RBC Capital Markets has just started covering Chrysos Corporation Ltd (ASX: C79), and its analysts believe the innovative gold assay technology company is undervalued.
The broker has issued a new research note on Chrysos, with a bullish share price target, which I'll get to shortly.
First, let's look into what they're saying about the company.
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Innovative assay technology
Chrysos has developed a technique to analyse mining samples, which RBC says is displacing existing "centuries old" techniques because it is faster and cleaner, with similar pricing.
The company also has an innovative business model, leasing its machines to customers, which provides a recurring revenue stream.
RBC estimates that Chrysos has to date only penetrated about 10% of its total addressable market in the gold sector, providing it with a substantial growth pathway.
The broker said in its report:
Chrysos's PhotonAssay technology is a demonstrably superior alternative to the centuries-old fire assay method that is non discretionary for every gold miner globally. The growth runway is long and visible, underpinned by an expanding contracted pipeline across 23 countries and endorsements from the world's largest miners including Barrick, Newmont, and Gold Fields. The majority of the machines are with independent labs, including several of the world's largest (ALS, Bureau Veritas, Intertek, MSALABS and SGS), with an increasing number deployed on-site at major mines.
Chrysos, RBC said, was charging its customers a minimum monthly amount, with volume-linked upside.
Each machine costs about $4m to produce and install, and generates about $2 million in annual revenue per year.
RBC said they estimated that over a 20 year life, each unit would produce $40 million in revenue.
The broker added that the company did not have any credible competition.
There are no known competing or copycat technologies in the market today. The most credible long-term threats would likely originate from large instrument manufacturers, Chinese state-linked science/industrial companies, or the incumbent lab giants themselves. That said, we believe Chrysos's pace of deployment and deepening customer entrenchment make that window harder to exploit with each passing year. Other factors working in Chrysos' favour are: actively defended patent portfolio; highly specialised components; four major global lab companies are already aligned with Chrysos; and development of next gen units and solution analysis extensions continue to widen the technology gap.
RBC said the company was fast-growing and highly-profitable, but free cash flow would remain negative for the next five years due to capital expenditure for new units.
Shares looking cheap
RBC has a price target of $9.25 on the company, which is 36% higher than the current level of $6.80.
Chrysos is valued at $776.3 million.
