Investment Memo: FYI Resources Ltd
(ASX:FYI)
-
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 FYI 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.
Why did we invest in FYI?
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 FYI 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.
What could go wrong?
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]: Grade = 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.
General updates from FYI