EORBF: Slaying the Bayer; Initiating with a
Buy and $10 PT
Orbite Aluminae has developed an innovative, closed-loop, acid recovery
process that efficiently extracts alumina, other metals (hematite, MgO), and
rare metals (scandium, gallium). Unlike the Bayer process, Orbite’s alumina
production does not produce any toxic waste. The company is already in JV
or licensing discussions with RUSAL and Nalco and is poised to disrupt the
global alumina industry.
Initiating coverage on Orbite with a Buy and $10PT. Orbite has developed
a novel chemical process that unlocks the potential of aluminous clays at
an attractive cost structure and without any red mud waste. The strategic
implications for the alumina industry are potentially far reaching. We expect
the industry to be disrupted and Orbite to be a prime beneficiary. As a result,
we are initiating coverage with a Buy.
Bayer vs. Orbite: Orbite wins. Management is targeting an alumina cost
structure of $210/tonne vs. the 125 year old Bayer process of ~$265/tonne
as a global average. Not only does Orbite avoid the production of red mud
waste, but it also can use red mud as an input. The Bayer process is only
65-70% efficient at refining alumina, resulting in 10-30% alumina in the mud.
Thus, Orbite’s technology can serve as a way to remediate red mud sites
throughout the world, while generating attractive ROI for waste site owners.
B/S fully funded to bring 1,500tpa HPA facility online by YE’12. With
$60mn of cash, management has the capital required to build its 1,500tpa
HPA facility. Production is targeted to begin in Q1’13, and we see a clear
path ahead. Concurrently, Orbite is finalizing the BFS for its 540,000tpa SGA
plant, which we expect to start production in 2015.
By-products to drive attractive SGA margins. Although SGA
performance could yield top tier financial performance in the alumina
industry, we expect the revenues from by-products (hematite, rare metals,
etc) to drive substantial margin expansion and financial performance as
these by-products are produced with little to no incremental cost.
Partnerships on the horizon. RUSAL and Nalco are each discussing either
JV or licensing agreements with Orbite, which we view as positives. RUSAL
may invest $25mn in Phase 1 of the SGA plant.
What could go wrong? We view solid execution as the key success factor
since Orbite is pre-revenue. It is critical for the company to meet or exceed
expectations for capital costs, operating costs, and product quality. Any
material delays or hiccups in the chemistry could serve as a downside risk
Important Disclosures & Regulation AC Certification(s) are located on page 69 to 70 of this report.
Roth Capital Partners, LLC | 888 San Clemente Drive | Newport Beach CA 92660 | 949 720 5700 | Member FINRA/SIPC
Page 2 of 70
ORBITE ALUMINAE INC. (TSX: ORT) Company Note - September 17, 2012
We are initiating coverage of Orbite Aluminae with a Buy rating and a $10 price target.
Orbite Aluminae has developed a novel set of chemical processes that we believe is poised
to disrupt the ~$30bn alumina industry, as it expects to produce alumina at an attractive cost
structure ($210/tonne vs. global average of $265/tonne) and not leave behind a toxic residue.
Moreover, the technology can process a variety of inputs, such as abundant aluminous clays,
low grade bauxite, fly ash, and even red mud, in contrast to the traditional Bayer process,
which requires high grade bauxite ore. In addition to alumina, Orbite expects to produce a
variety of by-products, such as hematite, rare metals, and rare earths that can generate
meaningful revenue for little to no incremental cost, thereby driving margin expansion and
return on capital.
The key to the technology is its closed-loop, acid recovery process.
The fundamental key to Orbite’s chemical process is that it recycles the hydrochloric