Fundie picks up on under-the-radar metal HPA and ‘incredibly lucrative' vertical

In 2022, the Australian Government added High Purity Alumina/Aluminium (HPA) to its critical minerals list, garnering significant government financial support for operators in the skew. Because of its crucial role in the production of electric vehicles, LEDs and semiconductors, HPA has carved out a place for itself in the global shift towards renewable, sustainable energy.

Despite drawing considerable demand in recent years, HPA has been flying under the radar. While approaching the HPA market has been labelled ‘difficult’ for Aussie investors due to the ‘tricky’ valuation metrics involved and scarcity of ASX-listed companies in the sector, fundie Jeremy Bond thinks he has found an ideal HPA investment opportunity.

Speaking on Reach Markets’ The Insider: Meet the Fund Manager in June 2023, Jeremy Bond, Chief Investment Officer at Terra Capital chose Alpha HPA Ltd (ASX: A4N) as one of his favourite stocks highlighting the company’s progress within what he deems an ‘incredibly lucrative’ vertical. Watch the full The Insider: Meet the Fund Manager session.

“[Alpha] is an HPA producer, on a small scale at the moment,” Mr Bond said, adding that the company is likely the next HPA producer of scale. “It is not really a mining stock. It is more of a specialty chemical stock…that’s part of what we think is the opportunity.” 

Alpha’s Stage One production facility in Gladstone, Queensland represents the first commercial application of a proprietary licensed technology to produce HPA products in commercial quantities. HPA products are considered high value, high margin and are highly in demand with a market expected to grow from US$3.2 billion in 2022 to nearly US$16 billion by 2030.

“That Stage One facility has been really important to scaling the technology. I think it’s been great in terms of verifying the product and the tech [and] you will start to see contracts come out from there,” Mr Bond said.

He noted that having the facility up and running has helped Alpha attract ‘strong’ government support – nearly $80 million in funding at the time of speaking – and that as the business progresses further into larger scale production so will the quantum of government support. “On our estimate, it’s about a $400 million buildup,” he said.

Recently, the company announced a non-binding Letter of Intent (LOI) with Ebner-Fametec for a potential larger scale rollout of Fametec’s synthetic sapphire growth technology. Second to only diamond in hardness, synthetic sapphire is used in the manufacturing process for LED lights and semiconductor wafers, and HPA is considered essential to its production.

Under the agreement, Alpha’s HPA will be used as feedstock to produce a total of 100 synthetic sapphire growth units, which Mr Bond estimates will generate a free cash flow of about $60-80 million. The LOI terms have been extended to ‘contemplate’ the production of an additional 1,000 growth units with an estimated free cash flow of $600-800 million.

“It’s really really meaningful. I think that’s why the share price is going up because I think people are really starting to understand what an amazing skew that’s going to be,” Mr Bond said. Since the start of November 2022 to the 27th of June 2023, Alpha’s share price experienced one of its steepest rises, from $0.42 to $1.135.

In conclusion, Mr Bond touted the advantage of specialty chemical companies in their ability to trade on above 20x multiples than those of mining businesses. He also highlighted one of Alpha’s large competitors being Russian and how it gives the company a particular strategic advantage among companies seeking commercial opportunities.

“Once people understand what this business is and what sort of cash flows it can generate, [Alpha] can be awfully larger than it is at the moment,” Mr Bond said.

Click here to view more videos from Jeremy Bond’s The Insider: Meet the Fund Manager session.

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