Awesome news! Weebit Nano (ASX:WBT) signed its 2nd foundry partner!

Weebit Nano & Whitehaven Coal

In this week’s Investor Webinar:

• Weebit Nano (ASX:WBT) signed its 2nd foundry partner!
• Whitehaven Coal (ASX:WHC) got the deal of the decade!

Check out today’s news article on the Weebit Nano deal HERE!

 

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TRANSCRIPTION

 

Marc: Good morning, it’s Thursday the 19th of October. Good morning, Stuart.

Stuart: Good morning.

Marc: It’s time for our weekly webinar, although weekly, we weren’t there last week, but for a good reason. But we’re back this week with some good news actually. For the people that have been following us for a long time, you might have seen this morning that Weebit announced its second customer, long awaited second customer. And we’ll talk about that and also Whitehaven Coal, a lot happening in that space. But we’ll kick it off with Weebit, because it’s a pretty big announcement. And it’s an announcement that a lot of people have been waiting for for a long time. So basically, the company’s just signed its second foundry partner, and the company initially said a while back that they expected this to happen sort of in the middle of 2023. Of course, we’re well past that, but finally they announced it.

And I think it’s further validation to the Weebit story, because, as you might know, they’ve got SkyWater already as a partner. This is the second one, and we’ll go into who this is and how big they are. But I think it’s just really good news that they signed this one and share price is responding positively, obviously, in this depressed markets, which is good news. So, let’s have a look at who they signed. So, DB Hitek in Korea is Weebit’s second partner. It’s the number two foundry after Samsung in Korea. It’s running two fabs with, 1.7 million 8-inch wafers per year. Which is okay, it’s not massive, if you compare that to TSMC for instance, they run, I think, around 15 million wafers a year, but that’s a 12-inch equivalent. So, the capacity is about 30% higher than an 8-inch wafer. So, it’s nowhere near TSMC, but it’s still a top 10 foundry in the bigger scheme of things. It’s not the most advanced ones, but it’s… So as an example, TSMC manufactures well below 10 nanometers down to 2 and 3 actually. This one, DB Hitek is manufacturing… Most advanced node they have is 90 nanometers. But that goes all the way up to 180, but that’s basically their bread and butter. And I think purely looking at those nodes, that makes the perfect partner for Weebit, because they’re qualified already at SkyWater at 130 nanometers. So, it should be fairly straightforward to get qualified at this new partner as well.

Stuart: So like the lower the nanometers, the more sophisticated the chip?

Marc: That’s correct, yeah. So, the more sophisticated the chips… So the most advanced chips are using the high-end mobile phones, for instance, as an example, right? Or in artificial intelligence chips. But, the older nodes… Basically the circuitry of the chip is what we’re talking about here. So 90 nanometers 130, 180, there’s a lot of fabs in the world still manufacturing at those nodes. And this is for products that don’t necessarily have to be really small, right? So there’s a big market for that out there. As an example, a power management chip for, I dunno, a vacuum cleaner, or a fridge, or something that’s battery-operated, most of the time, it doesn’t have to be really, really small. So that’s where these foundries come in.

So, big markets for these guys, and of course we’ll be writing an update on this, research update with Pitt Street Research. But, they’ve got very well-known customers on their books. Revenues in 2022, $1.24 billion. And, like I said, this is a big play on power management chips that are used in all sorts of devices, including battery-powered devices, or devices where you need to switch between a battery and a wall outlet, an external power point basically. And, so as Weebit announced today, these are manufactured using, BiCMOS processes, and this is basically, DB Hitek’s bread and butter, right? So this is a core business for them. So this is a slide that Weebit showed a couple of times, and this is… On the left, the top 10 foundries in the world.

So these are manufacturers that manufacture chips for third parties. DB Hitek is number 10 right there. So it’s a top 10 player. But, as a company, Weebit has told many times, they’re talking to a lot of players on both of these two lists, right? So on the left of foundries, so talking to most of the top 10 players there. So let’s exclude the Chinese ones, you’ve got about seven left, so they’re talking to all of those. And then also they’re talking to the integrated device manufacturers. So these are companies that designed the chips, manufacture themselves and also sell ’em themselves, right? So, the best example, Samsung, Intel, these are really big companies as well. And, so Weebit is hoping to sign a bunch of these companies as well in the next little while.

