APPLIED MINERALS INC AMNL
January 03, 2013 - 10:12pm EST by
hao777
2013 2014
Price: 1.58 EPS $0.00 $0.00
Shares Out. (in M): 97 P/E 0.0x 0.0x
Market Cap (in M): 153 P/FCF 0.0x 0.0x
Net Debt (in M): -4 EBIT 0 0
TEV: 149 TEV/EBIT 0.0x 0.0x

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  • Mining
  • Insider Ownership
  • Micro Cap
 

Description

Applied Minerals (ticker AMNL) is not your typical value investor’s pitch, due to its somewhat speculative nature, but the dramatic upside potential makes the stock worthy of discussion. AMNL is a mining and mineral technology company, and a leading global producer of halloysite clay, trading at 24% of a highly-risked NAV and <1x 2015/16 EPS. The key questions which must be answered to justify AMNL’s upside are: 1) will halloysite clay achieve commercial success?; 2) can AMNL fund the development of its Dragon Mine, which is the only significant large-scale halloysite clay mine in the western hemisphere?; and 3) are the other potential revenue streams worth anything? If we can answer each of these with at least “partly”, then there is a significant margin of safety. I will attempt to do so below.

What is halloysite clay?

Halloysite is a non-toxic clay exhibiting a rare and naturally-occurring tubular structure. While chemically identical to commonly-used kaolin clay, the extremely rare tubular structure, which takes millions of years to develop, provides a range of functionality that other materials cannot. The key intrinsic properties include a high aspect ratio, a high surface area, hollowness, and the ability to bind water.

AMNL markets a number of halloysite products, including Dragonite (for applications such as a controlled release carrier for active ingredients, used in environmental remediation, agriculture, paints/coatings, and catalysts); Dragonite-XR (flame retardant and polymer reinforcement); Dragonite-HP (polymer reinforcement); and Dragonite-PureWhite (cosmetic industry applications). AMNL also holds a broad portfolio of intellectual property surrounding the technology related to its material.

I would encourage you to take a look at the AMNL site for further background as well as 3rd-party research:

http://appliedminerals.com/site/our-products

http://appliedminerals.com/applications/flame-retardancy-application-page

http://appliedminerals.com/site/research

 

AMNL Background

AMNL is a mine to market producer of halloysite clay, owning the Dragon Mine in the Tintic District of Utah. This mine is the only known measured resource of halloysite in the Western Hemishpere (Imerys, based in France, owns a lower-quality halloysite mine in NZ). Per a 2012 analyst report: From the late 1800s through 1930, mining at the property focused on iron ore with gold and silver as trace byproducts of production. From 1949 through 1977, Filtrol Corporation mined over one million tons of halloysite for use as a petroleum cracking catalyst. Production was shut down in 1977 due to a variety of factors including a mine fire, a cracking catalyst substitute for halloysite, and falling oil prices. Since May 2008, a detailed investigation has been conducted to determine the quantity of the halloysite and remaining iron ore resources. This includes significant drilling and exploration activities as well as an updated resource statement issued in April 2011.

In terms of management, the current CEO Andre Zeitoun (former SAC and RBC portfolio manager) – and significant inside owner – took over in January 2009, installing his team and ousting the former management group, who had been accused of securities fraud. After placing a new Board of Directors, Zeitoun continued work on a 3-year study to better understand the Dragon Mine’s resources, and as indicated above, this was completed in 2011 (note that this only pertains to a portion of AMNL’s property, 11 of 230 acres):

Underground: Measured Resource  
         
Tonnage       596,700
  Halloysite   61.9%
  Kaolinite     19.4%
  Illite-smectite   10.3%
Clay Content     91.6%
         
Underground:   Indicated Resource  
         
Tonnage       776,500
  Halloysite   4.1%
  Kaolinite     47.4%
  Illite-smectite   24.4%
Clay Content     75.9%
         
Surface   Piles: Indicated Resource  
         
Tonnage       4,526,989
Varying %   Halloysite    
         
         
Iron Ore   Resource      
Measured     2,104,000
Inferred       688,300
        2,792,300
 

 

 

In addition, a JV agreement was formed in 2010 with KibbeChem, a polymer compounder specializing in foaming agents.  In early 2011, the first commercial order for Dragonite-HP was awarded by Signature Fencing, a modular flooring systems manufacturer. The company is also selling nucleated polymers to Ames TrueTemper for hose reels and other products. 

