Updated: Jun 9, 2020
Current Price: $0.10 | Price Target: $0.51 | Upside Potential 410%
Our view: Initiating coverage on ARS with an Outperform and Speculative risk rating. Our thesis is driven by the changing market dynamics involving China becoming a net importer of fluorspar, the U.S. breaking away from foreign imports of the mineral, and high grade and resource prospects of the Lost Sheep property.
Uncontested Market Space Ares is currently one of the few, if not the only, permitted and past producing fluorspar mine in the United States. The United States currently imports 100% of its fluorspar consumption from abroad, given virtually no domestic producers owing to foreign competition that has left the industry dormant for more than two decades. With a major MOU signed that involves the sale of 60,000 tons per year and limited competition, Ares is well-positioned to scale and become an eminent supplier in the United States.
Tightening Supply as China Decreases Exports As the Chinese economy grew and China became a global manufacturing hub, the country has been consuming more and more of its local fluorspar production. This coupled with the fact that the Chinese government has been closing down domestic mines that do not meet environmental standards due to anti-pollution measures have not only caused global fluorspar supply to tighten significantly but also made China a net importer of metspar in 2018. This has sparked the need for buyers to source their supplies from elsewhere and should work in favor of emerging miners like Ares.
The Need to Diversify Supply Chain As Covid 19 continues to disrupt global trade, we believe that many American companies that tended to rely on a single or a small group of suppliers in Mexico or China are feeling an acute need to diversify their supply chains and/or source their supply locally. With the Trump administration expressing an unequivocal desire to break away from foreign imports of critical minerals and support for local producers, we believe Ares should stand out in the marketplace and benefit from this changing landscape.
Valuation & Recommendation We are valuing Ares based on 2021 EV/EBITDA of 4.5x. At our estimated 2021 EBITDA of ~$8 million, this implies a price target of $0.51. We are assigning the stock with a Speculative risk rating given the undetermined resource estimate, nascent stage of the project, and limited operating history.
What is Fluorspar?
Fluorspar, the commercial name for fluorite, is a hardrock mineral composed of 51.1% calcium and 48.9% fluorine (CaF2). Pure fluorspar is colorless but they can be found with colorful hues if tinted with other elemental impurities. Fluorspar is the principal source of the world’s fluorine supply.
Fluorspar found its first application as a flux in metallurgy. A German mineralogist Georgius Agricola first referred to the mineral as ‘fluores’, from the Latin fleure, meaning “to flow” in his book, “De re metallica,” which was the first written detailed description of how to prepare metals from ores. Published in 1530, the book described fluorite as “stones which become liquid in fire.”
Today, fluorspar is still widely used as a flux in manufacturing steel and aluminium. However, it has also found applications in a number of other industries ranging from consumer additives to pharmaceutical to electronics. Because fluorspar is not renewable and key to a number of industries, it is considered a “critical mineral” by many governments including the United States, the European Union, and China.
Uses of Fluorspar Uses of fluorspar depend on its grade of purity, which the industry classifies into 3 categories:
Acid-grade fluorspar (“acidspar”) is the highest grade with greater than 97% CaF2. Acidspar is primarily used in the manufacturing of hydrofluoric acid (HF) (hence acid-spar), which is used as a starting point for a myriad of industrial and consumer products including refrigerants, solvents, high-performance plastics, glassware, and a variety of fluoropolymers (e.g., Teflon). Another primary use of acidspar is in the production of aluminum fluoride (AIF3), which is used as a flux in the production of aluminium.
Ceramic fluorspar is the next grade down with 85%-96% CaF2. Ceramic fluorspar is used in the manufacturing of specialty glass, ceramics, and enamelware.
Metallurgical fluorspar (“metspar”) is the lowest grade with 60%-85% CaF2. Metspar is used just like how Agricola described it – to lower the melting point of steel, making it less costly to manufacture.
Ceramic and metallurgical fluorspar are often placed in the same category and simply called “metspar” for convenience. We will follow this convention throughout the report.
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