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Hi Scaramonga, I do indeed own shares of this stock.
Generally, like everyone else, I’m keen to understand possible risks to my investment and the likely SP into the future. In that context, most of my posting is around market structure – PRE’s position within this will have a critical impact on its fortunes, and there are a number of unanswered questions in this area still (again, hope some of this will be covered by ‘Tony’s RNS’).
I’ve been involved with PRE for some time, so perhaps this combined with the complex (and interesting) market-level issues leads me to post here rather than on the boards of other companies in which I am invested.
Having said that, being a single-company poster is not that unusual (on this or other boards). Of course, there are more here due to existence of the Australian contingent.
Listening to the LYC call yesterday, it was interesting to hear AL’s caution regarding the potential for Lynas to integrate downstream into magnet manufacturing. Essentially, it seemed that AL was wary of treading on the toes of existing customers (although nothing was ruled-out).
A conundrum for PRE further down the line, perhaps.
ASM recently signed a 10 year off-take agreement for 100% of the NdPr from their Dubbo project.
The ASM MD mentioned that off-take was one of the top concerns for financiers.
Do we expect that PA is currently looking for an off-take partner for PRE?
Joe, Mumbles: yes, fair enough, describing the expected UK supply chain as ‘government controlled’ is probably going too far – however, the external dependency is still there – PRE will be reliant on the plans of the magnet producer at the end of the chain if that latter entity is independent. This arrangement, and the ‘common profit margin’ described by the LCM study are hardly open market.
Mumbles: I think you’re suggesting that the PM manufacturing market may grow organically as a result of demand and a desire to substitute – if that was the case then surely we wouldn’t need the likes of the LCM study? It’s not easy – it seems that options are either a government-sponsored new entrant, or expansion from a limited existing base (VAC).
Joe, GK: humour me – please name one European manufacturer (Europe being PRE’s stated market) from the many lists of companies you have provided (a company that manufactures PMs from metal, not a distributor or component assembler). Perhaps there are in fact others outside of VAC, but I suspect none of these are of scale (and PRE wants to supply 5% of the global market).
Thanks all for the constructive responses.
I’m still concerned about the ambiguity surrounding Pensana’s business model – in short, to whom will Pensana sell?
I believe the only magnet manufacturer in Europe of any scale is Vacuumschmelze, and they are already supplied metal by LCM. Will Pensana be relying on VAC to expand, with PRE moving into that space (either directly or through supply to LCM)?
Perhaps the most likely alternative would be selling into the expected government-coordinated UK supply chain (the LCM study). While such an option will allow UK to achieve the political aims of security of supply and job creation, there is a danger that this will cause Pensana to essentially become something akin to a public utility, with volume and price decided by a central government agency – a good outcome for the government, but perhaps not for PRE shareholders.
Both of the solutions above create strong external dependencies for PRE – they are not selling into a traditional open market. As well as potentially being volume-limiting, do either of those solutions create a situation where PRE will be able to sell at the prices included in the business plan? While the whole global pricing subject requires a separate post (or several of them), it’s worth bearing in mind that the BP NPV of £6.50 per share relied upon significant price increase – at current prices (including the recent uplift), the NPV is around £0.50 (my own estimate using assumptions based on BP data – please DYOR).
An obvious solution might be for PRE to fully integrate downstream, but this is easier said than done. Even in the UK government solution, it’s not clear who would provide the magnet-making expertise.
Hopefully the upcoming RNS that was indicated to Tornado will provide some clarity in this area.
The latest issue of 'Rare Earth Observer' provides some interesting detail on the issues of Customers and Pricing:
Thanks Tony - I also spent some time in consultancy, so can relate to your comments. However, since this is a new business launch where cash will be in short supply (rather than, say, an ERP implementation in a stable business), I suspect it won't have escaped the partners' attention that, in addition to (or in place of) fees, they may also be able to develop a passive revenue stream as Pensana scales up and, in particular, potentially rolls-out its processes to other feedstock companies. As ever, I expect PA will have covered this as best as possible, but it's something that would be interesting to clarify.
All - my questions are not intended as 'down-ramps' - they're just points on which I think we need further clarity in order to understand the Pensana business model; in that context, Pricing and Customers are the main focus, IP is a minor point.
"Pensana is working with Wood, the international engineering group. Wood has committed forty experts from its Western Australian, UK and South African operations to work on FEED for both projects."
Consultants, including Wood, have been an integral part of the Pensana story so far - will we own the Intellectual Property for any innovations they develop through the course of this work (in particular, the new sulphate creation process), or is there a chance that we will have to pay them ongoing licensing fees / will this cause problems in any way in the future?
Of course, Pensana couldn't have progressed to this point without the use of external exports, I'm just considering whether or not there may be any long-term implications.
GK, yes, I expect a good level of detail to be delivered in the LCM report - the point that took my interest in particular was "...and the study will investigate... market opportunities...". Again, the questions will be how LCM's magnet manufacturing plans align to PRE's desired production levels, and to which customers LCM will sell (perhaps we'll be in a JV with them and others - same 'customer' questions will still apply).
