The advanced kaolin miner breaking the ASX IPO mould
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Most mining companies heading for the ASX are early stage and nowhere near production, but that’s where WA Kaolin is breaking the mould.
The founders of WA Kaolin have already done most of the hard yards and sunk in over $40m of their own cash to significantly de-risk the project and prove up their kaolin product to start supplying the market.
To take that next step and ramp up to full production, the company is undertaking an IPO to raise $22m, of which $17m of cornerstone interest has already been received from domestic funds, family offices and high net worth investors.
Canaccord Genuity is acting as lead manager and JP Equity Partners is acting as co-manager of the IPO.
WA Kaolin was born from assets acquired from mining giant Rio Tinto (ASX:RIO) in the late 90s.
Kaolin increases the durability, smoothness and whiteness of ceramics, it is used in the production of fibreglass and it also increases the gloss, smoothness, brightness and ink absorbency of paper and packaging.
These are the key markets for kaolin, but there are also ‘blue-sky’ market opportunities opening up, such as for use as a feedstock to make high purity alumina (HPA) and metakaolin for the construction industry.
Thanks to metakaolin’s excellent binding properties, it allows for the production of high-performance concrete, and offers many other advantages such as improved aesthetics, enhanced mechanical strength/chemical resistance while also offering lower CO2 emissions than traditional supplementary cementing materials.
With the booming ecommerce market driving a massive increase in the need for paper and packaging, along with rising construction activity, the kaolin market is predicted to reach $US6.3bn ($8.8bn) by 2027, climbing from $US4.76bn in 2019.
Rio Tinto saw the value in this high value commodity back in the 90s and started selling to Japan. And when it ran out of kaolin in Queensland it went on the hunt for more, which led it to Western Australia and the discovery of the Southwest deposit near a small town called Wickepin.
After spending millions of dollars on building up its kaolin business, Rio Tinto eventually deemed kaolin non-core and sold off its assets, which gifted WA Kaolin a lucrative opportunity.
Three private partners – Andrew Sorensen, Alf Baker and Keith Snell – picked up Rio Tinto’s tenements and set about building a kaolin business.
“We developed a pilot plant for a new process in 2014 in Melbourne at one of our other businesses, and then in 2016 we transferred it back over here to WA and we started really going hard at developing the process, the market and doing all of the pipeline of approvals,” Sorenson told Stockhead.
Since then, WA Kaolin has locked in some serious big buyers and is producing on a small scale to build out its customer base.
“Right now, we’re an operating business. We mine and run a plant in Kwinana, and we ship product to customers,” Sorensen explained.
“We ship between five and seven containers a week out to customers.
“We’ve done that to kind of prove out the process and also to develop the markets and make sure that we can produce the right products at the right price points and get those customers in the markets we want, both geographic markets and vertical end use markets.”
Currently the kaolin market is dominated by Imerys, Quarzwerke (Sibelco) and BASF, which collectively account for 26 per cent of global production. Imerys, a Paris-listed conglomerate, is the number one player, controlling 16.3 per cent of the market.
In total, Imerys has 250 million tonnes of resources and reserves globally, but its Australian operations are small and only supply the domestic market, not the export market.
This is where WA Kaolin has an advantage. Besides Imerys, WA Kaolin is the only other kaolin producer in Australia. And just its Wickepin deposit alone contains 280 million tonnes in resources and reserves, with the potential for that to grow even further.
WA Kaolin’s deposit is also a primary deposit not a secondary sedimentary deposit.
“Kaolin is formed by the degradation of granite, so granite breaks down and forms kaolin and silica and then the kaolin and silica coexist in the deposit,” Sorensen explained.
“In a primary deposit, that material stays put from where it was broken down. A secondary deposit is where rain falls on that material, and then it washes down into valleys and becomes a sedimentary deposit.
“Most of our competitors are mining secondary deposits and those secondary deposits are of a lower quality — lower brightness and higher impurities.”
Sorensen said the key buying features for customers was brightness, level of impurities and particle size.
“So, we naturally have the advantage on the first two because it’s a primary deposit and it’s one of the largest known remaining primary deposits in the world. You can access different markets depending on the quality.”
And WA Kaolin already has customer demand and an established brand in the market.
Stanco, a company that supplies the fibreglass market in China and Taiwan, has executed a 10-year offtake deal with WA Kaolin.