Finally, in early 2011 AMNL announced the hiring of Dr. Chris DeArmitt as CTO, previous head of specialty polymer product development at Electrolux and BASF, where he was also responsible for the scouting of new technologies on behalf of BASF Venture Capital. At the time of his hiring, DeArmitt said: “The commercial potential of Applied Minerals’ Halloysite-based products as a high tech material is very exciting. I have seen very few materials during my career that match its potential. As a functional additive or filler in plastics, coatings, adhesives or cosmetics, Halloysite gives remarkable property enhancements spanning the gamut from boosted mechanical properties to the controlled release of active agents. Furthermore, while most high performance materials are synthetic, expensive and of questionable toxicity, Halloysite - as a naturally occurring clay – is both affordable and environmentally friendly.”

Note that because the area in Utah where the Dragon Mine is located is a historical mining district, there is well-developed surrounding infrastructure. Furthermore, the company has invested in a new state-of-the-art processing facility which will be able to produce up to 45k tons of halloysite to meet customer specifications – this is due online in Q1’13. The existing processing plant will be devoted to iron oxide (10kt of capacity – can be expanded to 40kt for <$2mm).

Insiders own ~30% of the company.

Commercial Opportunity

As detailed in a November analyst day (http://appliedminerals.tempwebpage.com/images/uploads/events-presentations/Applied_Minerals_2012__Shareholder_Presentation.pdf), AMNL has made significant progress on a number of commercial developments. The company gave specific updates on: flame retardancy applications; lightweighting of polymer composites; and, iron oxide pigment products.

Flame Retardancy:

  • The market is currently 1.96mm mt ($5.4bn) growing at 6.0%/a
  • Mineral-based retardants represent 65% of market volume
  • Dragonite competes by having:
    • Lower required loadings (preventing brittleness caused by peer products)
    • Superior reinforcement ability
    • Usability in transparent and engineering polymers, where there is a great need
    • In April 2012, AMNL announced a supply agreement with Samsung Cheil Industries; product validated by 5+ end-users
    • At 2% market share, 1.96mm mt, AMNL sells 39,200 mt = $166mm revenue opportunity

Nucleating and Lightweighting of Polyethylene:

  • Through nucleation of polyethylene, Dragonite drives a reduced cost, improved quality, and reduction in weight for the injection molding industry
  • 50% of polypropylene, the 2nd-largest plastic in the world, is pre-nucleated, versus 0% for polyethylene (the most common plastic)
  • Prevalent demand for lightweighting in automotive and aerospace – Dragonite reduces weight by 10-15% with 30%+ production speed improvements (the clay essentially speeds up the cooling period of the plastic by accelerating crystallization)
  • Multiple molding companies in manufacturing scale-up trials (already selling to Ames)
  • At 5% market share, 500,000 t, AMNL sells 25,000 t = $100mm revenue opportunity

Iron Oxide Pigment:

  • IOPs are mined by only three companies in three states in the US; including synthetics, 57% are used in concrete and other construction materials, 29% in coatings and paints, 6% in foundry uses, and the rest in other applications
  • The US is a net importer of over 50% of its needs (natural IOP: Cyprus, Spain, France, etc; synthetic: China, Germany, etc)
  • With a 200k t US market, at a price per tonne of $1470, and AMNL’s current processing capability of 10k t = $15mm revenue opportunity; for less than $2mm, AMNL would be able to expand its capacity to 40k t

In addition, the company is sitting on 4.5mm t of waste piles containing a mixture of clay and iron oxide which may be beneficial for the environmental remediation market. For analysis’ sake, assume a conservative ASP of ~$50-150/t, sold over a number of years – at a range of $225mm-675mm, the value of the waste alone shows how cheap AMNL is today (EV of $149mm today). Certain applications, such as oil spill clean-up or uranium absorption, may in fact garner prices on the order of $500/t, with the worst-case scenario being $15-20/t as aggregate or clay for brickmaking (~$68-90mm of value; my estimation of the downside case in AMNL). Note, the company announced in June 2011 a Cooperative Research and Development Agreement with the EPA to pursue the development of Dragonite sorbent technology for the remediation of oil from contaminated salt marsh and wetland environments.

