Undervalued and underrated: Calix's case for a re-rate

(upbeat music) Phil, welcome back. I think we might have done one there's a couple of years ago. - Indeed, thanks, Simon, for having me back. - Absolute pleasure, so eight years listed, which doesn't feel like almost 10 years ago. It's quite scary, but listed back then at 53 cents. I've gone through what we would call a green boom, but being in the ASX 300 and today the stocks, probably the cheapest, or it is certainly the lowest in terms of share price, but cheapest it's ever been as well. Give us the whole arc of that journey. It's been a long journey, short in anything that you do differently. - Yeah, certainly an interesting journey. As you say, the green peak took us from that 53 cents up north of $8 a share. The company, one stage, was valued well in excess of a billion Australian dollars, and obviously the winds behind us there was everything to do with decarbonization. A lot of the economy, the people felt that decarbonization was inevitable and was going to be happening this decade. And so that was a great sort of. - It was a great ride to catch. - I don't think we, we'll go on to exactly what I think we could have done differently, but certainly we took the opportunity to raise some capital at the time. We were still pre-revenue or pre-profit at that stage 'cause we were developing the technologies. So we took that opportunity to raise capital and we did that fairly efficiently, obviously, at those sorts of share prices. And then interestingly enough, looking back, certainly when Trump and the US administration started to sort of appear and we certainly did not think that the impact of that change in administration. - It would have been so violent. - We would have had the same, yeah, we underestimated that. Yeah, ostensibly the US is only five percent of global cement production or steel production, so a small player. But as we've seen a massive player when it comes to you, pretty powerful in terms of politically. - Exactly right, and the impact upon us, of course, and the impact upon the share price started to play through. It was a lot of focus on interest rates, global conflicts, and euthematics coming through. CleanTech was coming off the boil, euthematics, such as AI coming through. And so all of that for a pre-profit company meant future valuations were discount, so to get discounted quite substantially. So here we sit today, as you say, 25 cents, the lowest we've been, and so that's an interesting lesson for us, 'cause you asked, what do we learn the most if we look back? I think we probably pivoted too late, to a lower-cost model. We certainly got some good capital in cheaply, and it would have been great if that could just run on a bit longer. We had a lot of iron in the fire, and we should have pulled a few of those iron's out, a little bit earlier. And what we did, late 24, we made some pretty significant changes to our business. We really focused down on a few key, significant large opportunities, as well as focus on what's going to underpin the business in terms of cash generation. And so our combination of both of those, let's make sure that we secure our future as best we can with the cash-generating business, but make sure also that we have some optionally upside for the really high-value applications of the tech. And so the pivot to that strategy was late 24, oh, we should have done it late 23, that's my biggest regret. Everything else was fun. - No, exactly. So back in '21, Kellex was spoke about a decarbonisation play, material technology platform play. Today, in 2026, it's fair to say, yeah, the strong focus at the moment in terms of cool, operating cash load, an EBITDA positive is the magnesium business, which in the second half is at $2.4 or $2.6 million in terms of EBITDA. And you sort of look at that in terms of the focus of the business, is that been a change of strategy or is it just been that, like if we look back and maybe just give us a little bit of a background on the magnesium business, it's grown tremendously well. - Yeah, when we first joined the company, I think we had about $1 to $2 million left in the bank. And we had to try to finish off building a very first manifestation of the technology, which is a new type of kiln or furnace. And so we need to do something. We weren't listed at that time, so the capital options available were fairly limited. So we had to get into something that would generate revenue. And we got into taking our technology, we have very small minds out the Australia, the minds this thing called magnetize. - That's a magnesium outlet. - That's a metal spring. And so we were able to start to turn that into magnesium oxide, which we mix with water and sell into the water treatment industry as an alternative alkali to say, caustic soda. So that was 2013, we started that business. And just taking you through the trajectory of that business, we priced it really cheap because there was a dominant player in the market. And we're able to gain some market share and grew that business to about three million Aussie bucks. Not bad, not huge, but not bad either. But that was enough for us to sort of pay people and continue to bootstrap the rest of the company and the technology. And so as an important part of our foundation, we operated the company with that business sort of turning over that sort of level. And because of that business, being the only revenue part of producing part of our business at that time, and because we're getting pretty good at it, by the way, we had a look at a business in the States around 2019. And they were turning over a little more than us, maybe twice or two and a half times what we were turning over. And so we decided, and now we're making a pretty crap product, to be honest. And so we decided to see if we could