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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
Nice update today.
Glad I topped up IRL yesterday at ~$4.58 as the price fell back into and successfully tested the now-strongish support zone of around $4.38-$4.75, which is also C79's 52-week lows. With no news driving the price falls to 52-week lows, it seemed like a good risk to take.
Big ticks this Quarter - (1) 4 new lease agreements signed (2) 2 units deployed (3) 9% uptick in sample volumes (4) 1st US-based installation, one more WIP in Alaska - all are signs of increasing technology penetration and global reach
Highlights
Price Action
Price yesterday testing again the floor around ~$4.38, on no news, which is the 52-week low - now unjustifiably so given today’s update.
Over and above the usual familiar results content that C79 puts out, picked up a few interesting points in the Annual Report and Rem Review which gave me confidence that C79 were/are very much focused on the deployment issues and the operational risks around counterparties, risks of conflicts etc.
Thesis and high-conviction very much intact!
Disc: Held IRL and in SM
FY24 felt like a year of customer, deployment and operational consolidation/reality check/learnings followed by a deliberate re-base lining of market expectations of the pace of deployment to ensure a more sustainable cadence vs the FY23 over-excitement of “straight-line”-like deployment plans. This is a good thing from a long-term investment perspective.
Despite this, C79 grew significantly in terms of revenue (69%) and EBITDA (156%) and Photon Assay technology uptake via growth in samples undertaken.
Starting to see more traction in securing sales for new units - 4 new sales, post EOFY - very good to see - this also spreads out the customer base and allows for acceleration of parallel installations
No funding issues in the horizon - strong balance sheet, cash $61.1m, undrawn debt of $95m, ensuring funding for ~39 units
14 units ready-to-be-deployed removes any supply chain risk for FY25 deployments
FY25 guidance is for (1) 25% to 45% YoY revenue growth and (2) a potential doubling of EBITDA
Review of Annual Report provides evidence that the Board is very focused on the deployment of units, CEO was not awarded STI’s relating rate of deployment units. While you would expect this focus, good to see clear evidence in the Annual Report.
Expecting a controlled, deployment-focused FY2025 which will then translate directly to revenue and EBITDA growth - this will be much more sustainable going forward - “steady high growth”
Upside could well come from (1) a faster rate of units deployed as the company learns and adapts to the site-related challenges faced in FY24 (2) Continued traction in samples as technology uptake further embeds, directly leading to Additional Assay Charges
FINANCIALS
BALANCE SHEET, FUNDING
Cash $61.1m, $95m CBA debt facility undrawn - enough funding to deploy about ~39 units
DEPLOYMENT
NEW SALES
4 more units contracted post period - good to see some traction in new sales - ongoing focus on diversifying the customer base to accelerate installations.
Deepening relationship with one of the world’s biggest lab, SGS, following last year’s partnership with Barrick Gold
OPERATIONS, TECHNOLOGY UPTAKE
Sample volume growth continues to grow indicating increasing uptake of Photon Assay technology - 4.31m samples in FY24, 29% increase over FY23
22 consecutive quarters of record sample volumes
Unit costs have decreased by 10% YoY - impact of hubbing strategy, increased in-house maintenance, less reliance on 3rd party providers - reflected in gross margin of ~76%
Non-APAC revenue now 55% of revenue, up from 33% in FY23 - reflects increased global market penetration
EMERGING RISKS
Counterparty risk - non-performance of counterparty, concentration risk around counterparty, operating in some jurisdictions which are at a higher risk of geopolitical unrest, bribery, corruption, modern slavery and crime
Risks of Conflict - Chrysos operates in countries adjacent to or where conflicts may occur between nations or other entities, encompassing the possibility of diplomatic breakdowns, territorial disputes, ideological conflicts, and resource competition that may escalate into armed confrontations. This means Chrysos’ ability to control and operate its assets in these territories may be impacted, which may, in turn, lead to impacts on profitability and loss of assets.
