POW-dered opportunities

The GSA Acquisition

Where there’s muck

Dear reader

This week’s 75% GSA (Environmental) Ltd (GSAe) proposed acquisition by Power Metal adds an interesting skill set to their business - even if the match isn’t immediately obvious. The deal is conditional on due diligence which will complete in the next 30 days and has a negligible £0.075m price tag, paid in shares.

GSAe is a small, privately held UK engineering services provider and process licensor, which specialises in the extraction of strategic metals from 'secondary sources' including power station ash, refinery waste, titanium dioxide waste and spent catalysts, while also producing much more environmentally friendly residue. This is their range of services delivered worldwide:

GSAe's robust and adaptive technology enables the production of high purity strategically important metals at production costs that substantially undercut traditional mining routes. Using hydrometallurgical techniques, GSAe's metals extraction technology allows for improved sustainability/environmental impact by preventing otherwise harmful compounds being released. It also substantially reduces the volumes of waste materials sent to landfill.

There are several reasons O&G and industrial firms engage with GSAe:

1.Compliance - HazOps and reducing noxious substances since both vanadium and nickel pose serious health risks according to the CDC. Both of these metals are present in crude oil.

2.Revenue Stream - the same metals are valuable by products. Don’t let your workers breathe your profits.

3.Circular economy - the production costs of extracting metals is substantially cheaper than mining them. This will become more and more prevalent as mining projects dwindle. Chemical expertise is as important as geological skill.

4.Reduced volumes sent to landfill.

Expertise

Judging by the case studies, GSAe’s expertise takes them all over the world. The Flexicoke market is worth $400bn worldwide.

To contextualise this, for example, in the Amuay Refinery they produce 630kbpd heavy crude. This generates 38,000 tonnes per year flexicoker residues (largest flexicoker unit Worldwide).

GSAe helped Amuay produce:

• 4,500 tonnes per year vanadium pentoxide (worth about $57m)

• 450 tonnes per year nickel (worth about $8m)

So a $65m annual return on $87m Capex. No brainer?

Interestingly, the extraction process GSAe follows appears to be from this expired patent where Flexicoke is blended with an alkali metal source, such as sodium sulfate or sodium carbonate, and then roasted in an oxygen-containing gas until carbon is removed and a fused mixture is obtained. Thereafter, the vanadium is leached from the mixture with an aqueous solution, and nickel is contained in solids remaining from the leaching.

GSAe speak to this project needing “25,000 hours”. Assuming $250/hour (and that’s an educated guess) then a $6.25m project (of that $87m) for GSAe maybe. The accounts tell us there are 5 people working at GSAe so on a 40 hour working week equates to 625 days (or 125 for all 5). So about 4 months worth of work. Assuming £100k cost per engineer, that’s a profitable business - so long as you’re busy.

The RNS tells us during the period of 1 June 2023 to 31 December 2023, GSAe made £0.15m profit and, as at 31 December 2023, and net assets of £0.04m.

This latter performance is a big improvement to the 12 months prior where they appear to have lost £0.2m as at 31/5/23 and has net assets of -£0.11m. There is a shareholder loan on £0.26m and accumulated losses of -£1.3m so GSAe has been a labour of love for, owner, Mr Grimley it seems… grimly hanging on?

But the performance milestones agreed with POW suggest there is profitability improvement to come.

Roll of the dice?

The initail roll costs £0.075m POW shares - so a net £45k loss to POW (75% of £40k net assets)

There are then performance milestones:

1.Based on a contract win of £0.16m or more. Another £0.075m POW shares. On a 20% margin a net £50k loss (£0.16m*0.2 margin*0.75 ownership = £25k-£75k). So £0.15m shares paid and a £0.1m net loss to POW in dilution.

2.Year 1:Subject to profits of £0.45m (£0.34m belong to POW). Either £0.25m cash or shares so POW “make” £90k net. (£0.4m total gross and breaks even on a net basis)

3.Year 2: Subject to profits of £0.65m (£0.48m to POW). Either £0.25m cash or shares so POW make £0.23m net

4.Year 3: Subject to profits of £1m or more (£0.75m to POW). Either £0.35m cash of shares so POW make £0.4m net.

Why do it?

• Can you think of a country beginning with the letter S which is trying to diversify away from being the world’s 2nd largest Oil producer? Being able to more broadly cater to that important country is a powerful proposition.

• Chemical engineering also can be used to provide rapid assaying of rock samples (albeit unofficial ones). So GSAe’s skills in assaying will be crucial in speeding up IPOs and trade sale of assets.

• Particularly GSAe have experience with REEs (Rare Earths), which is errm rare. This will be valuable, for example, at Haneti, but also for some of FDR’s projects.

• Mr Grimley gets his money out and being a future POW millionaire may turn into many more millions - as presumably he believes in what POW are doing.

• Increased credibility with clients - including government bodies across the middle east like Saudi Arabia (and Oman). Skills of geology/lithology but also EPC skills and Chemical Engineering.

• So synergies around clients and projects perhaps?

• GSAe already has a Memorandum of Understanding in place with a major Saudi Arabian supplier of fly ash with several further discussions ongoing.

• Cash generation from GSAe could help fund POW overheads.

• Perhaps further similar acquisitions/partnerships to follow?

Conclusion

Sean plays a blinder for POW-ters. It’s an extremely low risk roll of the dice with synergies and upside. No net cash exposure, minimal dilution which actually breaks even in year 1, and then all further payments come out of profits.

For GSAe grimly holding on can sometimes be the path to prosperity.

For POW Sean’s Corporate Finance background expertise just shone through.

This is not advice

Oak