- The ~31% decline YTD in Applied Minerals (OTCQB:AMNL) more than prices in the inherent uncertainty facing this exploration stage miner and ignores the ongoing transition to the production phase.
- 100% ownership of one of the only two commercial halloysite clay deposits in the world provides a significant competitive advantage while the halloysite-based products have the potential to gain market share in a wide range of applications.
- Insiders own ~32% and have a history of disciplined capital raising (uncommon in the mining industry).
AMNL is a vertically integrated producer of halloysite clay (marketed under the Dragonite brand name and produced at the Dragon Mine in Utah) and iron oxide. Its products are used to improve performance in an environmentally friendly manner in the plastics, oil and gas, building materials, environmental remediation, agriculture and cosmetics industries. In 2008, AMNL exited the contract mining business due to poor economic conditions in order to focus on halloysite clay.
Disruptive products + large market opportunity + increasing demand = Significant growth potential
Dragonite can gain market share by providing superior performance at a lower cost and in an environmentally friendly manner. The latter advantage alone provides a significant competitive advantage given the secular demand for environmental sustainability. Below are five markets waiting to be disrupted:
Polyethylene (NYSE:PE). PE is the largest volume resin (plastic) in the world at 50 million tons annually. Dragonite provides significant benefits in the manufacturing process through the nucleation of PE* including cost savings, improved quality and weight reduction (lightweighting). The demand for the latter should continue to grow given the increasing CAFE standards. For example, the automobile industry foams many of the plastic parts in order to reduce weight and meet certain fuel efficiency standards. However foaming typically results in a loss of strength and stiffness. Adding only 1% Dragonite to foamed plastic increases the strength by 20%, which results in reduced manufacturing time and lower resin use.
Currently 0% of the PE market is pre‐nucleated compared to 50% of the polypropylene market. There is only one other competing nucleating product which costs $15‐30 per lb compared to $0.76 per lb for Dragonite. AMNL is gaining traction as one of the largest lawn and garden tool manufacturers is a customer and there were multiple scale-up trials last year by other companies. The 5% target market share (conservative given the competitive advantages) would generate annual revenue of $100 million.
*By nucleating crystallization, plastic parts solidify faster, which increases the number of parts produced per hour and reduces manufacturing costs.
Fracking. AMNL is a first derivative fracking and shale play as it provides proppants (a material used to keep an induced hydraulic fracture open) to oil and gas drillers. According to The Freedonia Group, ~5.3 billion lbs of ceramic proppant were consumed in North America in 2012 while consumption is projected to grow at a CAGR of 8.8% through 2017. The need for lighter, stronger and more permeable proppants should continue to grow as drilling depths increase. Last month AMNL entered into a development agreement with OPF Enterprises to develop proppants.
AMNL should gain market share for two reasons. First, its proppants either meet or exceed performance metrics of the current market leading product. Second, its Dragon Mine in Utah is next to the Bakken (the largest North American user of proppants) and Niobrara shale basins. Utah has four of the 100 largest domestic oil fields and two of the 100 largest gas fields.
Source: Company press release
Flame retardant (NYSE:FR). The FR additives market is a significant opportunity given its size (~$5.4 billion) and projected growth rate (5.4% annually through 2016 according to the World Flame Retardants publication) driven by more stringent safety standards.
High market share for its Dragonite product is easily achievable for three reasons. First, it is competitive from a cost/performance standpoint by reducing the amount of additive required to achieve flame retardancy.
Second, it provides superior reinforcement to existing FR additives (ideal for high performance plastics requiring high strength) as well as the ability to be used in extreme conditions.
Third, Dragonite should benefit from the gradual phase out of brominated flame retardants (due to negative health and environmental effects) in favor of mineral-based alternatives. Existing mineral-based flame retardants such as Alumina Trihydrate and Magnesium Hydroxide have an unattractive trade-off in the form of reduced polymer performance as a result of the loading required to achieve acceptable flame retardancy. Moreover, a widely used competing synergist Antimony trioxide is becoming increasingly uncompetitive as the price has risen ~5x during the last decade as China controls ~90% of global production.
The 2% target market share would generate annual revenue of $166.6 million. As with the PE market, higher market share is possible given the competitive advantages.
