Suvo Strategic Minerals Ltd (ASX:SUV) has kept its 'buy' recommendation with a price target of $0.10 due to its Pittong Hydrous Kaolin Plant in Victoria ramping production back to historical levels, according to Pac Partners.
The research firm sees the under-the-radar Suvo on the fast-track path to positive earnings before interest, taxes, depreciation and amortisation (EBITDA) and free cash flow (FCF) this year, with limited downside from external debt.
“We recently visited Suvo’s Pittong operations with about 25 investors,” Pac Partners said in a research note.
“We came away impressed with the solid foundations that support a straightforward investment case.”
Suvo shares are currently trading at about $0.028.
Following are excerpts from the research report.
Pittong to be at capacity within 12 months
An enlarged salesforce has sample product with over 30 international customers currently, which should convert to capacity-filling sales contracts and doubling of the production rate by end 2023.
Trawalla can double capacity again
By mid-2024, FCF from a peak operating Pittong plant should trigger potential development of the nearby and permit-ready Trawalla Kaolin Project.
As Suvo hits its near-term targets, we see Trawalla an increasing part of the 3-year investment case, particularly if a joint venture (JV) partner can bring the capital and base level of underlying sales to de-risk the project.
Trawalla is 30 kilometres from Pittong and permitting for a 100,000 tonnes per annum Trawalla mining and processing operation was last refreshed in 2021.
Our current estimate of capex is A$100 million, of which a majority may be provided through JV partners and debt financing, underpinned by a long-term offtake agreement.
Key drivers
- Increasing volume - Sales and marketing success through new offtake agreements are the key near-term catalysts in our view. With over 30 samples currently out in the global market for testing, we expect even a small conversion rate would result in meaningful volumes for Suvo.
- Increasing price - New sales agreements are expected to be struck at incrementally higher prices.
- Rapid revenue increases - This volume and price dynamic should see revenues more than double and deliver long-term EBITDA of about $10 million per year, supporting a valuation of more than 200% higher than current.
Risks
Unlike other kaolin companies, Suvo’s end markets are known, its key asset in production, capex is complete and the resource very well understood after 50 years (and more than 30 to go).
Risks, therefore, are moderate relative to peers.
Risks do include operating risk at levels of production last seen 15 years ago (currently, the plant is run at full capacity but on a reduced number of shifts).
Working capital, long-term domestic market share, decline of the paper industry and kaolin prices (a bilaterally negotiated market) are other notable risks.