Orbite Aluminae is Transforming Aluminum and Rare Earth Industries
(Thomson Reuters ONE) -
By James West
MidasLetter.com
TORONTO - 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 29(th) 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 5(th) 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 6(th) 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% Al(2)O(3 )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?
About Midas Letter
Midas Letter is the Journal of Investment Strategy of the Midas Letter Financial
Group Ltd., a Canada and Luxembourg-based advisory group that identifies premium
opporunities in resources, technologies and real estate for its clients.
Contact: James West
midasletter(at)midasletter.com
http://www.midasletter.com
(416) 598-9181
This announcement is distributed by Thomson Reuters on behalf of
Thomson Reuters clients. The owner of this announcement warrants that:
(i) the releases contained herein are protected by copyright and
other applicable laws; and
(ii) they are solely responsible for the content, accuracy and
originality of the information contained therein.
Source: Midas Letter Portfolio Advisors AG via Thomson Reuters ONE
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Datum: 31.07.2012 - 19:22 Uhr
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