REPORT FOR POTENTIAL INVESTORS: TECHNOLOGY METALS AUSTRALIA...

REPORT FOR POTENTIAL INVESTORS: TECHNOLOGY METALS AUSTRALIA (ASX:TMT)​

Investment Thesis And Company’s Financial Prospects:

TMT is a junior resources company, currently advancing its Gabanintha Vanadium Project (Western Australia). TMT holds all the mineral rights at their mining tenements in Gabanintha, their sole project. This is a pure-play vanadium investment.
Having responded to an improving vanadium market by advancing the project through the Pre-Feasibility Study stage (PFS), next steps are completing the Definitive Feasibility Study (DFS) and securing project financing. Management are projecting mining to start in 2021.
Major investment risks are the direct leverage to the historically volatile vanadium price¹, project financing and extraction costs linked to Gabanintha’s specific metallurgy.

Investor Information & Capital Structure
Share Price: AUD$0.71
12 Month Price Target: AUD$2.00
Price Target Methodology: NPV
Market Capitalisation: AUD$39.5m
Shares on Issue (SOI): 55.63m
Current Cash: AUD$2.8m
In Money Options: 27.7m
Average Strike Price: AUD$0.32
Current Fully Diluted SOI: 83.3m
Current Fully Diluted MC: AUD$59.1m
Total Cash After Dilution: AUD$11.52m
EV: AUD$47.6m
Daily Liquidity: AUD$0.5m


TMT’s largest shareholder is Twentieth Century Motor Company Pty Ltd (Mathew Walker/CICERO Group) who hold 30.14% (as of 21/03/2018).² TMT’s Managing Director Ian Prentice acts as an Executive General Manager of CICERO. No other party holds over 12% of the stock.³
The company is debt-free with all capital raised through equity placements since float on the ASX in December 2016.⁴ Current quarterly cash outflows are projected at AUD$1.65m so further capital raising is likely⁴, although aided by the PFS, TMT is actively seeking partners to finance the project through off-take agreements avoiding shareholder dilution.

Vanadium Market
91% of global vanadium is used in steel production, typically as a strengthening agent in alloys. Addition of just 0.2% vanadium can increase steel strength by 100% and reduce weight by 30%. Therefore the vanadium price is largely tied to steel output, especially from China. More recently, interest has heightened for vanadium use in energy storage (batteries).⁵
Supply
Vanadium is sourced from three processes:

• Primary: from mined vanadium ores (18%)

• Co-product: mainly in China, from the production of steel from iron ore (71%)

• Secondary: produced in oil refining and burning oil in power plants (11%)

Global vanadium supply is dominated by China (56%), South Africa (12%) and Russia (10%).⁵ The Chinese government has recently moved to reduce pollution from steel production by cutting back use of domestic low-grade magnetite iron ore in favour of higher grade imported ore. Low-grade Chinese magnetite contains vanadium and has historically been a major source of the element. This move has lowered supply.
Increased supply from mined vanadium ores is coming onto the market, but the volume is not significant such that it should disrupt the market price. There are a very limited number of vanadium exploration stocks that are near to production and TMT is likely to be the next primary vanadium project to come on stream.
Demand
Global vanadium consumption is approx 90,000tpa with forecasters expecting demand to increase to 131,000tpa by 2025, excluding growth in the battery sector.⁵
Chinese steel production (>50% of global output⁶ ), is at record levels despite cutbacks at magnetite fed mills. To phase out substandard steels, the Standardization Administration of the PRC has announced new rebar standards for implementation in November 2018.⁷ Increased vanadium content will be required to improve steel quality, consequently raising vanadium demand.
Beyond demand from traditional markets, a potentially significant new area of demand is energy storage. This sector is expected to grow to >US$350bn by 2030 with Vanadium Redox Batteries (VRBs) taking significant market share, implying demand for an additional 10,000–20,000tpa of vanadium by 2025.⁵
The commercial viability for VRBs is not yet proven, however, unlike the degradation of lithium that occurs in lithium batteries, the vanadium in VRBs does not degrade so retains its value. Other benefits over lithium batteries are lower fire risk and the ability to charge and distribute energy simultaneously. VRBs should therefore predominate in national power grid applications.
The addition of vanadium to steel also has significant uses in aerospace, offering low density and high strength at extreme operating temperatures.
Conclusion On The Vanadium Market
Although no official Chinese vanadium inventory figures are available, market estimates are low.⁸ Additionally, structural supply and demand side changes should keep upward pressure on prices over the longer term. Historically, the vanadium price has been volatile but these factors suggest that a re-rate in price is due.