FY25 GUIDANCE
Total Revenue range of $60m to $70m - between 25% to 45% growth from FY24 $48.1m
EBITDA range of $9m to $19m - between 0% to 110% growth from FY24 $9.0m - this is a wide range
My thoughts on C79's Appendix 4C and the Friday SM Meeting:
SM MEETING SUMMARY
APPENDIX 4C
Positives
Disappointments
Takeaways
In taking a step back and looking at the last 2 FY's, there is:
I think the mistake that management made was to set up overly unrealistic expectations of a rapid deployment of units. This may got the market overly-excited as revenue and EBITDA would similarly follow and the market got ahead of itself. Since management tempered expectations earlier this year, the market and share price has similar cooled.
Interestingly also, since 2QFY24, management has no longer provided clear guidance on how many units it intends to deploy in the upcoming quarter and FY and has now switched focus to revenue, EBITDA and industry technology uptake metrics.
But taking this step back and in digesting Dirk's comments in the Friday SM meeting, other than the earlier unrealistic expectations, I remain very comfortable that C79 is actually travelling very nicely and that my thesis is actually very much intact and is currently playing out.
The only change is in my expectations is that the deployment of new units will continue to be a steady 1-unit-at-a-time march, rather than a multi-unit rapid deployment that I thought would be the approach a year or so ago.
FY25 GUIDANCE
ACTION
The C79 price is now in the middle of a decent buying zone and will look to be topping up on weakness below $5.00 in the coming weeks. Will keep some powder dry to top up further if the price falls below $4.00, although I can't quite see this happening given that the FY24 results to be released should not provide any surprises following the recent Appendix C.
Have watched the recording of the Friday 26th July meeting which was quite informative and helpful in outlining some of the financials, business strategy and challenges faced in selling the photon assay product. Thanks to @Strawman for organising this session
Although Dirk presented well, my overall feeling is that there is still more work to do in terms of converting people's mindsets and getting the right customer mix.
In regards my question on EBITDA guidance, while I agree the redeployment from Perth to the goldfields would improve margins by being closer to the action, my question was more about the guidance given in April 3 months ago ....
versus the actual result (no EBITDA mentioned in FY24 highlights, just the revenue)
So I assume from checking 1.9 and the summary, the EBITDA result fell below guidance stated in Q3FY24 as a result of the redeployment which probably was a one-off, it would have been good to confirm. Or maybe this Q3FY24 guidance was a typo and meant for FY25?
I took the opportunity to exit on Friday after the price recovered and use this to offset returns from ALU, CMM and DXB while needing the cash for other reasons - as usual did not time my trade well. But will continue to watch.
Just had a closer look this morning at investing activities.
One issue I do have is the breakdown on property, plant and equipment
Versus increase in deployed units
Previous quarter
Versus additional deployments
In conclusion if I assume purchase of property/plant/equipment is related to number of deployed units then it seems that the deployment cost is going up per unit (from 4.6m per unit to 6m per unit) and not staying constant
Then again I could be wrong and this is a question I submitted.
Quite timely that we have a meeting tomorrow just when the quarterly came out which was below expectations. I think we were expecting +ive ebitda of 8m but looks like this fell short?
Will submit a few questions in the slido.
[held]
Reviewing the C79 chart position:
Timing is interesting as we are not far away from a Trading Update, then the Appendix 4C. The price feels like it is "neutrally positioned" for the results given that C79 has downgraded guidance for the number of deployments in FY24, and hence revenue.
