Excerpts Euro Pacific Report as per Morongo RequestValuation: Our valuation only accounts for the Company’s HPA plant and a red mud remediation (RMR) project. We have excluded the Company’s SGA business, as it has postponed the feasibility study and engineering of this project. Although the RMR process can also be adapted for the remediation of fly ash, we will not include the fly ash project in our model until Orbite announces an agreement with Veolia Environnement S.A. (ENXTPA:VIE, $14.34, NR) and/or other waste remediation companies. We have also reduced HPA prices, increased capital costs, and incorporated share dilution from the last financings. Given these changes, we have decreased our target price from $3.00/shr. to $0.55/shr. We maintain our SPECULATIVE BUY recommendation. The EV/EBITDA multiple for 2016/2017 is 11.6x/8.2x.
*Target Price Revision: Our prior price target of $3.00/shr. was originally set on June 7, 2013, prior to our going under restriction on June 27, 2013, to October, 17 2013 and then again on November 8, 2013, to December 20, 2013. Our change in target price was primarily affected by our expected share dilution (from ~200M to ~305M) and exclusion of the SGA project.
Orbite has secured sufficient funds to finalize the HPA plant and is in discussions with Veolia to advance its Red Mud Remediation Agreement. Thus, we have decided to value Orbite based only on its HPA plant and RMR initiatives. Prices of HPA, SGA, rare metals, and rare earths have declined dramatically in the last three years, as much as 70% for some HPA products. Our valuation is conservative as we assume that prices will stay at current depressed levels, however, we discuss the sensitivity of our target price to changes in HPA prices below.
Orbite’s recent financings have caused a significant share dilution. Prior to the Company’s December 2013 financing, Orbite had ~200M shares outstanding. Current shares sit at 250M and in 12 months we estimate that Orbite will have ~305M shares outstanding, which we have incorporated into our valuation. The additional estimated 55M shares are expected to result from further debenture conversions and also from new issues relating to the $10M in equity financing from Investissement Quebec.
Orbite is now in a stronger financial position since its $16M convertible debt raise in December 2013 with a recently received $4M interest free loan from the Government of Canada and $10M in equity financing from Investissement Quebec. Orbite also has a binding agreement to access an additional $40M in financing from Crede Capital Group. Collectively, these financing facilities total $70M. It should be noted that a portion of the Crede financing is contingent on shareholder approval. Furthermore, we expect Orbite’s future technology partners may support the financing of the RMR and SGA projects. Going forward, we believe the successful operation of the HPA plant should de-risk the Orbite process and improve the Company’s credit standing.
We have maintained our SPECULATIVE BUY recommendation but reduced our target price from $3.00/shr. to $0.55/shr. due to lower pricing assumptions, higher capital costs, share dilution, and the
Risks – High
Technology
Unforeseen challenges may occur during the commissioning and operations of the HPA plant, leading to project delays.
Costs
Orbite may find unexpected but justifiable capital costs, which if implemented, could improve plant efficiency and operating costs in the long term but may lead to higher capital costs in the near term. Actual future operating costs may turn out to be higher than forecast, if for instance, plant efficiency (e.g., recovery rates, acid regeneration) is lower than expected.
Patent Protection
Most of Orbite’s patents have not yet been granted. As the Company discloses more detailed information about its technology to the market there could be attempts to illegally reproduce the Orbite process in countries where it has not been protected or patent law is not adequately enforced. This scenario may compromise the Company’s growth and future license revenues.
Financing
Orbite has secured sufficient funds to complete the HPA plant. The Company may need additional funds if unforeseen challenges occur during the commissioning and operations of the HPA plant. Tight credit markets could make it difficult for Orbite to raise funds, which could cause project delays.
Price
Fluctuations in commodity prices could have an adverse effect on the economics of a project. SGA is sold on both spot and contract terms, but HPA markets are fairly inefficient by nature, as sales contracts are usually set up between the seller and the buyer and depend on the quality, purity, and quantity of the HPA sold.
Currency
Commodities are usually priced in US dollars; as such, companies operating outside of the US, like Orbite, will be affected by changes in the exchange rate between the dollar and their functional currency.
Previous Missteps and Challenges
Metal prices and securities experienced strong performance between 2009 and 2011. Orbite’s stock performance was no exception. During that period, the Company was able to raise funds to grow its team and engage in a number of parallel projects (HPA, SGA, RMR, etc.). However, in early 2011 the prices of many commodities started to decline. To aggravate matters further, Orbite encountered a number of challenges during the construction of the first Orbite process for the production of HPA. Below we discuss some of the Company’s key challenges and missteps during this time:
Design Changes & Cost Overruns
Orbite originally planned to simply expand the HPA pilot plant from a few kilos per day to 3tpd and then 5tpd. As the SGA feasibility study advanced, management decided to convert the HPA plant to a mini-SGA plant. This led management to materially change the HPA plant design and increase its output while being built. These changes affected the complexity and schedule of the construction project and directly contributed to an increase in capital costs.
Lower Commodity Prices
As mentioned above, the prices of most commodities declined in 2011, particularly those of ‘specialty’ materials such as HPA. Through discussions with numerous traders, we determined that 4N HPA could be sold for more than US$100/kg in 2011. The same product now sells for less than US$30/kg. The dramatic decrease in HPA and rare metal prices have had a severe effect on the Company’s financials and
Timeline for the RMR Project
We anticipate that Orbite will conduct tests at the converted HPA plant facilities, likely in late 2015 or early 2016, assuming the HPA plant is already converted. Once the tests are completed at Cap-Chat, Orbite, in collaboration with its RMR partner(s), will likely first build a commercial prototype RMR plant (e.g., capacity 125,000 tonnes feedstock). We expect the construction of the prototype plant will start in H216, with full production be achieved by Q417 or early 2018. When the prototype plant is successfully commissioned and operated, Orbite and partner(s) will likely build the first full scale RMR plant, possibly during 2018, with commissioning in 2019 and reaching full production by late 2020 (Exhibit 9).