Andromeda Metals Limited (ADN) Earnings Call Transcript & Summary

This meeting is being recorded.

[Audio Gap] presentation from Andromeda Metals. Today, we'll be hearing from the Managing Director, James Marsh and Head of Operations, Joe Ranford will be giving us a bit of a walkthrough of the Definitive Feasibility Study that was released earlier in the week, providing some color and some outlooks to how the company is going to move forward from here. I'm going to hand it across to James, who will walk through the presentation and there will be some questions at the end. So, thank you for joining and I'll hand it across to James now.

Yes. Great. Thanks, Peter. Thanks for introduction. Hello, everybody, and welcome to Andromeda's presentation on our Definitive Feasibility Study. So, this came out during the week. We were happy that we delivered a very robust, very sound DFS here that gave a great baseline for the new business going forward. Now clearly, that wasn't understood properly or there were some misconceptions in the market and people didn't quite understand what's happening. So, today is a great opportunity for us to walk you through this and explain why this is such a -- in our view, such a good DFS and why it sets the base for a great new exciting business and a very bright future for Andromeda and all its shareholders. And as Peter said, Joe, our Operations Director, will be joining us to cover some issues around the operations of the DFS. So, here's our usual disclaimer. Now, I've covered this before, so I won't dwell too much on this, but just to mention that we now have a new Non-Exec Chair, Mick Wilkes, who joined us this week, a very experienced mining executive and he's certainly joining us at just the right time to drive us through into the operational phase and to make us into a great success that we believe we will be. So, where are we today? So, at the moment, our market cap has taken a bit of a hit, as I think most of you have probably realized, but we're now sitting around about AUD 300 million. We still got plenty of cash in the bank with no debt. We have got well over 100 million tonnes of this very interesting and valuable industrial mineral. So, that is a truly world-class resource. We've now released our Definitive Feasibility Study, which is our base case study. We're advancing rapidly towards operations and cash flow. If we look at what we got in the ground, we've based the DFS on over 15 million tonnes of reserves. But we do have well over 10,000 square kilometers of tenements, so that's a very large holding and we are -- we'll be out exploring new areas imminently where we are hoping to find some more interesting resources of this halloysite and halloysite-kaolin. So, we've landed on the 28-year project mine life for the Great White Project. But alongside that, we have the whole host of multiple opportunities, including new products, new markets, nanotechnologies, and of course, we do have gold and copper assets. So again, this is a slide you may have seen before, so I won't dwell too long. I want to focus more on the DFS, but this is our purpose, our vision and our mission. Very important just to note there that we have these 3 areas or 3 pillars of our business. Industrial minerals, which is focused as a growth area around the Great White and the Great White Project. Based on that DFS, will give us the cash flow we need to push into other areas, new exciting areas, including nanotechnologies, where we have a whole host of projects there coming through. And we have -- in the middle, we have the metals there, which is our legacy projects, which we are looking to capitalize to maximum value possible. So, strategic focus, in the section under grow, we've got the industrial minerals. So, here we have the Great White Project, first cab off the rank. So, that's heading roughly towards operations. We've also got Mount Hope, which we've done some more resource work on. So, we'll be talking more about that soon. Eyre Kaolin, a very large, highly prospective area for high-quality kaolin and halloysite and we've been drilling that very soon now. And also Camel Lake high purity halloysite project as well. So, there is over well over 100 million tonnes, as I said before, of very high quality resources there. And this is a halloysite-kaolin, so it's a high-value industrial mineral. It's highly sought out in the world. The demand is growing due to certain economic circumstances. So, we are just in the right place at the right time with the right resource. The metals, we have got copper and couple gold projects. So, this is harvest, so we're looking to probably do deals on those and reinvest the money we're planning into other areas of our business. And then we have nanotechnology. This is a true growth area, some very exciting new developments there and that's going to be advanced forward as quickly as possible and the intention is to use cash flow from the Great White to expand and grow those opportunities in nanotechnologies. So, the DFS, looking a bit more closely at the DFS that we published. We included 4 products in this. That was CRM is the ceramic grade product. We have Binding Offtake for that. I think everyone knows about that product, very high quality premium grade for ceramics. That is based on our halloysite-kaolin, which is highly desirable in ceramics. We also have the PRM, which is the paint grade, ultra-high purity non-halloysite plate count. Also, a large Binding Offtake for that one. But what we've done is we've introduced the concentrate at this stage. Now, we look very closely at a DSO option. And DSO, there's certainly a very strong demand for that because there's a shortage of mineral around the world and people wanted our DSO. Now, we realized that the DSO would sell, but it's marginal business. There's been some dramatic changes in the world over the last year or 2, and that includes very high logistics costs. So, our DSO product became more marginal, plus there's