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Advanced Metallurgical Group (AMG)

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Summary

A global critical materials company at the forefront of CO2 reduction trends.

AMG looks very interesting @ €35 per share. The shareprice dropped significantly last month, although results came in better than the analyst consensus.

Average analyst consensus (source = AMG investor site) is € 52,4. That's approx. 50% upside to the current share price.

AMG is starting lithium concentrate production in a few months. 90k ton spodumene a year in fase 1 & doubling that in 2020. Downstream LCE is expected in the future.

AMG is planning to expand it's Vanadium recycling business by 30% by the end of 2019.

Introduction

AMG is divided in 2 main segments;

- Critical Materials; basically they mine, recycle or proces the following metals; Vanadium, Lithium , Tantalum & Niobium, Titanium & Aluminum alloys, Chrome/superalloys, Silicon, Antimony, Graphite.

- Engineering; They are the world leader in vacuum heat treatment services. Better known as 'ALD vacuum technologies'. They mainly serve automotive, aerospace, energy (including solar and nuclear), superalloys and specialty steel industries.

If you like more info about their businesses, this link is a good starting point!

AMG trades @ Euronext Amsterdam (NYSE:AMX). The ticker symbol is (AMG.AS). AMG reports its results in US$ but the stock trades in €.

I'm only going to cover a few -probably the most profitable- businesses within AMG.

Lithium Project

AMG's most important mining activities are located in Brazil at the Mibra mine. They are exploiting that (open pit) mine for more than 40 years. Tantalum & Niobium have been there most important ore for years, but several years ago they noticed that there were high degrees of lithium in that ore. So AMG started a pilot plant & stockpiled the tailings of the processed Tantalum ore. 7 years later AMG is ready to start the 'Lithium concentrate' (spodumene) production. The official opening of the factory is planned the 15th of May. AMG's states that they are among the lowest cost 'hard rock producers', if not the lowest cost producer. AMG's spodumene operating costs benefit from the production of 'Tantalum concentrate', which absorb the costs of mining and initial ore processing (crushing and grinding), AMG targets a production cost of 134$/ton spodumene. So with current prices at 850-950$/ton spodumene that is highly profitable! Their lithium story is planned in 3 stages;

- phase 1; Initial production of 90k ton spodumene. AMG has signed a 3year 'variable' contract in March 2017 at somewhere north of 800$/ton. Sales prices under the agreement are partially indexed to the published market price of lithium carbonate, subject to a contractual minimum threshold. The sales price (CIF China), determined with reference to the current published lithium carbonate market price, would exceed $ 800 per ton lithium concentrate. The Capex for this project is estimated at $ 50M.

- phase 2; AMG plans to double production to 180k ton spodumene & will double the Tantalum production to 600k lb concentrate. An expansion of the mining infrastructure is needed to hit these targets. The Capex for this project will come in at around $ 110M. During the last conference call CEO Mr. Schimmelbusch said that they were in negotiations for an offtake agreement, so expect some news around that topic in the following months.

- phase 3; Downstream Lithium production! This project will be split in 2 stages, just like they did with the spodumene-project. The planning stage of the project is progressing well, AMG already has a site location for the first stage of 13k ton LCE, and are under negotiation with (local) Brazilian governments. AMG seeks for stable Long term contracts and expect LCE production costs of approx. 4000$/ton. They will probably go for 'Lithium Carbonate' production, because 'Lithium Hydroxide' is less stable when shipped over seas and AMG wants to deliver a pure product to their customer.

The 'life of mine' would be approx. 20 years, but more drilling can be expected in the future.

You can find more info in this presentation.

Tantalum mining & processing

There are similarities to the Cobalt story, as most of the world supply comes from (illegal) mining in Congo, Rwanda & Burundi. AMG delivers conflict free Tantalum & that is an asset nowadays! There were some issues last year, such as a fire in one of the two production lines & a one-sided contract termination by their customer 'GAM'. AMG did not agree with the decision of GAM & this story is going to be continued in court. The production line is back on steam since the end of september and insurances paid all the damage done. Meanwhile AMG is selling al it's Tantalum in a 1-year contract during 2018. Signing a long-term contract is likely undesired due to the GAM court case. The GAM-contract was very profitable, rumors say it came around 130$/lb. Spot prices were 96$/lb on the 2nd of March -and still rising- according to AMG's latest presentation. That's 14% higher than the average for Q4 17.

One of the most important applications of Tantalum is in the production of electronic components, mainly for portable electronics. 

Roskill wrote a report last year on Tantalum prices. The info they provide about AMG is wrong though!

Vanadium Recycling

AMG Vanadium is the sole producer/recycler of FerroVanadium (FeV) in North America(NA). They signed LT contracts to process and recycle spent catalysts from a major oil refinery in North America. This is a very cost effective & environmentally friendly way to process FeV. The fact that there are no competitors left in NA proves that AMG Vanadium is doing something right! AMG signed these LT contracts with downside protection, which is very interesting to stay profitable when prices are on the lower side of the bracket. At current prices of 34 to 35$/lb, the impact on AMG's bottom line will be very significant. Indeed, this business was already highly profitable during 2017 when the average price was approx. 15,4$/lb. The great news is that AMG will expand its business by 30% at the end of 2019 (if they get environmental approval which is unlikely to be a problem since it is a critical material in the USA). Dutch bank ING expects the expansion to impact Ebitda by $ 12,5M in case FeV prices normalize, or with $ 27,5M if prices stay high. FeV prices were approx. 27$/lb when their analyst spoke to the newspaper. If prices remain where they are now, there would be even more upside to their bull case!

Why are Vanadium prices that high? It's a mixture of reasons; Chinese environmental restrictions lowering the output significantly, new rebar standards in China & higher demand for Vanadium redox batteries.

