Andromeda Metals’ clear path to kaolin production underpins East Coast Research’s big price target

• East Coast Research sets 5.4c target for Andromeda, a 200% upside from the current 1.8c share price
• The Great White kaolin project is development-ready with a 15.1Mt ore reserve and approved $75m credit facility with Merricks Capital
• Plenty of upside potential in improved product pricing, lower logistics costs and potential to expand offering
• Does not include a valuation for High-Purity Alumina (HPA) opportunity, for which ADN is due to release a Scoping Study this week

Special Report: The clear pathway to profitability offered by the Great White kaolin project in South Australia has led East Coast Research to initiate coverage of Andromeda Metals with a 12-month price target of 5.4c.

This represents a massive 200% upside from the Andromeda Metals’ (ASX:ADN) current share price of 1.8c.

East Coast Research analysts Rahul Tiwari and Riddhesh Chandwadkar have good reason to be confident as the Great White project is development-ready, with a significant 15.1Mt ore reserve supporting a 28-year mine life.

They note the project is significantly derisked with the staged development minimising the risk for all stakeholders.

“We think the most critical stage for Andromeda is Stage 1A+ wherein the capex is front loaded (A$101 million including sustaining capital), and this is significantly derisked from the financial standpoint,” they said.

The analysts pointed to Merricks Capital’s recent confirmation of credit approval for a $75m credit facility to support its development as why capex is derisked.

“The project economics are poised to improve as it ramps up the production in Stage 1B and Stage 2 wherein the capex requirements are lower than Stage 1 and the operational efficiencies materialise from higher volumes,” Tiwari and Chandwadkar added.

“This implies very strong project economics as Andromeda progresses through future stages. Additionally, project economics are supported by low-cost, conventional open-pit mining operations, as well as the premium pricing achieved under binding offtake agreements in the high-value markets targeted by Andromeda.

“Importantly, Andromeda has already procured the long-lead items required for initial production and has significantly derisked the GWP through a staged development plan as it minimises the execution and capital risk.”

Premium market position

Under the Stage 1A+ development, which is supported by binding offtakes, Great White will generate net present value and internal rate of return of $211m and 26% respectively.

This is based on the production of 100,000 wet metric tonnes of high-quality kaolin per annum.

East Coast Research notes the high-quality kaolin produced by the project targets high-value ceramics market segments, where only a few global kaolin sources qualify for use in premium applications.

This sees the project’s high-quality halloysite-kaolin blend able to command premium pricing in the high-end market segments targeted by the company.

Premium segment demand growth and ongoing constraints from high-quality kaolin supply sources due to historical mine depletions, Ukraine supply disruptions and Chinese domestic shortfalls, creates a favourable pricing environment.

The researchers note that the kaolin market is expected to grow at a CAGR of ~5-5.5% to 2030.

Highlighting the potential of Great White kaolin to target the premium segment, the company recently completed commercial-scale pilot trials that validated the use of its Great White CRM™ kaolin product in industrial glaze formulations.

Andromeda has also demonstrated the capability to produce high purity alumina (HPA) at 99.9985% purity using its novel flowsheet.

This provides further upside potential given HPA market dynamics and offers the company the opportunity to expand its portfolio into the critical minerals sector.

“Beyond traditional kaolin applications, Andromeda has demonstrated the ability to produce high purity alumina (HPA) at 99.9985% purity using its novel flowsheet. This creates significant upside potential given HPA market dynamics” stated East Coast Research.

Upside potential

While East Coast Research has set an aggressive price target for Andromeda, it has flagged potential for further upside.

It used a starting price of US$400/tonne for the initial year of production (June 2027) which reflects the implied contracted pricing of the company under its offtakes to known leading players in the industrial mineral space.

The base case scenario assumes an annual price escalation of 1%, resulting in an average sale price of US$459/tonne over the project life.

This could increase to US$493/tonne over the project life in the bull case scenario, which could see prices escalate 1.5% annually.

East Coast Research also expects logistics costs to reduce materially once production ramps up to 200,000wmtpa as the company should then be able to pursue bulk or break-bulk options, which opens up the opportunity to use closer ports.

This could deliver a product margin improvement of ~20%, which is another opportunity for upside.

The analysts also note that Stage 1A+ is the most critical stage as it is majorly financially derisked with active discussions to secure the balance of funding for this stage.

“As the company moves to subsequent stages, the project economics presents compelling investment opportunity,” East Coast Research wrote.

“We highlight that our assumptions do not incorporate the operational efficiencies to be achieved post ramp-up of the production, particularly on the operating cost assumptions.

“Additionally, we also currently do not incorporate the pricing upside from the HPA opportunity, the pricing for which is materially higher than our current pricing assumptions for kaolin.

“We believe there are multiple near-term catalysts which could lead to share price improvement from current levels including the final investment decision (FID) finalisation, scoping study of HPA, [and] advancement towards production commencement among others.”

This article was developed in collaboration with Andromeda Metals, a Stockhead advertiser at the time of publishing.

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.