a lot of value that's been given away to other people there. And our mineral is so valuable that we want to capture as much that as possible. So, we've decided that doing a concentrate, which is a semi-refined product. So, it's lower cost to refine, lower CapEx, and yet it's got some very clear value in the market and a very desirable product in the market. That was a good stepping stone in our approach to starting at the -- starting at the Great White Project. So, that's called the KCM90. Also in DFS, we brought in our concrete stroke buildings products additive, HRM. That is certainly a material that's very, very interesting. And we spent a long time developing it. We spent a long time working on the resource of that material, which we now have got. And we're now looking at -- we're talking to quite advanced discussions with offtake partners for that material and that could be going to a number of markets, not just concrete. So, offtakes are in negotiation right now, our offtake agreements for the concentrate and for the HRM and both those products are very, very desirable. So, we're highly confident we'll get those, but they are in progress and they'll just take a little bit longer because we had to get a DFS out first. And to give you an idea what the pricing in the market is at the moment. This is an independent study we have done by an external group, which did a very, very comprehensive study of the market and worked out where our product sits in the kaolin market. So, what I should highlight here is that we have the lines going across there. We've got the KCM, which is a concentrate. This is -- there's still a fairly high value, for kaolin, it is very high value for a semi-refined product. But the good thing about the KCM90 is that it can be further processed to find its way into the high-value markets or it can be used as a material to dilute other kaolin resources to upgrade them, make them more valuable or it can be used directly as is in certain applications, including ceramics. So, you see there the potential pricing range in the -- is in the red zones there. And you'll see that the CRM and the PRM are largely towards the bottom end of that. And we've done that on purpose. We've done that because we want to be conservative. Now, we don't want to high things up are needed. We still got a very attractive numbers in the DFS despite that. So, we stayed on the conservative side, but realizing that there's a huge upside potential there. And this is clearly identified by independent external consultants. The markets are in that mainly. We've got medical and cosmetics, potentially very high value. We know our materials can be used there. We've had always had approvals through in some areas. Also on the catalyst, there's some approvals come through there, some exciting new areas. We decided not to target at this point certain markets like rubber and plastic where most of the bulk out business is actually quite low value and it's very, very competitive against the American producers, for example. So, we've targeted our products where we know we've got a unique selling point. We've got halloysite angle, we've got the high purity angle. So this is -- a lot of work just going into [ margin ] part of the business. So, looking at below there, I'll just quickly run through the stages. So Stage 1, and it's important to note, Joe will cover this on a slide, but this is a very -- our stage approach has been -- was decided on to derisk the projects as much as possible. We wanted to get the lowest risk but highest rewards for the shareholders and for the company. The stage approach is, we felt was, was what we needed, especially with the current global economic circumstances as they are. So, Stage 1 is the KCM. This is the concentrate. And as I said before, that can be used 3 different ways in the market. We're getting a very, very strong interest in that and we are negotiating to get the maximum value from customers at the moment for that product. And then we move through to Stage 2 where that will be -- the plant will be upgraded. And that will take us through the fully refined CRM for ceramics. Again, very high growth areas. Ceramics is the highest growth area now of all kaolin markets. So, that is -- we know that's a highly desirable product. So, we have CRM there. Then Stage 3 will be an increase in the CRM. And then Stage 4, we're bringing the PRM, which is our coatings grade, a non-halloysite type. So, this is our strategy behind the DFS. As I said before, we feel that this is a very good baseline business for us. Our DFS is our Stage 1 business plan. It's the starting point of a much, much bigger business. So, the numbers we have here, the approach we've taken is a very sound one, very robust. We've got very high confidence in what we're seeing here in all aspects of our DFS. We've taken this very derisked and measured approach. We feel that is a very, very sensible approach in the world at the moment for a number of reasons. What we've tried hard to do is minimize any upfront capital. So, that's very, very important. We don't want any more dilution that if it's all possible for any more shareholders. So, what we've done is we tried to maximize the value out of the product, but also by minimizing the CapEx that's required. So, that was a very important aspect of it. And importantly, it allows for funding of any of the subsequent expansion phases by retained earnings. So, that's the point that I will cover anyway a bit later, but it means the payback time looks long, but it's not actually long at all. We will be into profit in the second year. And so giving a profit in the second year. What we're doing is we're reinvesting that profit into subsequent expansion phases. So, it looks like the time line for payback is pushed out. But the reality is we're doing that for the benefit of the shareholders. So, that is a very important aspect. So, I'll just bring Joe now to expand on that. Joe, if you like, please.

