Australia | Jul 03 2008
By Greg Peel
Microequities is an Australian financial adviser specialising in in-depth research of listed “micro caps” – those companies of low capitalisation too small to register on ASX indices or to attract research coverage from leading stockbrokers. In June Microequities hosted its Rising Stars conference, at which selected companies presented their wares. FNArena was invited to attend, and over a period of time is providing conference highlights. This is the fifth in the series
During the 1970s, a young scientist by the name of Dr John Floyd created something called “Top Submerged Lance” (TSL) technology for the Commonwealth Scientific & Industrial Research Organisation (CSIRO). There was little fanfare.
Keen on the possibilities of his invention, Floyd founded a company called Ausmelt ((AET)) in 1981 and licensed his TSL from the CSIRO. He continued to refine the process, and in 1991 was rewarded with his first commercial contract. A company called Korea Zinc built the first commercial smelting plant to use TSL in South Korea. In 1993 Ausmelt was listed on the ASX.
Today there are 46 Ausmelt TSL smelting furnaces in operation or under construction across 14 different countries including China, Russia, Bulgaria and Brazil, servicing the smelting of copper, lead, nickel, tin, zinc, and the platinum group.
There is little point in trying to explain TSL here. Smelting buffs can learn more about the process by visiting the Ausmelt website. But suffice to say TSL is a single technology which can be applied to a diverse spectrum of metals and metallurgical wastes. It delivers lower operating and capital costs than competing technologies, and is environmentally superior. It is also patented, and Ausmelt is keeper of the requisite technical know-how. The company earns its revenue from selling a licence to use the technology, and from the related engineering services and equipment supply.
Typically each new TSL application brings in $5-10m in revenue. Ausmelt’s business model for TSL ensures the company can never actually lose money on a project, given a 25% licence fee and only 10% of actual liability.
Ausmelt itself owns a smelter in Whyalla, South Australia, which was originally designed as a demonstration plant for TSL and was used to make iron, but it is capable of processing more than 50,000 tonnes per-annum of non-ferrous feed material. Currently Ausmelt has a contract with Nyrstar (formerly part of Zinifex) to “toll smelt” 55ktpa of zinc-bearing wastes from Nyrstar’s operation in Risdon, Tasmania. Ausmelt spent $10m on upgrading the Whyalla smelter and it commenced commercial operations in April this year with forecast revenues of $15m per annum. Currently the company is investigating other feed sources.
TSL does not alone form the basis of Ausmelt’s business. Describing itself as “an Australian-based company servicing the global mining, metals and industrial waste recycling industries with world-leading technologies”, Ausmelt now offers a broad suite of environmentally safe and technically superior applications.
Another rising star is the company’s AM2 “mineral floatation reagent”. This is another patented Ausmelt technology, and again we won’t go into the science of it all here, but suffice to say AM2 improves the recovery of oxide minerals.
AM2 provides a high margin business for Ausmelt. It costs the company $4000/t to produce but it sells for $9000/t. The reagent has so far proven popular for copper smelting in South America and Africa, and Ausmelt is currently in the process of selling to the Ruashi copper/cobalt mine in the Democratic Republic of the Congo. AM2 has also been sold for plant trials in Peru and Morocco. In the first half of 2008, AM2 sales reached $2.4m.
But wait, there’s more.
Ausmelt has developed yet another new technology, which is about to undergo its first commercial feasibility study – in Mongolia. AusIron is another patented technology, developed for pig iron production, which involves the direct use of iron “fines”. AusIron is a single process which requires no sintering or pelletizing, and tolerates high levels of phosphorus, zinc and alkalis. Apparently that is good. It is a simple, low-pressure operation offering operating flexibility, ease of maintenance, and is environmentally robust given an efficient use of coal. That all sounds good. It is also a low capital cost operation.
Ausmelt believes AusIron represents a “significant blue-sky growth opportunity”.
To top it all off, Ausmelt has also established a new minerals processing testing laboratory in Gosford, NSW. The laboratory specialises in flotation testing of base and precious metal ores, hydrometallurgical testing, gravity and grinding work, and index tests. The laboratory currently services both Australian and overseas clients, and Ausmelt plans to expand this service globally through acquisition.
With every man and his dog trying to be a miner at the moment, one presumes the laboratory’s services will be well sought after.
Ausmelt’s shares trade at around $1.25 for a market cap of $54m. The company increased revenue by 45% in 2007 to $20m, EBIT by 21% to $3.8m, and profit by 7.4% to $3m. An unfranked dividend of 3cps was paid. The 2008 first half results show revenue up 7%, EBIT up 51% and profit up 34%. An unfranked dividend of 2cps was paid at the interim. In the year to date, Ausmelt has signed five new projects worth a total of over $37m.
The company is debt free, and there are just over 40m shares on issue. At $1.30 the shares represent a PE of 17x 2007 earnings, and 13.3x 2008 earnings extrapolated from the first half result.