Tony - thanks, fully agree with the macro sentiment, I'm just interested in how the pieces link together at a lower level - this will in part, will have implications for PRE's market/pricing power. I think there's no dispute that we need more rare earths, perhaps the question is more who will capture the economic value of the opportunity.
China - I appreciate the timing looks concerning (I hadn't noticed HE's post this morning), but these are written as genuine questions that I believe are of relevance when trying to understand the overall Pensana story.
Still hoping that we might have some suggestions as to who our customers might be!
MoF - yes, indeed, to all those macro factors. A few weeks ago we discussed how this higher demand might play-out in terms of price (to what extent will increased demand be neutralised by incumbent supply growth, etc.). Now I'm looking to drill the next level down to understand precisely how PRE expect to 'go to market'.
So far, it sounds like we don't have a clear view on who is actually going to buy PRE's product. Might it be Chinese magnet manufacturers (who then, e.g., supply through an integrator to VW, as with Bakker/GE)? That perhaps seems counter-intuitive, but where are their European equivalents? Some European firms have factories in China/Asia – still means shipping ex-Europe? Looking at the domestic alternative, will nascent UK PM capability scale quickly enough to be a material customer of PRE?
Of course, I hope that the directors would have a much clearer view on this, but I’m keen to make sure that I also understand a sufficient level of detail - PRE are only building part of the supply chain, we need to understand their position in the context of the whole. Further discussion welcome…
Hi all, thinking about potential customers… interested to hear others’ thoughts on the following…
What is the current scale of the addressable market for Pensana oxides/metals in Europe? How much metal and magnet manufacturing currently takes place in UK and the EU? Is it correct to assume that, in the short/medium term, there will be a limited European market for Pensana oxides/metals? In the absence of European customers, to whom will Pensana sell? If European customers exist, who are they?
There has been discussion of creation of a new ‘mine to magnet’ supply chain in UK (to meet European demand). Assuming UK Government decide to support creation of a new PM factory in UK (following completion of the LCM study) and Pensana are chosen to supply into this, does this approach still not risk falling foul of a chicken and egg scenario? Which OEM will want to work with a company that represents a supply route that has not yet been built; and how can a supply route be built without any buying commitment from an OEM? Will the UK offering have to scale-up over a considerable length of time before being able to compete with existing competitors? Will UK Government have to intervene with protectionist measures? Is anyone aware of similar scenarios in other industries?
How is market demand for magnets in Europe currently fulfilled? Here is an example:
In this case, GE have awarded the contact for (at least part of) the Dogger bank magnet assemblies to a Netherlands firm, Bakker Magnetics. The article does not explicitly state whether or not Bakker are producing/sourcing the magnets themselves, but I presume this to be the case, since Bakker have a JV factory producing magnets in China. So this suggests a model where high value design and assembly takes place in Europe while manufacturing takes place in China. It seems that in order to supply Bakker, Pensana would have to ship their oxide to China – i.e., the materials provision opportunity is not in Europe.
Hi China - with the 'venue of publication' being ECEU for the '1.31' transaction, I suspect that this relates in some way to the incorrect conversion of a EUR transaction into GBP. e.g., in the London Stock Exchange download, they are perhaps taking the transaction value (in EUR) and dividing by the GBP price to give an inferred unit value, resulting in fractional units. On this website, the unit value for the '1.31' transaction (08:29:58) is shown as 1 (i.e., no fractional units in this data source).
There are many other possible explanations of course (we could probably just write to the LSE and ask!), but more likely to be a technical issue than anything untoward, I suspect.
We often use Lynas market cap as a reference for our own target valuation (“Lynas is worth X, so that’s what we’ll be worth in four years”). But what if Lynas is significantly overvalued at present?
A poster on HC, ContraryJ, puts forward the argument that this may indeed be the case; an excerpt of the relevant post is shown below:
“...I would maintain that both prices [MP and Lynas] are highly inflated… If I take MP last 4 Qs then are on course to make $60 M in a year… Market cap of 6B divide 60M So there PE is actually half of Lynas's but still grossly over valued. I expect 2021 to be a great year for Lynas and would not be surprised to see its PE drop to <100 with AR in August 2021.
All this comparison of Lynas and MP reminds me of Dot Com. On every board for a Dot Com company posters compared their company to other companies with over inflated prices. To justify why their company should be higher. In the end they all crashed no mater how good or bad the company was. Amazon USD 106 Nov 1999 to 8.37 May of 2001. Amazon survived but many others just went BK.
If you think Lynas should be higher answer at least two of these questions. If you can't what makes you positive on Lynas? Surly you have some reason for figuring AUD 6.00 or higher is as fair price.
1. Lynas was worth AUD 2.20 in May of 2020. What events or press releases have happened since then to make it worth AUD 6.00 to day? Was it undervalued then. Why?
2. Lynas management sold $450 M in stock a little less than a year ago. They will need that cash but not till later this year. Why would they have sold then unless they thought AUD 2.25 / Share was a good price for company. That they should sell at what they thought was a good price. Has anything happened since then that makes the company worth more? What?