Environmental remediation. Dragonite can be used for environmental remediation by capturing and immobilizing pollutants in a solid form, which allows them to be disposed in an environmentally friendly manner. Moreover, in polluted marshland Dragonite does not need to be recovered once the oil is absorbed, which eliminates the disruption to wildlife. AMNL is working with the EPA to further develop this application.
Agricultural. Dragonite delivers agricultural agents such as pesticides and fertilizers in a more efficient and environmentally friendly manner than existing solutions. For example, it can release agricultural agents uniformly and in the appropriate dosages, which eliminates the need for frequent spraying, reduces run-off and saves money. Moreover, the end user is safer during handling as exposure to the agent is blocked.
Cosmetics. AMNL is positioned to take advantage of the growing demand for natural cosmetics with its skin cleanser Dragonite-PureWhite, which is biocompatible with no chemicals or additives. Dragonite-PureWhite is even effective without an active agent at absorbing excess oil and toxins from clogged skin pores due to its high surface area and porosity.
In November 2012, AMNL and HCT Group formed a joint venture to develop an all-natural line of specialty skincare products focused on the high-end skincare market.
AMNL is to halloysite clay as China is to rare earth minerals
Much like China controls the rare earth minerals market (e.g. 90% of production last year), AMNL controls a large portion of the halloysite clay market. For example, its Dragon Mine is one of the only two commercial sized deposits in the world and the only one in the western hemisphere.
AMNL believes there is no competition for its halloysite-based products. For example, the only other commercial sized halloysite deposit (owned by Imerys) is in New Zealand and supplies the tableware and technical ceramic markets. AMNL does not expect Imerys to compete in its target markets given the level of purity of the Imerys property and the costs involved.
AMNL deserves a higher valuation for four reasons. First, by owning 100% of the Dragon Mine (which it acquired for only $500,000 in 2005) with no royalty agreements, AMNL will capture 100% of the upside unlike other miners that give up significant ownership in order to obtain financing.
Second, as a low cost producer of high quality (e.g. 90%+) halloysite and iron oxide, AMNL can earn a solid margin while being price competitive.
Third, last month AMNL reported that its measured clay resources rose 193% while its measured iron oxide resources rose 57% since the previous statement in April 2011.
Fourth, its domestic location provides two advantages (in addition to the previously mentioned advantage in oil and gas drilling). First, AMNL operates in one of the friendliest countries for mining with virtually no risk of expropriation. Second, AMNL can gain market share in the iron oxide market as a domestic producer due to the fact that the U.S. imported 160,000 tons of its 200,000 tons of consumption last year. In June 2013, AMNL sold its first 10 tons of iron oxide to a leading specialty chemicals company.
One of the few miners with high insider ownership
The high insider ownership is in contrast to many other miners that have seen their insiders massively diluted by multiple stock offerings. AMNL is different as it has been able to place stock close to the current price (as opposed to a significant discount) and typically does so without using brokers or paying a commission. The near term risk of dilution is reduced given that management said in the mrq 10-Q that it has sufficient resources to fund operations for the next year.
The convertible PIK note offering in August 2013 provides the financial flexibility required for an exploration stage miner.
Moreover, a core group of four 5%+ holders owns ~55% and provides long term shareholder stability.
Transition from exploration to production phase closer than implied by valuation
AMNL moved from exploration to commercialization in less than three years and has gained valuable credibility through recent partnerships with leading companies such as Mitsui Plastics and Sigma-Aldrich.
Last month AMNL said it was in the final stages of constructing its processing plant with an annual production capacity of ~45,000 tons. The low breakeven level and minimal growth capex requirements going forward should drive significant free cash flow as production ramps up.
As AMNL transitions to the production phase, the twin drivers of increasing revenue and decreasing exploration costs should result in the market re-pricing the ~$41 million of federal NOLs that expire in 2032, currently valued at zero by the market and AMNL.
AMNL is an exploration stage miner with virtually no revenue and continuing operating losses. Additional risks include:
- The need to continually raise capital through the sale of stock and convertible debt to fund operations.
- The lack of proven/probable reserves.
- The inherent volatility involved in mining (e.g. cost overruns, lower than expected deposits).
A traditional valuation analysis is difficult given the current losses. However there is significant appreciation potential if AMNL "grows into" even a discounted valuation received by larger industrial mineral companies such as Molycorp or AMCOL International.
A price target of ~$1.50 should be attainable within 12-24 months. Given the increased risk, a combination of tight stop loss (below the recent support area of ~$1.00) and reduced positioned size should be used.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.