Leilac & Heirloom Announcement (30/10/23)

The announced MOU in Feb23 has moved to an agreement with terms in line with MOU. 

Very interesting potential application for the feasibility of Direct Air Capture (DAC) technology to stop the world boiling, but little tangible value adjustments for Calix at this stage... Market hates it currently for some reason (down 11% as I write) and price is under half what it was then the MOU was announced in Feb.

Agreement Summary:

·       Leilac and Heirloom will work together exclusively for DAC applications.

·       Leilac will receive a royalty of US$3/tonne or 3.5% of the prevailing CO2 price for each tonne of CO2 separated for lime decarbonisation.

·       US$3m contribution by Heirloom towards mutually agreed upon DAC lime-related R&D activities.

·       Leilac will retain all intellectual property relevant to its technology.

·       Heirloom: investors include Leilac shareholder Carbon Direct Capital Management, as well as Bill Gates-backed Breakthrough Energy Ventures, Ahren Innovation Capital and Microsoft

How it works (well the theory):

·       Heirloom have developed a process of re-carbonising Lime (CaO), effectively using it to suck CO2 out of the atmosphere in a process that takes 3 days rather than years, effectively reverting it back into Limestone (CaCO3).

·       Problem is you release a lot of CO2 getting that Limestone (CaCO3) into Lime (CaO), so all you do is waste a lot of energy and time.

·       Leilac has a kiln that allows for the capture of CO2 during the process of Lime production and can be powered by renewable energy, the extracted CO2 can then be stored in existing natural underground geological structures which allows for CO2 reduction over the process.

·       So if it works, then you have a rinse and repeat process for extracting CO2 from the air, at relatively economic rates and practical power use.

·       BUT: Carbon Capture & Storage (CCS) processes and infrastructure are going to be a challenge, and ultimately it needs to be funded via Carbon Credits or direct government funding to be economically viable.

What’s the agreement worth? Unsure, but initially not a lot given they cite the Heirloom deal with Microsoft to remove 315k metric tons of CO2 over a multi-year period as one of the largest carbon dioxide removal deals to date. A royalty of US$3/tonne for Leilac only produces about US$1m in revenue… BUT it is very early days for DAC and mitigation is going to be part of the solution.

Valuation: Current revenues and even announced possible agreement revenues do not justify the current or higher valuation, but are also mostly irrelevant relative to the potential revenues. Cement production generates around 2.7bn tonnes of CO2 each year – the Heirloom deal offers US$3 per tonne, so it’s all about the opportunity!

Disc: I own RL & SM

Article in todays AFR attached which covers some of the debate on Carbon Capture and Storage (CCS). Also, Federal Energy Minister Angus Taylor will be announcing on Friday $23m for three new CCS project grants in WA, the largest of which is for $11m is for Calix.

Article: CSIRO says it should have spoken out on viability of CCS.pdf

CCS is a vexed issue in addressing climate change, but what is not up for debate is that a lot of money is being directed to it as part of the path to net zero across the world and Calix is in the mix. 

This news comes on the back of the two other announcements this week by Calix in relation to the $20m Pilbara Minerals/Calix project grant and $30m Boral/Calix CCUS project.

Disc: I own CXL

A joint update on CXL’s scoping study with Pilbara Minerals (PLS) for the use of the Calex Flash Calcinator (CFC) to provide value add to Lithium phosphate processing. Intention to proceed with negation for a JV to develop a demonstration plant

Potential benefits of the Mid-Stream project in Lithium processing are:

·       Reduced Carbon: Ability to use renewables to power the process.

·       Logistical Savings: provides a denser Lithium product to transport

·       Improved Lithium Recovery & improved ability to treat very fine spodumene concentrates at lower lithia grades.

Progress on the project will be subject to the negotiation of a JV, market feedback from samples and a final investment decision on a demonstration plant.

Other recent events for CXL:

8 March: Received regulatory approval for its safe, environmentally-friendly crop protection product BOOSTER-Mag. CXL is developing relationships with global crop protection companies to tap the 500k ha global market.

