• ADN  recovers some ground after a poorly received project DFS released earlier this week sparked a 50% fall in the share price
  • Internal rate of return plummeted from 175% in the prefeasibility study (PFS) to 36% in the DFS, capex increased from $28m to $93.8m
  • Managing director James Marsh called the negative response  a “misunderstanding in the market”


Former market darling Andromeda Metals (ASX:ADN) was obliterated after a definitive feasibility study (DFS) — usually the most advanced of all studies — on the ‘Great White’ kaolin project in South Australia did not live up to expectations.

It’s planned halloysite-kaolin products are to be used in high grade porcelain, ceramics, nanotechnology, hydrogen storage, carbon capture, with research ongoing into new applications like slow-release fertilisers and construction.

But internal rate of return, a measure of the profitability of a project, plummeted from 175% in the prefeasibility study (PFS) to 36% in the DFS.

Initial capital expenditure increased from $28m to $93.8m.


Andromeda Metals — conference call

In a conference call Friday, Andromeda Metals managing director James Marsh called the negative response – which saw ~50% wiped from its market cap — a “misunderstanding in the market”.

“The fundamentals of the DFS – these are very strong numbers. In any market for any other company on the ASX in our state of evolution these would’ve been accepted very positively,” he says.

“Our DFS is our stage 1 business plan; it is the starting point for a much bigger business.”

“The approach we have taken is a sound one, very robust, we have very high confidence in what we are saying here.”

The bulk of the confusion comes from the fact that the DFS is not a continuation of the PFS – it is a totally different business model.

The Andromeda Metals PFS imagined a direct shipping ore (DSO) project (“just dig it up and ship it out”) which required minimal start-up capex.

That doesn’t work in today’s economic environment, Marsh says, which is why ADN wanted to build a plant on site to capture more downstream value in the initial stages.

“Since the PFS two years ago the world has changed a lot,” he says.

“The effects of the pandemic, supply chain issues, logistic issues, and exchange rate is also a major change in what has happened since the PFS.”

Here’s how Marsh tackled some investor concerns over the DFS:

The important DFS numbers. Source: ADN.

The weighted average sell price is lower than we expected.

“That is just purely due to exchange rate changes,” Marsh says.

“The weighted average price is still exceptionally high. Usually, you are talking somewhere between $200 and $300 a tonne for your average kaolin price, so we are right at the top end there.

“We have gone very conservative on that price because we know that the only way forward is up, not down.”


Net Present Value (NPV) should’ve been higher.

“It was slightly higher for the PFS, but that was for a very different business model,” Marsh says.

“As I mentioned, the world has changed dramatically over the past 2 years.”

“If the exchange rate and other factors stayed the same that would’ve added about $250m to that NPV.”


What happened to the internal rate of return (IRR)??

“The IRR at 36% is a lot lower than the PFS and has been flagged as something people are worried about,” Marsh says.

“36% for an IRR is very good number for any project, but the big change from the PFS is in the PFS we didn’t have a plant.”

“We just did DSO – direct shipping ore – so just dug it up and shipped it.”

“That doesn’t work now in the current global environment, and we want to capture as much value as we can. Not surprisingly, we now have some start-up capital requirements which brings the IRR down.”

“But still, 36% is a great number. We are happy with that.”


The payback period is too long.

“The payback period of 5.9 years looks long, but it isn’t long at all,” Marsh says.

“We will be into profit in the second year. What we are doing is reinvesting that profit into subsequent expansion phases, so it looks like the timeline for payback is pushed out.”

ADN share price chart