Description

Alpha is an under-the-radar specialty chemicals company that allows you to play the EV, renewables and semiconductor themes in the commodity markets. We think the stock is worth between $2-$4 over the next three years, compared to $0.90 AUD today. Addtionally, with a strategic like Orica already on the share register there is M&A optionality in the medium term. 

Overview of HPA demand drivers

Alpha’s primary product is HPA (high-purity Alumina). HPA market was valued at $3.2bn globally in 2022 and is expected to grow at a compounded 22%+ growth rate until 2030 (source: Grand view research). 

The increasing use of HPA in EV batteries, LED products and electronics manufacturing will be driving this growth. The lithium-ion battery consists of a thin coating on the separator sheet and a nano thickness for alumina-coated separators to improve battery performance. This HPA enhances the durability of the battery by increasing its ability to withstand a high rate of discharge. Finally, these high purity materials unlock key lithium-ion battery safety technology.

Nearly half the demand for lighting in the US has now shifted to LED as they are considered more energy efficient. This will be close to 100% by 2035, as LED products consume 75% less energy when compared to LCD.

HPA is also an essential base material for synthetic sapphire substrates that are used in numerous microelectronics, especially in semiconductors. In the high power semiconductor sector, HPA demand is linked to silicon-carbide (SIC). The value of SIC semiconductors used in EVs is expected to grow significantly in the coming decade.

Currently most of the producers of HPA are Chinese and this is a major issue for western companies looking to secure supply with friendly countries. It recently was added to the critical mineral list in Australia.

What is high purity Alumina?

HPA is an ultra-refined form of Aluminum oxide with a purity exceeding 99.99%. Unrefined aluminum holds small amounts of trace elements like silica and iron which gives it vastly different properties than HPA. Once these impurities are removed, the metal becomes glass-like transparent but with significantly higher strength, chemical inertness, high thermal conductivity and resistance to thermal shock. It can also be used to manufacture optical lenses (sapphire glass on iphone cameras and screens), medical equipment and specialized windows. In fact, purified alumina is so strong it is used as transparent armor for the military.

Its properties are critical for preventing short circuits in semiconductors and also in EV batteries, thereby eliminating the problem of spontaneous combustion of lithium-ion batteries.

Alpha specifics

A4N is a specialty chemicals company that produces ultra-high purity Alumina (HPA) products with a world first process providing this critical material for technology growth sectors like semiconductors and camera displays. The company has successfully run a precursor production facility since Nov 2022 in Gladstone, Queensland.

The company uncovered a new method of purifying aluminum oxide. It will be looking to process this into highly specialized downstream products. Alpha expects to reach full production of 10k tonnes of HPA per year by 2027.

Alpha has pioneered a new method of producing HPA from aluminum oxide called solvent extraction. This involves use of chemical solvents to separate metals from the impurities.

According to the company, there are only two other sites in the world that are able to replicate Alpha’s high purity capability. The other two sites consume significantly higher energy, which plays to Alpha’s advantage of being one of the world's lowest cost producers.

The technology has been de-risked with the successful operating of the stage 1  facility, and a final FID has been reached for stage 2 with a cost of $550mn.

First production is targeted for 1H’27. Along with the FID, the company secured equity and debt funding in the past few weeks. The federal and local government combined to provide $320mn of debt financing for the project, along with an $80mn overrun facility. This comes on the back of $60mn worth of grants as well.

ALPHA SAPPHIRE: A4N’S DOWNSTREAM SUBSIDIARY

In March 2023, A4N announced it had entered a LOI with Austrian technology providers Ebner Industrieofenbau GmbH (Ebner) and Ebner subsidiary Fametec GmbH (Fametec) to establish sapphire glass manufacturing in Australia using A4N’s HPA products and Ebner- Fametec’s sapphire growth technology. In June 2023, the groups announced a potential expansion and the staged rollout to over 1,000 units. This business is housed under A4N’s wholly owned subsidiary Alpha Sapphire.

In September 2023, Alpha Sapphire was awarded up to $30m in project funding to accelerate the rollout of an initial 50 sapphire growth units under the LOI with Ebner Fametec.

Valuation

HPA stage 2 and the downstream Alpha Sapphire business establishes A4N as a leading global supplier of ultra-pure, high value aluminum based materials for global high tech markets including semiconductors, lithium-ion, LED lighting sectors.

The company's DFS which led to the FID, showed the following  strong economics of the project at current spot prices of $30 /kg:

Production capacity of 10kt

Steady state revenue of $359mn- $509mn

Steady state EBITDA of $255mn- $403mn

Cash costs of AUD $9.58/kg

The cash cost forecast would place A4N at the bottom of the cash cost curve globally, with the clear strategic advantage of being an Australian producer.

The forecasts call for a growing supply deficit in HPA by 2030, even as A4N ramps to full capacity.

In our view, Alpha has a very experienced management team who has executed very well to date.

Orica (ORI AU) owns 5% of Alpha, and this provides technical and commercial validation due to the fact they conducted extensive technical due diligence prior to investing. Orica also has binding arrangements to supply chemical reagents and offtake by-products at the HPA project.

With the project fully derisked and funded, we expect investors to increasingly focus on the EBITDA run-rate and growth potential in the out years.

Specialty chemical companies trade at low double-digit EBITDA multiples with single digit growth potential. In this case, we expect Alpha to garner anywhere between a 10-15x EBITDA multiple, putting its value in the $2bn-$6bn range, vs. the $1bn market cap today.

Catalyst

With the financing and FID now received, the next catalysts will be offtake agreements. The company is in negotiations with end users in the US semiconductor industry who have already received test samples and will look to execute a deal in the coming months. We expect these deals to have a significant effect on the valuation of the company.