21 March: CXL added to ASX300 & All Ordinaries

23 March: LEILAC-2 project passed its Final Investment Decision and expect to commence construction in 2023.

Dics: I hold CXL

Presentation available via ASX, regarding voting matters:

I asked the question on why are the options zero priced? Will the board consider pricing to set threshold targets?

Phil Hodgson (CEO) answered saying that they were replacing employee rights with options, so zero price was the equivalent. Also that the options were capped to a % of overall salary (% unknown) so were quite modest. The matter was noted by the board and will be considered for future rounds which is some concession and at least causes them to consider the issue. 

In general I like options incentives but only where there is a strike price that aligns to improved shareholder returns, not were a benefit is had even when shareholders have negative returns.

ZESTY (Zero Emissions Steel TechnologY)

Iron & Steel Patent: Phil Hodgson talked a bit more about this

·      Calix process allows the blast furnace to run at 1000 degrees less than a conventional blast furnace due to not having the CO2 from coal firing causing a back draft that reduces the efficiency of the extraction of oxygen from the iron ore.

·      This is still early stage and requires testing but patent a step forward in what would be a similar business model to that of the LEILAC (ie 30% royalty + equity share).

Disc: I own (RL + SM)

Dan Rennie has been appointed CEO of the LEILAC Group, an internal appointment following a global search and supported by partner Carbon Capture

“Dan worked in the electricity sector, prior to moving to the Global Carbon Capture and Storage Institute. He also ran the European Commission’s CCS Network, then joined Calix in 2014 to investigate how Calix’s technology could be applied to the cement and lime industries”

His CCS connections are critical for this tech, so seems like a good option.

Also today director Mark Sceats declared the purchase of 49.5k shares to add to his 8.6m, seems he can’t get enough CXL…

Disc: I hold CXL (RL + SM)

The report is out for LEILAC-1 and here are the key findings:

·        Full scale LEILAC plant should capture CO2 at a cost of €14-24 per tonne (the lowest reported for any other tech which is €39-80, and below current pricing of €62.

·        Further cost savings identified and a fully electric installation has been shown to have a net energy saving against current best available technology cement plants.

·        Capacity is 25kTpa CO2 separation and was build on time and on budget.

·        LEILAC-2 is currently in Front-End-Engineering and Design (FEED) stage and is testing alternative fuel and energy uses, targeted commissioning late 2023/early 2024.

This report is more a formalisation of what management have been saying for some time.  It increases the value of CXL because it validates those claims and reduces the risk, so I expect a favourable market reaction.

I hold CXL

To summaries the deal – Calix gets to have it’s cake and eat it and eat someone else’s.

Phil Hodgson (CEO) at this morning’s investor presentation explained how the Carbon Direct deal worked.  The key takeaways are:

·        Calix’s current European entity becomes the “LEILAC Group” which Carbon Direct now owns 7% of.  Will be operated independently by a dedicated management and board.

·        All technology IP is transferred to an entity called “Calix Technology Pty Ltd (Aust)” and fully owned by Calix (Calix gets to have it’s cake)

·        30% of revenue from the LEILAC Group is passed onto Calix Technology as royalties, in addition to it’s ownership share of profits from the group (Calix gets to eat its cake).

·        Any new IP that the LEILAC Group creates is also transferred to Calix Technology (Calix gets to eat someone else’s cake) and can use for other applications of its tech.

·        The LEILAC Group only has rights over exploiting the IP as it relates to Lime and Cement.  Any other CO2 mitigation for other materials is still fully controlled by Calix (eg Lithium Salts)

·        Carbon Direct was chosen via a competitive bidding process and they see them as the perfect partner to commercialise the technology and the model used as the one suitable for commercialising the many other applications Calix’s technology is suitable for.