Valuation

While an NAV approach to methodology is arguably the best way to value a mining company (or in this case, a minerals technology company), like any DCF there are dramatic changes based on long-term price, cost, and discount rate assumptions. To that end, it seems sensible to sanity-check AMNL’s valuation using earnings multiples, and on both counts it is apparent that AMNL has significant upside.

NAV (assumes discount rate of 15%, ends at 2022, assumes unit cost 5x management expectation, and limits revenue to identified areas discussed above; ignores NOL, ignores waste pile, ignores future commercial opportunities):

 

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

 

 

 

 

 

 

 

 

 

 

 

Tons Sold

14.8

29.7

44.5

74.2

74.2

74.2

74.2

74.2

74.2

74.2

Revenue

56.3

112.6

169.0

281.6

281.6

281.6

281.6

281.6

281.6

281.6

COGS

7.4

14.8

22.3

37.1

37.1

37.1

37.1

37.1

37.1

37.1

SG&A

7.0

7.7

8.5

9.3

10.2

11.3

12.4

13.6

15.0

16.5

D&A

            4.0

            4.0

                4.0

            4.0

            4.0

            4.0

            4.0

            4.0

            4.0

            4.0

EBIT

37.9

86.1

134.2

231.2

230.3

229.2

228.1

226.9

225.5

224.0

FCF

30.3

68.9

107.4

184.9

184.2

183.4

182.5

181.5

180.4

179.2

PV

$649.2

                 

Per Share

$6.71

                 

Current Price as %

24%

                 

 

Multiples:

As seen in the tables below, based on simple assumptions, AMNL is trading at an extremely low earnings multiple, on the basis of easily-derived “potential” EPS. I have used only the commercial opportunities already discussed, and provide a second table haircutting the illustrative volumes by 80%. Obviously, there is an element of the unknown as it relates to timing, but I (and management) would view the EPS in the top table as possible within 3-4 years; and, I would note that there is value in the company even if we are off by a material amount of volume (or price, or cost). Other products are also in the pipeline – note the 11/29 release discussing a new JV to develop and market an all-natural line of skincare products based on Dragonite. Furthermore, the first leg of halloysite development does not require further capex as the processing plant is already in place.

Per management, the cost to mine and process their halloysite is $100/t. I have provided sensitivities of $500/t and $1000/t, though I am doubtful that management is off by a factor of 10.

 

Segment Revenues

           
 

Tons

ASP

       

Flame Retardancy

39200

4250

166.6

     

Polymer

25000

4000

100.0

     

Iron Oxide

10000

1500

15.0

     

Total Tons/ASP

74200

3795

       

Revenue

   

281.6

     
             

Cost per ton range

           100

           500

           1,000

     

COGS

            7.4

          37.1

             74.2

     

SG&A

            7.0

            7.0

                7.0

     

D&A

            4.0

            4.0

                4.0

     

EBIT

263.2

233.5

196.4

     
         

Assume

 

Tax

52.6

46.7

39.3

 

20%

rate

Net

210.5

186.8

157.1

     
             

EPS

 $2.18

 $1.93

 $1.62

 

96.8

shares

             

P/E

            0.7

            0.8

                1.0

 

1.58

price

             

(the company has $40mm of NOLs,   which I am ignoring for this analysis, and has depletion credits

as a miner leading to a 20% tax   rate once those are fully utilized)

 
             

Segment Revenues at 20% of Expected Volumes

     
 

Tons

ASP

       

Flame Retardancy

7840

4250

33.3

     

Polymer

5000

4000

20.0

     

Iron Oxide

2000

1500

3.0

     

Total Tons/ASP

14840

3795

       

Revenue

   

56.3

     
             

Cost per ton range

           100

           500

           1,000

     

COGS

            1.5

            7.4

             14.8

     

SG&A

            7.0

            7.0

                7.0

     

D&A

            4.0

            4.0

                4.0

     

EBIT

43.8

37.9

30.5

     
         

Assume

 

Tax

8.8

7.6

6.1

 

20%

rate

Net

35.1

30.3

24.4

     
             

EPS

 $0.36

 $0.31

 $0.25

 

96.8

shares

             

P/E

            4.4

            5.0

                6.3

 

1.58

price

In addition to the iron ore, AMNL may possibly be sitting upon other non-halloysite resources, namely a copper/gold porphyry (FCX is exploring at a property 15 miles north of Dragon; Rio Tinto is also close by);  they are currently drilling to assess the resource.

