Are NeoMetals (NMT) about to take charge?

This article was written by regular contributor Anton Crabbe. You can read his bio here

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Neometals (ASX:NMT) wants to be a sustainable battery materials producer focused on circular economy principles.

NMT plan to execute this via mineral extraction (titanium & vanadium) and commercialisation of their lithium-ion battery recycling and lithium hydroxide production technologies. NMT has three business segments Lithium, Titanium/Vanadium, and Other.

Across these business segments NMT has entered into a number of joint ventures to assist it in commercialising its technology and owns 100% of its titanium project based in WA. A brief description of these projects and ownership structure from NMT’s March quarterly activity report release 28^th April 2023, is as follows:

Lithium-ion Battery Recycling (Intellectual Property - NMT 50%, German owned SMS Group 50%) Commercialising via Primobius GmbH, a 50:50 incorporated JV with SMS group GmbH – to produce nickel, cobalt and lithium from production scrap and end-of-life lithium-ion batteries in an incorporated JV with leading global plant builder SMS group. The Primobius JV is operating a commercial disposal service at its 10tpd Shredding ‘Spoke’ in Germany and is the recycling technology partner to Mercedes Benz. Primobius’ first 50tpd operation, in partnership with Stelco in Canada, is expected to reach investment decision in Q4 2023;

Vanadium Recovery (NMT 100% Intellectual Property) NMT holds 72.5% equity in an Incorporated Joint Venture with Critical Metals Ltd – to produce high-purity vanadium pentoxide via processing of steelmaking by-product (“Slag”). Targeting a 300,000tpa operation in Pori, Finland, underpinned by a 10year Slag supply agreement with leading Scandinavian steelmaker SSAB. Finnish project investment decision with JV partner, Critical Metals, expected Q2 2023. MOU with H2Green Steel for up to 4Mt of Slag underpins a potential second operation in Boden, Sweden.

Lithium Chemicals (Intellectual Property held in Reed Advanced Materials PL – NMT 70%, Mineral Resources Ltd 30%) Reed Advanced Materials PL (“RAM”) Earning into 50:50 JV with Bondalti Chemicals SA – to produce battery quality lithium hydroxide from brine and/or hard-rock feedstocks using patented Eli™ electrolysis process owned by RAM (70% NMT, 30% Mineral Resources Ltd). Co-funding pilot plant and evaluation studies for a 25,000tpa operation in Estarreja with Portugal’s largest chemical producer, Bondalti Chemicals S.A.

Barrambie Titanium/Vanadium Project (Neometals 100%) The project is one of the largest vanadiferous-titanomagnetite (“VTM”) Mineral Resources globally (280.1Mt at 9.18% TiO2 and 0.44% V2O5), containing the world’s second highest-grade hard rock titanium Mineral Resource (53.6Mt at 21.17% TiO2 and 0.63% V2O5) and high-grade vanadium resource (64.9Mt at 0.82% V2O5 and 16.9% TiO2) subsets (referred to as the Eastern and Central Bands respectively) based on the latest Neometals 2018 Mineral Resource Estimate.

Image from NMT Investor Presentation 16^th May 2023

As you can see, the company is committed to cover the entire spectrum of battery delivery. The investment “narrative” around NMT is compelling as they have positioned themselves to benefit from decarbonisation globally as governments and industries look for greener ways to produce the minerals and batteries required to meet carbon reduction targets and transition to circular economies.

Furthermore, NMT’s projects are either nearing commercialisation, with offtake agreements signed and Pre Feasibility Studies completed or are awaiting final investment decisions.

Image from NMT Investor Presentation 22 March 2023

These advanced prospects caught the eye of traders and investors alike as NMT’s share price hit an all-time high of $1.94 in April 2022, but has since retreated an aggressive 70% to $0.58 at the time of writing as some of the interest has cooled for those not yet actively producing in the thematic.

Stockrank

The QVM and overall StockRank goes some way to explaining the fall in NMT share price. Since 2016 NMT has not managed to produce any meaningful revenue or cash flow and has only produced sporadic operating profits, and dividends. These have been mostly derived by asset sales and favourable taxation events. As a result, the QVM scores are (as you would expect) quiet low at Quality 37, Value 34, and Momentum 35 respectively, resulting in a StockRank of just 29.

At the time of writing

But if we go back to 3^rd April 2022, it was a different story.