So that’s DB Hitek, number 10 on the foundry list. So, what should we expect? Initially there will be a license fee, either at the start of the engagement, which is right about now, or at the qualification of the chips. So, Weebit’s IP Stack, in the technology transfer, will go to the new partner, they will design it into products that they want to design it into. Once those initial wafers have been produced, they will be qualified to see if everything works. And once that is confirmed at that point, that could be a license fee payment as well. So it depends a little bit on the structure of the contract. Obviously, we don’t know that, but, it’s fair to say that revenue should be flowing from this.

Yeah, purely based on this deal, either very soon, or once that qualification is done. There will likely also be non-recurring engineering fees to help this new partner and its customers to design and integrate the IP stack into their products. And this is the big payoff, obviously. Once these chips go into mass production, that’s when the royalties start to flow. So this will be a percentage based on the exact sort of IP in the total chip that the company that DB Hitek will be selling. So a percentage of the sales price, and usually it’s 1% to 3%, sometimes it’s a bit higher, actually. Sometimes 5%, and I’ve seen cases where it can be as high as 10%, but probably likely for this one, embedded memory will be something in that range of 1% to 3%. But that is still some time away.

So this morning share price responded positively. It was up about 12%, and we can do just a quick check. Yeah, it’s up, sort of, you know, 12.5%, 13%, which is okay. It’s not massive, and hopefully we can see a bit more of a response, either, you know, later today or in the next coming weeks, because, you know, obviously it’s good news. There’s still a big chunk of the shares that have been sold short around 6.6% for the 12th of October, which is about 12 million shares. And hopefully, and we don’t know if this is gonna happen, but hopefully, you know, on the back of this sort of good news, we can see some of those shorters may be squeezed out. Hopefully, you know, buying back at higher prices.

But yeah, you never know how that plays out, what the balance is in the market in terms of supply and demand for these shares. But, one thing that we can say for now anyway, is that Weebit has bounced off the roughly $3 support line. And we flagged that support line a little while ago in one of our webinars. We’ve seen that now a bunch of gaps have been closed as well. So hopefully, from this level, and you can see it in the chart on the right, it’s consolidated a little bit and jumped off that $3 mark. And again, hopefully, we can see some further share-price gains going forward. All right, what else is to come in 2023? Well, like I said, the initial revenues from SkyWater and/or the new partner could come in.

So license fees, non-recurring engineering fees, hopefully. And this is something that Coby Hanoch, the CEO, flagged with us a little while ago. Hopefully we can see more deals before the year is up. Either a foundry and/or an IDM, hopefully it’s both. We’ll see what happens in the next few months. Our valuation for stock is unchanged, it’s $9.50 based on what we’ve seen with other embedded rerun players. And, so we’ll update our research as well, but I think that that valuation is still something that we’re quite happy with. So you can check out all the research that we’ve done on Weebit to date on Pitt Street Research. So, the website is right there, pittstreetresearch.com, and we’ll try to talk to Coby today actually, to see if we can get some comments from him.

And we’ll publish that… Obviously, we’ll publish that on the Stocks Down Under, and the Pitt Street Research website. Because there’s probably some more color that he can provide for us. As a disclaimer, obviously, people that have been following us…or disclosure, I should say, both Stuart and I own stock in Weebit Nano. So, we’d like to see the stock do well, going forward. So, they have it, it’s good news today for Weebit and, hopefully there’s more to come this year. And with that, we’ll move over to Whitehaven Coal, Stuart, what happened with Whitehaven yesterday?

Stuart: Big development for Whitehaven Coal. And this is a company I’ve been a fan of for some time now. Whitehaven Coal is mostly a thermal coal story. They’ve got a number of coal mines in New South Wales. They just did a huge deal to take a couple of coal mines from BHP in the metallurgical coal space. And, that’s gonna add a considerable matter of shareholder value, as I’ll explain shortly. So, first thing to know is, coal’s gonna be with us for a while yet, and I used this in a webinar we did back in May to explain my thesis on coal. Basically for thermal coal, look for peak coal coming, probably, maybe end of this decade. But the world will continue using a lot of thermal coal in the meantime.

And, the demand has been not bad in the last little while. So don’t write off coal as a commodity just yet, because the world is necessarily going towards renewables. These things are in transition for us. And so a company like coal, who’s bread and butter up till now has been thermal coal, is in reasonably good shape. The next slide, which shows the chart for Newcastle coal prices, that’s mostly thermal. And as you can see, it’s come off the peaks of early 2022, which were related to energy shortages generally around the world. And also, a severe shortage of coal in China. The price has normalized, but it’s stabilizing there at about $150 a ton for the benchmark Newcastle coal contract.