Conclusion and Catalysts

Since the new management team has taken over, much progress has been made and AMNL is poised to benefit in the near-term as their core product reaches commercial scale. Given the depth of resources and the value-added industrial and consumer applications evident, the company should see a dramatic earnings ramp, for which one is paying little for today. Downside is also protected to the extent the company were to liquidate its assets. With the first material commercial transactions likely to occur in 1H’13 and further disclosures around product development, AMNL shares should rerate.

 

 

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Product validation and order wins
JVs/strategic relationships, especially in the flame retardancy and polymer segments
    sort by   Expand   New

    Description

    Applied Minerals (ticker AMNL) is not your typical value investor’s pitch, due to its somewhat speculative nature, but the dramatic upside potential makes the stock worthy of discussion. AMNL is a mining and mineral technology company, and a leading global producer of halloysite clay, trading at 24% of a highly-risked NAV and <1x 2015/16 EPS. The key questions which must be answered to justify AMNL’s upside are: 1) will halloysite clay achieve commercial success?; 2) can AMNL fund the development of its Dragon Mine, which is the only significant large-scale halloysite clay mine in the western hemisphere?; and 3) are the other potential revenue streams worth anything? If we can answer each of these with at least “partly”, then there is a significant margin of safety. I will attempt to do so below.

    What is halloysite clay?

    Halloysite is a non-toxic clay exhibiting a rare and naturally-occurring tubular structure. While chemically identical to commonly-used kaolin clay, the extremely rare tubular structure, which takes millions of years to develop, provides a range of functionality that other materials cannot. The key intrinsic properties include a high aspect ratio, a high surface area, hollowness, and the ability to bind water.

    AMNL markets a number of halloysite products, including Dragonite (for applications such as a controlled release carrier for active ingredients, used in environmental remediation, agriculture, paints/coatings, and catalysts); Dragonite-XR (flame retardant and polymer reinforcement); Dragonite-HP (polymer reinforcement); and Dragonite-PureWhite (cosmetic industry applications). AMNL also holds a broad portfolio of intellectual property surrounding the technology related to its material.

    I would encourage you to take a look at the AMNL site for further background as well as 3rd-party research:

    http://appliedminerals.com/site/our-products

    http://appliedminerals.com/applications/flame-retardancy-application-page

    http://appliedminerals.com/site/research

     

    AMNL Background

    AMNL is a mine to market producer of halloysite clay, owning the Dragon Mine in the Tintic District of Utah. This mine is the only known measured resource of halloysite in the Western Hemishpere (Imerys, based in France, owns a lower-quality halloysite mine in NZ). Per a 2012 analyst report: From the late 1800s through 1930, mining at the property focused on iron ore with gold and silver as trace byproducts of production. From 1949 through 1977, Filtrol Corporation mined over one million tons of halloysite for use as a petroleum cracking catalyst. Production was shut down in 1977 due to a variety of factors including a mine fire, a cracking catalyst substitute for halloysite, and falling oil prices. Since May 2008, a detailed investigation has been conducted to determine the quantity of the halloysite and remaining iron ore resources. This includes significant drilling and exploration activities as well as an updated resource statement issued in April 2011.

    In terms of management, the current CEO Andre Zeitoun (former SAC and RBC portfolio manager) – and significant inside owner – took over in January 2009, installing his team and ousting the former management group, who had been accused of securities fraud. After placing a new Board of Directors, Zeitoun continued work on a 3-year study to better understand the Dragon Mine’s resources, and as indicated above, this was completed in 2011 (note that this only pertains to a portion of AMNL’s property, 11 of 230 acres):

    Underground: Measured Resource  
             
    Tonnage       596,700
      Halloysite   61.9%
      Kaolinite     19.4%
      Illite-smectite   10.3%
    Clay Content     91.6%
             
    Underground:   Indicated Resource  
             
    Tonnage       776,500
      Halloysite   4.1%
      Kaolinite     47.4%
      Illite-smectite   24.4%
    Clay Content     75.9%
             
    Surface   Piles: Indicated Resource  
             
    Tonnage       4,526,989
    Varying %   Halloysite    
             
             
    Iron Ore   Resource      
    Measured     2,104,000
    Inferred       688,300
            2,792,300
     

     

     

    In addition, a JV agreement was formed in 2010 with KibbeChem, a polymer compounder specializing in foaming agents.  In early 2011, the first commercial order for Dragonite-HP was awarded by Signature Fencing, a modular flooring systems manufacturer. The company is also selling nucleated polymers to Ames TrueTemper for hose reels and other products. 