take that business over and that was one of the first little raises we did post our IPO is to raise some money to take over that business. It was called I in the environmental resources, which we still call it. Good red. And so that business was really good at converting customers to a magnesium hydroxide, from plastic soda. And so relative size of the business was at two and a half times the size of the Australian business here. And so if we have a look at the more recent history, we saw a lot of upside in the US part of the business. And if you have a look at the more recent numbers that have come out, as you say, with 34 million, 3.8 million, any bit of cash generation over the course of the last 12 months. And all that business needed to do was to hit critical mass. But the E before it made 300,000. So from 300,000 up to 3.8 million, how does that happen? Well, the cogs grows linearly with your revenue, but the fixed costs that sit above that we've been able to hold pretty constant. So as we grow from here, we've passed that rubicon where this thing cash generates. And so as that yield, as a, sorry, the revenue grows as a percentage that the EBITDA will grow quite substantially in line with that revenue. So we've got their business pass. It's real inflection points. I'm very pleased about that. And in December 25, signed a US contract worth up to 10 million bucks a year on its own, how many of those are there out there? We sort of put it out there that there's at least a dozen that we know of. So these are very substantial accounts that sit with large food processing and industrial processing type counterparties. The other reason we like the US when we first went there and had a look at it. The customer size, there is five to 10 times the customer size in Australia. And this is a fairly long sale cycle. It probably takes several years for you to get the trust, do the trials, and ultimately win the business. And so that's very efficient when your customers five to 10 times the size of the customer here in Australia. So the prospects in the US are substantial. I still estimate we're 15% of the immediately addressable market, which is existing magnesium hydroxide users. But there's the actual addressable adjacent market is multiples of that with costing and converting that cost is what we're really targeting. And even with this customer that we want, there's substantial additional share of all opportunities. So the US business and the US market is highly, we're highly optimistic about. Let me put it that way. - And in terms of how do you look at the US business like with regards to pipeline? Is there a pipeline, intention or aim that converts over 12 months, 18 months, how does that typically convert? Yeah, we obviously, as we expand into the states and we build these little manufacturing sites and because our product is stable and most other products in that market, the magnesium products are not stable, we can actually start to truck those long distances. So we look over the horizon, if you like, at where the next supply envelope could be for our product into large customers in that area. So we have quite an active pipeline and growing. And so it's a geographic sort of expansion strategy. We move from the Pacific Northwest into the Midwest and then down and across. So we're into the food belt of the states, that's exactly where we want to be. And so that's where the substantive opportunities are. Pipeline conversion. We've also got stats on moving through different parts of the pipeline, how long it takes. They're quite varied because different organisations are going to shift from procurement strategies. But suffice to say, we know that the sales cycles fairly long, but on the flip side, once you've got them, they're real sticky. And you've been at it for a while, as well as in the US. You spoke to operating leverage before within the magnesium business. What does your scale revenue at 50 million bucks? How does that sort of look? Is that sort of eight million dollar EBITDA margin or is there more costs that are low to then? There shouldn't be substantial more costs. So I mean, obviously with respect to, we may go past a bit of a tipping point on admin or something like that, but that's about it. I don't see substantial additional costs coming in. So yeah, that's probably a good metric to go by. And if we look at cash as a bit of a focus post, the four-year results, you know, is 10 million bucks as at 30 June, you had just under six million from PLS, come in and see, sitting at sort of $15, $16 million, you, in the results, you know, detailed cash flow neutrality for the remainder of the calendar year, what sort of needs to go right there? Are you relying on, yeah, sort of different, different boxes to tick or those are more so for now it is. Yeah, no, the, if I look at it in two boxes, first boxes, things like tax rebates and grants it would be extra for, yeah, so they're pretty, let's call it certain, as soon as you can be in this world, but yeah, typically we haven't had trouble with once we've won those things and put the report in or put the tax return in, then they get paid. So there's about two and a half million there. The second box is if you like the second payment that comes from Rio Tinto as part of the joint development agreement that we have with them, we have to get our project to what's called FID ready or final investment decision ready. We don't have to have found any of the additional financing that we sort of need for that project yet, but from a project sense, we need Capex sorted within a certain range. We need to secure utilities, secure it, hide it and supply. It's ticking those project boxes and so that's largely within our control and so that's the piece that is also counting in the overall cash statement, if you