Investment Memo:
FYI Resources Ltd
(FYI Resources Ltd)
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LIVE
Opened: 10-May-2023
Shares Held at Open: 1,096,996
What does do?
FYI Resources Ltd (ASX: FYI) is an critical minerals technology and development company, focusing on a key battery metal input High Purity Alumina (HPA) and rare earths.
What is the macro theme?
HPA: The market demand for HPA is tipped to more than treble from 2021 levels by 2028, largely driven by greater demand for lithium-ion batteries as automakers secure critical inputs for the mass production of electric vehicles (EVs).
Rare Earths: Rare earths are crucial for the clean energy transition. Rare earths like Neodymium (Nd) and Praseodymium (Pr) are used in the permanent magnets found in EVs and wind turbines, where we expect demand to surge over the next decade.
As China is by far the world’s largest producer of rare earths, there is a strong geopolitical element to the industry as major global powers look to secure domestic or friendly supply of strategic resources.
Our Big Bet for
We want to see FYI significantly re-rate by moving into High Purity Alumina (HPA) production and scaling its technology to other HPA projects
Why did we invest in ?
Advanced, DFS stage HPA project for Australia’s battery push
FYI owns 100% of its HPA project. Highlights from the Definitive Feasibility Study include:
- Project NPV: US$1.1BN
- Production: 10kt of HPA per year
- Annual Revenue: US$186M
- Mine Life: 25 years
- CAPEX: US$202M
We think this project is closely aligned with Australian government policy priorities and a push to build out Australia’s battery materials and manufacturing capabilities.
As such we expect that FYI will be able to attract government grants, loans and other financing support to help fund the construction of its HPA small scale production plant which would enable increased product qualification, offtakes and eventually, development of its DFS scale commercial plant.
Additionally, we think that DFS stage critical minerals and battery materials projects should benefit from current market dynamics and FYI’s HPA project is well positioned to benefit from this trend.
Potential for fast-tracked development of a major Australian rare earths project
FYI is looking to develop a rare earths processing plant with a feasibility study due for completion in early 2024.
FYI has proven highly capable of delivering feasibility studies in the past with its HPA project and we think their expertise should help the company deliver the feasibility study on schedule.
Based on estimates of potential volumes processed at the proposed facility, the output of the project could prove equivalent to:
- >3,000tpa of NdPr, which would be ~10% of the market for this rare earths product as of 2020; and
- >350tpa of Dysprosium (Dy) + Terbium (Tb), which would be equivalent to ~20% of the global market.
Critical minerals exposure, favourable market dynamics
The HPA market is expected to move into deficit in 2024.
With the cost of FYI’s HPA output expected to be under half of the current conventional method (that delivers most of the current HPA supply), the opportunity to substantially disrupt this industry remains on the cards.
With regards to its potential rare earths project, FYI’s pending investment and subsequent development of a rare earths processing hub in partnership with Arafura Rare Earths could prove to be a key plank of Australia’s ability to build out its rare earths supply chain.
The rare earths market is forecast to experience 1000% demand growth by 2035.
ESG focussed company, suitable for institutional investment
We back FYI’s ESG-centric approach, with its process set to replace the current and prevalent more expensive, energy intensive and polluting methods.
We think this will appeal to battery manufacturers and automotive companies as key customers, as well as larger institutional investors.
Projects located in Australia
Currently global processing of both rare earths and HPA are dominated by the Chinese market.
The US and Europe are looking to “friendshore” critical minerals, providing generous tax incentives through legislation like the Inflation Reduction Act.
As FYI’s processing facility is located in Australia, it may be eligible for these tax incentives and a more attractive product than if these minerals were produced in China.
What do we expect to deliver?
Objective #1: Advance HPA project via small scale production plant
In order to advance the HPA project under its now 100% ownership structure, FYI has opted to pursue a small scale production plant which is targeting output of ~1,000 tpa.
The small scale production plant will enable more potential customers to see if FYI's HPA is the right product for them.
As the HPA project becomes further de-risked, and more product qualification takes place using the output of the small scale production plant, potential customers should become increasingly interested in securing output.
We’re looking for FYI to secure at least one offtake for its HPA product over the term of this Investment Memo. We’ll reassess our Investment Memo should FYI achieve all of these milestones.