    Finally, in early 2011 AMNL announced the hiring of Dr. Chris DeArmitt as CTO, previous head of specialty polymer product development at Electrolux and BASF, where he was also responsible for the scouting of new technologies on behalf of BASF Venture Capital. At the time of his hiring, DeArmitt said: “The commercial potential of Applied Minerals’ Halloysite-based products as a high tech material is very exciting. I have seen very few materials during my career that match its potential. As a functional additive or filler in plastics, coatings, adhesives or cosmetics, Halloysite gives remarkable property enhancements spanning the gamut from boosted mechanical properties to the controlled release of active agents. Furthermore, while most high performance materials are synthetic, expensive and of questionable toxicity, Halloysite - as a naturally occurring clay – is both affordable and environmentally friendly.”

    Note that because the area in Utah where the Dragon Mine is located is a historical mining district, there is well-developed surrounding infrastructure. Furthermore, the company has invested in a new state-of-the-art processing facility which will be able to produce up to 45k tons of halloysite to meet customer specifications – this is due online in Q1’13. The existing processing plant will be devoted to iron oxide (10kt of capacity – can be expanded to 40kt for <$2mm).

    Insiders own ~30% of the company.

    Commercial Opportunity

    As detailed in a November analyst day (http://appliedminerals.tempwebpage.com/images/uploads/events-presentations/Applied_Minerals_2012__Shareholder_Presentation.pdf), AMNL has made significant progress on a number of commercial developments. The company gave specific updates on: flame retardancy applications; lightweighting of polymer composites; and, iron oxide pigment products.

    Flame Retardancy:

    Nucleating and Lightweighting of Polyethylene:

    Iron Oxide Pigment:

    In addition, the company is sitting on 4.5mm t of waste piles containing a mixture of clay and iron oxide which may be beneficial for the environmental remediation market. For analysis’ sake, assume a conservative ASP of ~$50-150/t, sold over a number of years – at a range of $225mm-675mm, the value of the waste alone shows how cheap AMNL is today (EV of $149mm today). Certain applications, such as oil spill clean-up or uranium absorption, may in fact garner prices on the order of $500/t, with the worst-case scenario being $15-20/t as aggregate or clay for brickmaking (~$68-90mm of value; my estimation of the downside case in AMNL). Note, the company announced in June 2011 a Cooperative Research and Development Agreement with the EPA to pursue the development of Dragonite sorbent technology for the remediation of oil from contaminated salt marsh and wetland environments.

    Valuation

    While an NAV approach to methodology is arguably the best way to value a mining company (or in this case, a minerals technology company), like any DCF there are dramatic changes based on long-term price, cost, and discount rate assumptions. To that end, it seems sensible to sanity-check AMNL’s valuation using earnings multiples, and on both counts it is apparent that AMNL has significant upside.

    NAV (assumes discount rate of 15%, ends at 2022, assumes unit cost 5x management expectation, and limits revenue to identified areas discussed above; ignores NOL, ignores waste pile, ignores future commercial opportunities):

     

    2013

    2014

    2015

    2016

    2017

    2018

    2019

    2020

    2021

    2022

     

     

     

     

     

     

     

     

     

     

     

    Tons Sold

    14.8

    29.7

    44.5

    74.2

    74.2

    74.2

    74.2

    74.2

    74.2

    74.2

    Revenue

    56.3

    112.6

    169.0

    281.6

    281.6

    281.6

    281.6

    281.6

    281.6

    281.6

    COGS

    7.4

    14.8

    22.3

    37.1

    37.1

    37.1

    37.1

    37.1

    37.1

    37.1

    SG&A

    7.0

    7.7

    8.5

    9.3

    10.2

    11.3

    12.4

    13.6

    15.0

    16.5

    D&A

                4.0

                4.0

                    4.0

                4.0

                4.0

                4.0

                4.0

                4.0

                4.0

                4.0

    EBIT

    37.9

    86.1

    134.2

    231.2

    230.3

    229.2

    228.1

    226.9

    225.5

    224.0

    FCF

    30.3

    68.9

    107.4

    184.9

    184.2

    183.4

    182.5

    181.5

    180.4

    179.2

    PV

    $649.2

                     

