Shares of Orbite Aluminae Inc. (OTCQX:EORBF), 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 canceling 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 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 (NYSEMKT: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 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. (Heavy Rare Earth Elements)"
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.
The announcement in March of the signing of a memorandum of understanding with RUSAL, which 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, which 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.
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 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, "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."
As with any new disruptive technology, there are risk factors that must be considered by investors before wading in. Some of the more prominent ones are as follows:
1. There is no guarantee that the technology will prove to be scalable in a commercial environment: The company's Smelter Grae Alumina has been processed successfully into pure aluminum ingots, according to the company's 2011 annual report. But there is no assurance that this will result in the technology's scalability in a major aluminum production environment.
2. Competition Risk: It is conceivable that Orbite's patented technology may be pre-empted by the emergence of another similar process that may be cheaper or otherwise superior by another participant in the aluminum space.
3. Mining and exploration risk. Despite the fact that a total of eleven professional geoscientists have signed off on the revised National Instrument 43-101 technical report that outlines a billion tonnes of mineable material, there is no assurance at this point that the project can be mined economically, and no such assumption can be made until the production of a 43-101 compliant bankable feasibility study.
4. Commodity price risk: It is conceivable that the price for alumina and/or aluminum products could fall below where the production of them is uneconomic. These factors are largely due to geopolitical influences well beyond the company's control.
These are a few of the big apparent risks. There may be additional ones that emerge involving the technological processes as they subjected to further scientific scrutiny.
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 aluminum 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 Original 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?
Disclosure: I am long OTCQX:EORBF.