like, of that coming in this calendar year. And in terms of if you look back at 24 and I know you mentioned, you would have liked to have in hindsight exited or you paused these things a little bit earlier, is the business fundamentally much stronger, more attractive business today, given magnesium business is growing really strongly, you've screwed down the costs and you still will get to Zestie and the excitement there. Any sort of stock, I don't know what there's 25% of what the price was then, any sort of look at that in terms of risk reward, obviously, taking the biased hat off. I would say the business is the strongest position it's ever been in, which is I guess yeah, it's a bit of an interesting thing when compared to how the market sees us at the moment as well, but certainly from a financial perspective, we've never been stronger in terms of the cash generation of parts of our business. We don't look at things for free anymore. Anyone wants to come and talk to us about our technology, we charge them to do test work, we charge them to do pre-work if they want to study how the technology fits into their business. So two or three years ago, we were giving that out for free and we sort of hacked it a little bit because we needed to get the interest coming in, we needed to establish and credential ourselves from a technical perspective. As it stands today, we don't need to do that. We've built enough of these, we've got enough data from running them that we can actually afford to charge now. So the revenue profile of the company is very different from what it was back then. And so yeah, I think if I have a look at the technical side and the technical development side, if I look three years ago, we were still very undercooked on where the iron and steel opportunity was. As it today, we've got a joint development agreement with the largest iron company in the world. And so that complements cement and lime, where we've got a joint development and license agreement with Hydealberg. We've got a project that we're pushing that currently it's paused, but the consortium area is Hydealberg, Zemix, Lwast, Sympore, some of the largest lime and cement companies in the world. We've just recently announced the joint development arrangement with the Dhani. They're now in the top 10 in terms of cement companies in the world. So small company, do I end very big names? Well, this is it. So I think if I was to think back to when we IPO, even the 53 cents, we had three million bucks in revenue coming in Magnesia, we had a lime and cement plate. We were trying to do, but had no license agreements in place or anything like that. Iron wasn't even thought about, aluminium wasn't even thought about, and that's another arm in the business, and we were not charging anything for a test work. It's a vastly different company to when it was there. So I think the market catch roughly about 50 million bucks, $15 million in cash, and post the PLS receipt, so in other words, you're doing $3.8 million a day in the water business. It's basically not valuing lime like Zesty. Is the market wrong to not value any of them? Well, one could argue, perception is reality, so fine. In the end, we know we've got to hit some proof points for value to be added, or value to be recognised in those different industries and those different opportunities that we have there. So I don't think the market's wrong, per se. What it says to me is if we can show the value in those subsidiaries, then hopefully the market recognises that in response. I think where the market's got to today is, well, this is a clean tech business, and the opportunities that the technology has is firmly attached to the fortunes of clean tech. In the way that might be seen in the world, what we've got to do better is communicate the advantages of the technology that isn't anything to do with clean tech. Clean tech, you're cherry on top down the track. The Adani deal that we just did with the cement deal we just did with Adani has nothing to do with the price of CO2 today, or a price of CO2 in India, or anything like that. It has to do with the advantage of the technology to unlock value in other ways, debondled next their cement plant, it gives them energy flexibility, and so hopefully people will see that that extra value associated with those bigger industries is not necessarily a link to clean tech. It's linked to counter parties, big counter parties who wish to take our technology forward because it makes sense today. I think we want to concentrate on that when we get to Zest, one other important thing, particularly the share price and the value I actually use today, and I think different a couple of years ago is right-sized business, you risk off in terms of your commitments unless it makes sense. You've actually got cash, whereas previously being with a big cost-base and not being unfunded, there's a pretty logical gap there, so I think that sort of helps, but moving to Zest, we've got the magnesium business, obviously that's exciting in its growth, it's got more to come, Zestie, Mark Skates, the co-founder at Calix, came up with this, when did you file the patent? In 2021. In 2021? Yeah, so not that long ago. So what is it in plain English, noting that we're not scientists like Mark Skates? Yes, no. If I had my toilet roll, so I would have been able to explain a little bit of it, certainly the core technology is just a new type of killable furnace, that's the core technology of the whole group. But essentially involves a large steel tube that we heat externally, we'll never have to build any bigger in terms of the tube, we've already built full scale. and you hit that tube externally, and in the iron ore, to iron application, we drop iron ore in the top. It's going to be fairly fine particles, anything smaller than about a