US Navy Now Demanding 3D Printed Parts, Or Else…

Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 6,810,029 AL3 shares at the time of publishing this article. The Company has been engaged by AL3 to share our commentary on the progress of our Investment in AL3 over time.

“If you are a supplier, and your lead time is too long, and you refuse to work with us” on 3D printing alternative spare parts, “we're going to figure it out. Not a threat – a fact of life.” US Navy Rear Adm. Jon Rucker,

The US Navy is now officially demanding that their parts suppliers use metal 3D printing technology.

And US defence spending just keeps going up.

US organisation Blue Forge Alliance has one job.

To modernise the US Navy’s supply chain and industrial base.

(including adoption of 3D printing).

And they just just received US$951M from the US Department of Defence to do it.

Our 2024 Tech Pick of the Year AML3D (ASX:AL3) has a Master Licensing Agreement in place with BlueForge to 3D print parts for the US Navy.

AL3 said today that they have been “guided to expect significant growth in US demand following the award” of this US $951M contract to Blue Forge Alliance.

So AL3 just raised $30M to more than double the original capacity of their new USA facility.

(which is expected to open in the coming weeks)

AND also to expand into the UK and Europe as well.

Meanwhile, there’s a new US President about to move into the White House - and his “First Buddy” Elon Musk wants to radically reshape defence spending and efficiency.

The tech tycoon has said US defence spending needs to be allocated to "entrepreneurial companies” over the traditional US defence juggernauts.

That sounds like our Investment AL3...

(Source)

This week, the US Navy made it clear that 3D printing metal parts will have a big role to play in manufacturing supply chains - demanding that Navy parts suppliers adopt 3D printing technology:

(Source - Breaking Defense)

AL3 was the only metal 3D printing company mentioned in this article about the US Navy pushing into 3D printing metals parts:

What’s clear to us is that there is a big push by the US Department of Defence to re-shore defence supply chains and adopt 3D printing.

And AL3 has a proven metal 3D printing product with sales momentum into US defence.

Over the last 18 months AL3 has sold ~A$15.8M of 3D printed parts and 3D printed systems.

AL3 sales have been primarily to the US Department of Defence and its supply chain partners, including submarine parts:

(Source)

This and the almost a billion dollars awarded to Blue Forge for future work, provided enough momentum for AL3 to raise $30M this week.

(Source)

(its always good to see a large capital raise to accelerate existing momentum, as opposed to the many “keep the lights on until things improve” cap raises we see in the small end of the market)

Since May of this year AL3 has been building out a facility in Ohio in order to:

• Be more responsive to AL3’s existing US customers
• Be better positioned to win new US customers
• AND help the US rebuild its defence manufacturing base

With $30M just raised today (and another $7M already in the bank) AL3 says it will now double the capacity of its soon to be launched Ohio USA based facility.

(Fun fact, Ohio, where AL3’s facility will be built is the home state of JD Vance, the new US Vice President.)

Why double capacity at its US facility before it is even finished being built?

Because - as we pointed out above - AL3 has been “guided to expect significant growth in US demand” after its key customer Blueforge was awarded a US $951M contract that includes pushing US Navy supply chains to adopt metal 3D printing.

Here it is in AL3’s announcement today:

(Source)

In September AL3 signed a Master Licence Agreement (MLA) with Blue Forge Alliance, a company working with parts suppliers to the US Navy.

MLAs enable the exchange of sensitive technical data between suppliers and expands the suite of 3D printed products that AL3 can offer its customers.

An MLA is like being given a special recipe book for all the parts, one that only a select few companies can have (it’s highly sensitive information after all).

And BlueForge now has an additional US $951M contract to fulfil - which includes “additive manufacturing" (3D printing).

Here is the US Department of Defense US $951M contract announcement for BlueForge Alliance:

(Source)

Recent media detailing the use of these contract funds:

(Source)

AL3 really appears to be in the right place at the right time, with the right relationships and contracts already in place (and now a big bank roll to execute)

The incoming US administration is pushing to reshore supply chains, encourage local manufacturing and increase government efficiency.

Elon Musk has recently been appointed as the new head of the “Department of Government Efficiency" to shake up government spending (particularly in the military) under Trump.

As we saw higher up in this note, the tech tycoon has said US defence spending needs to be allocated to "entrepreneurial companies” over the traditional US defence juggernauts.

(Source - Financial Times)

We think smaller, more nimble, efficient companies will benefit.

(especially US based ones... like AL3 is now).