Technology Metals Australia
TMT’s total resource is 119.9Mt at 0.8% vanadium pentoxide (V2O5) including a high-grade component of 55.0Mt at 1.1% V2O5, placing the project amongst the highest-grade vanadium deposits in the world.⁹ Australia’s stable and mining friendly jurisdiction is a further benefit.
Headline independent PFS results included target production volumes of 13,000tpa V2O5, C1 cash costs (OPEX) of U$4.27/lb, a 13 year mine life and CAPEX of AUD$380m. The company released a post-tax 10% discount, ‘de-risked’ (i.e. ignoring risk) NPV valuation of AUD$850m with a 3.4 year payback.⁹ The next steps for TMT involve additional drilling, refining the PFS results as part of the DFS and soliciting potential end users (off-take partners) and project financiers.
Near term upside price catalysts include upgrading more of the ‘inferred ‘ (possible) mineral resources to the ‘indicated’ (probable) category, thus increasing projected mine life. The PFS only considers the ‘indicated ‘portion of the resource which is currently 19.2Mt at 0.96% V2O5, as ‘inferred” resource values shown in the global resource estimates are considered too uncertain. Further test drilling should upgrade some of the ‘inferred’ resource to the ‘indicated’ category which can then be included in the DFS.
Other upgrades in the DFS should include the optimisation of the pit structure and scheduling of the mine to reduce operating costs. TMT are also exploring copper, cobalt and nickel extraction from vanadium refining tailings, thus diversifying the project and generating additional revenue.
Finally, the PFS assumes a V205 price of US$13/lb although the current price is US$18.8/lb. Fundamental shifts in the global market should maintain upward pressure on price.
Incorporating these upside factors, the ‘de-risked’ post-tax NPV surpasses AUD$2bn.¹⁰

Valuation:

At this early stage, TMT’s valuation should be heavily risk weighted. Uncertainty around project financing, metallurgy and exposure to long-term vanadium price movements are significant factors. TMT must address these risks to unlock value. The fully diluted EV of just AUD$47.6m reflects market concerns on risk.
In my view, TMT is significantly undervalued:

• Vanadium is still a relatively unknown material. The market is relatively illiquid and rarely covered by research houses or the press. Low market caps have also deterred many investors with the largest pure play vanadium stock, Largo Resources (TSX.LGO), valued at approx CAD$1bn.
• VRBs can enable renewable energy as a major energy source supplying the national grid.
• Higher Chinese rebar standard regulations due in November will boost demand.
• Australia Vanadium Limited (ASX:AVL) shares the same ore body as TMT. AVL have a fully diluted EV of approx AUD$100m. Whilst AVL’s in-ground grade is lower, their resource is 50% larger than TMT’s.¹¹ The ability to cross reference progress across both projects reduces risk; for example AVL has used different consultants for their PFS which should corroborate TMT’s findings.

Summary
TMT is a high-risk investment with potential for excellent returns. I consider the market to be pricing the stock inefficiently. Sophisticated investors have yet to buy with most shareholders speculative individuals. Despite the price almost doubling over the last month following the PFS release, the stock still holds substantial upside potential.

Further drilling at Gabanintha starts this month with the DFS release in April 2019. DFS developments and news of financing partners should stimulate price rises. Therefore I forecast a 12 month price target of AUD$2.00. This incorporates the upside from the DFS and demand growth for vanadium.



This is my interpretation of TMT’s prospects, please DYOR. I welcome any comments/questions. References on request.