Milestones
Select a preferred engineer for small scale production plant
Secure government grant funding (applications pending)
Release CAPEX and OPEX figures for small scale production plant (December 2023)
Complete construction and commissioning of small scale production plant (May 2024)
Product qualification update
Enter into first MOU offtake agreement
Begin financing discussions for commercial plant
Objective #2: Complete Minhub acquisition and deliver rare earths Feasibility Study
FYI has signed a deal to acquire Minhub Operations which has a joint venture partnership with Arafura Rare Earths to develop a mineral sands and rare earth processing facility.
There are a number of conditions precedent that need to be satisfied for both the Minhub Operations acquisition and the proposed partnership with Arafura Rare Earths to go ahead.
The rare earths project will be a “midstream” project so feedstock is needed to make the project viable and enable production of products for downstream use by end users.
The ultimate aim is to deliver a Feasibility Study that presents an economically viable project to the market and potential government funding sources.
Milestones
Finalise and settle Minhub acquisition
Technical feasibility work
Feedstock offtake(s)
Complete first part of Minhub Operations acquisition (50%)
Arafura commits to 50% of Feasibility Study cost
Site selected in Darwin
Permitting in Darwin
Arafura makes development decision (commits to building project)
Complete second part of Minhub Operations acquisition (move to 100% ownership of Minhub Operations)
Bonus: rare earths offtake with an OEM (original equipment manufacturer)
Ongoing financing risk
As of March 31st 2023, FYI had ~$9M in the bank.
This is enough for near term plans, however as FYI is not yet generating revenue, it does rely on either capital markets, government grants, or other financing facilities to progress with its plans.
Both the HPA small scale production plant and the rare earths project (including the feasibility study) have yet to be determined capital costs.
Should these costs prove to be too expensive for FYI and should financing not be secured for either or both projects, FYI may need to raise capital to progress the development of these projects.
Technology scale up risk
FYI’s process flowsheet and technology has been proven in the lab and on a pilot plant level, but has yet to be tested at scale. Scaling up the process could prove difficult, unachievable or not financially feasible.
Competition / substitution risk
FYI’s technology is new and seeks to replace the current conventional method (hydrolysis of aluminium alkoxide, a process that has not been substantially changed since the 1880s).
However, there could be yet another new technology that emerges that proves superior or more popular, which would be detrimental to FYI’s business.
Project Funding Risk
Building and constructing processing plants can be expensive.
FYI will need to secure a pathway to funding for the HPA small scale plant, HPA large scale production facility and rare earths processing facility.
Macro theme risk
There could be unforeseen changes to the HPA market that could alter demand, impacting the viability of FYI’s project. The same applies to the rare earths market.
Delay risk
There could be delays in development of both projects, impacting newsflow and the FYI share price. Small caps thrive on consistent delivery of projects to a timeline, and conversely, frequently suffer when newsflow dries up and timeframes are stretched.
Market risk
The broader market could suffer due to a range of macroeconomic factors or sentiment changes. This could exacerbate financing risk.
What is our investment plan?
We first invested in FYI at 20c and then increased our position at 50c and 44.4c.
In line with our standard investment strategy for small cap investments we de-risked around 17% of our FYI Total Holdings in the lead up to the Alcoa JV catalyst.
We still maintain around 83% of our Total Holdings in FYI and intend to hold the majority of this position until the Feasibility Study is completed for the proposed rare earths project OR until the funding for the small scale production facility is secured.
If the share-price runs up in the lead up to either of these Objectives being completed we will sell up to an additional 20% of our Total Holdings.
Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 1,097,000 FYI shares at the time of publishing this memo. The Company has been engaged by FYI to share our commentary on the progress of our Investment in FYI over time.
Investment Memo:
FYI Resources Ltd
(FYI Resources Ltd)
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CLOSED
Opened: 01-Jul-2022
Closed:
24-Feb-2023
Shares Held at Open:
1,097,000
Shares Held at Close:
1,097,000
Reason Memo Closed:
Key Risk Materialised: Funding
What does do?
