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Unearthing growth opportunities

Investor action on climate change will be a key focus at this year’s PRI conference, which for the first time, will run alongside the Global Climate Action Summit. Climate change is one of the highest priority ESG issues facing investors and the push to reduce carbon emissions is well underway. However, technological innovation is needed if we are going to meet the carbon emissions reduction targets set out by the 2015 Paris Agreement. In his latest note, Chi Chan, Portfolio Manager at Hermes Investment Management, explains how one company, Advanced Metallurgical Group (AMG) is playing its part in enabling a low carbon future.

In 2015, national governments, private sector companies and local authorities across the world pledged to reduce carbon emissions as part of the Paris Climate Agreement.

And although progress has been made – CO2 emissions have remained stable since 2014[1] – there is still a long way to go. According to the United Nations, adopting new technologies in key sectors, such as energy, agriculture, industry, transport, buildings and forestry, could reduce emissions by up to 36 gigatonnes per year by 2030[2].

Our current holding AMG produces critical components for technologies that tackle CO2 reduction.

Enabling a low carbon future

Dutch-domiciled AMG is a global critical materials company that produces high value-add speciality metals.

AMG’s development of products and processes to reduce emissions and improve fuel efficiency excites us greatly. That’s because technological progress enabling greater reductions in CO2 emissions is one of the main drivers of growth in the automotive, energy and manufacturing industries.

Digging deeper at Mibra

AMG has successfully operated its tantalum mine at Mibra in Minas Gerais, Brazil for almost 40 years. In 2010, it identified a high concentration of lithium concentrate, also known as spodumene, in the tailings – the “leftover” material after separating the valuable content. Lithium is used in rechargeable batteries that power electric vehicles. And with global electric vehicle sales forecast to pass 14m by 2025[3] – up from the current level of 1m – demand for rechargeable battery components is expected to surge in-line with this trend.

After a successful pilot run, the board gave the greenlight for spodumene production in 2016. The first plant, which has an annual capacity of 90,000 tonnes, began operations in May and a second plant with a similar capacity is expected to be online by the end of next year.

What’s more, production costs are low. As AMG has already processed the material to extract tantalum, the incremental cost to extract spodumene is marginal. At an estimated $135 per tonne, AMG’s cost of production is close to industry heavyweights and it offers strong profitability potential against a current market price of $700-$800. At full capacity, this means the lithium project could add $105-120m to group operating profit – a very significant contribution in the context of the $80m generated last year.

 A catalyst for growth

Another exciting area of growth is vanadium, which is used to harden steel and has applications in industrial flow batteries to store renewable energy. It can be mined but it is also found as a contaminant when drilling for oil.

Oil refineries install catalysts to draw vanadium out of the oil when it comes out of the ground. Once these catalysts are full, or ‘spent’, they are deemed toxic. Spent catalysts can be treated before going into landfill but this has a considerable negative environmental impact. Alternatively, they can be recycled and vanadium can be extracted during this process.

Today, AMG is the only provider of vanadium recycling in North America. Already, it has announced plans to expand its facility in Cambridge, Ohio by the end of next year, which will see its spent catalyst recycling capacity increase by about 30%. The group has also entered exclusive negotiations with Criterion Catalyst and Technologies, a subsidiary of oil major Shell, for a joint venture to expand their operations, which would offer further upside to forecasts once confirmed[4].

Vanadium pricing has more than doubled in the last 12 months, from $15 per kilogram (kg) to over $40/kg. Reduced supply, new Chinese rules to increase vanadium content in steel rebar, and the breakthrough of vanadium flow batteries in the commercial market have been responsible for this surge. Every $1 move in the price adds approximately $1.5m to AMG’s operating profits.

Figure 1: Vanadium prices have doubled in the last year

Source: Bloomberg as at 9 August 2018

Leading the way in CO2 reduction

At Hermes, we seek companies that are undergoing sustained positive change that will lead to higher future returns. We believe our investment philosophy is illustrated well by the enabling and mitigating technologies of current holding AMG.

It has focused on emerging growth opportunities by entering the lithium concentrate and vanadium markets, and producing critical components for products that reduce emissions and improve fuel efficiencies. AMG is also generating robust returns, which is evident from its Q2 results. In August, the group reported EBITDA of $45.2m in Q2, up from $21.3m on the previous year, driven by higher vanadium sales volumes and prices[5]. AMG now expects full-year EBITDA to increase by 40-50% compared to 2017[6].

CO2 reduction is – and will continue to be – a global imperative for the 21st century. And by remaining at the forefront of CO2 reduction trends, we believe AMG will benefit from factors that will generate enduring positive change: rising demand from customers for spent catalyst recycling, rapid expansion of the rechargeable battery industry and low-cost production.

 

This does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments. The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other Hermes communications, strategies or products. 

[1] “The Emissions Gap Report 2017,” published by UN Environment in November 2017

[2] “The Emissions Gap Report 2017,” published by UN Environment in November 2017

[3] “Metal recycles prepare for electric car revolution,” published by Reuters on 17 November 2017.

[4] “AMG and Criterion announce negotiations to form spent-catalyst recycling partnership,” published by AMG on 10 April 2018.

[5] “AMG reports second quarter 2018 results,” published by AMG on 2 August 2018

[6] “AMG reports second quarter 2018 results,” published by AMG on 2 August 2018

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