Any negativity against guidance could see a drop towards 3.96-4.27 (I would be topping up at that level). A better than expected deployment update could see it spike upwards towards ~7.29. If it goes as guided, the price will probably bounce around ~6.00, I suspect
Discl: Held IRL and in SM
C79 has a new friend in Regal Funds Management increasing their holdings
Buying what the CEO is selling
Also noticed that Regal has been selling Gentrack (GTK) although that has not really done much
[held]
Board
Inside Ownership Ordinary Shares %C79 Issued Net Value at $5.70
Rob Adamson 7,586,500 6.60% $43.243m
Ivan Mellado 200,000 0.17% $1.140m
Brett Boynton 207,820 0.18% $1.184m
Eric Ford 148,000 0.13% $843.6K
Kerry Gleeson 8,193 0.01% $46.7K
Greg Holt 0 0 0
Dirk Treasure 896,911 0.79% $5.112m
Total 9,047,424 7.87% $51.570m
Board Bio's
Rob Adamson - Chairman
Mr Rob Adamson spent the early part of his career as an engineer on mine sites working for Anglo American, before moving into a corporate advisory and investment role at RFC Ambrian Group where he is currently Executive Chairman. Longevity, transactional experience, due diligence exercises, strategic reviews, and experience developing commercial operating plans for large resources businesses, has given him a deep understanding of the resources sector. He has used this deep industry knowledge and commercial nous and combined it with the outstanding technology developed by the CSIRO to co-found Chrysos Corporation.
Rob also serves as Chairman of NextOre, Conveyor Manufacturers Australia and RFC Ambrian’s ESVCLP Basic Industries Venture Fund 1, an RFC Ambrian Impact Fund, and is passionate about supporting Australia’s emerging technologies in heavy industries. Rob has made it RFC Ambrian Group’s mission to continue investing in disruptive technologies, and to be an Impact Investor making a difference on a global scale.
Ivan Mellado - Director
Mr Ivan Mellado is a specialist in technology commercialisation, new venture development and strategic intellectual property management. He works with entrepreneurs in high growth companies, universities and scientific institutions to build business opportunities around novel technologies and intellectual property. Mr Mellado is well regarded for negotiating technology licenses, divestitures, and acquisitions, leading and financing early stage commercialisation ventures, and supporting early stage/growth companies with capital raising and M&A expertise.
With 25 years’ experience, Mr Mellado has developed executive and board level expertise across several sectors. He is currently Managing Director of Mellado & Co Pty Limited, Executive Chairman of Nimblic Pty Limited and a senior corporate advisor with Fawkner Capital Management Pty Limited.
Brett Boynton - Director
Mr Brett Boynton is the co-founder and Managing Director of Signature Gold Limited. Highly qualified in the field of finance, Mr Boynton has an international investment banking background with UBS in London and New York, and Credit Suisse in Australia. He has raised capital for a number of energy and resource companies, both at IPO and on the secondary markets, and managed acquisition, joint venture and divestiture of a number of projects and assets. Mr Boynton is currently Chairman of London listed Stratmin Global Holdings Plc and sits of the board of a number of private companies.
Mr Boynton has an undergraduate degree in Economics and Accounting and an MBA from the Fuqua School of Business at Duke University. He is also a CFA Charter Holder.
Eric Ford - Director
Mr Eric Ford has led, built, and turned around complex businesses encompassing large workforces in diverse geographies, cultures, currencies, and languages. This has included all lifecycle phases from feasibility through to closure and final rehabilitation in highly regulated and unionized environments across three continents. With a deep passion for mentoring and coaching, his reputation is one of creating high performing businesses founded on a culture of achievement, accountability and trust that span a diversity of cultures, customs, generations, skills, practices and beliefs. He is considered an influential executive team member and thought leader in the global industry with previous participation in the Coal Industry Advisory Board to the International Energy Agency as well as current local industry associations including the Minerals Council of Australia.
Mr Ford’s prior experience includes numerous executive roles within globally recognised mining companies during a career that spans almost 50 years in the industry.
Kerry Gleeson - Director
Ms Kerry Gleeson is an experienced Non-Executive Director with a 30-year career as a senior executive and lawyer, and brings to the Chrysos Board experience in the mining and chemicals industries across both Australia and the UK. She is a Non-Executive Director of St Barbara Limited (ASX: SBM) and of New Century Limited (ASX:NCR) both of which follow her career as a Group Executive member at Incitec Pivot Limited (ASX:IPL) where she was General Counsel and Company Secretary, overseeing its international operations in explosives and chemicals, mining, transport and logistics.