Hopefully they will add the presentation to their investor page soon for those who missed out, try:

https://www.calix.global/investor-news/

I own CXL, bough more yesterday and looking for more (particularly if the price drops)

The Carbon Direct deal announced today provides tangible valuation information, possibly the first market-based transaction that helps investors value part of their business.  The 40% price increase today shows how discounted the value has been without this type of information.

As such I am updating my valuation for this deal and also adding a value for the Sustainable Processing division which I had a nil value due to a lack of information and traction.  However, recent announcements and the investor day showed traction and an indication a likely TAM.

IV = $10.97 (up 29% from 21/4/21 valuation of $8.50)

Attached is the updated valuation calculation with a reconciliation of the move in value on the right, but I will walk through the value adjustments made:

Carbon Direct – CO2 Business Value

This division I had a value of $1.78 using a probability based assumption driven by the TAM for Cement and Lime.  Lithium salts may offer additional TAM but I am ignoring for the time being and just valuing based on what the Carbon Direct deal tells us.  Walking through the calc:

·        A $A24.5m price for 6.98% of the LEILAC business implies a value of A$351m for the total LEILAC business.

·        Calix will continue to receive 30% of royalty revenue of LEILAC directly, irrespective of ownership %.  Hence the LEILAC business only represents at best 70% of the value (probably less given costs will be incurred in running it). 

·        So the total business (CO2-LEILAC + Royalties direct to Calix) are worth A$501.4m (being the LEILAC value of A$351m divided by 70%).

·        Take away the A$24.5m that Carbon Direct own and Calix is left with A$476.9m

·        Divide by 159m shares and you get $3.00 per share in value.

·        This should be a low-ball estimate if you assume Carbon Direct got a bit of a bargain to take on risk and for what it offers as a strategic partner. Also upside with additional CO2 applications like such as Lithium salts.

Sustainable Processing

Recent announcements around deals in the Refactory Industry provide access to a $20b TAM for Calix.  As such I have added this value to the probability calculation (removing the CO2 business to replace it’s valuation with the above Carbon Direct figures).  SaltX may also add value, but no TAM is added for this yet.

Assuming they can achieve a 40% NPAT rate (due to licence/JV business model), a 6% probability of success and a 5% market share by 2030, this will add $1.25 per share in value.

There are still many commercial opportunities Calix has in the pipeline that I have not provided any value for.  All business lines are high risk, due to being early in commercialisation or yet to be proven/commercialised.  These factors offset each other, but at current prices I see an asymmetric investment proposition in Calix.

I own CXL and bought more today at $4.75 (add to winners and on a valuation basis was the reason)

Calix announced today the sale of a 7% stake of their LEILAC business (CO2 Mitigation) for €15m (A$24.5m) to Carbon Direct a world leading decarbonisation investor.  Further validation of the technology (still in commercial development – ie no sales) and gives us some additional valuation insights given it effectively values the LEILAC part of Calix at A$350m which is over half the market capitalisation.  To give context, my valuation has this part of the business worth about 20% of the value (expect a large price pop today)

Announcement Details:

·        Investment to accelerate LEILAC development

·        Carbon Direct will advise LEILAC – ie they are a strategic investor that will add value.

·        LEILAC piloted at 25,000tpa scale successfully and moving to 100,000tpa testing

·        Calix will retain 30% of royalties earned by the LEILAC Group regardless of Calix’s equity stake and the LEILAC Group will operate autonomously.

·        Comments to the effect that this will be the model Calix uses (farm in equity) to commercialise other applications of its technology going forward.

I own CX

Below are my key points from todays (2/9/21) investor day Calix presented, slides are available via the ASX.  The key takeaway is the expanding and untapped opportunities Calix’s core technology (CFC) presents.  CO2 mitigation is obviously huge and highly topical, but it’s the molecular structure of the materials created by the process that either enhances efficacy or offers expanded application of those materials which is as big and possibly a bigger opportunity.

If you have 2hrs to watch the recording it is worth it for those invested in Calix or thinking of investing.  They have a large team and are pushing in a lot of directions, each could be a $1b business alone, but they need a bigger team and to push in more directions.

