Analyst questions Orbite’s ‘game-changing’ technology

Orbite Aluminae (ORT-T) has been pushed in the spotlight after an analyst raised concerns about some of the technology the company will use to extract alumina and rare earths from its Grande-Vallee property in Quebec.

That technology in question is the hydrothermal acid regeneration process that Orbite included in its positive preliminary economic assessment (PEA) for the Gaspe-based project, published in early January.

The hydrothermal process will be used to extract rare earth oxides and rare metals from the acid used to leach aluminum from Orbite’s clay deposits at Grande-Vallee.

Some of the main assumptions in Orbite’s PEA, “based on the low-energy acid regeneration technology, are without merit,” Jon Hykawy, an analyst at Byron Capital Markets, said in an April 9 research report, urging investors to be cautious.

The following day, Orbite reiterated its choice for the hydrochloric acid recovery technology for its smelter-grade alumina (SGA) plant based on data from SMS Siemag and German steelmaker, ThyssenKrupp, supporting the efficiency and recovery rates of the process.

“The key decision factors in selecting this technology include the high yield recovery of acid, economic viability, as well as environmental friendliness,” Orbite said, explaining the process consumes less energy than the conventional spray roaster pyrohydrolysis.

Regardless, investors pushed the stock down nearly 6% to close April 10 at $2.10.

In his report, Hykawy suggests the hydrothermal process designed by SMS Siemag may not be working as specified.

He points to ThyssenKrupp’s move to award International Steel Service a US$15-million contract for a new acid regeneration plant at its Calvert steel mill in Alabama, based on conventional spray roasting. The mill currently uses SMS Siemag’s technology.

“What we were told directly is that ISSI has been tasked with replacing the SMS Siemag equipment within the Calvert mill by ThyssenKrupp, because the SMS Siemag process is significantly underperforming,” Hykawy writes in his report.

He urges if the technology doesn’t work, which is yet to be proven on a large-scale, then the economics of Orbite’s project may be impacted. Hykawy initiated coverage on Orbite with a “sell” and price target of 90¢.

ISSI, which is a competitor of SMS Siemag, didn’t immediately respond to a request for comment.

In an email, ThyssenKrupp Steel USA’s director of communication, Scott Posey, confirmed that it has contracted ISSI for additional acid regeneration capabilities, but declined to comment further on the existing plant.

A SMS Siemag executive, who is familiar with the subject, confirmed that the Calvert plant is not being replaced or abandoned as suggested by Hykawy.

“The plant is in advanced commissioning. It has been operating/functioning well, but not continuously. So far we have not encountered any facts which would indicate that it will not be functioning as soon as commissioning is completed.

“Proof of concept was delivered back in January 2011 when the plant for the first time produced the specified product and by-product qualities at the specified utility and energy consumptions. The process works.”

He adds, equipment-wise the company is still optimizing the plant for better availability.

On April 18, Hykawy reiterated his concerns that the project’s economics in the PEA largely depends on SMS Siemag’s technology, particularly in its ability to extract rare earth oxides and rare metals from the acid used to leach aluminum from its clays.

He notes the conventional technology used to recycle hydrochloric acid can only produce a mix of metals as oxides, not individual products as the hydrothermal technology to be used in Orbite’s SMA plant.

On the same day, Orbite stated its pilot plant tests in Europe “confirmed that the company’s patented chemical process enables a high recovery rate and individual extraction of REE and RM from clay in the Grand-Vallee deposit.”

Nonetheless, Hykawy argues if the process doesn’t work as planned, it would “necessarily and dramatically impact the revenue and profitability of the proposed Orbite Aluminae plant.”

But not all analysts share Hykawy’s concerns.

“I think to draw a dotted line from a prototype facility in Alabama run by SMS Siemag’s [technology] all the way back to what would be delivered for Orbite here in Canada is a bit of a stretch,” analyst Marc Johnson of M Partners said in a April 20 interview.

“SMS Siemag is learning from the prototype and they have provided numbers within the PEA, based on what they have learned there, and to suggest that the [Alabama] plant is not working by someone who has not been there or is not covering SMS Siemag is a bit of a stretch. So, no, I’m not concerned. You’d have to be implying that SMS Siemag in a way lied to the company — that is not the case at all.”

Johnson has a “buy” on the stock and a $15 price target.

Luisa Moreno, an analyst at Jacob Securities, explains in an April 24 research note that Orbite’s hydrothermal acid regenerating system is simpler than what ThyssenKrupp uses at its steel mill.

“Orbite’s waste acid feed reaching the hydrothermal acid regeneration plant is expected to be much cleaner than that of a steel mill pickling operation. Orbite’s waste acid feed to the H-ARP is expected to contain mainly water, hydrochloric acid, iron chloride and rare earth elements. Everything else would be diverted (e.g. aluminum chloride is calcined and the magnesium oxide is spray roasted). The point here is that a cleaner spent acid means less process risk.”

Based on a detailed estimate of the costs of the SGA plant, Moreno says Orbite “does not need by-product (e.g. rare earths) revenue to be competitive or economic.”

She concludes: “There have been unprecedented attacks and so far unfounded attempts to discredit Orbite’s project. We will continue to monitor the sentiment towards the stock.”

Moreno maintains a “speculative buy” on Orbite and $11.20 target price.

Stock halt

More than a month after the PEA was released the Autorité des marchés financiers (AMF) halted trading in the stock for nearly six weeks, requesting more information on the study’s rare earth component. The cease trade order was lifted on April 4.

During the 6-week trading halt, Orbite carried out an independent audit of its PEA as requested by the AMF. On March 30, the audit confirmed “despite the lack of clarity of the data and analyses, the conclusions of the January 12, 2012 technical report are valid and there is no evidence of fraudulent or exaggerated claims or disclosures in this report.”

Orbite is expected to release an updated PEA for the project by May 31. The major changes will include categorizing the resource into measured, indicated and inferred and adding alternate fuel scenarios, says Johnson.

In late March, the company also entered a MOU with Rusal, where the world’s largest aluminum producer intends to acquire a 25% interest in the initial phase of Orbite’s first SGA plant for $25 million. Rusal also has the right to participate in the following phases.

Orbite expects to start producing revenue by year end from its high purity alumina plant, which doesn’t require an acid regeneration system. It intends to get its first SGA plant, which does use the hydrothermal process online by late 2013 or early 2014.