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Shares of Orbite Aluminae Inc. (TSX:ORT), have yet to price in the disruptive nature and profound
impact that Orbite’s technology is about to
make on both the Aluminum and Rare Earth industries. Having labored long and
hard under a shroud of skepticism kept alive by short interests in the
company’s stock, industry validation is incrementally cancelling out
the naysayers and relegating them to the sideline.
As result
of all the short-side bashing, the share price has suffered. But the string of press releases throughout 2012 thus far constitute some glaringly obvious reasons to
conclude that the company remains sharply undervalued, as well as more subtle
ones.
A
Disruptive Technology
At the
core of Orbite’s business is its disruptive
process that extracts 99.999% pure alumina directly from aluminous clays,
bypassing the requirement for the mining of bauxite and the production of the
toxic “Red Mud” associated with that process. Ultimately that
means a cost reduction of anywhere from 30 to 50 percent in alumina
production, in fact becoming de facto the low cost producer of the industry
Orbite CEO
Richard Boudreault said in a recent interview,
“At the end of the day, including a cost spreading over all the
by-products we should have a cost advantage of about 50% over the low cost
incumbents Bayer (bauxite producers). And about 66% under the more expensive Bayers (process producers). The cash cost of alumina
production for the rest of the industry has increased much in the last
quarter improving our PEA calculated cost advantage.”
According
to the revised
Preliminary Economic Assessment (PEA) filed May 30, 2012, there are two
scenarios in terms of revenue and profit.
In the
first scenario, which would see only SGA and high grade hematite (iron)
produced from a single plant, the PEA suggests production of 540,000 tonnes of alumina worth $425 per tonne
and 190,000 tonnes of hematite with a value of
$200/ tonne. That would yield EBITDA of
$153,982,274.
In the
second scenario however, the same quantity of alumina and hematite would be
augmented with the extraction and purification of :
- 189,298 tonnes
of >99% pure hematite (Fe2O3) per year with an estimated value of
$200/tonne);
- 1,228,628 tonnes
of >95% pure silica (SiO2) per year with an estimated value of $25/tonne;
- 27,816 tonnes
of >95% pure magnesium oxide (MgO) per year
with an estimated value of $400/tonne, and;
- 104,089 tonnes
of mixed oxides per year that can be sold as a fertilizer with an
estimated value of $5/tonne.
That takes
EBITDA to $571.6 million. From a single plant. More than 10 plants are
required to appease half of the Canadian demand for alumina.
Orbite’s intention
is to build multiple plants wherever large quantities of Smelter Grade
Alumina are consumed. All within the next decade. Again, that’s just
for SGA alumina to make aluminum. There’s a market evolving that is at
least as important in the grand scheme of things, and possibly even more
lucrative for Orbite. And that has to do with the
production of alumina beyond smelter grade.
SGA vs HPA
Smelter
Grade Alumina (SGA) is the precursor to aluminum, and its maximum purity is
99.99%, or “4N” alumina. On June 29th this year, Orbite announced that it had produced its first
“5N” or 99.999% pure alumina. That doesn’t necessarily
signal a huge difference to us non-scientific types, but in terms of the
bottom line, its huge, more than 10 times as pure.
The
significant anticipated growth in HPA annual worldwide demand, which
according to Mackie Research will rise from 9,000 tons in 2012 to over 15,000
tons in 2015, will lead to a substantial supply deficit of about 6,000 tonnes per year caused notably by the global increase of
light emitting diodes (LED) demand.
According
to the Mackie report
…High-purity
alumina is metallurgical alumina oxide that has been further refined to a
purity of 99.99% or higher. Based on our discussions with industry
participants, we estimate the current annual market size of the global
high-purity alumina (HPA) market to be about 7,500 tonnes.