Notes:

Core technology: Calix Flash Calciner (CFC), radiant heat on powdered materials, separates CO2 and captures it, also maximises the surface area of materials extracted, fuel agnostic.

R&D costs covered by grant income rather than shareholder funds and all R&D is expensed currently but once commercialised it will start to be capitalised.

Water: Magnesium Hydroxide Liquid (MHL) has advantages in terms of properties with handling, servicing and chemical benefits. Business in Australia (Councils) and US with IER (non-CFC sourcing), struggling in Asia due to Covid. NEW: freshwater treatment not just waste water treatment optionality. Fluorides and P-Fas is captured and may be able to treat it.

CO2: €55 per tonne in EU, US looking to move to US$50-85 per tonne. 2.2b tonnes of Lime+Cement every year. LILACE 3 plants deal with 1m tonnes.  What do you do with the CO2 captured? Logistic solutions being developed, pump into dis-used oil and gas wells, on back of Hydrogen CO2 storage system. CFC is targeting being the lowest cost, LILACE 1 report due out in days.  NEW: Work with international experts to develop new products. Extensions of products due to the reactive nature of the output of Lime to capture CO2 in other processes.

Sustainable Processing: SaltX (Mineral looping energy storage), Refractory, Spodumene (Lithium), Concepts in development (LC3-Next Generation Clay Cement 1.1b tonne market, Alumina-Electrifying aluminium Oxide production, …). NEW: CFC could in theory be used for all processes requiring the heating of materials.

Bio: Crop protection (replacement of now band chemicals with acceptable efficacy), Marine protection (replacing copper-based treatment, more effective, cheaper and addresses environmental impact).

Batteries: more effective and resilient materials, Lithium Maganise Oxide.

Skunkworks: Opportunity to make new materials which have never been made before.  The high surface are of the CFC process is what provides the opportunity.

Call Notes (presentation slides attached):

·         Electrification of CFC Kiln is being proven, on top of effectiveness of materials and CO2 capture this further enhances ESG value as heating materials can sustainable.

·         Plan to continue to target operating profit break even to invest in development and growth. Conservative expensing of R&D, ie all R&D is expensed due to long commercial lead times.

·         Hold margins going forward in face of US market competition, expansion it to new state will offer higher margins, targeting over 30% GM%.

·         Lowest cost carbon capture technology is the desired outcome from LEILAC.

·         Share compensation costs associated with share price increases on pre-IPO issues of shares rather than increased issues of shares.

·         Talked to cash position and cash flows as being timing related and the balance sheet is strong and able to support growth.  Support from funded R&D that offsets a lot of capital spend and spending commitments.

·         Business Line FY22:

o   Water:  expansion in US and start in EU and re-establish China

o   CO2: Looking forward to releasing results of LEILAC-1, pushing for 2 MOU’s for license agreements.

o   Biotech: 2nd license agreement targets and soon to release a new biotech application

o   Advance Batteries: following up on successful full cell results with product trials

o   Sustainable Processing: Targeting the conversions of MOU’s to license agreements plus expect new sustainable processing applications.

·         Investor Webinar: Webinar Registration - Zoom Line of business deep dive 2 September 10-12am

·         Competition is not based on copies of CFC process, but rather alternatively manufactured materials.  IP is protected by worldwide patent.  25 pattern families to protect core technology and process.

·         2023 carbon tariff to be introduced in EU, will impact aluminium industry in Australia, and CFC may have an application to aluminium so is of interest for the company to pursue.

Full year results published today, key points noted below, however the current financials provide little guidance to the future value of the company and represent sales for what are probably the two business line opportunities that offer the lowest future margin and revenue opportunity.  The most interesting thing in the results is on page 11 of the presentation: “Successful test campaign conclusion – LEILAC-1 Results into public domain soon…” which relates to the CO2 Mitigation opportunities, probably the biggest value opportunity for CXL.

