From Latest Mackie Report Huge Mark of Validation with Veolia Deal
EVENT – Partnership to be created with Veolia on Red Mud Plant
This morning, Orbite and Veolia Environmental Services signed an exclusive
worldwide collaborative agreement for the treatment and recycling of red mud
generated by industrial alumina production using the Bayer process.
IMPACT– Getting Closer to the Technology ‘Holy Grail’: Royalties
More background on the collaborative agreement: Under the agreement, a
demonstration plant will be built and operated by Veolia. Site selection and capacity
for the demonstration plant will be determined by the end of summer, and the
construction timeline will be determined thereafter. Final terms of the agreement are
yet to be determined, but the intention is that Orbite would secure royalties on the
red mud remediation plants. Typical to most licensing arrangements, Orbite may
also receive an equity interest in a JV that would own the remediation plant, and
may also receive an up-front cash payment as each plant JV is setup. It remains to be
determined what the economic arrangement relating to Orbite’s involvement with
the demonstration plant, but we believe the Company will accrue revenue as the
demonstration plant is built and/or operated.
Veolia’s strategic rationale: The strategic rationale for Veolia is clear. As a
consolidated entity, it generates over 30 billion euros per year in revenue, employs
330,000 people globally, and is considered a leader worldwide in waste
management. Veolia’s website indicates that increasing its activities in industrial
waste management is a top priority, and in particular the recovery and recycling of
material resources from waste stockpiles.
What it means for Orbite: The Veolia agreement is clearly a huge mark of validation
for Orbite. On the subsequent pages of this note, we have calculated possible
economic outcomes for Orbite under potential licensing arrangements. At the low
end, single licenses could be worth as low as $0.16/sh per plant. However, a
successful red mud royalty portfolio could have an NPV of $28/sh or much more in
an aggressive rollout by Veolia (see page 6). At the current time, we do not include
any contribution from red mud remediation in our $9 NAV based target price.
ACTION – Maintain Spec. Buy Rating and $9.00 Target
Today’s agreement with Veolia strengthens the investment thesis on Orbite.
BACKGROUND ON RED MUD, THE AGREEMENT, AND VEOLIA:
A serious industry problem: Red mud is a toxic by-product of alumina production using the
traditional Bayer process. For each tonne of alumina produced, two tonnes of red mud are
produced. It is estimated that over 100mm tons of red mud are produced annually. The generation
of this toxic by-product can result in difficulties in permitting alumina production facilities. The
dangerous toxicity of red mud tailings ponds is the key environmental challenge facing companies
using the Bayer process to produce alumina. It is estimated that there are 100 million tonnes of red
mud produced per year, and the aggregate amount of red mud tailings amounts to 3 billion
tonnes worldwide. Leakages and outward floods from these ponds have caused extensive
environmental damage and even human deaths in various occurrences in recent years. In many
cases, the harmful footprint associated with red mud has made it increasingly difficult to get new
the Bayer-type alumina production facilities permitted.
Orbite holds the technological solution,
Veolia will use its resources to roll it out: The Orbite process is the only proven and commercially viable
eco-friendly technology that we know of for treating Bayer process tailings.
The collaboration agreement with Veolia, the world leader in waste
management, is a very strong endorsement of Orbite’s processing technology. To quote Veolia:
“They (ORT) are the key to best mining practice and guaranteeing supply.” As large as Veolia is,
and as a recognized leader in industrial waste management, it is an ideal partner for Orbite to help
drive penetration of its technology. Veolia will be the operator of the red mud joint venture (JV)
plants, and will also structure the financing for each one. Additional partners may be invited to
join each JV. In addition to site selection by end of summer, operating capacity and detailed
engineering for the demonstration plant will be completed by year end.
Conclusions from Orbite’s ICSOBA paper shows that the technology has been successfully
tested: At a recent ICSOBA aluminum industry conference, Orbite presented a paper highlighting
the merits of deploying its technology to remediate red mud tailings ponds. The paper highlights
that Orbite's process has been successfully tested on a variety of different red mud samples,
having different chemical compositions. Orbite’s technology was demonstrated to be very
effective and have processing yields approaching 100% on virtually all the constituent materials
within the red mud solution.
Key operating parameters and financial modeling assumptions based on results in the ICSOBA
paper: The economic calculations we outline below are based on technical results and the average
outcomes of the red mud remediation tests. This includes the types and amounts of materials (ie.
Alumina, hematite, caustic soda, etc.) that are expected to be recovered from a 1mm tonne per
year standard remediation plant. For price assumptions in our modeling below, we have used the
same prices used in Orbite’s PEA, with the exception of metallurgical alumina (SGA), where we
have used a price of $350/tonne.
ORBITE INVESTMENT THESIS:
Orbite remains a favourite name in our coverage universe, and we are becoming increasingly of
the view that 2013 will be a break-out year for its share price. As such, we review the key tenets of
our investment thesis:
- A demonstrated concept: The company has demonstrated pilot plant production of both
smelter grade alumina (SGA) and high purity alumina (HPA). A $45 million+ construction to
refurbish the pilot plant to a commercial producer is nearing completion, and first HPA
revenue is expected in Q2/13.
- A highly efficient, low cost HCl extraction technology: Orbite has demonstrated a viable
technology to extract alumina and other by-products from low grading aluminous ores such
as claystone and bauxite. Advantages of Orbite's hydro-chloric acid (HCl) process over others,
such as the Bayer Process, include lower capital and operating costs.
- By-product recovery and a cleaner approach - other advantages: Another very important
advantage is the ability to produce high purity by-products through the implementation of an
acid-recovery system. Also, because Orbite's process is closed loop it eliminates harmful
tailing products that the alumina industry is known to produce (ie. red mud). In fact, Orbite
has identified a business opportunity to remediate this red mud tailing product through
deployment of its technology.
- A 43-101 compliant PEA has been completed that validates economics: A PEA has been
completed showing a 33% IRR over a 25 year duration for a 540,000 tonne per year SGA
producing facility that achieves a production cost of $209 per tonne. This operating cost places
Orbite’s approach in the top quartile of SGA producing plants worldwide.
- 1 billion tonne alumina resource: This billion tonne resource is more than sufficient to allow
Orbite to build several SGA and HPA production facilities, and fuel their operation for over 50
years. We note that there is approximately 400,000 hectares of similar land surround Grand
Vallee resource.
- Non-disclosure agreements signed with over 10 potential strategic partners: Discussions are
underway with potential partners such as RUSAL (world’s largest aluminum co.) and
NALCO (India’s largest producer). The announcement with one of the world’s largest waste
management company, Veolia Environmental, not only provides further validation of Orbite’s
technology but also lays the foundation of a business plan to derive significant cash flows
utilizing ORT’s technology.