AL3’s technology combines robotics, welding, automation and software.

AL3 tech “3D prints” complex industrial parts for the defence, oil & gas and aerospace industries, and sells these 3D printers to industries looking for on-site custom solutions.

AL3's Ohio facility is almost ready to churn out 3D printed parts for the US Navy's submarine fleet (and a host of other big US companies like Boeing Space and Defense as well) as precursors for bigger sales.

And it will now be able to do so at double the initial original capacity.

AL3 strategy has recently moved from being a seller of just 3D printed parts to sellers of BOTH 3D printed parts and 3D printing systems.

These systems are the revenue drivers for the company, together with the ongoing software, maintenance and licensing revenue that comes with it.

From today onwards, AL3 will be able to hit the ground at pace with a $30M raise to facilitate its US expansion.

AL3 said in today’s announcement that the funds will primarily be allocated to the US expansion (approx $12M), but there will be some funds dedicated to growing the business in the UK and Europe as well (approx $5M).

(Source)

At the moment, the UK/European side of the business isn’t even on the markets radar - we think that over the next few years it could bring a lot of unexpected good newsflow for AL3.

(Source)

A big capital raise like this is a very important milestone for a small cap company like AL3, and validates its progress so far.

The $30M cap raise will give AL3 a market cap of ~$102M post offer (at the 19c raise price) and provide a launchpad for a more institutional investor base with sophisticated, patient capital and ability to continue to support the company.

(These kinds of cap raises are like a “baton pass in a relay race” between retail and institutional investors)

AL3 - our “Trump Trade”

With the US facility almost operational, AL3 is our “Trump Trade” pick and the most likely company to benefit under a Trump Administration from our Portfolio.

The key tailwinds for AL3 under a Trump administration that include:

• More spending on defence and aerospace industries.
• Move to nimble and entrepreneurial defence contractors rather than legacy suppliers.
• Import tariffs to build urgency around US-based, on-site manufacturing.
• Improved tax conditions for US-based businesses.

In particular we think that AL3 will benefit “tremendously” from Trump’s blanket import tariff policy.

Take the US Naval system, where AL3 already has a strong foothold.

The industrial base supply chain is already "incredibly fragile” according to leading navy admirals - and tariffs will put a further strain on this - encouraging companies to find additive manufacturing solutions (source).

Additive manufacturing (also known as 3D printing) is seen as THE solution to this problem for the US Navy.

At the Naval Submarine League conference the Executive Director of PEO-Strategic Submarine said that “Metallic additive manufacturing ... is our Manhattan Project” and a “national security imperative.”

AL3 already has the following blue chips clients using its products - these types of customers aren’t easy to break into:

We expect this to grow even more with the doubling in capacity of AL3’s US based facility.

In order to scale into these industries AL3 has two Master Licensing Agreements (MLAs) signed with:

• Blue Forge Alliance - an intermediary for the US Navy.
• Boeing Defence and Space

This is where we think today’s news comes into play...

AL3 will now have more capacity to supply into these MLA’s

With more than double the capacity at its US facility, AL3 can start fulfilling much bigger orders for its US customers.

In addition, AL3 should now be able to access more lucrative contracts that were previously restricted by the International Traffic and Arms Regulation (ITAR Contracts).

(The ITAR contracts require for the manufacturing facility to be based inside the US).

The US is a big part of AL3’s business with over $15.8M of revenues since 2023.

Now that AL3 is able to deliver more quickly on manufacturing / prototyping contracts we expect the sales cycle to ramp up.

Traditionally, these custom parts for big industrial products like naval ships, oil & gas rigs and rocketships were made using slow and inefficient manufacturing methods.

Traditional turnaround times can take months, and AL3’s 3D printing is better in almost every way than traditional “casting” or “forging”...

Our view is that 3D printing will replace traditional methods slowly, then all at once...

Not out of choice, but because buyers will have to pivot to a supply chain that is faster and able to produce at a higher quality standard.

AL3’s 3D printed parts are harder, better, faster, stronger.

We have been to AL3’s Australian facility in Adelaide - and it's genuinely like stepping into Tony Stark's basement...

We saw the largest ever custom AL3 ARCEMY 3D printing system ever built, before it was to be shipped off to the USA:

As well as some of the product software looks like:

To see our full site visit write up read: Our AL3 site visit and what we learnt.

Now that AL3 is scaling up its US facility to more than double its intended capacity we think that the company will be able to deliver a significant step change in revenue.

Revenue growth to be the catalyst for a share price re-rate?