Thanks, James. Yes, good morning, everybody. Like James said on our approach, we spend a fair bit of time working on the best possible way to build up our project and reduce the risk and reduce that capital demand that we need to go out and bring in funding for. So, although the 4 stage approach is to build us up to our full refining capacity, we spent a fair bit of time analyzing all different stages and what the value of the product was. And so pulling that back, if we went all the way through to the Stage 4, we would have seen a much larger capital investment required in the beginning. Sure, we would have seen bigger revenues through having more high quality product. But we also wanted to make sure that we could test the system and then provide good quality products to enter and build up our market. So, the approach was, as James said, we spend a lot of time looking at the DSO. When you are transporting sand, which doesn't have a high value like the kaolin, it became very cost prohibitive and it wasn't value-adding for the shareholders. So, we saw that it would help us build our name and our product. But at the end of the day, it didn't show that there was a value there. And if you break it down, on the haulage of sand alone, there was something like AUD 25 million a year in our operating costs to build the first stage of the plant. At AUD 60 million, you've got 2.5-year payback, that's smart capital to push ourselves in this way. So, that first stage was for a concentrating product. We removed the sand and that gives us much better operational costs associated with moving that kaolin. Like James said, it is a very good product. The KCM90, it's kaolin concentrate material. That's the KCM. And the 90 shows the high-quality, 90% pass with 45 micron. It is very close to a CRM product, but we do need to do additional refining to get to that product. So, our approach was to build that low-cost plant, establish the project, provide samples into the market and then we can build market side from that because we can provide products. Very quickly, we'll do a Stage 2. Those we start funding ourselves and this approach reduced our need for capital raising. The refining portion is additional hydrocycloning, but also additional requirement for dewatering. So, that is why we separated those stages out. And then down the track as we build our market and more confidence with what we're doing, the Stage 3 is doubling production. So, taking it from the 300,000 tonne feed up to the 600,000 tonne feed. And at that point in time, as we stage the capital, we can then self-fund ourselves to take that PRM and high refining stages. The PRM is such a great product that it does need additional attention to be able to produce. So, we've pushed that out. It's still there. The customers that we're dealing with are CRM and PRM, very interested in our KCM. It provides for them the business opportunities that they're looking for. So, that is really how we approached ourselves to the 4 stages. It was to look at reducing the risk, really building a baseline as soon as possible, provide a really high-quality product and reducing that capital requirement upfront.