On the back of an accounting $16.3m profit in FY21, the company also announced the disposal of their Mt Marion offtake agreement for $30m and the demerger of their Widgie Nickel project. Momentum was strong given the continued interest in the development of their green technologies and mineral projects and as a result the overall StockRank looked respectable.

However, NMT is a great lesson for investors because often an inability to have the fundamentals catch up with Momentum, will see the Momentum catch up to the fundamentals. In time this impacted the overall rank with a particularly big hit in September at a price which despite already having fallen from its peak, was double what it is now.

The reality is when it comes to developing new technologies (and mines for that fact), it takes time and money, and it would appear investors drank a little too much of the cool aid as expectations got ahead of where the company was, and currently is at, with its technologies and mineral projects. That's why at the end of the day, Stockopedia is so important because the numbers tell you what the PR spin will not.

For companies developing concept technologies, cash flow is so critical. Positive and increasing cash flow will be the first sign that NMT are starting to generate meaningful revenues/sales and the commercialisation process is starting to take effect. With increasing and consistent earnings, profits, and dividends hopefully not far behind.

Financial Health

As the financial health of a company is considered when calculating QVM and therefore Stockrank, it is no surprise to see NMT’s F-score at 1. When looking at some of the criteria for the F-score, such as “Is the company making a profit?”, “Is it generating cash?”, “Is it making more cash than it is reporting as profit?”, “Is it more profitable than it was last year?” and comparing this to the sporadic nature of NMT’s profits, cash flow and dividends, it’s not hard to see why the F-score is where it is.

However, NMT has no debt and as reported in their March quarterly cash flow report NMT had $32m cash on hand, which is estimated to provide 6 quarters of funding, and due to NMT’s current assets and assets far exceeding current liabilities and liabilities their bankruptcy risk as measured by the Z-Score is very low – that will change the longer the company does not generate cash.

Liquidity & Ownership

Since 2013 (10 years) shares outstanding has only increased by 27m, from 521m to 548m in FY22 which is relatively modest for a company so cash hungry. Of this, 451m or 82% of shares outstanding are classified as free float. Indicating there should be no issues getting in or out of the stock at this stage.

But given NMT’s prudency in issuing shares things can get a bit wild, as can be seen in previous price movements. This is highlighted by the fact that only 16.2% of shares are held by top shareholders, with David John Reed being their top shareholder with 5.4% or 30.3m shares and the remaining 83% held by smaller investors

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Outlook

According to NMT’s Pre Feasibility Study update on 15^th May 2023 for their Barrambie titanium mine, first production is slated for H1 2025 with production hopefully ramping up thereafter. The mine is forecast to generate average free cash flow or $103.3m p.a. in the first 5-years and they have agreed to a 5-year take or pay offtake agreement with Jiuxing, who are one of the leading chloride-grade titanium slag producers in China.

Their latest Lithium Chemical update on 26^th April 2023 stated pending successful co-funded pilot trial both parties will construct and operate a 25,000tpa lithium refinery, with commissioning and operation expected in Q1 2027.

NMT’s two most advanced lithium-ion battery recycling projects are expected to move to commercialisation in late 2023 and early 2024 and a final investment decision is expected for NMT’s vanadium recovery project by the end of June 2023, pending successful project financing. These may be near term catalyst for a price that has been beaten down heavily.

The two brokers that cover NMT both have a buy recommendation and although EPS is still expected to be negative for FY23 and FY24, it’s starting to head in the right direction. Any future developments from the company will likely impact any perception of the business given the small concentrated number of analysts that look at it.

As a side note, the general understanding by auto makers is that the need for lithium battery recycling will not start to take-off until 2030 as EV sales continue to grow and the demand for lithium batteries intensifies. Investors back in April 2022 would have done well to heed this warning.

Conclusion

There is a lot to get excited about with NMT. However, as this case study reminds us, given their projects and technologies are still unproven on a commercial scale and are yet to generate any meaningful or consistent returns, it is very much buyer beware.

As Stockopedia's founder, Ed Croft would say, NMT very much falls into the category of a “Story Stock” and thus far it has not had a happy ending. Investors will hope that will come soon in the form of much sort after progress.

As the road to proving untested technologies is full of sentiment driven ups and downs, I expect a few more in the next 2-3 years before any material results are generated. For the true believers, there is a lot of upside here, but for the less adventurous, waiting until cash flow and earnings start to appear might be a more prudent approach.

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