FYI Resources in exclusive talks with Alcoa to bring $1 billion HPA Project to life

FYI Resources Ltd (ASX:FYI) (OTCMKTS:FYIRF) (FRA:SDL) is positioning itself to be a significant producer of high quality, high purity alumina (HPA) in Western Australia, having entered into a nine-day exclusive period for a joint venture negotiation with Alcoa Australia (NYSE:AA) (FRA:185). Wise-Owl.com has released a research report detailing the strategic significant of the agreement, with outcomes from the negotiations expected to provide a clear path for the HPA project development, funding, operation and product marketing. The company’s Cadoux Kaolin Project has a 3.2 million tonne reserve and a >25yr mine life of aluminous kaolin clay, grading 24.8% aluminium oxide and around 10,000 tonnes per annum of feedstock would be produced via the company’s proposed HPA production facility in Kwinana. “Show of faith by a multinational” The report said: “The outcomes of these negotiations should provide investors with much greater clarity on how the project’s costs will be funded. “The JV could arguably prompt analysts to revise valuations due to a dilution in risk metrics surrounding product development and the securing of financing and offtake agreements. “Making this development even more significant is Alcoa’s close involvement with FYI during the testing process and the establishment of an updated DFS – in short, this is a show of faith by a multinational that has an intimate knowledge of FYI and its capabilities. “With investors now able to place a value circa US$1 billion on FYI’s project and a strengthening of its relationship with Alcoa, the company should continue to benefit from positive momentum and has been significantly de-risked.” Notably, the company also has backing for up to A$80 million from Luxembourg-based private equity group, GEM Global Yield LLC SCS which provides capital support for the development of the project, particularly at key funding requirement stages. FYI tenure and location map Updated DFS shows robust finances FYI has a proven resource, solid operational and financial metrics and proof of concept in terms of being able to bring a premium product to market. The company’s most recent DFS demonstrated a net present value of over US$1.015 billion (A$1.3 billion), and internal rate of return of 55% and upfront capital costs of US$202 million. FYI intends to use kaolin clay as a feedstock for its HPA production, which will have a much lower environmental impact – a simple process which results in cheaper capital and operating costs. The process also reduces raw material waste and generates low toxic waste, with extensive recycling at the inputs and outputs. Maiden production is expected to start in FY23, which means the company offers relatively near-term earnings visibility for a start-up project by mining industry standards. HPA demand could sky rocket The report notes that some forecasts have the demand for HPA to rocket from the current 40,000 tonnes per annum to over 140,000 tonnes per annum by 2026. Notably, FYI plans to produce 8,500 tonnes per annum of 4N HPA (99.99% pure) and 1,500 tonnes per annum of 5N HPA (99.999% purity and not originally part of the DFS). Wise-Owl.com said: “The production of 5N opens up new markets because of its high-end applications in areas such as lithium-ion battery manufacturing. “Currently 4N HPA sells for circa US$25,000 per tonne, and the higher purity 5N HPA sells for around $50,000 per tonne. “Further positive news regarding accelerated use of HPA in new age industries, in particular those involved in green energy, should be well received by investors attracted to FYI.” HPA market demand and deficit forecast 2015-2028 – CRU HPA Report 2021 High ESG standards attract customers Wise-Owl.com said: “FYI has calculated approximately 50% reduction in greenhouse gas emissions and 40% reduction in processing energy consumption per ton of HPA. “High ESG standards have become a prerequisite for HPA offtake customers and FYI has best practise here, including traceability of its process. “Following FYI’s Pilot Plant work, the company has demonstrated it can deliver a dependable supply of HPA for long term contract buyers, with high ESG standards – putting it in good standing to attract Tier 1 customers.“ The company is in advanced discussions with Tier 1 industry groups regarding HPA marketing and off-take arrangements and trial product has been sent to market participants including HPA customers and traders. FYI also recently listed on the OTC and is now looking to build its North American shareholder base in response to increased US investor interest, and the company is also listed on the Frankfurt Stock Exchange - which has already provided valuable exposure to European investors. Other analyst coverage Wise-Owl.com noted that Taylor Collison’s Enterprise Value/EBITDA implied valuation ($2.6 billion to $3.9 billion) is significant as it provides another valuation measure commonly used in the specialty chemicals industry. In addition, Foster share price target ($1.52) implies share price upside of circa 200%. Valuation would be enhanced by a positive outcome regarding Alcoa joint venture due to de-risking factors, project development benefits, improved funding opportunities and commercial advantages in terms of product marketing. The report said: “FYI’s shares have increased approximately ten-fold in fiscal 2021, driven by the group’s ability to demonstrate the value of its resource, the strength of its technologies and its ability to forge a strong relationship with a global player. “Based on peer comparisons we initially saw the potential for significant share price upside and we believe that a further rerating could occur on the back of an uptick in the group’s market capitalisation, as it begins to trade more in line with traditional financial valuation methodologies, similar to those applied by Foster Stockbroking and Taylor Collison.” Upcoming catalysts FYI has several share price catalysts on the horizon including: Outcomes of negotiations with Alcoa Australia – within the next 90 days; Additional process flowsheet development and demonstration; Completion of HPA project detailed engineering, FEED and FID; Continued product market seeding and qualification; Signing of customer MOUs and strengthening marketing relationships; Advancing financing arrangements; Investigation on additional internal revenue streams; Investigation into broader battery HPA utilisation and markets; and New demand growth sectors for use of HPA.