FYI impresses Alcoa, a likely near term offtake partner

FYI Resources Ltd (ASX: FYI) has released highly promising and commercially crucial analytical results from the recently completed HPA pilot plant trial conducted in collaboration with Alcoa Australia Limited (Alcoa).

Analytical results indicated more than 99.998% Al_²O_³ purity was consistently achieved with an average of 99.9986% Al_²O_³ purity surpassing expectations - just a whisker of the premium 5N product that has a grade of 99.999%.

The fact that some samples achieved results of 99.999% HPA is an outstanding outcome that surpassed both parties’ operational expectations, providing further validation of FYI’s innovative HPA flowsheet design.

In industry terms, this confirms that FYI has drawn significantly closer to being able to offer its customers a 5N product that fetches approximately double the price (circa US$50,000 per tonne) of the 4N product that had previously been applied as a base case in the definitive feasibility study (DFS).

The sale of a 5N product would not only generate substantially higher income, but it would also open up a much wider range of markets where that quality of HPA is essential.

As a backdrop, FYI and Alcoa entered into a Memorandum of Understanding (MOU) on 8 September 2020 for the potential joint development of FYI’s innovative, fully integrated, high quality HPA product.

These results go a long way to meeting a key condition precedent to the Alcoa MOU, being the successful review of FYI’s innovative process flowsheet design and performance and potential operational parameters in terms of FYI’s future production scenario.

Significant upside to DFS financial metrics

The MOU activities continue to progress toward completion of the two other key conditions precedent being the engineering review and the economic/commercial terms. The parties will now work closely to finalise the MOU review.

The following excerpt from the group’s DFS provides a snapshot of the base case assumptions that were used to project revenues, sales and the underlying project valuation from the production of 4N.

As you can see, management used pricing assumptions of US$24,000 per tonne which was conservative in terms of 4N pricing, and for the most part everything below that line including revenues, margins, underlying earnings and project payback will reflect more favourable numbers based purely on 4N production.

The project’s net present value and internal rate of return would be a substantially higher even if 99.999% 5N product sales accounted for 25% of production.

For example, just looking at the top line, a split of 25% 5N and 75% 4N would lift the revenue line from US$192 million to US$244 million.

This could have a proportionate impact on margins, EBITDA, project payback time (already a conservative 3.6 years), and in turn result in an increased net present value which would arguably see the company rerated on an enterprise value/NPV basis and/or by applying revised enterprise value/EBITDA metrics.

FYI continues to lead the way with its technical expertise

The 99.999% purity level was not specifically targeted for this trial, and managing director Roland Hill was buoyed by the results saying, “We are delighted with the exceptional results from the joint pilot plant trial.

‘’The achievement continues to demonstrate the outstanding qualities of our flowsheet in delivering consistent and reliably high quality HPA product – a key requirement from a customer perspective.

‘’FYI is encouraged by the outcomes of the pilot plant and will continue to progress with the development of our HPA strategy and advancing the MOU conditions with Alcoa.”

Some HPA from the joint FYI and Alcoa pilot plant trial was retained for detailed internal analysis and product phase work.

In maintaining the company’s on-going high standard of quality control and product assurance, the additional pilot plant trial HPA samples will be forwarded to EAG Laboratories in New York for further independent, elevated Glow Discharge Mass Spectrometry (GDMS) analysis to provide supplementary data that is intrinsic to the level of purity that has been achieved by the collaborative trial production.

Following the final product finishing work of the trial HPA, samples will be sent to several potential offtake parties for further product qualification – particularly directed towards the LED lighting and lithium-ion battery (LiB) markets.

Alcoa agreement could trigger a wave of commercial activity

The production of 5N would allow FYI to target a broad range of markets, providing scale, client diversification and leverage to multiple price points, including a proportion of top-tier product segments that fetch in the order of US$50,000 per tonne.

Given the numerous share price catalysts on the horizon, FYI appears to have what it takes to attract significant investor attention in 2021.

The most likely near-term material development is the finalisation of the memorandum of understanding that has been struck with Alcoa.

It is worth noting that much could be read into a positive decision by Alcoa given its global industry recognition by other potential offtake partners.

The trial product will be particularly directed towards the LED lighting and lithium-ion battery (LiB) markets in particular, industries that are continually under the microscope with upward assessments in what is already considered an exponential growth profile.

It is worth noting that FYI is already engaged in product qualifications with a number of targeted potential customers whom are focused on diversified applications and in specific jurisdictions – including South-East Asia, Europe and the US.

With management in discussions with other potential offtake clients, intermittent news on this front could commence in the coming months.

Combine these factors with the release of a revised project economics study in March and it is easy to see the company being substantially revalued.

The delivery of a successful final engineering report in the June quarter would position the company to confirm its decision to proceed to construction - another potential share price catalyst.