FYI Resources Ltd (ASX: FYI) is a specialist metals technology company, focusing on the key battery metal input High Purity Alumina (HPA). FYI utilises a new production process that is cleaner, purer, and much less expensive than conventional methods. FYI is partnered by leading global alumina company Alcoa, with a binding agreement through to commercialisation.
What is the macro theme?
The market demand for HPA is tipped to more than treble from 2021 levels by 2028, largely driven by greater demand for lithium-ion batteries as automakers secure critical inputs for electric vehicles (EVs) mass production.
[Memo Assessment - 24-Feb-2023]:
Grade = A
The macro thematic for High Purity Alumina actually improved over the last 12 months.
The Australian government added HPA to its critical minerals list as part of its updated 2022 critical minerals strategy. HPA now sits on both the US, European and Australian critical minerals lists.
Our Big Bet for
We want to see FYI significantly re-rate by moving into High Purity Alumina (HPA) production and scaling its technology to other HPA projects
Why did we invest in ?
Funded through to commercialisation
FYI has a binding joint venture agreement with Alcoa that essentially provides a complete pathway to commercialisation of its HPA technology. FYI retains a 35% interest and Alcoa funds US$243M in development costs. Subject to the technology continuing to tick Alcoa’s ‘boxes’, first production is poised for 2024, which would make it the first-to-market of any of the new kaolin-based processes. We can’t overstate the importance of Alcoa, considering its substantial R&D resources, operating experience, long-established marketing and industry relationships, and global reputation – alongside its large balance sheet. Indeed, we think project financing will be a considerable (even insurmountable) hurdle for many of FYI’s peers, whereas FYI is effectively free-carried through to production.
[Memo Assessment - 24-Feb-2023]:
Grade = A
Earlier this week Alcoa withdrew from its Joint Venture (JV) with FYI. As a result one of our key reasons for Investing in FYI is now redundant.
Favourable market dynamics
The HPA market is expected to move into deficit in 2024, coinciding with full scale production of FYI’s first plant facility. With the cost of FYI’s HPA output expected to be under half of the current conventional method (that delivers most of the current HPA supply), the opportunity to substantially disrupt this industry remains on the cards.
[Memo Assessment - 24-Feb-2023]:
Grade = C
While there hasn't been any changes to the market dynamics for HPA, now that the financing partner has pulled out of JV, the timelines for first full scale production are now unclear.
Positive ESG headwinds
We back FYI’s ESG-centric focus, with its process set to replace the current and prevalent more expensive, energy intensive and polluting method. We think this will appeal to battery manufacturers and automotive companies as key customers, as well as larger institutional investors.
[Memo Assessment - 24-Feb-2023]:
Grade = A
The merits of FYI’s technology and its ESG advantages are unchanged.
What do we expect to deliver?
Objective #1: Commission demonstration plant
- Ultimately the plan is to have full-scale production by 2025. Alcoa effectively handles the ~US$250M funding required, provided FYI’s technology successfully proves itself over several phases. This has already been demonstrated at the pilot plant scale.
- Subject to engineering, we expect Alcoa and FYI to greenlight the construction of a demonstration plant through funding US$50M – producing market demonstration and assessment volumes up to 1ktpa HPA.
- Allowing 6-12 months for construction, we would be looking at first HPA production sometime in 2H 2023.
Milestones
Complete pilot plant trials
Front end engineering design – progress update
Front end engineering design – final report
Greenlight Phase 2, Alcoa funds US$50m – December 2022
Appoint lead project engineer
Commence construction
Complete construction
Maiden production in 2023
[Memo Assessment - 24-Feb-2023]:
Grade = A
Aloca’s withdrawal from the project now means the demonstration plant is unlikely to be built by 2H 2024.
Objective #2: Progress FEED for the full-scale plant
- In parallel with the demo plant progressing, FYI and Alcoa will advance front-end engineering and design (FEED) for the full-scale, 8-10 ktpa plant.
- Subject to satisfactory demo plant performance, this will be the precursor for the Second Investment Decision to proceed to commercialisation. We expect that the FEED will commence before year end.
