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Altech Chemicals: broker assigns Speculative Buy and $0.41 target price

Altech Chemicals (ASX:ATC) has received a Speculative Buy recommendation and a risked valuation of $0.41 a share from Perth-broker DJ Carmichael.

Altech last traded at $0.10 a share. The following is an extract from the report.

Unique opportunity in high-tech chemicals

Altech Chemicals Ltd (ASX:ATC) is a speciality chemicals company developing a vertically integrated High Purity Alumina (HPA) project.

ATC is unique in that it uses a process to convert aluminous clay, sourced from its own quarry in Western Australia (WA), to HPA in a simple, highly cost effective process with operating costs a fraction of its larger, more established peers.

ATC follow a conservative development strategy, using management's extensive experience in building chemical plants, with the aim to be one of the world's largest producers of HPA.

HPA is being used in a growing number of high tech applications and is set to have a CAGR of 19.7% to 2021.

Key Points

HPA. What is it and what is it used for?

HPA (99.99% Al2O3) is sold as a white powder and is the base material for the manufacture of sapphire substrates, scratch proof sapphire glass and as a coating on separators used in lithium-ion batteries.

Most HPA is used in the manufacture of LED's, alumina semi-conductors and phosphor TV screens but it is experiencing a wider and growing use in smartphones and Li-ion battery applications amongst others (aerospace, medical, defence).

Government Policy and public awareness on energy saving is, in part, driving the increased usage of these products.

ATC is developing a large HPA project with its own source of feedstock from a quarry in WA and its own HPA plant based in Malaysia.

The Asia-Pacific region is expected to see the highest growth in use of HPA over the coming years.

Most competitors are using old processes:

Most existing producers of HPA exist as small business units in very large industrial conglomerates, using processing routes that re-refine aluminium metal that was produced from bauxite via the Bayer Process, to produce HPA.

This is expensive and very energy intensive.

High labour costs also add to operating costs. More recently, aluminium waste products are being used as a feedstock, but ATC has a sustainable competitive advantage in that it will use an inexpensive, white, very pure aluminous clay as a feed source.

Project financing:

ATC executed an exclusive mandate with Kfw IPEX-Bank GmbH for the provision of services relating to project financing of its HPA project.

The mandate contemplates the arrangement of senior debt project financing aimed at utilising, to the maximum extent, an Export Credit Agency (NYSE:ECA) insurance cover under German-backed project finance export guarantees.

ATC estimate that approximately US$40m of the estimated total US$77m project capital cost will qualify for ECA cover.

An additional $15 million of senior debt financing will be required.

Very robust financial metrics:

The current macroeconomic environment in the medium term favour ATC's strategic intent.

Global 4N HPA demand is set to increase significantly with a forecast CAGR of 19.7%.

This fact and new market developments support ATC's projected operating margins. ATC's planned production facility operates with an attractive contribution margin generating sustainable gross operating margins of between 60-80% and EBIT margins of 50%.

Unlevered free cash flows are robust with the HPA project generating an IRR of 29% with a payback period of 5 years.

Recommendation and Valuation:

We place a Speculative Buy recommendation and our risked valuation of $0.41 a share.

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