3. Do you believe that PEs are at these levels for another 3 or 4 years? If so why? What do you think is a reasonable PE for Lynas? Why?
4. Could you say what Lynas profits will be in 2021, 2023 and 2025? To do this you need to make assumptions could you say what yours are?
Many times since the roaring 1920s stock prices have soared. Most recently dot com 1998 - 2000 crashed in 2001 banks 2005 - 2007. Crashed 2008. Here is a 90 year chart of S&P PEs take a look at how high PEs have been historically and what happed soon after. Now look at last 9 years and explain why we should not expect a dramatic drop in PEs in next year or two and what that would do to Lynas SP even if profits double or triple between now and 2025. IE if Lynas PE drops to 20 then price drops to AUD 0.60 Profits triple that is SP of AUD 1.80. I personally would not be surprised if their PE drops to about 10….”
Not me, China. As stated previously, I'm an independent actor in all respects.
"Charley, I appreciate that you have a lot of faith in your own numbers, sadly I an many others have differing results "
Putting aside any funding or executional risk, the only real debate is around price, all other aspects (capex, opex, volume) are broadly provided by the company.
That leaves us with three main scenarios (excluding interest, tax and any ramp-up period):
- Current price ($68), NPV = nil
- Adamas 2030 price ($100), NPV = $1bn
- Estimated business plan price ($140), NPV = $2.3bn
What price level are you assuming in your assessment, China?
Mumbles, the $1bn valuation would be based on:
- full production for all years (1-10)
- opex of $22 per t of treo (this is stated in the BP, no need for an assumption)
- NdPr price of $100 per kg (versus current market price of $68)
- discount rate of 8%
- no interest or tax!
Hopefully the table below helps clarify (seems to paste back into Excel in a usable format) - the calculation is very high-level (i.e., simplistic), but serves to check the focal assumption - that of Price.
Also, to clarify my earlier post - there were no assumptions in those calculations, I simply used the data explicitly stated in the BP to determine that, over the initial five year period, the NdPr price is implied as being $160. The 8,682t is a by-product of that calculation, represents the average annual production in the first five years, and suggests to me a fairly extended ramp-up in the first couple of years.
Hope that helps - welcome further discussion (even if it bores everyone else!)
Vol-NdPr Vol-Other Vol-Total Price-NP Rev-NdPr Rev-Oth Rev-Ttl Opex-Ttl Capex Net PVF PV CumulNPV
0 - - - - - - - - (423,000) (423,000) 1.0000 (423,000) (423,000)
1 4,500 8,000 12,500 100 450,000 44,505 494,505 (275,000) - 219,505 0.9259 203,246 (219,754)
2 4,500 8,000 12,500 100 450,000 44,505 494,505 (275,000) - 219,505 0.8573 188,191 (31,564)
3 4,500 8,000 12,500 100 450,000 44,505 494,505 (275,000) - 219,505 0.7938 174,251 142,687
4 4,500 8,000 12,500 100 450,000 44,505 494,505 (275,000) - 219,505 0.7350 161,343 304,030
5 4,500 8,000 12,500 100 450,000 44,505 494,505 (275,000) - 219,505 0.6806 149,392 453,422
6 4,500 8,000 12,500 100 450,000 44,505 494,505 (275,000) - 219,505 0.6302 138,326 591,747
7 4,500 8,000 12,500 100 450,000 44,505 494,505 (275,000) - 219,505 0.5835 128,079 719,827
8 4,500 8,000 12,500 100 450,000 44,505 494,505 (275,000) - 219,505 0.5403 118,592 838,419
9 4,500 8,000 12,500 100 450,000 44,505 494,505 (275,000) - 219,505 0.5002 109,807 948,226
10 4,500 8,000 12,500 100 450,000 44,505 494,505 (275,000) - 219,505 0.4632 101,674 1,049,900
Mumbles, I'm sure the numbers as presented are internally consistent and add-up as you suggest - however I am looking beyond the initial data and attempting to understand the assumptions that appear to be embedded in the EBITDA. One angle on this shown below:
- average for first five years: EBITDA = 359, Revenue = 550
- from this we can imply that cost is (550-359) = 191
- since we know that cost per treo kg is $22, we can determine the average volume over the five-year period: 191k/22 = 8,682kg of treo (assuming that the 22 is constant)
- we can split total volume into NdPr and Other reo based on 4.5/12.5: so the total volume splits into 3,126 of NdPr and 5,556 of Other
- we can split the revenue into NdPr and Other based on an assumption declared in the PFS (NdPr = 91% of revenue): so 500 NdPr, 50 other
- from this you can determine the implied price of NdPr over the five-year period: 500m/3126 = $160 per kg of NdPr
Given that the Pensana investor presentation shows the Adamas assumption for 2030 to be $100/kg (and current price is $68/kg), the $160 looks high. This then leads into the discussions on price and, in turn, to the NPV scenarios I laid-out in an earlier post (13/06 11:24). Based on the available data, overlaid with my own interpretation and opinion, I still suspect $1bn is more realistic.