Ms Gleeson also has experience in international governance, mergers and acquisitions, complex corporate finance transactions, and risk and crisis management. She has also led the Corporate Affairs function dealing in government, media and regulatory affairs including in relation to major environmental remediation projects. Earlier in her career, Ms Gleeson practised as a corporate lawyer in both Australia and the UK, where as a partner she focused on corporate M&A transactions, IPOs, plus debt and equity issues; including acting for early-stage technology companies in the areas of technology commercialisation and financing.
Greg Holt - Director
Mr Holt is a senior executive with an international career spanning over 40 years across the logistics, industrial services, mining contracting and engineering industries. He is also an experienced company Director (GAICD) and Board member, having previously held Board positions with Brambles companies in the United Kingdom, and Swire companies in Australia and the United States. Mr Holt’s strong track record includes driving and finalising successful global expansion and business optimisation projects.
Mr Holt is currently the CEO of Swire Water Holdings, which is a member of the Swire Group of Companies, a business with which Mr Holt has held Managing Director or Chief Executive Officer positions since 2010. Prior to Swire, Mr Holt worked within Brambles in senior executive positions across several of its subsidiaries and helped lead the transition of Brambles into BIS as part of the KKR acquisition.
Dirk Treasure - Managing Director and Chief Executive Officer
Mr Dirk Treasure is a metallurgist with both technical and corporate experience. He has a Bachelor of Mineral Science from Murdoch University in Perth and has been an active member of the mining industry since 2006. He is a member of AusIMM and AICD and was recently awarded the Komatsu-sponsored Emerging Leader of the Year Award by Australian Mining Monthly. Mr Treasure spent seven years in novel metallurgical process design employed by service providers and mining companies directly. He has designed, built, and managed pilot plants across various deployment scales for hydrometallurgical, pyrometallurgical and electrolytic technologies. His technical experience includes working as the Principle HPAL/Leach Metallurgist for Ravensthorpe Nickel Operations and, during his time as Operations Manager of ABR Process Development, he oversaw development of technology from conceptual design to commercial reality.
Prior to joining Chrysos, Mr Treasure worked within the financial and commercial side of the mining industry. During his time in corporate finance at RFC Ambrian, he oversaw Chrysos’ seed capital raising and company formation. He also managed the transaction for acquisition of the underlying PhotonAssay technology from CSIRO. He has joined Chrysos Corporation as the company’s Chief Executive Officer, a role he has held since the company began operations in January 2017.
SUMMARY
GOOD
NOT GOOD
RISKS
GUIDANCE FY24
BETTER FINANCIAL GRANULARITY
Had a quick look through the C79 preso pack for a Site Visit in PER, released today. There are some new slides which provide more insights on the PhotonAssay technology, the ESG benefits and the typical economics lifecycle, which I found very useful.
Discl: Held IRL and in SM
How Does PhotonAssay Work
Hitting samples with high-energy X-rays, PhotonAssayTM causes excitation of atomic nuclei allowing enhanced analysis of gold, silver, copper and other elements in as little as two minutes.
Speed and ESG benefits of PhotonAssay are quite stark.
Unit Economics
This is a really good slide on the per-unit Capex spend cycle which will improve the understanding of the cashflow profile and underlying economics.
Future Opportunities
Not the immediate focus. Lots of yet-to-be-tapped pathways for future growth once the gold-related TAM shrinks over time.
For a still loss-making company I was surprised at the level of institutional ownership with the well know fundies and even the LICs in there. Seems to have some very exciting possibilities but wonder who the incremental buyer is going to be before they reach CF breakeven which still looks some time away. Tempted to buy but looks like it could trade sideways for a fair while after the cap raising. A bit surprised this has a larger market cap than RUL which has proven tech, scaling and profitable.
The SP has drifted downwards from it's peak of 8.72 to a more attractive 6.56...
