Technology Metals Australia (ASX: TMT)

This has the potential to add substantial value for TMT shareholders, with “potential” being the operative word at the moment.

According to a press release last Tuesday: “Work is progressing on an “Integration Study” designed to optimise the integration of Yarrabubba ore into the expanded MTMP. Benefitting from the very high quality GVP DFS, the “Integration Study” is expected to be completed in mid 2022 and will deliver optimised production, operating costs, capital costs and financial model to enable the timely progression of project financing. The MTMP Global Measured and Indicated MRE is expected to support a project life in excess of 25 years.”

That is, we should get very important news from TMT in mid-2022.

This is positive news.

The most significant change during the latest quarter was the company’s decision to combine Gabanintha and Yarrabubba to form the Murchison Technology Metals Project (MTMP). This has delayed the FS for Yarrabubba to beyond its previously scheduled December-2021 completion date, but we view the change as positive because it should result in superior economics.

TMT had A$3.7M of cash at 30th September, but due to a subsequent A$20M equity financing the company should be fully funded for the next 12 months.

The plan, now, is to revise the GVP FS to incorporate the processing of ore from Yarrabubba with the goal of making a Final Investment Decision (FID) during the second half of 2022. In addition to revising the GVP FS, getting to the FID will require more pilot testing.

This news is positive. It confirms that TMT is a good way to have long-term exposure to vanadium.

Last Thursday TMT reported the following exceptional intercepts from infill and extensional drilling at Yarrabubba:

– 24m @ 50.2% Fe, 1.13% V2O5 and 12.8% TiO2 from 176m

– 26.5m @ 46.6% Fe, 1.06% V2O5 and 12.1% TiO2 from 21.5m

– 67m @ 36.6% Fe, 0.81% V2O5 and 9.4% TiO2 from 69m

The drilling results should lead to increased estimates of mineral resources and reserves.

TMT had A$5.6M of cash at 30th June. This would be enough to fund the business for about three more quarters at the current rate of spending, but we expect that the company will top up its treasury before year-end.

1) Due to its use as a steel additive (the addition of a small amount of vanadium can increase the hardness of steel by 100%), its demand could be given a hefty boost over the next 12 months by an extension of the post-pandemic global economic rebound and the US government’s infrastructure spending program.

2) It could play an important role in the clean energy revolution due to its use in grid-level redox flow batteries.

3) Its price remains low relative to the past five years.

Here is a chart showing the Vanadium Pentoxide (V2O5) price over the past three years:

The best way for most investors to have exposure to vanadium is to own the shares of Largo Resources (LGO in both Canada and the US). LGO has current profitable production of about 20M pounds/year of V2O5, a strong balance sheet and a nascent Vanadium Redox Flow Battery (VRFB) business. LGO would be a reasonable candidate for new buying if it were to pull back to near the bottom of its 3-month range (that is, C$17-$18).

Another way to have exposure to vanadium is via the shares of Technology Metals Australia (TMT.AX). TMT has been in our Small Stocks Watch List (SSWL) for the past 2.5 years, but we have decided to move it into the TSI Stocks List as a long-term position. The company has 150M shares outstanding, about A$7M of cash and a market cap of A$53M at its current share price (A$0.35).

TMT originally was put into the SSWL (rather than the TSI Stocks List) due to its lack of liquidity and the speculative nature of its mineral assets. The stock remains illiquid, so it should be traded in small tranches using limit orders only. However, over the past two years the company has made considerable progress at its flagship Gabanintha Vanadium Project (GVP) and also has progressed the Yarrabubba Iron-Vanadium Project (YIVP) to the Feasibility stage (both projects are located near Meekathara, Western Australia). As a result, it now has a far more substantial asset base.

Based on the FS completed in August-2019, for US$318M the GVP could be developed into a mine that produces 28M pounds/year of V2O5 at a relatively low cash cost of US$4.04/pound. At a V2O5 price of US$8.78/pound (about 15% above the current price), the estimated post-tax NPV(8%) and IRR are A$409M and 17%, respectively. At a V2O5 price of US$10.88/pound, the estimated post-tax NPV(8%) and IRR are A$870M and 27%, respectively. In other words, a 24% increase in the V2O5 price increases the project’s NPV by more than 100%. This is called leverage to the commodity price, which is a good thing to have in a commodity bull market.

TMT has signed off-take agreements covering more than 50% of GVP’s planned production. This indicates that the GVP’s output will be acceptable to vanadium consumers and that the consumers are prepared to work with TMT.

The YIVP, TMT’s other mineral asset, is an iron-ore deposit with a vanadium by-product. The iron-ore price has more than doubled over the past 12 months and is now at an all-time high (see chart below), so this is a good time to have iron-ore exposure. We doubt that the current high iron-ore price will prove to be sustainable beyond the next few months, but we don’t mind getting exposure to iron-ore for free. Given that the GPV’s NPV is about eight times the company’s current market cap, buyers of TMT shares near the current price effectively get iron-ore exposure for free.

The YIVP’s economics are in the process of being determined via a Feasibility Study scheduled for completion in September of this year.

It is easy for us to come up with a valuation of A$1-$2/share for TMT, or several times the current share price. However, we expect that the speculative demand for TMT and similar stocks will be low until the V2O5 price makes a solid and sustained break above US$8.00/pound. There’s no way of knowing when that will be, so it’s possible that the stock will continue to trade at a large discount to its potential value for a long time. Bear this in mind.

Lastly, TMT’s price chart looks constructive and played a part in our decision to feature the stock in today’s report.

As mentioned above, TMT has been added to the TSI List at A$0.35.