On February 13, 2024, Canary Capital released an Equity Research Report on SUVO Strategic Minerals. The findings have been positive, indicative of SUVO’s exciting growth potential based on recent equipment upgrades, kaolin production capacity increased to 60,000 tonnes per annum (tpa), significant sales pipeline developed in Asia on the verge of converting to sales orders and shooting the company into profitability. According to Canary, despite the “potential upside of immense growth prospects and a DCF valuation of 11.9 cents per share from the foundational kaolin business, without factoring in the substantial upside which could be generated from the geopolymer concrete opportunity, SUVO remains overlooked by the market.”
SUVO is currently selling for 3.7 cents per share, with a market valuation of $33.2 million, representing a significant upside for investors when compared to Canary Capital’s valuation. They are the sole producer of hydrous kaolin in the country and currently supply 90% of the Australian market. Hydrous kaolin is a natural white clay mineral that is critical in various industries, including the production of ceramics, paper, rubber, and pharmaceutical products.
SUVO acquired the Imerys-owned Pittong processing facility and mines in 2020 for $3 million. They’ve since successfully commissioned the Pittong plant to a production capacity of 60,000 tpa. With the sales book for its kaolin sitting at about 22,000 tpa, SUVO has ~38,000tpa left to sell. Only 2,000tpa worth of additional sales is required for SUVO to break even across corporate, all sales thereafter generate profit. Bojan Bugonovic, SUVO’s CEO has his sights set next on Asia, bringing in a sophisticated team of ex-Imerys and BASF kaolin sales experts to help close deals in the Asian Pacific. Currently, more than 20 customers in that region have begun testing SUVO’s kaolin samples, and numerous are on the verge of converting to sales orders. The Pittong Operations have supplied a vast body of customers over the past 20 years. Given SUVO’s reputation for producing high-quality kaolin, and its extensive list of distinguished domestic and international customers, which include Dulux Group, Visy, and Norske Skog Boyer, customer conversion shouldn’t be an issue. Their proximity serves as an advantage, as shipping kaolin from America or Europe costs more per tonne for Asian customers, not to mention the significant lead times to product delivery. SUVO presents itself as an attractive partner to put a dent in Asia’s 5 million tpa demand for hydrous kaolin. Most kaolin in Asia is produced in China and Indonesia, however, they pose little competitive risk because their product is generally of lower quality. High-quality kaolin is required for applications like paint, paper coating, and ceramics, which will turn customers towards SUVO’s premium product.
A Glance at Pittong’s Profit Potential
Prior to SUVO taking over in 2020, Pittong Operations had an attractive EBITDA of $2.1 million on revenues of $13 million in 2019. Post-acquisition, Pittong operations generated a total EBITDA of $3.6 million in 6 quarters, which meant SUVO made their investment back in less than 5 quarters, The estimated replacement cost of Pittong falls in the range of $50 million to $100 million, emphasizing the exceptional value reflected by the acquisition price of $3 million.
5-Year Revenue Projections
Canary projects SUVO’s sales revenue by taking estimates of their annual production of kaolin in tonnes and weighted average selling price. Given Canary’s anticipation for SUVO to convert a substantial portion of their sales pipeline opportunities, annual production is projected to increase to 25,000 tonnes in FY24, to 45,000 tonnes in FY25, and 55,000 tonnes in FY26. At 55,000 tpa, SUVO would be utilising 92% of the Pittong plant’s 60,000 tpa nameplate capacity.
In FY24, Canary expects the weighted average selling price to be in line with Q2 24, at $590 per tonne. However, throughout the forecast, they expect a gradual increase in price due to rising CPI (consumer price index). They estimate CPI to increase ~2.3%, as well as demand for higher quality kaolin to increase which commands a higher price point. Kaolin demand is forecast to grow 4.7% CAGR through to 2025, driven by increased industrial demand for paint, paper & ceramics.
“These factors are anticipated to drive the price to $600 in FY25, $618 in FY26, $633 in FY27, and $646 in FY28. As a result, SUV’s sales revenue is expected to reach $14.7m in FY24, up 31% from $11.3m in FY23. In FY28, SUV is expected to generate $35.5m in sales revenue representing a cumulative annual growth rate of 26% during the forecast period.” Looking forward to FY28, the company is poised to generate $8.3 million in free cash flow, achieving a robust profit margin of 23%.
All in all, Canary Capital’s thorough financial analysis of SUVO and its hydrous kaolin operations signals that it is positioned to generate healthy returns in the next five years. Canary notes that operating costs are likely to come down as SUVO has already made significant investments in equipment upgrades in the past two years. As they begin to close out the pipeline in Asia and inch closer to their goal of selling out Pittong, they can begin to look at ramping up their other mining operations and becoming an established kaolin player on the global front.
Canary Capital and Involvement in SUVO
Canary Capital is an experienced micro and macro cap investment management team. They were the lead managers in the most recent raise of $2.5 million for SUVO. Their projections are solely based on SUVO’s hydrous kaolin operations and do not account for the low-carbon, geopolymer concrete which has the potential for commercialization within the next 24 months.
To read Canary Capital’s full report:
https://canarycapital.com.au/wp-content/uploads/2024/02/SUVO-Strategic-Minerals-Limited-Research-Report.pdf