But is it reasonable to buy based on unit economics? Which sorts of models are best used to value this kind of business? Is it reasonable to think of it as a future infrastructure style business? It would seem that in a few years time gold miners will be in a position where they either mine and pay for this service or they don't mine (given their competitors will likely be using the best assay technology available)
My notes from the Investor call this morning and the announcements. Overall, nothing really new as most were already revealed during the release of the Appendix 4C in Jan. Its all about getting the FY24 deployment of 18 units back on track.
Expense watch items:
Discl: Held IRL and in SM
Built the attached xls to line up the Statutory P&L and the Management View side-by-side as I found myself getting knotted up with the movement in the numbers from Half-to-Half, Qtr to Qtr and some of the numbers in the preso. Building the sheet also forced a deeper dive into the P&L which I found very helpful.
I still can’t value this. I really have no idea where to start.
But.
a lot of people clearly saw value the last year. A large cap raise has them well funded and was priced $6.50 a share. Since that shares have soared roughly 27% up and back again. So if we make the assumption that far value is near, or at $6.50.
Others on this have commented that the earnings potential of this is bigger than they can comprehend, sentiment I agree with. Other key points have been at execution risk of deploying more units to meet the TAM they have outlined.
My view on this will be along those lines, how well can they execute, and how many units do they roll out annually moving forward? Additionally, how much perfection on those two assumptions are currently cooked into the share price.
I am tempted IRL to use $6.50 as a floor price of value, and make a small investment. With my thesis being based around those 2 points. I will also be keeping a keen eye on the mining cycles to see if that has an affect.
My notes, including points raised on the brief-as-usual investor call this morning. I have had direct experience as a customer having customer-end contractual responsibility to prepare a site for a big installation of equipment by vendors - power, network, fire suppression, level concrete floors etc.. So I relate very much to the challenges that C79 are having at mine-site deployments and believe they will be sorted/pre-empted as C79 gains more experience deploying at mine sites.
Discl: Held IRL and in SM
SUMMARY
GOOD
WATCH ITEMS
NEW RISK
GUIDANCE FY24
Lower-end of forecast range of $48m to $58m - adopting a conservative approach and flagging the emerging risk that 18 units may not be deployed in FY24, some of these deployments may only be finalised in 1QFY25, expect to increase deployment at the tail end of the FY
Confident with retaining FY24 EBITDA forecast of $7m to $17m, middle to lower of that range - expecting operational efficiencies from operational hubs, costs are saved when deployments are delayed
OTHER POINTS
Source: FNArena.com [https://fnarena.com/index.php/analysis-data/consensus-forecasts/stock-analysis/?code=c79]
Disclosure: I hold C79 here in my Strawman.com virtual portfolio, but not in any real money portfolios at this point.
SECURES ADDITIONAL $65m DEBT FACILITY
Can't help but feel that some big announcements are in the pipeline following the recent partnership announcement with Barrick Gold as this amount of secured funding allows from some big things to happen ...
Discl: Held IRL and in SM
Following the post from @Bear77 on the soaring gold price, the ABS released this quarters Australian Mineral Exploration spend today.
Gold exploration spend is on a roll which can only be good news for C79 as additional sampling over and above the minimum contracted photon-assay unit monthly cost is all upside revenue and profitability.
Discl: Held IRL and in SM
Australian Super has been busy accumulating 1.47% of C79 between Aug 2023 and mid-Nov 2023 at very attractive prices ranging from $4.91 to $6.29.
Ah ... if only I had bought more back then ...
Discl: Held IRL and in SM
Having gone through a flurry of capital raises over the years, I finally looked up ASX Listing Rule 7.1 which governs capital raises and learnt something new. This is probably nothing new for the more experienced members, but posting in case it helps anyone - it certainly opened my eyes!
Am forced to enter a company name for this post as there is no "general" category ...
To raise more than 15%, rule 7.1A kicks in and is significantly more onerous:
Full document: https://www.asx.com.au/documents/rules/gn21_chapter_7_restrictions.pdf
Takeaways for me:
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:
The C79 Placement
Use of Funds
My Thoughts
Things are coming together very nicely for C79 - sales conversion, deployment momentum, product improvements, improving of manufacturing capacity, supply chain resilience.