Milestones
Front end engineering design – progress update
Front end engineering design – final report
Appointment of lead project engineer
Greenlight Phase 3, Alcoa funds US$200M
[Memo Assessment - 24-Feb-2023]:
Grade = F
While a contractor was appointed to do this work, Alcoa’s withdrawal also impacts this objective. While FYI may still proceed to get this work done, at the moment it is unlikely to happen without a major financing solution being found for the company’s demonstration plant.
Objective #3: Secure first offtake agreement
As projects become further de-risked, potential customers become increasingly interested in securing output. We think that sufficient progress can be made in 1H22 such that multiple customer offtake MOUs and marketing relationships can be delivered in 2H22.
Milestones
Enter into first MOU offtake agreement
[Memo Assessment - 24-Feb-2023]:
Grade = C
FYI didn't manage to announce any offtake contracts BUT the company’s project is still at an advanced stage with a Definitive Feasibility Study (DFS) in place. FYI may still choose to progress on the offtake partnership front as it looks to progress the project as 100% owner.
Financing risk
The commercialisation of FYI’s technology currently hinges on Alcoa funding, which in turn hinges on both parties progressing through three phases of development, as outlined in their Binding Agreement entered in September 2021. There is no guarantee that both parties will proceed across all stages, which would result in FYI requiring to raise substantial funds for project financing, which would almost certainly lead to a market sell off.
[Memo Assessment - 24-Feb-2023]:
Grade = F
Unfortunately this risk materialised after the announcement earlier this week.
Technical risk
FYI’s process flowsheet and technology has been proven in the lab and on a pilot plant level, but has yet to be tested at scale. The demonstration plant, followed by the full plant facility, will test this. There is no guarantee that FYI’s technology meets Alcoa’s requirements to progress through these stages.
[Memo Assessment - 24-Feb-2023]:
Grade = A
FYI actually made progress on the technical front with Alcoa’s US$5M in funding for testwork. During pilot plant trial runs FYI was able to produce purity levels of 99.999% (5N) - purity levels that make FYI’s product suitable for Electric Vehicle (EV) battery, LED and optics industries.
Market dynamics
FYI’s technology is new and seeks to replace the current conventional method (hydrolysis of aluminium alkoxide, a process that has not been substantially changed since the 1880’s). However, there could be yet another new technology that emerges that proves superior or more popular, which would be detrimental to FYI’s business. Furthermore, there could be unforeseen changes to the HPA market that could alter demand, impacting the viability of FYI’s project.
[Memo Assessment - 24-Feb-2023]:
Risk = Unchanged
No major changes to the High Purity Alumina (HPA) market dynamics.
Project timeline
The timeline for first production from the full scale plant is 2025. However, the scope for timeline slippage is real, given logistical constraints and supply challenges not accounted for. It is also not uncommon for joint venture partners to ‘move at different paces’, which would impact the timetable.
[Memo Assessment - 24-Feb-2023]:
Grade = C
With Alcoa terminating the Joint Venture (JV) agreement the 2025 first production from a full scale plant is unlikely. FYI now needs to go back and source funding which may take months and push back the timeline on first production.
What is our investment plan?
We first invested in FYI at 20c and then increased our position at 50c and 44.4c.
In line with our standard investment strategy for small cap investments we de-risked around 17% of our FYI Total Holdings in the lead up to the Alcoa JV catalyst.
We still maintain around 83% of our Total Holdings in FYI and intend to hold the majority of this position until the Alcoa US$50M funding decision – expected in December this year.
If the share-price runs up in the lead up to this decision we will sell up to an additional 20% of our Total Holdings.
We’ll re-evaluate our investment plan after the Alcoa funding decision.
[Memo Assessment - 24-Feb-2023]:
Grade = C
Even before the decision to terminate the JV with Alcoa, the share price had come off in line with the broader small cap market. During this period of weakness we held on to our position - in line with our strategy.
Since then, the share price has come down a long way, which can happen with small cap stocks if a key risk materialises.
This is why it was important for us to Top Slice our investment and take some money off the table while the share price was higher.
Disclosure: The authors of this memo and owners of Wise-Owl, S3 Consortium Pty Ltd, and associated entities, own 1,097,000 FYI shares at the time of publishing. S3 Consortium Pty Ltd has been engaged by FYI to share our commentary on the progress of our investment in FYI over time.