High-purity alumina is used in several growth industries which include LED
lights, PCs, semiconductors, artificial sapphires and rubies for fiber optic
communication systems, coating of missile nose cones, ultra-pure nano-materials, and bio-ceramics for prostheses and
implants. The pricing of high-purity alumina varies based on purity level, as
well as size of the alumina oxide powder, and can range from US$75,000/tonne to US$1.8 million/tonne.
The company anticipates that its average realized price will be approximately
US$300,000/tonne. However, in order to be
conservative, we use an average selling price of only US$200,000/tonne in our financial model.”
“I’m
very pleased that a large number of first-rate, internationally renowned
companies are interested in our HPA and are prepared to evaluate our
materials,” stated Yves Noel, Vice President of Sales and Marketing at Orbite. “The quality and purity of our alumina
provides an opportunity for Orbite to fill a
pressing and growing market need”.
Orbite plans to
have completed its HPA facility by the year end and start production in the
first quarter of 2013. Moreover the plant will enable the tolling of heavy
rare earth from the early part of 2013 bringing significant additional
revenues to the firm.
Rare
Earths: An Elephant in the Room
The fact
that the Orbite process is capable of isolating and
purifying certain critical rare earths is another aspect of the company that
is not fully appreciated. Note the above mentioned EBITDA numbers do not take
into consideration the sale of REE’s as a byproduct of the production
of alumina and other minerals.
According
to equity research published by Jacob Securities, “Orbite
Aluminae, a company developing a disruptive alumina
refinery technology, expects to be able to produce about 1,000 tonnes of rare earths as a byproduct before 2015 and
increase output by more than ten-fold as it expands production in Quebec. Orbite clays contain more than 20% HREEs.”
So each of
these additional product categories has the very real potential to add
another order of magnitude to the projected revenue of Orbite.
So why, one must ask, is it so cheaply priced?
Mackie
Research Capital, in a March 2011 research report, targeted a share price of
$7.50, a number that has not yet been reached, due in part to the overzealous
administration of National Instrument 43-101 by the Autorité
des marchés financiers (AMF), the provincial
securities regulator of the province of Quebec.
Unfortunate
Timing
The
announcement in March of the signing of a memorandum of understanding with
RUSAL, who supplies 11% of the world’s primary aluminum and 13% of all
alumina production, is the game changing development that, in a normal
market, should have lit up the shares in Orbite. It
didn’t because the shares had been halted by AMF, who called into
question the methodology for estimating the Rare Earth content of the
company’s Grand-Valée aluminous clay
deposit in its January 10, 2012 43-101Technical Report.
The
additional Qualified Persons and associated firms called in to substantiate
the 43-101 subsequently concluded that the findings of the original 43-101
were accurate and compliant, and on the 5th of April, the shares
were allowed to trade again. Unfortunately, in the meantime, 11 million
shares had accumulated to the short side, which understandably drove the
shares downward.
Acute
weakness in the Canadian resource-centric markets, the continuing saga of
sovereign debt-driven risk aversion, and a
widespread inability to fathom the multitude of value propositions implied in
Orbite’s various applications all combine to
render the stock undervalued, in my opinion.
RUSAL JV
Though
simply a “memorandum of understanding”, there is clear intent for
the world’s largest aluminum supplier to determine the viability of Orbite’s process on a large commercial scale, as
its condition to control use of the technology in Russia indicates.
Vladislav Soloviev, UC RUSAL First Deputy CEO, said: “The
alternative technology is important for alumina production in Russia and its
development will allow the strengthening of RUSAL’s vertical
integration. Our technical team visited the Orbite
pilot plant in Cap-Chat and we have high regards with respect to the
potential of this new technology, which we, as one of the world’s
largest alumina producers, have all opportunities to realize.”
The MOU
contemplates financial participation by RUSAL of up to $25 million in a
phased approach that will see the two companies share human resources and
technological processes to refine the process in Canada, and adapt to
Russia’s specific ores.