    Per Share

    $6.71

                     

    Current Price as %

    24%

                     

     

    Multiples:

    As seen in the tables below, based on simple assumptions, AMNL is trading at an extremely low earnings multiple, on the basis of easily-derived “potential” EPS. I have used only the commercial opportunities already discussed, and provide a second table haircutting the illustrative volumes by 80%. Obviously, there is an element of the unknown as it relates to timing, but I (and management) would view the EPS in the top table as possible within 3-4 years; and, I would note that there is value in the company even if we are off by a material amount of volume (or price, or cost). Other products are also in the pipeline – note the 11/29 release discussing a new JV to develop and market an all-natural line of skincare products based on Dragonite. Furthermore, the first leg of halloysite development does not require further capex as the processing plant is already in place.

    Per management, the cost to mine and process their halloysite is $100/t. I have provided sensitivities of $500/t and $1000/t, though I am doubtful that management is off by a factor of 10.

     

    Segment Revenues

               
     

    Tons

    ASP

           

    Flame Retardancy

    39200

    4250

    166.6

         

    Polymer

    25000

    4000

    100.0

         

    Iron Oxide

    10000

    1500

    15.0

         

    Total Tons/ASP

    74200

    3795

           

    Revenue

       

    281.6

         
                 

    Cost per ton range

               100

               500

               1,000

         

    COGS

                7.4

              37.1

                 74.2

         

    SG&A

                7.0

                7.0

                    7.0

         

    D&A

                4.0

                4.0

                    4.0

         

    EBIT

    263.2

    233.5

    196.4

         
             

    Assume

     

    Tax

    52.6

    46.7

    39.3

     

    20%

    rate

    Net

    210.5

    186.8

    157.1

         
                 

    EPS

     $2.18

     $1.93

     $1.62

     

    96.8

    shares

                 

    P/E

                0.7

                0.8

                    1.0

     

    1.58

    price

                 

    (the company has $40mm of NOLs,   which I am ignoring for this analysis, and has depletion credits

    as a miner leading to a 20% tax   rate once those are fully utilized)

     
                 

    Segment Revenues at 20% of Expected Volumes

         
     

    Tons

    ASP

           

    Flame Retardancy

    7840

    4250

    33.3

         

    Polymer

    5000

    4000

    20.0

         

    Iron Oxide

    2000

    1500

    3.0

         

    Total Tons/ASP

    14840

    3795

           

    Revenue

       

    56.3

         
                 

    Cost per ton range

               100

               500

               1,000

         

    COGS

                1.5

                7.4

                 14.8

         

    SG&A

                7.0

                7.0

                    7.0

         

    D&A

                4.0

                4.0

                    4.0

         

    EBIT

    43.8

    37.9

    30.5

         
             

    Assume

     

    Tax

    8.8

    7.6

    6.1

     

    20%

    rate

    Net

    35.1

    30.3

    24.4

         
                 

    EPS

     $0.36

     $0.31

     $0.25

     

    96.8

    shares

                 

    P/E

                4.4

                5.0

                    6.3

     

    1.58

    price

    In addition to the iron ore, AMNL may possibly be sitting upon other non-halloysite resources, namely a copper/gold porphyry (FCX is exploring at a property 15 miles north of Dragon; Rio Tinto is also close by);  they are currently drilling to assess the resource.

    Conclusion and Catalysts

    Since the new management team has taken over, much progress has been made and AMNL is poised to benefit in the near-term as their core product reaches commercial scale. Given the depth of resources and the value-added industrial and consumer applications evident, the company should see a dramatic earnings ramp, for which one is paying little for today. Downside is also protected to the extent the company were to liquidate its assets. With the first material commercial transactions likely to occur in 1H’13 and further disclosures around product development, AMNL shares should rerate.