Great. Thanks, Joe. That was -- now we move on to a summary of the project. So, here are some more numbers from the DFS. As Joe mentioned there, the feed rates, we're looking at years 1 to 5, about 300,000 tonnes, dry-metric tonnes and then doubling to 600,000 tonnes. And that's a stage approach that we're comfortable with. And as Joe said, this is -- this stage approach is very important because marketing of these products is the difficult part of the business. And it's far better to use this approach, which is what we call the crawl-walk-run approach where we get product into the market for the lowest possible production cost, lowest CapEx, lowest OpEx. We get our name out there. We get the branding out there. And we get -- we test our supply change. We test our customers and all of the downstream parts of the business. And once that's all proven and we're comfortable with it, then we expand. So, a great way to derisk the project and make sure that it grows at the right rates and produces what we need at the right rate. So, looking at the weighted average sale price of the product. So, we've got there AUD653 a tonne, now that is probably a bit lower than something we expected. And that's just purely due to exchange rate change. So, since the -- since we put our PFS out 2 years ago, the world has changed a lot and I don't need to tell everyone there that the effects of the pandemic and supply chain issues, logistics issues, huge changes there and exchange rate is also a major change in what's happened since the PFS. So, that price at weighted average price is still exceptionally high. Usually, you're talking about somewhere between AUD200 and AUD300 a tonne for your average kaolin price. So, we are right on the top end there. And as I explained before, we've gone very conservative on that price because we know that the only way that is up, it's not down. We've got a 28-year mine life purely based on the reserve we have, the ore reserve we have, but that's on the Great White ore reserve. And as you see now, we've got 100 million tonnes of resources around the area. So -- but this first project, our baseline project is based on 28 years, which is a very healthy period for any start-up business. And stripping ratio is about 2.3%. So, that reflects the easy mining that we've got here, very shallow, quarry-like mining where you just take off the overburden and then remove the material dry. So, that makes the mining very easy. So here, the fundamental financials of the DFS. Now these are very strong numbers in any normal market for any other company, I think, on the ASX and our period of evolution, stage of evolution then these would have been accepted very, very positively. So, this is why we hear today to explain why they are so good and how there must be some misunderstanding in the market. So, we've done, as you heard there, we've worked very hard to get this Stage 1, minimize the startup capital required. And it's worth noting here there is a very large contingency building to that. So, that's something that's very important to have. We have minimized that. And then from that point on, we'll be using our cash flow to fund all the other future capital that maybe required. So, that number has kept low and we're now pushing forward as fast as we came to a Bankable Feasibility Study to work out how much debt funding we can get for that. And also, there's a lot of money now out in the market from a government for mining projects. So, there's all sorts of opportunities here to get that down to any requirement we have above and beyond debt funding as small as possible. So, sustaining capital there, we talk about AUD 26 million and revenue, over AUD 4.7 billion. So, very large number there. EBITDA, AUD 2.28 billion, again, a very large healthy number, very impressive and as a baseline case with conservative numbers, then it's an excellent result. Pre-tax cash flow, over AUD 2 billion. Now the NPV, we've had feedback saying that people expected the NPV to be higher. It was slightly higher for the PFS, but that was a very different model. And as I mentioned, in the last 2 years, the world has changed dramatically. So, if the exchange rate and other factors have stayed the same, then that would have added around about AUD 250 million to that NPV. So, world circumstances pushed the NPV down below the original PFS, but in real terms, it's actually better than it was back in the PFS. The IRR, 36%. Well, that is a lot lower than the PFS. Again, that's been flagged as something that people are worried about. And that 36% for an IRR is very good. That's a great number for any project. But the big change from the PFS is due to the fact that in PFS, we didn't have a plan. We just did DSO, Direct Shipping Ore, so we just dug it up and shipped it out, which Joe's explained that, that doesn't work now in the current global environment and we want to capture as much value as we can. So not surprisingly, we've now got some start-up capital required, so that brings the IRR down. But still 36% is still a great number. So, we're happy with that. And the payback period, 5.9 years, well, this looks like a lot longer than it was in the PFS. Just as I mentioned just earlier, that is actually because it's pushed out by the fact we are reinvesting our cash flow into the stages for the project. So, we will be into profit in year 2 and very, very -- by year 3, a very substantial free cash flow. So, it's -- that AUD 5.9 million is not a problem. That is actually a good, very good number and it's there because we are protecting our shareholders from raising any more money by making sure we invest all the money we earn back into the project. So, what's next? DFS is out, that's another milestone completed. We've had some comments about time line for that and it was changed for good reason, but it's done now. And as I mentioned before, this is a baseline DFS. This is a start of a great business and it's a great, very solid comprehensive start to a much bigger exciting business. So, now we've been pushing through the Binding Offtakes, which will include the concentrate, include more CRM, which is second stage and also include the HRM into various markets and applications. So, that's all in progress and we're at an advanced stage with many of those. We'll complete our Bankable Feasibility Study, which will allow us to secure funding, debt funding that we need to advance the project into an operational stage. So, approvals and construction. We've got the mining lease end of last year. We're now upgrading the pilot plant as we speak. We want to start ramping up business from the pilot plant. We can produce semi-commercial amounts, so fairly large amounts of product, which we can get into the market early. We can start earning money for those, but we can also start the crawl stage of the project, which means we can get our name out there, get our products out there, get the customers excited, get them used to using us and working with us. The PEPR, which is raw metal sign-off and land access. So, that's all in progress. And then we're looking at constructing and commissioning the plant as soon as we possibly can, following the approvals before that. And then moving as quickly as we can into operational start. There's also the value circle at the end there. So, we have got a huge upside potential in -- or very large upside potential in new opportunities. It's been talked about before. Not least of those is carbon capture and the plant is on the way, arriving on 8th of May. So, we are planning what we do with that and how we get the best return from that very exciting technology. And I'll be going over to Europe at the end of this month, talking to various people about the project, about the DFS, about the great future we have and also about these new opportunities. We're also targeting high purity halloysite. We need that for the nanotech opportunities, but we also would like to be selling that as a very high-value product. And drilling is going out -- is happening in new areas at the moment, and we're also working on purification processes as well as at the pilot plant. Those additions also we're looking to lock in. We're looking at locking more kaolin, more halloysite, halloysite-kaolin and also more HRM resources. In the DFS, you may have noticed, some people may notice that the HRM is only factored into year 4 at the moment. That's just so we have enough time to expand the existing resources of that. We know we've got a lot more of it. We just got to make sure we measure it, identify it. And then those numbers will be ramped up and grown significantly as the project moves forward. And also, we're looking at now nanotechnology commercializations and nanotechnology commercializations. Currently, spending 2 days at the university, looking through how we commercialize these opportunities and how we make the most value out of these new exciting opportunities. And that brings the presentation to the end. There are some supplementary slides that you're free to look at in your own measure. But I think now we've got a whole lot of questions coming through. And I'll hand you back to Peter to start asking us questions. Thanks, Peter.