But companies like Whitehaven can make good money at $150. So, I’m expecting that you’ll see the stock even stabilizing without this deal. But, with the deal I’m about to describe to you, it’s going to a whole new level. So who is Whitehaven Coal? Four mines in the Gunnedah Basin of Northwestern New South Wales, including the flagship, which is Maules Creek. Look at the September quarter, they were selling at $224 a ton, operating cost is a lot low below that, shipping about, 5 million tons a quarter and cash from operations, $250 million even in a quarter that wasn’t so good as the previous one. Now, this is the important thing, Whitehaven has a net cap position of $2.45 billion, as at the end of the September quarter. So it doesn’t even have to go and talk to banks if it needs to acquire something, it can just use its own continuing free cash flow, plus the enormous amount of cash that’s built up. And, Paul Flynn, one of the quiet achievers of the ASX 200, he’s been running this thing, since 2013. So he’s had 10 years to strategize about how he’s gonna build a world-class coal company.

So, what just happened? BHP are a big player in the Bowen Basin, in central Queensland, with a lot of metallurgical coal mines. One of the really important mines they own is Blackwater, relatively new mine was Daunia. Those mines are now going to Whitehaven, who will pay up to $4.1 billion. Now, I’m looking at the numbers here, only about $2.1 billion of that is upfront. Then there’s a deferred payment and maybe a little bit extra, if coal goes to a certain level. And this deal is important because it takes the company out of the thermal coal sweet spot that it’s in at the moment, and gets ’em into metallurgical coal to the point where 70% of their future revenues is gonna come from selling coking coal to steel makers.

And, why is that important? We’ll click to the next slide and I’ll explain that. So, one of these days, Marc, you and I might even live to see it, the world might need thermal coal anymore. I suspect our great-grandchildren might eventually get to that moment if things are going the way they will. The outlook for coking coal doesn’t change all that much. And the reason is, the world needs steel, to make steel, you need coke, and not the stuff from South America. But, the coal-derivative…

Marc: I was waiting for that one, Stuart.

Stuart: Yeah. And the only way to get coke is from metallurgical coal. So, in other words, you are on the right side of the coal space at this point. And BHP is selling super cheaply. They’re selling out for just 2.9 times, 2024 EBITDA just on the forecast prices. Use the current spot prices, which are still reasonably high, you get 1.8 times. So it’s a giveaway. I’ve said it before and I’ll say it again. BHP has gone a bit woke in recent years from the company my father was a lifetime employee of. They’re getting out of the stuff that workies don’t like, like coal, and they’re focusing on the stuff that is important for the energy transition, such as copper.

Well, that’s fine. They’ll probably make good money, out of doing that. But they’re giving away the old, less popular assets at bargain basement prices. And this is probably the best example of that to date. So highly accretive deal. Just looking at comparable coal companies, you can get at least three or four times EV to EBITDA on bang down multiples. And, yet, BHP is selling for less than that, so highly accretive deal. But not just highly accretive, but long lasting. Blackwater is a gigantic mine, and it’s got a 50-year mine life associated with it. So, Whitehaven will be making up like band-ups on this deal for decades as a result of that. So no surprises there. Soon as that deal got announced, the Whitehaven stock reacted strongly to it. And I think there’s probably more where that came from so long as prices stabilize and start holding their own but possibly moving in the right direction again.

Marc: Right. So, apart from the wokeness, why did BHP sell so cheaply then?

Stuart: Well, there’s probably an issue. Most acquirers of these assets would need to go to banks, or find project financiers. And it doesn’t matter whether it’s met coal or thermal coal, banks don’t really like to be associated with either kind of coal, given the fact that, to get coke out of met coal, you’re putting a bit of carbon into the atmosphere. So, there was probably a paucity of potential buyers, and you needed cashed up companies like Paul Flynn has managed to position Whitehaven to be. I think that that’s part of the reason why they’re selling cheaply. The other thing is they probably wanted to move it off their balance sheet fairly quickly. And, Whitehaven had the most credible deal. So put those two together, and that’s why Whitehaven has managed to get such a great arrangement.

Marc: All right, good stuff. We’ll leave it there. So, to all Whitehaven and Weebit Nano shareholders, congratulations. And we’ll see you next week.

Stuart: See you next week.