Results webinar at 2pm today: Webinar Registration - Zoom

Results Notes:

·         Activity: The attached announcement walks through the activity for the year which has seen significant steps forward in it’s 5 business line opportunities: Advanced Batteries, Water, CO2 Mitigation, Biotech and Sustainable Processing.

·         Revenue: +22% to 29.9m, excluding grants and other income it’s +36% to 19.2m, all but a tiny fraction relates to the Water line and mostly the US IER business.  Alone the potential of the Water line could justify the current valuation, but high growth rates would be needed.

·         Margin: 27%, up 4%, hardly an inspiring margin, but to be expected for sub-scale Water line, but its early days and provided it continues to increase then things are on track.

·         Profit: Break even operating profit (excludes depreciation 7.0m and sharebased payments 1.9m), NPAT loss of -$9.1m, $2m worse than last year, but not an issue at this stage.

·         Cash: burn rate is very high with -$15.1m in FCF which is under a 1 years cash run way given current net cash of 14.6m.  However working capital (AR+Inv-AP) increases of $8.5m caused most of the FCF impact and $8m in grant funding is expected in 3 months, so FCF should improve and also CXL have no trouble raising cash, so I don’t see cash as a problem but expect many more capital raises (which I am fine with provided things move forward at a good pace).

I own CXL, the financials provide little new information on which to change my $8.50 valuation due to the probabilistic nature of it.  News on the LEILAC and the need to add the Sustainable Processing business opportunity will require a valuation review in the next couple of months.

Calix completed the trifecta today with their third announcement in a week: “RHI Magnesita and Calix Limited execute MOU to advance CO2 emissions reduction in the refractory industry” attached.

Nice to see, but little to no detail on what it may mean for future revenue.  So who is RHI Magnesita, what are refractory products, how big a market is it and how relevant is Calix’s offering to it (all new to me)? My notes and sources used below, but there is a lot of info available so DYOR.

RHI Magnesita: is a supplier of refractory products, systems and services (high-grade). It is listed on the London Stock Exchange and is a constituent of the FTSE 250 Index, headquarters in Vienna Austria and with Euro2.25b in sales in 2020. RHI Magnesita, the leading global supplier of high-grade refractory products, systems, and solutions. The company produces roughly 3 million tons of refractory products each year at 35 main production and 10 main raw material sites around the world.  RHI’s market share in the range of 7-10% of the refractories market.

Refractory Products: is a material that is resistant to decomposition by heat, pressure, or chemical attack, and retains strength and form at high temperatures. Refractory materials are used in furnaces, kilns, incinerators, and reactors. Refractories are also used to make crucibles and moulds for casting glass and metals and for surfacing flame deflector systems for rocket launch structures. Today, the iron- and steel-industry and metal casting sectors use approximately 70% of all refractories produced.

Market Size: $30b in 2018 and estimate to grow to $41b by 2025.  The refractories market is fragmented in nature, where the top five companies cater to about 31%-33% of the global market demand.? The major players include RHI Magnesita GmbH, Vesuvius, Krosaki Harima Corporation, Shinagawa Refractories Co. Ltd, and Saint-Gobain, among others. Refractories market is segmented by Form (Bricks & Shapes, Monolithic), Composition (Clay-based, Nonclay-based), Type (Acidic, Basic, Neutral), Manufacturing Process (Dry Press Process, Fused Cast, Hand Molded, Formed, Unformed) and End-user (Iron & Steel, Non-metallic Materials, Non-ferrous Metals).

Calix Opportunity: Note that RHI Magnesita is European based and as such is subject to the EU carbon regulations and tax/credit system.  Hence there is a financial incentive to reduce carbon emissions from manufacturing processes, something Calix processes are offering.  RHI Magnesita has a 2025 target of reducing CO2 emissions by 15% and in 2019 had only achieved 5% (Sustainability - RHI Magnesita).  If Calix can prove it’s technology with RHI Magnesita it opens up a $30-40b industry to them, however their revenue opportunity will only be a very small % of that.  Note that magnesium based products is where Calix has first cut it’s teeth and the basis of it’s current revenue generating products.  Magnesium is a key ingredient for basic refractories, not sure what % this makes up.

