FYI Resources Ltd (ASX:FYI) (FRA:SDL) has received a buy recommendation and a price target of 68 cents per share from Foster Stockbroking due to its long life, high grade kaolin asset, and low-cost high purity alumina (HPA) refinery project.
Foster forecasts commissioning of the Cadoux Kaolin HPA Project in FY23 with first full year of production in FY24 to deliver earnings of $94 million.
The following is an extract from Foster’s initiation research report on FYI:
- We initiate research coverage on FYI Resources Ltd (FYI.ASX).
- FYI Resources Ltd (FYI) is an ASX listed company developing its Cadoux Kaolin HPA project in WA (100% interest), comprising the Cadoux mine and proposed HPA refinery at Kwinana. FYI aims to be a single source integrated producer of high quality HPA with supply provenance wholly from a tier 1 mining jurisdiction.
- Massive, long life, high grade HPA asset: DFS contemplates a 25-year project life comfortably underpinned by only 47% of Reserve, the total of which potentially supports a 55-year project. Resources could support a 175-year project, if fully converted to Reserve. JORC Reserve contains 3.2Mt at 24.8% Al2O3, while the Resource stands at 11.3Mt at 22.5% Al2O3.
- Robust economics in high-margin project: DFS (released March 2020) highlights include NPV10 US$543M and IRR of 46%. Attractive capital intensity with modest capex of US$189M for 8ktpa of 4N HPA product. Swift payback of 3.6 years. High margin project with low operating cost of US$6,217/t. Shallow, low-lying, high grade deposit with campaign mining facilitates negligible mining cost.
- Alcoa MOU offers potential finance flexibility. The joint pilot plant has now commenced after recently signed MOU with Alcoa offers possible pathway to JV as well as potential balance sheet access to assist with project financing.
- Demand from LIB separators and LEDs to drive HPA supply deficit. Forecast CAGR of almost 20% for HPA demand as market expected to enter deficit from 2025 with increased demand from EVs to drive demand for LIB separators.
- Cash of $8M at following recent raise and no debt. Secured equity finance of A$80M significantly reduces funding risk. FYI is negotiating with Alcoa to progress Cadoux as a JV, which we suspect will come with balance sheet access to reduce project risk further.
Earnings and Valuation:
- We forecast commissioning and ramp in FY23e with first full year of production in FY24e to deliver earnings of $94M.
- We have derived a risked valuation of $0.68 per FYI share (0.65x NPV). Our valuation is underpinned by an unrisked NPV10 of A$770M for Cadoux in the base, assuming first production in FY23e, twelve-month ramp, and HPA price of US$24,000/t.
- Considerable valuation upside potential: we note further drivers of value in the Cadoux project include life extension, potential production capacity upgrade, and/or inclusion of by-product revenue, deliberately omitted by the DFS.
- We initiate coverage of FYI with a Buy recommendation and price target of $0.68/share, due to its long life, high grade kaolin asset, and low-cost processing HPA refinery project.
- Catalysts for the stock include: 1) FEED and FID decisions and commencement of the Cadoux HPA project; 2) customer offtake MOUs and marketing relationships; 3) updates on financing arrangements; 4) updates on the Alcoa JV; and 5) updates on LOM extension, capacity upgrade, and/or by-products.