A simple business in mining Clay - Andromeda Metals Limited (ASX: ADN)

A simple business in mining Clay - Andromeda Metals Limited (ASX: ADN)

Mining clay is not what your typical mining conversation would be about if one is talking shop over a beer with friends.  Over the last 30 years in this industry, the connotation of being a geologist is all about mining. I will say that the mention of clay would not be part of that conversation.  If you mention industrial minerals, you would have them confused.  Imagine mentioning the term Halloysite-Kaolin.

Interestingly, if you mention the mining of clay to those in the industry, you will be told that this has been happening for centuries.  What will come as a surprise to my non-mining Malaysian friends is that Malaysia or at least South-East Asia do mine a lot of clay.  I have been looking at this commodity for a while.  I think I looked at this in the early 2000s, but I will say that my understanding of the market, especially in the last decade is lacking.

Hence, you can imagine my surprise when I looked into Andromeda Metals Limited (ASX: ADN).  Looking back, I should have taken more notice and looked at it more seriously.  The most significant disadvantage of being in this industry is thinking you know better.  I mean, mining clay, what is so special. After all, this has been happening for decades and centuries.  What could be so exciting?

 

Andromeda Metals Limited (ASX: ADN)

(source: Andromeda Metals website)

Andromeda Metals (previously Adelaide Resources) was incorporated on 23 December 1993 and subsequently listed on the ASX on 11 September 1996. The Company’s head office is in Adelaide, South Australia.

Andromeda Metals’ vision is to be a sustainable industrial minerals producer of high-quality halloysite-kaolin and high purity alumina material. The company aims to provide shareholders with a sustainable financial return on their investment in the Company.

ADN has projects covering 6,102 km2 within 22 exploration licences located in South Australia, Queensland, Western Australia and the Northern Territory.

The flagship and darling for the company would undoubtedly be the Poochera Halloysite-Kaolin project.

 

Project Location (source: ADN Investor Presentation May 2019)

 

What is Halloysite -Kaolin?

An excellent question as I don’t even know how to spell it!  Well, let’s see what Wikipedia says:

Halloysite is an aluminosilicate clay mineral with the empirical formula Al2Si2O5(OH)4. Its main constituents are aluminium (20.90%), silicon (21.76%) and hydrogen (1.56%). Halloysite typically forms by hydrothermal alteration of alumino-silicate minerals.[4] It can occur intermixed with dickite, kaolinite, montmorillonite and other clay minerals. X-ray diffraction studies are required for positive identification. It was first described in 1826 and named after the Belgian geologist Omalius d’Halloy.

Halloysite is more for the High Purity Alumina or HPA part of the market.  It is the high end.  Kaolin is principally used to make chinaware and “simpler” products.  As described in several resources on Halloysite, the main focus is to get to the HPA market, which is slowly approaching as the next best thing.

Electron micrograph of halloysite nanotubes (Source: Wikipedia)

 

The Poochera Project.

As one that prides in finding these non-descript projects that have hidden value, I am totally “pissed” that I did not get in when first introduced.  Why am I saying this?  Well, the project is straightforward — a white pile of clay mined with a loader and a truck.  I may have described it too simplistically, but if you get through all the jargon, it is that simple.

 

Carey’s Well Resource (source: ADN May 2019 Investor Presentation)

 

Corporate Information

Market Capitalisation: Approximately 83M (20/08/2019)

Outstanding Shares: 1.3B (20/08/2019)

Top 20 shareholding: 41% (2019)

 

ADN share price chart (source: Commsec)

My Thoughts

Like all these “next best thing” market, I am not overly convinced that it is going to be the Holy Grail.  How many of these Holy grail markets have we seen in the last few decades?  The only one that has come in and created a large new community is that of the Internet.  For those that are sceptics on what I have mentioned, look at graphite, graphene, lithium, cobalt, tantalum, tungsten…the list goes on.

I am not saying that there is no demand.  What I am saying is that there is a difference between futuristic product demand and real current demand.  Lithium has an existing demand. However, the hype for a futuristic demand will be debated.  The profitability of a lithium producer is not worthwhile to debate. We all know that they will make money eventually as the lithium market will get squeezed, the supply shortages will guarantee a goof profit for producers.

In terms of Andromeda Metals, I do believe that they have a great product.  They are now sitting on a market capitalisation of 80M based on no mining and a good story.  Are they worth the current value of 80M or the potential of higher values, my short answer is an overwhelming yes, for now?  Why?  It’s simple. They have a product that is required, and it is not that expensive to mine and deliver.  The market loves the story, and the perception of “off-takes” meaning products selling is working.  Will we see some consolidation on the price till the mining and real delivery happen, yes.

Source: Photo by Chris Liverani on Unsplash

Where I can be very wrong here is that the market perception does not allow it to fall and instead hold the current position.  I have seen this happen before, but if the final execution never happens, the price will fall.  If the market keeps it at the current levels, I suspect that the level of risk will be higher.  Market sentient has a history of keeping things where they may not be technically viable.

Do I think that the company strategy is right? I will have to say yes as I know Rhod Grivas. Rhod has been in several great success, and I am sure he has plans in place.  For the very least, I do feel that management is not going to be the issue.  Like it or not, the content of the management group is essential.  For those “experts” who tell you that management is not that important, they are in for a big shock.

 

Conclusion

Andromeda has the market’s attention.  The momentum is on their side, and this is a very positive component of a reasonable share price.  The steady newsflow is helping the market pundits excited in anticipation of more positive news.  If I had to play the devil’s advocate, I would say that the market capitalisation of AUD80M before a scoping study on mining is probably getting to a temporary roof.

What I want to see is a good pull back from the current pricing.  This thinking is probably one that comes from a trading perspective.  The old, let it come back and take a rest trading mentality,  take a few steps to consolidate for the next move.  This move creates a sense of relief that the pressure is not boiling.

The “off-takes” are good. However, as we have seen in the past, the Iron ore “MOUs” was not a good outcome.  The other drawback is that you are not mining a rare as hen’s teeth commodity.

What is the positive side of the equation?  As I have said, it is a simple mining process.  What they need to do is deliver a scoping study that is going to show the dollars.  They have the buyers, and they will get the funding, they need to show to the world a useful spreadsheet calculation.

Source: Lean Enterprise Institute

People in the mining sector refer to the term “free dig”.  When you look at the previous photographs of the area, it will be easy picking for the machines so mining cost will be minimal.

If this scoping study shows promise, Andromeda is going to reach much higher values.  A lot higher than the current market capitalisation value of AUD80M.

 

 

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