Back of the Envelope Valuation Exercise for NOVX21

NOVX21 is a PGM recycling company that expects to fund and build its first commercial scale facility in 2014.

NOVX21, ticker NOV.v is a PGM recycling company that expects to fund and build its first commercial scale facility in 2014. Assuming the first facility gets built this year, the upside for the company is quite significant.

Let’s assume that the Net Present Value, “NPV” of a single 10-reactor facility is $30 million. How do I get that number? Based on the company’s previously reported projections of the economics of a 4-reactor facility, scaled up by a factor of 2.5 (10/4 = 2.5). Using the company’s figures, a single 4-reactor facility was expected to produce $21-$29mm of revenue, the midpoint of $25 million scaled up by x 2.5 = $62.5 million. Gross margin was stated by the company as 33%. Let’s assume on revenue of $62.5 million, the operating margin might be 15% or roughly $9 million per year. The capital cost to build a 10-reactor facility is stated as $10 million.

Assuming a 15-year facility life, and discounting $9 million per year at an 18% discount factor, that equates to about $36 million. Let’s haircut that $36 million to $30 million to account for capital replacement costs over the 15-year facility life. Why an 18% discount factor? I have no specific reason, but I feel that’s fairly conservative for a technology that’s been pilot tested at 1/10th commercial scale for over a year.

Hard to Imagine How (Fully-Diluted) NOVX Shares are Not Worth AT LEAST $0.20….

There are 145 million fully-diluted NOVX shares. If all of the warrants and options were to be exercised, the company would receive proceeds of about $10 million. Let’s assume that the company raises $10 million of convertible debt in July with a convert price at 20c. NOTE: I believe that the company hopes to get a better funding package. Maybe it can raise $5 million of the $10 million as straight debt with no equity component or through equipment financing or community subsidies / tax breaks of some kind. In any event, if it’s a $10 million convert at 20c, that would be 50 million additional shares upon conversion, for total pro forma, fully-diluted shares of 195 million, (call it 200 million so that management can give out share-based bonuses). The valuation of NOVX21 based solely on $10 million of cash proceeds from the exercise of warrants and options, PLUS the NPV of a single 10-reactor facility ($30 million) = $40 million of tangible asset value. $40 million divided by 200 million pro-forma, fully-diluted shares = $0.20 per share.

If the story ended there, that would not be too exciting. Remember, companies frequently trade at valuations below Net Asset Value per share. But, the story doesn’t end there because if the company successfully builds facility #1, more will certainly follow. Assuming that all subsequent facilities could be built from internally generated cash flow and warrants/options proceeds, i.e. no further equity dilution after this imminent capital raise, then there’s a lot more value to be considered.

For example, let’s assume that 2 additional facilities are built in 2015 and that those facilities ramp up so that by 2016 they’re essentially at design capacity. Since cash flow would be set back an additional year on these 2 facilities compared to cash flow from facility #1, the NPVs of those 2 additional facilities would be say $30 million divided by 18% = $25 million each, or $50 million for the 2. Therefore, assuming the first facility is successful, the total value of the company on 3 facilities operating by 2016 might be $40 million plus $50 million = $90 million, which would equal about $0.45 per pro forma, fully-diluted share.

… And, a Valuation Over Time of $1 or More Per Share is Not Unreasonable

One can imagine the blue-sky possibilities. How many facilities could the world absorb? I certainly think dozens over the next 10 years. Even if just 10 are built over the next decade, the NPV of those 10 would reach into the hundreds of millions of dollars, which would equate to a pro forma, fully-diluted share price above $1. Again, assuming no additional convertible debt or equity is raised after this upcoming capital raise.

The magnitude of de-risking that is set to occur by the funding and construction of the first facility is very significant. I would think that the NPV of a second facility (assuming it comes online after the successful demonstration of the first facility) would be higher than $30 million because instead of an 18% discount factor, one could assume a lower rate of say 10%-12%. At a 12% discount factor, the NPV would be $51 million compared to $36 million at 18%. Instead of a NPV of $25 million for facilities numbers 2 & 3, it perhaps could be $35 million each as they would be substantially de-risked units. The valuation would then be $40 million for the first facility + options/warrants proceeds plus $70 million for facilities #2 & #3 = $110 million. $110 million divided by 200 million pro forma, fully-diuluted shares = $0.55 per share. Why am I fooling around with different discount factors? Merely to demonstrate the de-risking upside. Taking that line of thought to the final conclusion, what discount factor would a major PGM company like Stillwater or Anglo American need to apply to a soon to be proven commercial technology like NOVX21’s? A LOT LESS than 18%!

Licensing Opportunity Could be Tremendous as Well

A final thought- the company will be building and operating its own facilities, but may also (eventually) roll out new facilities through licensing agreements. Perhaps the company could collect 7.5% of the top line revenue from a licensed facility that’s 100% funded, built and operated by a third party. 7.5% x $62.5 million of annual revenue = ~$5 million of royalty income per year per facility. A royalty stream like that might be valued in the tens of millions of dollars. Who knows how many licenses could be sold in China alone?

By Peter Epstein

In 2011, Peter Epstein, CFA, left a $3 billion hedge fund where he was a senior analyst, to help increase awareness of a number of natural resource companies in which he's invested in. Mr. Epstein formed MockingJay, Inc., a consultancy for companies in the natural resources space and informal (non-licensed) advisor to high net worth investors. Mr. Epstein's areas of expertise include uranium, coal, gold, potash, copper and graphite.
He has published hundreds of articles / blogs on investment sites such as Seekingalpha, and the Motley Fool and some articles on and

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