Discl: Held IRL
Looks like a capital raise from Chrysos.
https://hotcopper.com.au/threads/ann-trading-halt.7682722/
No further details yet.
Hoping to look in more detail into this company later.
Very positive ASX announcement this morning. The market was and still is clearly excited (as am I!):
What is Significant
What Is Unclear
Have written to C79 Investor Relations seeking clarification on this topic - I suspect the wording was left somewhat vague given that the deal (if there is to be a deal), is very much in the mix, but not committed yet. This may explain why this was not price sensitive news today.
Discl: High Conviction Holding IRL
Attended the C79 call on their 1QFY24 Appendix 4C. It was the usual short call as C79 has a standard set of clear slides with changed numbers each quarter ... a good thing!
Built a simple xls to summarise the key metrics from the 4C that I need to watch, based on the various discussions here. Rather than take a YoY comparison, which for C79, is really no longer impressive or relvant, really, as it is marching forward in a clearly defined trajectory, have taken (1) a forward looking view against the mid-point of FY24 guidance, where the guidance was provided (2) QoQ trend for those metrics which provide a "rule-thy-world with PhotonAssay" perspective eg. Samples processed and (3) QoQ trend of key watch areas - funding and employment cost.
It does give a more balanced perspective of the risks as @RhinoInvestor rightfully pointed out, vs merely focusing on the wonderful by-definition revenue % increases, which masks future issues. The call with Dirk also provided valuable background context which makes these figures that much more meaningful.
Discl: High conviction holding IRL
GOOD
NOT SO GOOD
Nothing to not like
TO WATCH
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
OVERVIEW OF PHOTON-ASSAY UNIT
TOTAL ADDRESSABLE MARKET
PATENTS, TECHNOLOGY/IP MOAT
SCALABILITY
FINANCING
R&D IMPROVEMENTS
UTILISATION OF TECHNOLOGY
MACRO INFLUENCES
DEPLOYMENT CYCLE
RISKS
KEY TAKEAWAY THAT MARKET STRUGGLES WITH
Did a bit more work this evening and updated the C79 cashflow outlook for FY24
Made the following changes to the cash flow xls of 3 weeks ago:
The cash position at end-FY24 is now looking to be a SHORTFALL of ($1.3m) vs the earlier calculated cash surplus of $29.8m.
There will be ~$20.2m of debt still available at the end of FY24. This can fund ~4.9 FY25 deployment units, which given the FY24 plan, is ~1 Quarter's worth of FY25 deployment.
Funding is thus in place for ~42.9 (20 FY23 + 18 FY24 + 4.9 FY25) of the 49 contracted units.
The CBA facility size thus seems to make good sense, noting that it is contracted when the interest rate cycle has been on the up. A new loan facility sometime mid-FY24 is probably on the cards when the interest rate cycle should hopefully be on its way down. This should cover FY25 + new contracts beyond the current 49.
I do not see any capital raise occurring due purely to operational funding gaps. Indeed, given the high visibility of revenue, costs and funding needs, it will probably be a huge management red flag if they do not get the funding right ...
An opportunistic capital raise, similar to AD8, could be something to look out for in 3Q/4Q FY24, if the share price spikes to say $10-12 from the current ~$6 as a cheaper/more effective way of raising capital vs debt. This could be based on a better-than-expected revenue trajectory and/or a surge in newly contracted sales or expanded breadth of use of the Assay units.
Am happy that I now have a simplistic cash flow model against which to track the cash position during FY24!
Hope this makes sense.
Remaining very bullish on C79 and looking for the opportunity to top up.
Covered them also in this weeks article (https://www.goforgrowth.co/p/10-growers-in-fy23-part-3). Quality chart from @jcmleng on expected cashflow per unit. I do wonder what the chart looks like if we extrapolate to 5 years. In my mind the valuation on this one feels a little bit out there as it stands. It feels like 2 good years of continued strong growth are built into the price.