We think that revenue growth will be the catalyst for the market to start rewarding AL3 from a share price perspective.

Revenues from MLA contracts and deals are a big part of this.

There is a precedent set by the market for this type of re-rate, just take a look at Droneshield.

Droneshield supplies anti-drone products to the US military went from ~28c per share to a high of ~$2.60 (market cap of ~$2BN) off the back of its ~1,000% revenue growth between 2020 and 2023 (~$5M to ~$54M).

The peak in Droneshield’s market cap coincided with revenues growing by ~3x over the last 12 months:

The past performance is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.

We wrote about the Droneshield story in detail in our last AL3 note here: Global defence spending up, AL3 revenue up, US sales up.

Ultimately, we are Invested in AL3 to see it grow its revenues and re-rate to a market cap greater than $500M.

We think that this is achievable over the next 2 to 3 years as the company pushes its US expansion strategy.

And an extra $30M in the bank as of today is certainly going to make things happen faster.

Our AL3 Big Bet

“AL3 re-rates to a $500M market cap on achieving significant sales growth across an expanding range of industries and jurisdictions”

NOTE: our “Big Bet” is what we HOPE the ultimate success scenario looks like for this particular Investment over the long term (3+ years). There is a lot of work to be done, many risks involved - just some of which we list in our AL3 Investment Memo. Success will require a significant amount of luck. There is no guarantee that our Big Bet will ever come true.

How does today’s news affect our AL3 Investment Memo?

One of the key reasons why we invested in AL3 was its “Strong US Focus”.

The news today, regarding a “more than doubling” of the US facilities capacity further strengthens this strategy and validates our reasons for investing in AL3:

Strong US focus as AM Forward Program rolls out

In 2023 AL3 commenced its US focused strategy. The US spends more on its defence than the next 9 countries combined and as such is easily the most lucrative defence market jurisdiction to operate in. In 2022, the US has also launched the AM Forward Program to support 3D Printing across the industrial manufacturing sector. We think that the US is the right place for AL3 to grow its business.

Source: “Why did we invest in AL3” section - AL3 Investment Memo 27 June 2024

The $30M capital raise also de-risks “funding and dilution risk” for two reasons:

1. Because the raise was done at multiples of our Initial Entry Price - our Initial Entry Price in AL3 was at 6.4c per share. Today’s raise is multiples higher than that which means we're not being diluted down at a much lower valuation to our Initial Investment
2. Because the company is now funded to execute its business plan - $30M should give the company a fair bit of runway to execute its business plan and deliver revenue growth.

It’s also important to note that In the short term there might be some churn in AL3’s share price as some investors look to sell the 19c stock from the placement.

With a few solid sales announcements we think AL3 can get through that churn period fairly quickly.

(we are hoping to see some big deals soon)

Funding and dilution risk [Risk Mitigated]

If AL3 is unable to sell enough of its products and services and move towards sustained profitability it may need to raise additional capital to sustain itself. This funding may be secured via a capital raise at a discount, and incur dilution to existing holders of AL3 shares.

Source: “What could go wrong” section - AL3 Investment Memo 27 June 2024

What is next for AL3?

More sales out of the US

Now it’s all about the US scale up.

Now that AL3 will be more than doubling capacity at its US facility we want to see AL3 come out with big new contracts to fulfil (and hopefully big $ revenue amounts attached to those deals).

We are also hoping to see some of those lucrative ITAR contracts that AL3 have mentioned get converted into sales.

UK/European expansion on the cards?

In today’s announcement AL3 also flagged the opportunity of expanding into the UK.

The majority of AL3’s sales are out of the US, so expansion into a new market is completely new upside from a revenues perspective.

We are looking forward to newsflow from the company’s push into the UK/European market.

What could go wrong?

The short term risk for AL3 is sales and sales delay risks.

With an extra $30M in the bank the expectations for future sales and scale up is now apparent.

If AL3 fails to deliver more sales and its financial performance suffers, the market may start to price in lower growth potential for the future and re-rate AL3’s share price lower.

Sales risk

There is always the possibility that AL3 does not close more sales, and its financial performance suffers as a result.

Source: “What could go wrong” section - AL3 Investment Memo 27 June 2024

Our AL3 Investment Memo

In our AL3 Investment Memo, you can find the following:

• What does AL3 do?
• The macro theme for AL3
• Our AL3 Big Bet
• What we want to see AL3 achieve
• Why we are Invested in AL3
• The key risks to our Investment Thesis
• Our Investment Plan