So looks good, it’s promising but very hard to determine value.  My valuation is probabilistic and the announcements of the last week show the direction is right and progress but not a lot to add to my current valuation which assumes these things keep happening on the road to commercialisation.

Sources:

RHI Website

RHI Magnesita WIKI: https://en.wikipedia.org/wiki/RHI_Magnesita

Refractory WIKI: https://en.wikipedia.org/wiki/Refractory

Mkt Analysis: https://www.gminsights.com/industry-analysis/refractories-market

Mkt Analysis: https://www.mordorintelligence.com/industry-reports/refractories-market

The Calix MD Phil Hodgson interview on Ausbiz on this weeks annoucement on the Government funding of the Heavy Industry Low-carbon Transition Cooperative Research Centre (HILT CRC) which Calix is partnering in.

Canberra meets Calix; the company cashing-in on low carbon future for Australia's industrials on ausbiz

Two announcements in two days for government funding to support Calix research (attached).

Calix Limited awarded $1m to develop Biotechnology manufacturing capability in Australia (29/6/21): This was the maximum available under the MMF for Calix’s revenue generating technological applications in the Biotech area, but it essentially adds $1m for the business to use.

Calix partnering in low carbon research, backed by $39M Australian Government funding (30/6/21): Calix is a partner in the Heavy Industry Low-carbon Transition Cooperative Research Centre (HILT CRC) which is the organisation receiving the funding.  With partners including ADBRI, Alcoa, Boral, Fortescue, Grange Resources, Liberty, Roy Hill, and South32, it’s a heavy weight in a key market opportunity for the Calix Flash Calciner (CFC) process and it’s commercialisation.

Both positive announcements which provide support to assumptions made in my valuation so good to see but not material enough to revisit the valuation ($8.50).  Calix is well placed for the governments technology rather than tax approach to addressing climate targets and these announcements validate the support Calix’s technology has.  However there is much greater value in Europe via the LEILAC-1 and 2 projects, but nice to see Australian applications in the mix.

I continue to hold CXL.

Given the current price ($2.15), $8.50 is a high valuation, but note the process it is more to see what value potential there is rather than estimate current value, which is impossible.  The key question is: if this company does ok, what might that look like, and what price might be ok if it dose.  For me that is what it may look like in 2030.

So I have taken the TAM for each technology application from the prospectus A$94b and rolled it forward to 2030 to get A$162b, mostly on a modest 3% growth rate, but 7% for Cement (due to guidance) and 13% for Li-Ion Batteries from other market size projections.  Note that I have no TAM for Sustainable Processing opportunities, leaving this as a potential upside and which can be add if and when substantive guidance is available.

Next I have assumed the earnings % (NPAT%) from each product area as if they are separate businesses, assigned a probability that it will achieve this and assumed a 5% market share is achieved.  All totally debatable and subject to review (they are thumb sucks), but in line with the promise the company has.  The multiple of these gives the % of the TAM Calix may see as earnings in 2030, which is 0.14% of the total TAM or $231.8m in earnings.

I have used a PE of 15 as modest price multiple to get a market cap of A$3.5b in 2030.  I have left share count around where it is now because I have assumed dilution will be offset by cash generated between now and 2030.  This gives a share price in 2030 of A$21.94, which if you discount at 10% is $8.50 today.  Note that a discount rate of 23% will get back to around todays share price of $2.15, hence the IRR is 23% if you accept the valuation (which you shouldn’t because it’s all guess work and you should do your own ;)

CONCLUSION: There is sufficiently large market and opportunity for Calix to justify the current and higher valuations.  It is unlikely we will ever get a clear view of value, but updates on progress and performance will help us refine our view of the opportunity and Calix’s ability to capitalise on it.

I welcome any constructive comment and critique of this valuation as well as other methods and ideas on valuing it.  It is such a hard company to form a view of value on I am sure I have missed some key factors. Cheers.