     

     

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Product validation and order wins
    JVs/strategic relationships, especially in the flame retardancy and polymer segments

    Messages


    Subjecta few questions
    Entry01/07/2013 12:01 PM
    Memberotto695
    This looks very interesting....A few questions:
     
    1) Regarding the $56m n reveues for this year, are you expecting that to begin in 2Q or will they have any revenues in 1Q?
    2) why have they not been selling the iron ore pigment over the past couple years?  do they have a customer for this?
    3) is there any indication they will seek to up-list form the bulletin board any time soon?
    4)I see they are seeking to increase the share authorization.  Any insight?  recent PR indicated that they do not need to raise money following recent small raise.
    5) you allude to underlying asset value should commercialization falter.  what is the value of the 290 acres?  and the mine itself (if commercialization doesnt work)?
    6) investor update from november seems very positive with commentary about commercialization of the clay and ongoing testing with several customers.   in particular, this language regardnig the flame retardent space seemed especially important:
     
    "Our findings have already been validated by two major ATO end users and have led to commercial scale-up samples with commercialization planned in early 2013. We have been approved as suppliers by both companies".
     
    Any sense of the volumes that can be generated from these two customers-- how much of the 14.8m tons you project for 2013 can be generated just from these two customers?  just trying to get a sense of how much of the 14.8 seems "high probability" given how far down the road they are with these customers....
     
    thanks!

    SubjectRE: I don't Get It
    Entry01/09/2013 08:20 AM
    Memberhao777

     

    Thanks for the questions and the perspective, and I understand the skepticism. Off the top, my first general reply is that this high margin is the basis for the opportunity - the Dragon mine is that unique in terms of it being a high-purity halloysite deposit, with minimal need for processing. As you suggest, the cost per ton of $100-150/t is reasonable (and is common for similar deposits of kaolin, talc, or calcium carbonate). And yes, because of the purity of the ore body, one ton of ore virtually yields one ton of product, which also drives the profitability. I have less concern here and only showed the sensitivities to higher unit costs to make the point you're questioning, namely that this story all depends on selling price.

     

    On that front, there are a couple of pieces of persuasive evidence. Firstly, the company is already selling tonnage at that price (for polymer nucleation, but granted, in small quanities). Secondly, the reason that halloysite is so valuable is the nano-tubular structure I referred to. While it is natural (and non-toxic) and mined out of the ground, it has a signicantly higher worth than most commodity minerals. Indeed, Bayer Material Sciences (and others) are synthesizing carbon nano tubes to achieve similar functionality to what halloysite does. The lowest quality product is selling at $95k/t, and it is arguably less versatile than halloysite (http://cheaptubes.com/carbon-nanotubes-prices.htm - see SKU-030502 in the Industrial Grade Carbon Nanotubes Prices section). Check http://baytubes.com/ for more detail on what nano tubes can do.

     

    The leap of faith here is that management will succeed in their trials and get to full commercialization. The early signs are encouraging and are the result of a number of years of testing and market development. The reason I would like to own AMNL here is because they are on the cusp of selling material volumes, finally. I encourage you to call the company and push them for as much detail as they can provide.

     

    Anecdotally, Imerys (ticker NK FP, a eu3.7bn market cap company based in France) scoured the globe for a deposit similar to what they acquired in NZ - one of much lower purity halloysite, with a high content of crystalline silica (a carcinogen), used for fine china applications. In the end, the Imerys chief geologist (1974-2001) in charge of the search was unsuccessful, but took a role as consulting geologist with AMNL (in retirement) once he became familiar with the Dragon Mine deposit.

     

    Furthermore, mines like Diavik (diamonds) and Grasberg (copper-gold owned by FCX, which at one point with gold by-product had a zero cost of mining copper) do illustrate that high-quality deposits can generate impressive margins (without getting into a debate on the capex required to build them, as they are much different commodities).


    SubjectRE: a few questions
    Entry01/09/2013 08:22 AM
    Memberhao777
    Thanks for the qs. Here are some thoughts:
     

    1) Regarding the $56m n reveues for this year, are you expecting that to begin in 2Q or will they have any revenues in 1Q?