The deal will see WA Kaolin supply 432,000 tonnes of kaolin product to Stanco in the first six years. Stanco stumped up $1.5m in the company’s pre-IPO raising to secure its supply.
All up, WA Kaolin has around 83 per cent of its initial 664,000 tonnes of production in the first three years locked up in offtakes with Stanco and letters of intent with other customers like CMP, which supplies the Chinese coatings market.
“These customers that we’ve got offtakes with are current customers who are ordering and they want more than we can produce, but they know our status and they kind of went through this process of investing in us, writing the offtakes in order to support us to bring our capacity up so that we can fill their demands,” Sorensen said.
Because of the higher quality product WA Kaolin produces, it can supply into the fibreglass market right up to the top end ceramics market that requires very white, low impurity kaolin.
“Product like that we’d be selling into that market around the $US260 mark, and our average selling price right now is around $300 Australian dollars,” Sorensen said.
“So we’re up in that range because of the quality of our product.”
WA Kaolin initially plans to ramp up production in a modular manner to produce 400,000 tonnes per annum.
Right now, WA Kaolin is trucking its ore 220km from its mine in Wickepin to its plant in Kwinana just south of Perth. The plan once the company is listed is to build an $18m plant next to the mine.
“By eliminating that trucking route of moving the ore all that distance, we save about $30 a tonne because the ore has got waste in it,” Sorensen explained.
Once WA Kaolin has built the plant and successfully moves into stage-one production of 200,000 tonnes per annum, it believes that may be able to fund the stage-two development to ramp production up to 400,000 tonnes per annum from internal cash flow, meaning it may not need to tap shareholders for more cash.
“It’s low capital intensity,” Sorensen said.
“The first module is budgeted to cost $18m. The second module is only $14m because we would have sunk cost into infrastructure that can service further expansion.”
“Our objective is to eventually ramp up production to 1 million tonnes by bolting on further modules if we have the funding and the demand to match.”
Veteran resources analyst Cathy Moises, which has a career spanning three decades, covered WA Kaolin during her time with well-known Western Australian stockbroker Patersons Securities.
She liked the story so much she dropped $200k into the company.
Moises says it’s because management have “skin in the game” and they “know the project inside and out”.
“As an analyst, which is what I was when I first invested in this, it’s really important to me to see that management has got skin in the game,” she told Stockhead.
“The project itself is quite a simple process and it’s been very much tested thoroughly at the Kwinana trial plant, and so they’re selling it on a commercial basis, albeit at a very small scale and at a more expensive scale because they’re trucking the material down from Wickepin, but they’ve proven the concept.
“Most companies I see going to IPO are fairly early stage, and this is an unusually advanced stage to be investing in because they could be in production in a year’s time at a good commercial scale.
“It’s only about a nine-month build to get this thing up and running and the capital intensity is particularly low.”
Moises is now a non-executive director of WA Kaolin.
WA Kaolin will be coming to the ASX with a market cap of just $56m following a $22m IPO at 20c a share.
There are just two kaolin producers in Australia — Imerys and WA Kaolin — and another two ASX-listed explorers, Andromeda Metals (ASX:ADN) and Suvo Strategic Minerals (ASX:SUV), working towards production.
Andromeda is valued much higher than WA Kaolin at a $265m market cap.
WA Kaolin looks cheap by comparison, especially considering once it lights up the ASX boards it will be just nine months to a year out from first stage production and starting to deliver on its initial two-stage project.
The company also already has an established brand in the market, which means the offtake deals are coming much more quickly than the initial two years it took to finalise its first supply deal.
“We’ve now got to the point where we’ve got a brand in the market in that people know our product,” Sorensen said.
“They know Stanco is using the product, they know CMP is using the product. Yamaka, who are one of the imminent tableware manufactures in Japan, uses our product.
“So we sort of get that halo effect from these customers who are buying and have approved our product. The last customer we converted only took us three months because people have trust that the material is useable.”
Another differentiator, Sorensen says, is that WA Kaolin has been set up to be a “multi-generational dividend play”.
“After the first three years, we’ve got a 66 per cent dividend policy on NPAT (net profit after tax).”
Moises says WA Kaolin is a “really good simple story you don’t often see with a low volatility commodity, good margins and already proven”.
“Very good incrementals of the expected market cap on listing and 66 per cent payout ratio, fully franked for most of its life,” she told Stockhead.
“My super fund hopefully will appreciate those sorts of returns. It just looked like a really solid investment to me.”