IMERYS' CHANGING COURSE WOULDN'T HURT ITS POCKETS

A week ago, we published a special report on a speciality building materials player Imerys – about how it can surf on the lithium-ion battery explosion. Yes, you read it right! A small-cap speciality mineral company with less than 5% exposure to lithium-ion batteries may make major announcements before the end of this year, leading to a complete reversal of its story, and, of course, its share price momentum. For further details, click here to read the report.

In the report, we mentioned Imerys’ less talked about treasure – an ongoing study to determine the economic and environmental feasibility of extracting lithium from one of its quarries, deep in Central France. Given the limited (financial) information in the market, we made a lot of assumptions to derive a value for this project. We are now taking a step forward and making some speculative guesses as well. Since lithium extraction and refining is a complex process and currently Imerys does not have a lithium-based product offering, this new project could prove seriously capital-intensive, as it will require ad hoc technology and facilities. More than €500m (i.e. 20% of Imerys’ market cap) could be needed over the first three to four years as the initial investment. Hence, financing would be key right from the beginning. We believe Imerys might choose one of these the following three alternatives:

1/ Imerys will quickly look for a buyer for its non-core assets, especially the ones targeting deep cyclical end markets, to re-allocate the proceeds to this project. However, it will be difficult to get a good value for these assets especially in a foreseeable downturn. Additionally, it can take a toll on Imerys’ earnings because an exit from the existing business to a new project will lead to a revenue/cash flow contraction.

2/ Another option is to raise debt but the company already has a net debt/EBITDA of around 2x (considering that the €1.3bn recently generated from divestments will be reallocated to expand the carbon black and graphite businesses), which is way above industry standards when matched to mining stocks.

3/ The rational move for Imerys could be to find an external investor. Lithium is one of the most sought-after materials due to its key role in batteries. The EU has the fastest growing lithium end market in the world, with demand expected to grow seven times by 2030. Global demand for lithium-ion batteries is expected to be more than 3,100GWh, and Europe alone has planned more than 1,000GWh capacity by 2030.

Such a surge in demand brings new risks to the lithium-ion battery supply chain and, hence, locally sourcing the key raw materials could be the game-changer for many battery manufacturers while car manufacturers will see the ESG benefits of going local. Hence, we believe that the battery manufacturers closer to the quarry and the ones which are backed by large cap giants could make a run to co-invest with Imerys. Two names that immediately come to mind are ACC (Automotive Cells Co) and Verkor. ACC is a battery manufacturing JV formed by SAFT (wholly-owned subsidiary of TotalEnergies), Stellantis and Mercedes-Benz, and Verkor is a JV formed by Renault, Schneider Electric and 10 other partner companies. Both these companies have a gigafactory in Hauts de France, and intend to increase from 13.4GWh to 40GWh and 16GWh to 50GWh by 2030 respectively. Hence, even though lithium mining is a polluting process, these battery companies have enough motivation to co-invest, both financially and intellectually, making this project somewhat more likely to happen.

Valuation

Market volatilities and the concerns about a global slowdown in 2023 are becoming increasingly concrete. We have taken this into consideration in our DCF analysis, along with lower revenues following the recent divestments. Yet, our DCF value offers a 42% upside. Additionally, our NAV value (which includes an estimated value for the lithium project) suggests a whopping 142% upside. Coupled with the near-term catalysts as mentioned in our special report, Imerys offers a great entry point for investors.

* For further information on Imerys, please reach out to sales@alphavalue.eu to schedule one-on-one calls