Opened: 02-Apr-2024
Shares Held at Open: 3,750,000
What does GEN do?
Genmin (ASX: GEN) is a green iron ore developer aiming to put its Gabon iron ore project into production.
What is the macro theme?
As a key ingredient for steel, iron ore demand has been persistently strong over the past several years with pricing well above US$80/tonne.
In the long run, we expect demand for high grade, green iron ore will grow as major importers (especially China) and customers seek to utilise cleaner raw materials for the steelmaking process that reduce emissions.
Our Big Bet for GEN
“GEN re-rates 1,000% by scaling up its production over time from its iron ore project in Gabon”
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 GEN Investment Memo. Success will require a significant amount of luck. There is no guarantee that our Big Bet will ever come true
Why did we invest in GEN?
Green steel
Steel production accounts for ~6-9% of global carbon emissions and as an industry, is one of the single biggest polluters in the world. “Green steel” is the industry's response to decarbonisation which means demand for green iron ore, like GEN’s, will increase in the future.
Mine built and producing in next 12-18 months
GEN is aiming to have its project in production and generating cashflows within 18 months.
Ready to build - all permits in place
In January 2024, GEN received a 20 year, large scale mining permit in Gabon, which provides certainty of tenure at the project. From our experience Investing in Africa, this is a big step forward for any company to take.
Access to existing infrastructure
GEN has already negotiated 1) a 20 year agreement for green hydroelectric power, and 2) an integrated port and rail logistics solution that will take GEN’s products along the Trans-Gabon Railway to Port Owendo on the west coast of Gabon.
China push to use green steel
The Chinese government is proposing to become carbon neutral by 2060. To do that the government is looking to decarbonise the industries that are generating the most pollution. Currently steel production accounts for ~15% of all carbon emissions in China - driving the government's desire to push for the growth of a green steel industry.
GEN already has 4 x Chinese offtakers
GEN has four offtake MoUs for future production in place, three of which are in the top 15 biggest steelmakers in the world. These four non-binding offtake MoUs cover ~18mt over GEN’s first three years of production — effectively all of its production during that period.
Offtake with Hunan, the early backers of FMG
Hunan Valin Steel was one of the early backers of FMG back in 2009 with a >$500M direct investment into FMG. Hunan’s stake in FMG is worth about ~$6.7BN. Hunan currently has an offtake MOU in place with GEN.
$76BN FMG just produced iron ore in Gabon
Back in December 2023, FMG shipped its first batch of iron ore from a pilot operation at its first overseas mine in Gabon.
Tembo Capital owns 50% of GEN
Private equity mining specialist fund Tembo Capital is GEN’s biggest shareholder. Tembo was the same group that led the recapitalization of Paladin Energy out of administration before relisting the company. Paladin now trades at a market cap of ~$4.1BN. Tembo’s Managing Director John Hodder (and also GEN board member) invested $1.65M in GEN’s placement at 10c per share.
GEN just went through its own recapitalisation
GEN just raised $13.2M via a placement at 10c per share and ~$10.5M from an entitlement offer. Tembo Capital took up ~$8.3M in that entitlement offer through cash and loan conversions.
US$391M NPV with just US$200M in CAPEX
GEN has a pre feasibility study completed showing a Net Present Value of US$391M, Internal Rate of Return of 38% and payback period of just 2.7 years. To get the project into production, GEN needs US$200M in CAPEX.
Potential to 4x iron ore production to 20mtpa
GEN’s development strategy is to get the mine into production through a 5mtpa starter mine. GEN also has the capacity to increase the mine capacity to ~20mtpa.
What do we expect GEN to deliver?
Objective #1: Objective #1: Final Investment Decision (FID) made on GEN’s project
Milestones
Reach a successful FID
Advance toward project financing
Objective #2: Objective #2: Convert Offtake MoUs to Binding Contracts
Milestones
Binding offtake #1
Binding offtake #2
Objective #3: Objective #3: Secure US$200M in CAPEX financing
Milestones
Confirm funding strategy
Secure debt financing
Secure equity financing
Secure binding offtake agreements
Secure prepayments for offtake or other strategic capital partners.
Objective #4: Objective #4: Construct mine
Milestones
Construction contracts awarded
Construction begins
Construction completed
Objective #5: Objective #5: Ship first iron ore product and become an iron ore producer
Milestones
This one is fairly simple - we want to see GEN produce and ship its first batch of iron ore.
What could go wrong?
Financing and delay risk
The development of Baniaka will require ~US$200M in debt and equity funding to be raised in financial markets.
Financial markets are inherently uncertain and readily influenced by global macro-economic events at the time.
GEN may experience delays in procuring the funding and consequently development of Baniaka through exposure to the sentiment in financial markets, which may adversely affect GEN’s value and share price.
Jurisdiction risk/political risk
In August 2023, a military coup affecting regime change occurred in Gabon.
A transitional, appointed rather than elected, government has been put in place with elections scheduled to be conducted in August 2025.
While the population of Gabon has generally supported the coup - there are uncertainties about the future political climate of Gabon.
For example, delays in holding elections and returning to an elected civilian government may lead to economic, political, and social risks materialising that adversely impact GEN’s ability to develop Baniaka and subsequently produce, export and sell iron ore products.
Infrastructure access risk
The success of Baniaka (GEN’s primary project) will require initial and ongoing access to, and available capacity on, the Trans-Gabon Railway and at the Owendo Mineral Port.
GEN has signed a long-term, conditional 15-year bulk logistics agreement with Owendo Mineral Port for the provision of rail and port services utilising existing and operating rail and port infrastructure.
There is no guarantee that GEN and Owendo Mineral Port will be able to fulfil the conditions precedent to this agreement in a timely manner, and therefore there is no guarantee that this agreement will come into effect, potentially having an adverse impact on the value of GEN and its share price
Commodity price risk
The iron ore price could fall and no matter what GEN has achieved in terms of its project fundamentally, there is a risk the company’s share price performs poorly because of a poor performing underlying commodity price.
Market risk
Broader market sentiment can get worse and equity markets as a whole trade lower, taking GEN’s share price with it. Alternatively, there could be further sector specific pain ahead where iron ore developers explorers suffer more than the broader market.
What is our investment plan?
We are Invested in GEN to see it bring its project into production.
Our plan is to hold the majority of our position in GEN for 3 to 5 years which we hope is enough time to see GEN get to first production and start ramping up its production rate (see “our long term bet” above).
After 12 months we will apply our standard de-risking strategy.
We may look to sell up to 20% of our holding if the company delivers on one or more of our Investment Memo objectives and/or the share price materially re-rates.
Any sell downs will be in accordance with our trading and hold policy disclosure.
Disclosure: Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 3,750,000 GEN shares and 1,250,000 GEN options at the time of publishing this article. The Company has been engaged by GEN to share our commentary on the progress of our Investment in GEN over time.