Although typically when I see a high valuation, the only result is it just seems to get higher over time.
Curious how holders think of valuing this one?
@RhinoInvestor , your post got me thinking a bit more deeply about the cashflow for C79 and challenged my bullishness! I knocked up a back-of-envelope cash flow xls to clarify my thought process, hoping it helps answer some of your questions/thoughts.
This super raw calcs point to the min cash surplus end-FY2024 to be shy of $30m, meaning, there should be no need for further drawdown of the CBA facility in FY2024.
Extrapolating into FY25, the Cash surplus of $29.8m should fund roughly 13.67 units in FY2025 without the need for debt. As of now, C79 has 11 units contracted to be deployed in FY2025 (49 contracted less 20 deployed less 18 FY24). Assuming no further sales (highly improbable), C79's cash balance will fund the remaining 11 units for FY25 without resorting to debt.
The $21.5m undrawn facility will, on its own, fund slightly under 10 units. If these 10 units were contracted for delivery in FY2025, total units that need to be deployed in FY25 will be 21 - more or less the same as FY23 and FY24, very much in the ball park.
So, as of now, it appears that it is not unreasonable to conclude that C79 is well funded up to end FY2025 to deploy 21 units through a mixture of debt and cash. With locked in contracts, clear visibility of revenue and cash inflows that stretch into FY25, with funding available for 10 new contracts, I think this is as certain as it will get that C79 will have no reason to capital raise.
I think the key point is the progressive increase in MMAP which flows through as soon as a unit is deployed, so each deployment results in a contracted step up of revenue and cash flow. This is what makes C79 highly attractive in my view.
Completely happy to be corrected on the thought process and assumptions. It helped clear my head a bit anyway!
Discl: Held IRL, looking to top up on weakness
Is C79 going to need to raise "Growth CAPEX" in FY24?
I'm hoping these guys can manage their cash flow so they don't have to shake the tin again with investors to be able to meet FY25 plans ...
The prospect of further dilution is my biggest fear with this company to support what they describe as "Cadence of Growth CAPEX to increase in FY24" ... anyone able to share their opinion?
Its a very capital intensive business if they are going to be able to grow into their TAM. Looks to me like they are going to run out of capital before they get to 10% of the way there.
Unit economics still look pretty good but I'm struggling to see when the Operating Expenses might tail off.
A good set of results from C79. My conviction has increased with each quarter and will be looking to top up on weakness.
Discl: Held IRL (trade did not close on SM)
GOOD
Financials
Cash Position
Operations
FY24 Guidance
NOT SO GOOD
Nothing to not like - it was a solid result and guidance, with a good degree of certainty of being achievable
WHAT TO LOOK OUT FOR
SUMMARY
Solid result with good forward visibility
It is all about deployment excellence in deploying the new PhotonAssay units - everything else follows from that - good momentum and track record thus far inspires confidence
C79 came out of a 2 day Trading Halt followed by a 1 day Voluntary Suspension in response to the ASX Speeding Ticket as the price rocketed from from a close of $4.95 on Wednesday, 9 August 2023 to a high of $6.10 on Tuesday, 15 August 2023 following daily increases starting on Thursday, 10 August 2023.
Was super pleased with this price rocket as I topped up at $4.95 on Wed 9 Aug ...
No new news or announcements in C79’s response to the ASX speeding ticket. Not unsurprising as C79 is well capitalised, so there was little risk of a capital raise or share placement.
2 points that I took away from the announcement, that I did not fully appreciate before, in italics:
Any minesite deployment/re-deployment or sales win will be more positive news vs a laboratory-win.
Further buying in to C79 of larger funds, which will increase coverage of C79
SUMMARY
Remaining very bullish on C79.
My review and summary of C79's Q4FY23 result announcement of last week. Text in italics are my comments, the rest are extracts from the Appendix 4C announcement and preso.
Discl: Held IRL looking to top up this week and open position with SM
KEY TAKEAWAYS
Summary of Announcement and Presentation
Deployment Progress
CashFlow Summary
FY24 Guidance