Thanks, James. Thanks, Joe. Here we've got a lot of people on the line here today, and there are a lot of questions and some non-helpful questions as well. But I encourage everybody to send your questions through, and to my e-mail address, which I have sent out there and we'll endeavor to get you the answers. We couldn't answer all of them here today, but we're going to do our best.

So, I'm going to start here, James or Joe, that some of these questions probably you've covered, but let's go with these. Why is the DFS different to the PFS in terms of the IRR and NPV?

Yes. So hopefully, I covered those to some extent or great extent in that presentation. And first of all, I'd say that we've tried to emphasize all the way through this process in the last 2 years that our DFS wasn't actually an upgraded PFS, it was actually a different concept. And the different concept, different model was purely around minimizing the risk and maximizing the benefit to shareholders. So, we work very hard to get to where we are with this DFS, pardon me, because what we realized was the world has changed in the last 2 years and logistics, especially supply chains as well have changed dramatically. And we had to make sure that we had the right plan for the right time, which is now. So, the lowest risk, the minimum exposure to shareholders and the numbers that changed I've talked those through in those previous slides, the numbers that people seem to object about, which is probably due to the fact they don't understand that what's changed in that interim period, the NPV has mainly been affected by the share -- by the exchange rate. Now, exchange rate has knocked about AUD 80 million, AUD 90 million of the NPV. And supply chain logistics is probably another maybe AUD 200 million of the NPV as well. So, if things had stayed the same, then our NPV would be closer to AUD 1 billion now.

James, following along from that, these numbers in the DFS, I understand you said they're conservative, their base case. If you're able to secure higher value contract pricing, what do you think the impact to the NPV would be? Say if it's a 10% increase on some of the pricing that you've got there?

Yes, there's a very linear relationship with the pricing and product pricing has got a very strong relationship. And in the DFS, there are some sensitivity and as I just said that people can read at their leisure. And quite clearly shows any increase in product pricing gives a sharp increase in all those numbers for the project. And so it is important factor, it's a linear factor. It's got a strong linear factor, the gradient is quite strong there. And by taking the conservative approach that we have now, and as I said before, the only way is up here. So, the numbers we have are very robust, very strong and we're happy with those numbers, but they will improve. As we negotiate these offtakes, so the numbers we plugged into the DFS. We've got to be careful with commercial and confidence because we're actually negotiating these people right now. But we have put the largest numbers in there to be safe and we intend to get more and we intend to improve on that.

And to satisfy most likely funding requirements as well, you need to use those base case numbers, I imagine, too?

