Neometals – Finding Value When The Market Has Lost Its Mind (Flashback to March)

Neometals Ltd.
  • ASX: NMT
  • Shares Outstanding: 545M
  • Share price: A$0.16 (29.07.2020)
  • Market Cap: A$85M

In this series of articles, I’m shining a light on the companies I feel have been given bargain valuations because of coronavirus-induced market sentiment. In the previous article in this series, I looked at RNC Minerals, a gold producer with exploration potential that has seen its share price slashed. It is worth noting that these drops have occurred without any operational frailties revealing themselves; this is pure sentiment at play as the market resets.

Today, I’m looking at one of my favourite stories that slots neatly into the EV revolution thematic: project development company, Neometals. Neometals already had a surprisingly low share price, but it was as low as A$0.14 in the last few days. In my opinion, this is incredible value, especially given the company’s incredibly strong cash situation. Here’s why.

Neometals: An Overview

In case you are unfamiliar with the Neometals story, Crux Investor has conducted numerous in-depth interviews with key management personnel over the course of the last few years. They have managed to paint an intriguing picture of a company with a variety of futuristically relevant projects.

Neometals’ management team has a track record of making shareholders money. Neometals made its money with a Lithium mining project, Mt Marion in Australia, and the team times their exit beautifully. They pocketed c.A$130M and have returned c. A$45M to shareholders in the shape of dividends. In addition, the team has managed to retain an option on the Lithium spodumene component; this will be a revenue stream for them at the point the market comes back.

So, with this strong management team, Neometals is off to a good start. Moving on to the projects, I am a fan of all of them. Neometals’ most advanced project, the battery recycling business, is a proprietary battery recycling process that allows for clean, cost-efficient hydrometallurgical (using acid) extraction of constituent battery metals from spent battery cells. This is a game changer because up until now, the green energy cycle hasn’t had a logical end; pyrometallurgical recycling is extremely expensive and causes a huge amount of pollution. It is also very wasteful, as the majority of the battery metals are lost during the process.

This business can allow companies to cut down on expensive and pollutive mining (currently responsible for c. 10% of global emissions). It also finally provides green/ethical investors the opportunity to invest in a solution to the conclusion of the green energy cycle. Institutions are thinking much more seriously about the impact supply chains have on the environment. We recently heard Cornish Lithium CEO, Jeremt Wrathall claim the EU is putting €3Bn into the EV supply chain. Blackrock, one of the biggest funding institutions in the world, has recently stated it now cares a great deal more about carbon footprint because of government and investor pressure. Automotive giants like BMW have also chimed in on the importance of an ethical supply chain. Neometals looks to be positioning itself very strong for a wave of green momentum driven by last year’s ESG, and Greta Thunberg’s many scathing rants.

Moving on to the titanium side of the company, Neometals has the Barrambie Titanium and Vanadium Project. The Barambie co-product, vanadium, fits into the futuristic thematic with VFRBs, but this is still some way off. However, it has fundamental, strong demand in the world of stainless steel. The primary focus, titanium, also adds to Neometals’ EV narrative, given its battery metal applications. However, the primary demand (90%) for titanium comes in the form of titanium white, a pigment derived from titanium dioxide and used in paints, protective coatings and plastics.

Paul Wallwork, General Manager Neometals, recently claimed in a Crux Investors interview that the Barrambie Project has the scale, longevity and grade to stand out from the competition. The ore body is forecasted to produce 9,235t of FeV80 and 6,337t of V2O5 a year, with an average plant feed rate of 2.66Mtpa, over an estimated mine life of 15 years. This looks like another encouraging project.

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Neometals’ final core project is cutting-edge lithium refinery; Neometals is evaluating vertical integration down the lithium value chain via future production of lithium chemicals. Neometals also has two non-core projects in the form of the nickel-focussed and wholly owned Mt Edwards mineral exploration project, and a category of research & development initiatives: the ELi Project, the Dexter Project, and a proprietary Lithium Titanate manufacturing process. It seems Neometals has covered every EV-related base imaginable.

So, what appears to be a great project portfolio, investors will be left scratching their heads at Neometals’ current market valuation. This is all without mentioning the most telling part of this situation:

Neometals’ Cash Situation

Neometal is currently sat on c. A$110 of debt-free cash, despite only being valued at around A$89M by the market. Does this mean that all of Neometals’ impressive projects combined are worth minus A$21M, or has the market lost its mind? I have a feeling you’ll be leaning towards the latter now you’ve been presented with all the facts.

In fact, this A$110M is worth $2 on the $ given the current COVID-19 crisis. This capital would be very expensive to raise right now, so the fact the company already has access to it puts it in a very strong position indeed.

The management team has managed to remove Neometals from our least favourite part of the mining space: mining risk. The company has some huge strategic partners. In addition, it is positioned smartly within an EV narrative that has exciting levels of potential. Neometals’ only rivals in the world of green battery recycling don’t quite cut the mustard. Li-Cycle looks interesting, but stacked up against Neometals, the choice is obvious. The different proprietary processes don’t compare, and the cash situation at Neometals, combined with the track-record of the management and existing strategic partners, puts Neometals in a league of its own.

We can’t quite work out what investors are missing, other than…

Lacklustre Marketing

For me, there is only one explanation for Neometals’ market performance: disappointing marketing. Neometals is not effectively communicating to investors the value proposition it can offer them, and the story is not being picked up or heard by the investors who need to hear it. Explaining such technical projects is certainly complicated, and we don’t doubt the articulacy of the management team, but Neometals is definitely missing a trick at the moment.

Neometals has all the makings of a high-value, modern project developer, but investors need to hear this story louder and much more clearly. However, some investors will be happy; the longer Neometals slips under the radar, the more discounted shares they can grab.

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If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

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