    Admittedly, this is more aggressive than the company is probably comfortable with. While commercial sales will start ramping in 1H’13, they will be lumpy wins, and so perhaps using that as a run-rate for 2H’14 might be more reasonable. If you take a slower ramp, the NPV looks more like:

     

     

    Yr

                     
     

    2013

    2014

    2015

    2016

    2017

    2018

    2019

    2020

    2021

    2022

     

     

     

     

     

     

     

     

     

     

     

    Tons   Sold

    7.4

    11.1

    18.6

    29.7

    44.5

    74.2

    74.2

    74.2

    74.2

    74.2

    Revenue

    28.2

    42.2

    70.4

    112.6

    169.0

    281.6

    281.6

    281.6

    281.6

    281.6

    COGS

    3.7

    5.6

    9.3

    14.8

    22.3

    37.1

    37.1

    37.1

    37.1

    37.1

    SG&A

    7.0

    7.7

    7.0

    7.7

    8.5

    9.3

    10.2

    11.3

    12.4

    13.6

    D&A

                  4.0

                4.0  

                    4.0  

                4.0  

                4.0  

                4.0  

                4.0  

                4.0  

                4.0  

                4.0  

    EBIT

    13.5

    25.0

    50.1

    86.1

    134.2

    231.2

    230.3

    229.2

    228.1

    226.9

    FCF

    10.8

    20.0

    40.1

    68.9

    107.4

    184.9

    184.2

    183.4

    182.5

    181.5

    PV

    $449.5

                     

    Per   Share

    $4.64

                     

    Current   Price as %

    34%

                     

     My challenge with the investment is the timing of the ramp, but I feel confident that once it starts being sold in commercial quantities, the runway is long and the opportunity large.

     

    2) why have they not been selling the iron ore pigment over the past couple years? do they have a customer for this?

    The company did not have a plant to process the oxide, which is why they have invested in the plant expansion. Both products could not be produced on the same line due to cross contamination. Per their 11/19 letter:

    “Upon completion of the new plant [me: end of Q1], we will utilize the existing plant exclusively for the production of our iron oxide pigment products with approximately 10,000 tons of annual capacity. There have been some significant developments in terms of evaluating the quality of our resource as well as the specifics of the final products.”

    3) is there any indication they will seek to up-list form the bulletin board any time soon?

    Per my conversations with the company, they hope to list on the Amex once their stock hits $2. In the meantime, they are a fully-audited, SEC-compliant company.

     

    4)I see they are seeking to increase the share authorization. Any insight? recent PR indicated that they do not need to raise money following recent small raise.

    Insiders own 30% of the company, bought with their own cash, and importantly not through stock option grants with anti-dilution protections. They are highly sensitive to any share issuance. That being said, my understanding is that if shares were required to be sold as part of a strategic partnership (e.g. to a large potential customer and potential partner), management would like to retain the flexibility to execute such a transaction.

     

    5) you allude to underlying asset value should commercialization falter. what is the value of the 290 acres? and the mine itself (if commercialization doesnt work)?

    To be frank, I am unsure as to what the land is worth, and it may dramatically change once the copper-gold drilling results are finalized. I did try to illustrate the worth of the waste piles as one store of downside value, but the honest answer is that I have yet to do that broader analysis. 

    6) investor update from november seems very positive with commentary about commercialization of the clay and ongoing testing with several customers. in particular, this language regardnig the flame retardent space seemed especially important:

    "Our findings have already been validated by two major ATO end users and have led to commercial scale-up samples with commercialization planned in early 2013. We have been approved as suppliers by both companies".

    Any sense of the volumes that can be generated from these two customers-- how much of the 14.8m tons you project for 2013 can be generated just from these two customers? just trying to get a sense of how much of the 14.8 seems "high probability" given how far down the road they are with these customers....

    I don’t have any further color here, but if you look at the industry structure of plastics, plastic processors, and flame retardant manufacturers, there are a limited number of large players (plus a number of smaller players, e.g. in injection molding). I would imagine that if the company were able to commercialize with a notable participant, the ramp could be significant. This would obviously be a major catalyst but we are just waiting to hear, frankly.


    SubjectRE: Likelihood of commercialization
    Entry01/22/2013 03:14 PM
    Memberhao777
    The company is testing with a number of major companies and is close to commercialization with a few of its applications. The product is already being sold to a polymer-application customer, and volumes can grow in that field over the next two years. While I agree with you that skepticism is warranted given the length of time AMNL has been talking about this, the timeline is not that out of step with the typical testing / qualification of any new (and in this case, totally novel) material.
     
    As for Imerys, as I've noted, the relative purity of their halloysite is much lower than AMNL's, limiting the applications in which it can be utilized. I am not sure that is a direct comparable, as a result.
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