NALCO JV
Nalco is
Asia’s largest integrated aluminum complex, and is the 6th
largest in the world. The non-binding partnership with Orbite
incorporates the adaptation of Orbite’s
processes for use on Gibbsite and Bohmite, the two
predominant ores in the NALCO’s mineral inventory, as well as for use
of the technology on the “Red Mud” that is the toxic waste from
processing bauxite into alumina through the Bayer process.
According
to the International
Committee for the Study of Bauxite, Alumina and Aluminium
(ICSOBA) “Alumina refineries world over presently generate more
than 100 million tons of red mud per annum, which is likely to increase with
the setting up of new production facilities and decreasing ore quality. Less
than 5% of red mud is being utilized in the world with the remainder disposed
in ponds.”
The global
current inventory of Red Mud tailings sites measures an estimated 3 billion tonnes. For every single tonne
of alumina produced from bauxite using the Bayer process, 2 tonnes of red mud are produced.
It’s
a problem that grows every day.
Orbite’s Process Remediates Red Mud
Orbite’s process
applied to Red Mud has achieved remarkable results already. The company
expects to deploy its technology as a stand-alone solution to the remediation
of Red Mud sites around the world as early as next year. Though no revenue
model has yet been publicly disclosed by the company, back-of-the-napkin
calculations generate enormous numbers.
According
to the company’s press release of June 27 this year:
“Tested
on various sources of red mud, Orbite’s
patented process enables red mud residue to be converted into raw material
and allows for the extraction of its main components while neutralizing,
purifying and extracting some of its key elements (Fe, Al, Ti, MgO, Na, Ca, REE, etc.). Orbite’s process converts red mud into a dry, inert
and environmentally neutral product as residue (leachate) and can reduce
residual volumes by more than 90% compared to the product’s initial
state. The Orbite technology may be offered via a
licensing agreement or delivered as a ready to use product to customers in Canada
and abroad for the high purity extraction of the alumina, titanium oxides, hematites, magnesium oxides, rare earth oxides, and rare
metal oxides contained in this environmentally harmful waste.
“This
is a world first, as the Orbite technology is essentially
ready to be commercialized,” stated Mr. Boudreault.
“Our process is, to our knowledge, the only confirmed, commercially
viable technology to remediate Bayer process residues, thereby extending the
lifespan of Bayer units often limited by red mud storage permits governing
red mud tailings ponds” stated Richard Boudreault,
President and CEO of Orbite. “As a result,
our technology helps ensure sustainable development by offering an ecological
and economical alternative in managing these environmentally harmful
residues, and by extension, the associated red mud spills. In addition, our
agreement with Nalco is expected to follow the steps of Rusal,
as both companies are seeking to reduce their operating costs using local raw
materials.”
Adds Up to
a Game Changer
This all
adds up to pretty significant game-changing technology. It creates extremely
high purity, high value alumina. It extracts and concentrates Rare Earths and
other valuable minerals. It remediates the very toxic and ubiquitous
“red mud” that is the legacy of bauxite-derived aluminum.
Currently
the Quebec aluminum industry imports annually about $3 billion worth of
expensive Smelter Grade Alumina, which is the lowest hanging fruit for Orbite. The much higher price, higher margin High Purity
Alumina, however, is also relatively low hanging fruit. The remediation of
Red Mud, the extraction of other high value minerals, and applications yet to
be determined constitute the substantial upside and a technology penetration
fast track into the aluminium industry.
The
company’s Grand-Vallée deposit contains a billion tonnes of aluminal clays
grading 23.13% Al2O3 from only 5% of the total land
package of 6,441 hectares. It now has claimed an additional nine times this
area spreading from Quebec city to Gaspé on
the same Orignal geological formation.
With early
stage memorandums of understanding in place with two major players in the
aluminum sector, it would appear that the process of industry-wide
integration of the company’s disruptive technology is underway
The
question is, what are the shares worth when each of the additional value
streams are incorporated into the entire equation?
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