Investment Memo: FYI Resources (ASX:FYI)

Published May 2022

What does FYI do?

FYI Resources Ltd (ASX: FYI) is a specialist metals technology company, focusing on the key battery metal input High Purity Alumina (HPA). FYI utilises a new production process that is cleaner, purer, and much less expensive than conventional methods. FYI is partnered by leading global alumina company Alcoa, with a binding agreement through to commercialisation. 

What is the macro theme for FYI?

The market demand for HPA is tipped to more than treble from 2021 levels by 2028, largely driven by greater demand for lithium-ion batteries as automakers secure critical inputs for electric vehicles (EVs) mass production.

Why do we continue to hold FYI in 2022?

1. Funded through to commercialisation – FYI has a binding joint venture agreement with Alcoa that essentially provides a complete pathway to commercialisation of its HPA technology. FYI retains a 35% interest and Alcoa funds US$243M in development costs. Subject to the technology continuing to tick Alcoa’s ‘boxes’, first production is poised for 2024, which would make it the first-to-market of any of the new kaolin-based processes. We can’t overstate the importance of Alcoa, considering its substantial R&D resources, operating experience, long-established marketing and industry relationships, and global reputation – alongside its large balance sheet. Indeed, we think project financing will be a considerable (even insurmountable) hurdle for many of FYI’s peers, whereas FYI is effectively free-carried through to production.
2. Favourable market dynamics – The HPA market is expected to move into deficit in 2024, coinciding with full scale production of FYI’s first plant facility. With the cost of FYI’s HPA output expected to be under half of the current conventional method (that delivers most of the current HPA supply), the opportunity to substantially disrupt this industry remains on the cards.
3. Positive ESG headwinds – We back FYI’s ESG-centric focus, with its process set to replace the current and prevalent more expensive, energy intensive and polluting method. We think this will appeal to battery manufacturers and automotive companies as key customers, as well as larger institutional investors.

What we expect the company to deliver in 12 months

Objective #1: Commission demonstration plant

• Ultimately the plan is to have full-scale production by 2025. Alcoa effectively handles the ~US$250M funding required, provided FYI’s technology successfully proves itself over several phases. This has already been demonstrated at the pilot plant scale. 
• Subject to engineering, we expect Alcoa and FYI to greenlight the construction of a demonstration plant through funding US$50M – producing market demonstration and assessment volumes up to 1ktpa HPA.  
• Allowing 6-12 months for construction, we would be looking at first HPA production sometime in 2H 2023.

Milestones

✅  Complete pilot plant trials
🔄  Front end engineering design – progress update
🔲  Front end engineering design – final report
🔲  Greenlight Phase 2, Alcoa funds US$50m – December 2022
🔲  Appoint lead project engineer
🔲  Commence construction
🔲  Complete construction
🔲  Maiden production in 2023

Objective #2: Progress FEED for the full-scale plant 

• In parallel with the demo plant progressing, FYI and Alcoa will advance front-end engineering and design (FEED) for the full-scale, 8-10 ktpa plant.  
• Subject to satisfactory demo plant performance, this will be the precursor for the Second Investment Decision to proceed to commercialisation. We expect that the FEED will commence before year end.

Milestones

🔲  Front end engineering design – progress update
🔲  Front end engineering design – final report
🔲  Appointment of lead project engineer
🔲  Greenlight Phase 3, Alcoa funds US$200M

Objective #3:  Secure first offtake agreement 

• As projects become further de-risked, potential customers become increasingly interested in securing output. We think that sufficient progress can be made in 1H22 such that multiple customer offtake MOUs and marketing relationships can be delivered in 2H22.

🔲  Enter into first MOU offtake agreement

What could go wrong?

Financing risk – the commercialisation of FYI’s technology currently hinges on Alcoa funding, which in turn hinges on both parties progressing through three phases of development, as outlined in their Binding Agreement entered in September 2021. There is no guarantee that both parties will proceed across all stages, which would result in FYI requiring to raise substantial funds for project financing, which would almost certainly lead to a market sell off.

Technical risk – FYI’s process flowsheet and technology has been proven in the lab and on a pilot plant level, but has yet to be tested at scale. The demonstration plant, followed by the full plant facility, will test this. There is no guarantee that FYI’s technology meets Alcoa’s requirements to progress through these stages.

Market dynamics – FYI’s technology is new and seeks to replace the current conventional method (hydrolysis of aluminium alkoxide, a process that has not been substantially changed since the 1880’s). However, there could be yet another new technology that emerges that proves superior or more popular, which would be detrimental to FYI’s business. Furthermore, there could be unforeseen changes to the HPA market that could alter demand, impacting the viability of FYI’s project.

Project timeline – the timeline for first production from the full scale plant is 2025. However, the scope for timeline slippage is real, given logistical constraints and supply challenges not accounted for. It is also not uncommon for joint venture partners to ‘move at different paces’, which would impact the timetable.

What is our investment plan?

We first invested in FYI at 20c and then increased our position at 50c and 44.4c. 

In line with our standard investment strategy for small cap investments we de-risked around 17% of our FYI Total Holdings in the lead up to the Alcoa JV catalyst.

We still maintain around 83% of our Total Holdings in FYI and intend to hold the majority of this position until the Alcoa US$50M funding decision – expected in December this year. 

If the share-price runs up in the lead up to this decision we will sell up to an additional 20% of our Total Holdings.

We’ll re-evaluate our investment plan after the Alcoa funding decision.

Disclosure: The authors of this memo and owners of Wise-Owl, S3 Consortium Pty Ltd, and associated entities, own 1,097,000 FYI shares at the time of publishing. S3 Consortium Pty Ltd has been engaged by FYI to share our commentary on the progress of our investment in FYI over time.