Analyst questions Orbite’s ‘game-changing’ technology

Orbite Aluminae (ORT-T) has been pushed into 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-Vallée property in Quebec.

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

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

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 acid recovery, economic viability and environmental friendliness,” Orbite says, 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 Services 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 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 that if the technology doesn’t work — it has yet to be proven on a large-scale — the economics of Orbite’s project may be impacted. Hykawy initiated coverage on Orbite with a “sell” and a 90¢ price target.

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.

An 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 and 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 that 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 depend on SMS Siemag’s technology, and 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.

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 rare earth elements and rare metals from clay in the Grande-Vallée 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, 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” recommendation 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 Thyssen-Krupp 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 hydrothermal acid regeneration process is expected to contain mainly water, hydrochloric acid, iron chloride and rare earth elements. Everything else would be diverted. The point here is that a cleaner-spent acid means less process risk.”

Based on a detailed cost estimate for the SGA plant, Moreno predicts Orbite “does not need by-product revenue to be competitive or economic.”

She concludes that “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 an $11.20 target price.

Stock halt

More than a month after the PEA was released, Quebec financial regulator 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 six-week trading halt, Orbite carried out an independent audit of its PEA as requested by the AMF. On March 30, the audit confirmed that “despite the lack of clarity of the data and analyses, the conclusions of the Jan. 12, 2012 technical report are valid, and there is no evidence of fraudulent or exaggerated claims or disclosures in this report.”

Orbite intends to update the PEA by May 31. The major changes will include categorizing the resource into measured, indicated and inferred, and adding alternate fuel scenarios, Johnson says.

In late March, the company also entered a memorandum of understanding 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 should 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 uses the hydrothermal process — online by late 2013, or early 2014.