Titanium aluminides 

AMG Titanium Alloys and Coatings is a world-leader in the production of advanced materials for the aerospace industry and the largest qualified provider of TiAl feedstock for all major commercial turbine engine manufacturers. AMG signed a contract with Pratt & Whitney two years ago. This industry is growing fast because of the worldwide trend for CO2 reductions & a growing middle class. This business comes with a high backlog & great visibility and will be growing fast in the coming years. AMG installed extra capacity last year.

Financials 

AMG has a very solid balance sheet, with $ 10,3M net debt or a 0,1x Net Debt/Ebitda. They recently renewed their credit facilities & now have up to $ 650M to spend! The company won't need it any time soon, since they can finance most of their growth projects with their strong free cashflows.

There is a 'small' & manageable pension debt, which most companies do have due to the current low interest rates.

AMG runs solid free cash flows. The maintenance capex is being used to calculate the free cashflow, working capital is excluded in these calculations. In 2017 AMG produced up to $ 68M FCF, which was a great result. Definitely if we take in account that the maintenance capex was up $12M (after few years in austerity mode from '13 to '15) from their expected LT maintenance capex (Mcapex). So with a normalized Mcapex the FCF could've been $ 80M! In 2016 FCF was $ 47,1M. But that year there was a one-off payment of $ 23M for their pension scheme. Without that payment, FCF would've been $70M. Clearly, great cashflows can be expected from their current business, and most of their projects can be finances with growing cash flows.

AMG pays a small dividend of € 0,28 because they prefer to keep their cash reserved for expansion plans.

Investment Thesis

Last year AMG set some long term goals; AMG expected EBITDA to exceed $200 million within 5 years, and they recently adjusted their forecast because it was too conservative! Now they expect to achieve those goals in 2020. During the latest conference call, CEO Heinz Schimmelbush stated that there was even some upside to that. Even now I do think MGMT is still too conservative (and I think analysts do think the same)...

Ebitda was $ 125,5M in 2017, so you would think it's impossible to get to that $200M level? ... Don't forget about the capacity expansions in Tantalum, lithium & Vanadium!

AMG is about to produce 180k ton spodumene in 2020. If we take into consideration Morgan Stanley's bearish thoughts on the Lithium market & forecast a LT spodumene price of 550$/ton. The operating costs were 134$/ton, add some transportation costs & maintenance capex to that and 200$/ton seems a fair number going forward. So that gives you an Ebitda margin of 350$/ton. That would account to an Ebitda of $ 63M.

ING expects the 30% expansion in Vanadium recycling to deliver an extra $12,5M (normalized prices) and an extra $27,5M (@ approx. 27$/lb), We remain conservative & use $ 12,5M in our calculations.

I expect the extra 300.000 lb Tantalum to bring in an extra $ 15M Ebitda at current prices, but again lets stay conservative & account $ 10M. 

So if we take 2017 as a base year; Ebitda was $ 125,5M & we account no further growth in those businesses. Then add up the expansions/new businesses below;

Spodumene = $ 63M

FeV = $ 12,5M

Ta= $ 10M

total Ebitda 2020 => $ 211M

So even if Morgan Stanley is right about future lithium prices, AMG will seem to succeed!

Enough with that Ebitda... I rather use 'free cash flows' to value a company; Let's try to figure out what Cashflows AMG can produce in 2019 & 2020.

If we go back to the cashflows from above (financials) we use $ 80M as a base case for AMG's current business(we take into account a 'normalized maintenance capex' for 2018). This is a conservative number as current pricing is significantly better than in 2017.

First we gonna do some math... AMG's 3-year spodumene contract has a price of over 800 $/ton (with downside protection). we gonna use that sum for the first 90k spodumene & than we will be a bit more conservative for the 2nd 90k and use 650$/ton. We account an all-in operating cost of 200$/ton & we apply a tax rate of 30% on Ebitda. For FeV & Ta we assume a FCF to Ebitda conversion rate of 65%.

- 2018; base case +10M (high FeV prices) + approx. 35k ton spodumene @850$/ton

=> 80 +10 + 16 = $ 106M

- 2019; base case + 90k spodumene => 80 + 38 = $ 118M

- 2020; base case + 90k + 90k + 30% extra FeV + 300k lb Tantalum

=> 80 + 38 + 28 + 8 + 6 = $ 160,5M

As you can see, AMG is perfectly capable of financing the majority of their growth projects thanks to their strong cash flows.

Current market price of AMG is € 1113M. The current share price is € 35,1 and there are 31,7M diluted shares. Exchange rate €/$ = 1,23; so the market price in US dollar would be $ 1369M.

If we take that into account, we can calculate forward FCF yields;

2018; 7,74%

2019: 8,62%

2020; 11,7%

Conclusion

AMG lost almost 30% since it's year high (€47,2), but unlike you would expect, the business got even more profitable. Quickly rising Vanadium prices & better pricing in Tantalum & Silicon should significantly raise profitabillity in 2018. So prices went down on sentiment? Fear of interest rates, Morgan Stanley's Lithium report & Trump's trade war?

Based on these conservative/realistic figures AMG looks very appealing with a FCFyield of 11,7% to be expected in 2020. 

And there's even more upside in the future if AMG's manages to go further downstream to LCE production. & that's what they're planning to do!

It looks like all 5 covering analysts do agree, with price targets in the range of € 50 to € 55 and 5 times a buy rating. 

Don't forget; "In the short run, the market is a voting machine but in the long run, it is a weighing machine."

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Disclosure: I am/we are long AMVMF.

Additional disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
The information in this article is general in nature and should not be relied upon as personal financial advice.
This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.