive I will be willing to increase the position. That said my record in speculative investments is well below investing in the more mature record. The potential reasons for that I will leave to another post! Lol

C79 (Chrysos Corporation) began as a CSIRO-funded venture to develop an alternative to fire assays that sample the attractiveness of gold deposits. The inventor, James Tickner is still with C79. The CSIRO involvement does give me some confidence that the technology has some substance.

The company has moved on and listed in 2022. The aim is to replace as much of the fire-based assay technology currently used by gold miners and lab operators. The technology is promoted as safer, quicker and more accurate. The pricing is to match the existing fire assays and the customer has the benefit of the other advantages.

Total Addressable Market (TAM)

C79 identifies 610 possible sites for its units. These are split between 200 lab-based units and 410 site-based units. The labs are the large testing operators such as SGS and ALS, there are four major labs. The site-based units are directed to the larger mines that can sustain a unit on their own (defined as 40kg/pa). Management has indicated that they wish to capture 100% of the market. There are several issues with this likelihood. Firstly the units are $4m each and are leased out by C79. That means they are on the C79 balance sheet, for the time being anyway. There is the logistical process of building, selling and locating these units, some in remote areas. Secondly, the patents associated with the technology expire in 2032. Possibly that could see a competitor enter the market, although as would be expected C79 are already patenting more ancillary technologies and processes. The ability to keep out competition is unknown in the medium term. 100% replacement is possible but probably not likely and I have ended up assuming 60% (360 odd) in 20 odd years. Which sets a doable but not easily achievable limit. The number of units deployed so far is 31.

Unit Economics

Management has stated that the ROI they are experiencing and pricing for their units is 50-80%. That is a very attractive return. The leases are long-term and designed to offer good and safe returns for C79 through take-or-pay arrangements. The upside comes through extra volumes. These are priced at lower marginal pricing. The marginal cost for C79 is very low. The ability to capture that upside gives the range in the ROI. C79 is exposed to the overall health of the gold mining industry although not explicitly exposed to the gold price. GMs are in the 70-80% range, very attractive. On the last call management indicated that since fire assays are exposed to labour, energy and consumables costs, that will increase over time, C79 will follow. Management also indicated that as they assess the increase in mine productivity that is expected over time using their technology, those gains are expected to be shared with C79. we shall see.

Overheads

A perennial issue with smaller companies is the level of overhead required to sustain and grow the business. that overhead has to be deployed ahead of profits therefore delaying profitability. Secondly, overheads, at some point must stop growing as fast as the top line for operating leverage to occur. C79 has stated that the S&M, product development and G&A costs have largely been put in place and increases should be incremental from here. C79 has also stated that when they enter a new geography diseconomies occur due to service levels (costs) needing to be put in place before units are deployed to cover the cost. The overhead run rate is about $30m pa. the costs will increase but are now expected to lag revenue growth and with the high GM’s, overhead coverage or fractionalization of the cost base should occur from about now.

Funding

C79 has about $45m in cash and $95m in debt facilities (undrawn) from CBA. We can see a race between the capex involving $4m per unit and increases in overhead to expand the business offset by the high incremental return on capital deployed. There is a cadence in which the deployment of units becomes self-funding. If everything goes well there may not be any further requirement for equity, however, clearly, there is a large build required if all 610 units are deployed at $4m each of $2.4b. It will take some careful timing and some luck will be involved. I am not overly concerned with the funding if the requirement is due to huge demand for the units but not, for example, if funding is required to cover a blowout in overheads. I have assumed debt running at $45m average for ten years, 8% pretax cost. This is a guess and it is not significant to the valuation. A large equity raising would be impactful for the valuation.

VALUATION

The critical drivers are 1. Units deployed 2. Unit economics holding and 3. Overhead cost stabilisation. If units are deployed as management expects, the value balloons out if unit returns hold and overhead growth slows. My valuation is $11-12. Maybe you could say the same for every speculative investment. The above are the main factors to monitor, IMO.

Inverting the current SP means almost no growth is assumed but the current ROI holds.

The C79 is mostly dependent on maintaining a high ROI. If it is reduced to 25% (halves), there is little extra value apparent in my numbers. If ROI falls it opens up a whole range of issues. One of the main risks is that as the business expands it encounters customers who don’t see the value and either want a discount or don’t participate, either is bad but lower returns are a much larger issue.

Disclaimer – This is not advice and could contain errors. My success rate in speculative investments is below my average, beware. lol

Like many retail investors, I am admittedly wired up to "dislike capital raises", almost by default. However, having experienced 4 capital placements in the last 2-ish months, I can sense my thinking and emotions gradually changing to not instinctively dislike, but to assess each raise on its own merits.

Being the cricket tragic that I am, to use cricketing analogies:

• ALC and WSP was not great - "fairly severe batting collapse after a good solid start by the openers, required run rate is accelerating to worrying levels"
• AD8 and now C79 - both feel like "a good understanding and use of the conditions, opening partnership is flourishing and platform is being set for a huge innings and subsequent win .."

The C79 Placement

• 11.4m shares at an offer price of $6.60, a 7.7% discount to the last closing price of $7.15 on Fri 3 Nov 2023 - I was expecting a $6.50 raise, at the time of writing, C79 is trading ~$6.70-ish, so pricing seems good
• New shares represent 11% of existing shares on issue and was not underwritten
• Placement raises C79’s funds available to $108m - $75m Placement + $33m Cash, excludes untapped debt facilities

Use of Funds

• Support the deployment of new PhotonAssayTM units - ~90%
• Development of (1) PhotonAssay Gen II (2) Application Development (3) Supply Chain resilience - ~10%
• Includes, subject to the provision of new debt, the potential expansion of manufacturing capacity beyond 18 units per year over the medium-term - this would result in a positive step up of earnings growth
• Strengthen the Company’s balance sheet, which in turn is expected to assist with its discussions with lenders, ensuring that it is best placed to optimise its capital structure moving forward. 
• The Company is already in a position of generating positive operating cash flows from its existing 22 deployed units and therefore funds raised from the Placement can be applied primarily towards growth. 

My Thoughts

• Clearly defined and focused use of funds for Deployment Growth and Development of Improvements - a good place to be as the units deployed moves closer to positive operating cash flow
• The recent Barrick & MSALABS partnership provided strong technology validation and appears to be a pivotal moment which will now drive momentum acceleration of deployment, manufacturing and further Gen II improvements - funding is now in place to drive that momentum via the placement, which will inevitably be followed up by increased debt facilities on more favourable terms
• No additional sales have been formally announced, but appears inevitable
• The placement reflects management’s long-term 360 degree thinking and business confidence

Things are coming together very nicely for C79 - sales conversion, deployment momentum, product improvements, improving of manufacturing capacity, supply chain resilience.

Discl: Held IRL