Yes. The bank process is very thorough. The banks will analyze this data to the nth degree and our financial model will be highly scrutinized. So, by putting in the base case numbers, which we are very confident of, that we only will improve on it, but I think then the analysis the banks get from that will give them a lot more comfort. And as we move forward, we'll say let me just get better and better.

James, the PFS CapEx was approximately AUD 30 million, and now the full CapEx is over AUD 200 million. How will this be paid for and why the dramatic increase in that number and the size and the scale of the plant?

Yes. So, the PFS was based on no plant at all. That was based on having the DSO, I mentioned just opened the ground up. So, the cost of doing that was about AUD 28 million at the time. That was just to open the ground up, build tracks and a little bit of infrastructure, but that wouldn't get us to value from the product. Now we want to get maximum value from this special mineral. This minerals now is valuable. We know it can sell at those high prices you've seen. So, by selling it for what would maybe AUD10 a tonne profit for someone else to make hundreds of dollars a tonne profit wasn't the right approach here. So, what we've done is we're using this approach where we are stating it. And that CapEx is a total CapEx over the life of the project. So, it's not the upfront CapEx at all. We have minimized that. And so we've got a big contingency now but we're sitting about AUD 90 million with a big contingency, and that's to get the first plant up and running and going and getting products out the door, and we'll be into profit within 2 years. So, the CapEx isn't that big. It's for the numbers we have in the DFS, the CapEx is actually very low in comparative terms. And as we make money on that from year 2 onwards, we are reinvesting that all the way through. So that AUD 200 million-plus number that people have seen is going to be funded from the cash flow from the project and not by the shareholders.

Thanks, James. A question about the HRM. Why does the production at HRM not run for the full life of the mine?

Yes. So, our intention is it will run for the life of mine, and it will run and it will probably -- it could over the biggest product in volume terms that we do out of the plant. It's the fact that we have got a certain amount. Now we're very, very thorough and professional with our geology work. So, we're making sure that we are absolutely confident in the materials we have in the ground. We've been back and measuring that. Now we're confident that we've got well over a 4-year supply, but we've -- at this point, we've put in 4 years out the supply rate in the DFS. But that gives us now ample time to expand that to as much as we need and also to find more HRM that we intend on doing. Now we've done some very complicated chemical analysis and testing, very detailed testing months and months or in fact even years of that now. So, we know exactly what we're looking for. And we will expand that dramatically. And that HRM is not just going to be going to concrete, as far as we can say at the moment. There's a whole range of applications it works in. And that testing is going on right now. The great news is that this stage plant model that we're using, the first stage to make the concentrate. We've also to make the HRM. So, we can make the HRM through the concentrate plant as it stands in our plants. So, that means that we get a very, very high value high margin product from a very simple plant. So, we'll make our effort to now lock in offtake agreements for that, but then grow that business as quickly as possible. Now we're talking about a new product here that hasn't been used before in these markets. We know it works exceptionally well. We're getting great feedback from the customers. But we do have to grow that. So, it has to start at a certain point, whatever that may be and then grow, but we will grow that as quick as possible. And we're confident that what offers to market in terms of performance, cost savings and environmental benefits means that it will grow not just in Australia, but it will grow globally. And we're now looking for the like partners to help us do that.

Thanks, James. PRM now, why does starting -- why is the PRM starting so late, even though we have a Binding Offtake? And how those Binding Offtake status changed with this -- the planning in the DFS?

No. So, that's [indiscernible]. The Binding Offtake for the PRM is one of the things that gave us confidence in this business and gave us confidence in the project as a whole. It's a very large Binding Offtake, and it's a very interesting Binding Offtake. Joe mentioned earlier in his description of the stage process to make the PRM though that's the ultimate grade. And it means the highest CapEx to get to that grade to [indiscernible] that grade. So what we'd like to do is we want to make sure that, that highest cost and highest CapEx component is funded from the cash flow and not from the shareholders. So, we've put that at the back end. So, that means that, that will be funded without any more -- without going to the market again. So, we'll bring it in at just the right stage. We know we can make the cost trait before that. We can make the CRM before that for a much lower investment. And those products will then give us the money we need to go straight to the PRM at the right time. So, that's why we view this, we'll consider it stage process to get to the PRM eventually, we will get there, but we'll get that at the right time and for the lowest risk to everyone involved.