CFRHF - IperionX: One To Look Out For

2024-01-21 08:55:22 ET

Summary

• Titanium producer IperionX aims to reach a breakthrough moment for titanium production as it commercialises operations in 2025, the production facility for which is expected to be commissioned soon.
• To meet its liquidity requirements, it has received government funding and has raised capital through private investors. There's also interest in its products from both the government and the private sector.
• However, there's a risk that its price has run ahead of itself, despite the promise it indicates.

Titanium producer IperionX (TAOFF)(IPX) might be pre-production but it has made a fair bit of progress since I wrote about it last September. This is also reflected in a 17.3% price rise since. And in the past year, the price at its NYSE listing has seen a significant 90% rise (see chart below). But can it continue to show an uptick in 2024?

The “Bessemer Moment”

The company’s recent developments certainly look good. In a letter to shareholders released a few days ago, the company looks forward to reaching its own “Bessemer Moment”, which is a reference to the time that steel production took off. After being an exclusive product for 3,000 years due to higher production costs compared to iron, the breakthrough for steel came in 1856 when Henry Bessemer found a low-cost way to produce it. Between then and 1882, costs fell by 70% ushering in a new era for rapid steel production (see chart below).

IperionX now hopes to reach this inflexion point for titanium, as it targets launching commercial operations in the first half of this year (H1 2024) with the commissioning of a facility in Virginia, USA. It will use its patented production processes called the Hydrogen Assisted Metallothermic Reduction [HAMR] process and Hydrogen Sintering & Phase Transformation [HSPT] for production, which offer a significant cost advantage to current production processes.

Furthering partnership with the US government

That it has the support of the US government both in terms of funding and orders is also encouraging. At present, the government relies heavily on titanium sponge imports for the defence sector. The company can play a crucial role in securing a domestic supply of the metal, which explains its close collaboration with the government.

Government funding

To this extent, it received a Department of Defence grant worth USD 12.7 million last November, which will go towards building its production facility. It has also received a letter of interest from the US government’s official export credit agency, the Export-Import Bank for a sum of USD 11.5 million , which will go towards equipment finance. Specifically, IperionX intends to use the funding for industrial furnaces and comminution equipment.

The funding from the Department of Defence along with EXIM Bank bolsters the capital already raised via a placement to existing investors worth USD 16.7 million in November last year.

This is much needed capital for the company, whose operating expenses at USD 17.7 million exceeded the working capital available of USD 11.2 million by 58% for its financial year ending June 2023. However, the funds raised should hold it in good stead now. It’s also worth noting that IperionX has very little debt on its books. In any case, if it begins production in the final quarter of 2025 as envisaged, the revenues should begin to stabilise its finances in less than two years from now.

Defence orders

Besides government funding, IperionX is also now supplying titanium for defence purposes. It has produced titanium plate components for the US Army, which according to the company, can help to “improve both corrosion mitigation and light-weighting in Army ground vehicles.”.

This follows its collaboration with Carver Pump, which has been a long-term supplier to the US Navy, to manufacture titanium pump components for the US Navy. It also won the Air Force Research Laboratory Grand Challenge earlier in 2023, which involved the selection of the best technology for recycling titanium for further use, which makes it eligible for a contract reward of USD 500,000 over four phases.

Growing private orders

Besides government collaborations, there’s also strong evidence that it can have a healthy revenue stream from private clients. In the latest development among these, in October last year, it agreed on the supply to GKN Aerospace, which provides smart aerospace systems and components to most of the aircraft and engine manufacturers.

Earlier last year, it had agreed to provide the same to the security and aerospace company Lockheed Martin ( LMT ). These add to its earlier collaborations with the automotive major Ford Motor Company ( F ) for the supply of titanium components and luxury company Richemont ( CFRHF ) for the production of sustainable titanium watches.

The market multiples and NPV

With the rise in its price, however, the stock’s trailing twelve months [TTM] price-to-book ratio has also risen to 10.5x from the 9.2x it was at the last I checked. It’s also significantly higher than other titanium stocks like titanium miner and products manufacturer Tronox ( TROX ), which is at 0.96x and titanium oxide pigments producer Kronos Worldwide ( KRO ), which is trading at 1.24x.

IperionX does have another ace up its sleeve, though, in the form of the Titanium Project, which is its mining operation. With a post-tax net present value of USD 692 million, the project alone indicates that the stock’s price should be 2.75x of its present levels.

The only challenge in factoring these numbers into the overall valuation is that the production date isn't set yet, though it's encouraging that key development permits for the mine have been granted as per the company’s latest update.

By the time the mining operations start, it can be assumed the company could be well into generating revenues in its industrial facility currently underway. So for the stock analysis right now, the relevant metric to consider is still the P/B, which does continue to look high, though IperionX can be a game changer in its industry if it succeeds. We don’t know that for sure yet, though.

What next?

The latest developments for the company continue to reflect that it’s on the right path. The increased funding can provide sufficient liquidity until it starts commercial production in late 2025.

But the rubber is yet to meet the road, so to speak. While it is confident of being a game changer for the titanium industry, it’s trading at much higher multiples than its industry peers, which means that it may just have run ahead of itself. Just to avoid risk, I’d maintain a Hold rating, though it’s definitely one to watch out for.

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