While the pandemic has delayed the initiation of operations at various assets, Blackstone did well in H1 20 to monetise its under-development Norwegian rare earth metal asset. By virtue of this transaction, the group also managed to reduce its borrowings materially. Add on top the R&D progress in batteries of recent months, it seems that the group is on the right track.

Given the COVID-19 disruption, the kick-start of Blackstone Resources’ various operational assets (reflecting in respective segments) has been delayed, again resulting in ‘nil’ H1 20 sales. Nevertheless, the group reported H1 net profit of c.CHF20m (vs. CHF5.1m in H1 19) – single-handedly driven by the profit from the disposal of the stake in its rare earth metal asset in Norway. As a result, ‘reported’ EPS came in at CHF0.46 per share. Interestingly, the group has a buy-back option for the disposed asset, and is also entitled to a 2% royalty until 2030.

Blackstone ended H1 with net debt of CHF8m (vs. CHF29m at 2019-end). On the other hand, the book value of equity (ex. minorities) increased (74% vs. 2019-end) to CHF45m.

While core operations are yet to begin, …

According to management, the pandemic has hampered the start of operations at the Peruvian gold milling plant – especially given the impact of preventive and punitive lockdown measures. Similarly, the progress at other divisions has also been negatively impacted. While the initiation of the gold refinery amid prevalent precious metal tailwinds would have been a valuable cash flow support – particularly for the funding-hungry battery R&D, the material reduction in borrowings (discussed above) is a comforting development. In such a scenario, the possibility of ‘delayed’ cash flows precipitating a debt and/or financing squeeze has been averted – at least for the immediate term.

… global economies’ greener priorities and …

Despite fears of a pronounced global slowdown, most economies – barring the funding-deprived ones – have reinforced their ‘green transition’ plans. In fact, in many countries, the stimulus money is being directed based on the recipients’ ‘green’ credentials. Overall, COVID-19 has further catalysed the strategic importance of key battery materials and, hence, the strong rebound in (less-polluting and/or green metal-centric) mining stocks has been an inevitable outcome.

Of course, the immediate-term disruption of demand breakdown due to market frictions like lockdowns cannot be avoided, but there is ample reason to believe that long-term prospects for battery materials are intact. In effect, Blackstone’s respective mining assets are aptly-positioned to capitalise on the strong long-term market fundamentals. Remember, while First Cobalt is guided to witness recommissioning and expansion of its refinery, various other battery metal projects are simultaneously under development.

… Blackstone’s R&D breakthroughs are comforting

In our last note titled “_Important battery R&D progress_” dated 25 August 2020, we had highlighted some of the group’s battery R&D breakthroughs achieved in July 2020. Then, in mid-September 2020, the group announced the achievement of some key milestones for its proprietary 3D-printing technology to print lithium ion solid-state batteries. Management claims that this printing process entails significantly lower costs, introduces high production flexibility and increases energy density by c.20%. Overall, these developments are indicative of Blackstone’s R&D efforts progressing in the right direction – with the first prototypes for printed solid-state cells guided to be tested in Q1 21. This progress comes at an opportune time, when competition from the well-established giants is intensifying. Remember, recently, Tesla has unveiled plans to almost halve the cost of batteries.

However, given that the battle is head-on with deep-pocketed peers, the realisation of state-sponsored grants becomes critical for emerging players (like Blackstone) to sustain R&D efforts. Fortunately, with global battery markets being dominated by the US (via Tesla) and Asian firms – particularly in China and Japan, Europe has a strong vested interest to nurture the creation of a home-grown battery giant, especially at a time when protectionism rhetoric is (re)gathering momentum.

Our model is under review as we incorporate the impact of the H1 20 results. While near-term operating estimates (especially in 2020) should be slashed/trimmed – given the delayed kick-start at various assets, we don’t expect any major change in the target price, considering that the majority of the value still lies in the out-years – better reflected in the NAV and DCF valuation metrics. Hence, our recommendation should remain unchanged.

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