third of a millimetre is fine. Those particles basically float down through the tube, and the red hot walls of the tube we heat them up to a thousand degrees centigrade, they radiate heat into those iron ore particles as they're falling. And in the bottom, we introduce a gas, in this case hydrogen. Hydrogen basically strips the oxygen off the iron ore, and that makes iron. Iron ore is basically rust, iron oxide, so if you can strip that oxygen off, then you've made iron. And out the top, the combined hydrogen and oxygen is water. So it's a way to strip the oxygen off the iron ore to make iron and out the top, basically become steam. That's the basis of the system. How was that? Was that a good idea? It was punchy, I like it. So you've gone from patent in 21, to lab, to 2010 per annum, piloted back a smash, to completed feed, to a 30,000 ton per annum, demo plant at Quenana, to fear scale in relatively short period of time, which brings us to the development in terms of Rio. Why did they get involved in how much work did I imagine someone like a Rio doesn't throw their name behind it and just talk to us in terms of what significance of bio iron and the Quenana facility as well. No, absolutely. And I think if I look back to that time scale, Simon, it is remarkably fast. And there's been independent comments made about that. I think we've surprised industry a little bit. In fact, one of the years that we stopped to work on was batteries. We very quickly converted one of our little reactors that made battery materials to our first pilot scale iron facility. So we just switched it across and off we went. And basically, Rio, BHP, Fortescue, Grange, Roy Hill, we tested all of those all through our facility. And so that started to peak the interest of all of those players and Rio with the quickest to move. And so they were developing their own in-house technology. They called bio iron, where you mix iron ore with biomass and you microwave it. And that facility they'd plan to build in Quenana in Western Australia. But they're costs blowing out. And they felt that they weren't going to get that to an economic sort of solution in the time frame and with the dollars that they were willing to spend on it. And it just so happened that we were there engaging heavily on our technology at the same time. They were considering what the future of bio iron should be. And it was decided that it'd be quite a neat swap to have us move in to continue the development at the site. They were thinking of it bio and bio and it's not killed off. It's sort of back into their R&D phase. They wanted to do more development on it. But yeah, so basically that happened in November last year. And in terms of arena, maybe just talked to the funding there is not significant. No, so July last year we announced that this particular full scale tube that we want to make. The one that Rio is now supporting us on in Quenana. They announced 45 million funding support for that. Rio, sorry, a relatively funded about 50% ratio. So the full capital cost, not just of our cool technology, but the balance of all the hydrogen production and all the all handling is coming to about 90 million Aussie bucks. So a reader there for half of it. Rio are in there for 35 million in cash and in coin. Some of which counts towards the matching arena funding. But we still have some funding that we've got to get to get past the financial who, if you like, to get the project underway. So arena did extensive due diligence. Rio has done extensive due diligence in terms of technical due diligence on the technology. So it's been through quite a bit of scrutiny in terms of technology. So we don't feel that that's a significant risk to the project proceeding. We've got to get the matching financing. That's the last thing. And that brings me to the next point. In terms of pitching a deal like this, to have 45 million dollars, is that free money? Yep, by the pound lobe. Yep. Absolutely. So 45 million dollar head start. You've got one of the biggest iron ore miners, if not the biggest in the world. So it's signing off on it that it's, they can use our facility and use our wars and loss, a licensing deal with it. Licensing, the terms of the licensing. It's a pretty good head start, I would have thought. Yeah, exactly. There's a lot that has to go into a project to have it financeable. And the last piece of the puzzle started falling to place last week. So that's the hydrogen. Believe it or not, a lot of people thought that the hydrogen wouldn't be that difficult to solve. If you, you know, you can buy a big tanker trailers of hydrogen, if you want to buy a lot of it. And you can have that delivered. It starts to stretch the capacity of, say, a hydrogen production facility in Melbourne. There's one ton of hydrogen in that tanker, in that whole huge tanker. It's very light molecule. We'd need five tankers a day to run our demonstration facility. So the hydrogen solution, and that's, that's not a logistical real, real, real, real plastic. It's just not going to happen. And so we need hydrogen production. The original player was to get it over the fence from the hydrogen hubs that were being developed by arena, all of those hubs of four and over, basically, one still moving ahead in Newcastle, that's it, that's it. So the hydrogen solution actually moved from low risk pipe under the fence to one of the key projects, either disables or enablers. And the ability last week to announce the deal with pertinent, who are also developing hydrogen in the form of, well, basically hydrogen production, ultimately, for your real production, for the borrowed peninsula plant that they're constructing, puts them in a great procurement and project management piece to get that hydrogen solution to us. So we announced that last week, the partnership we've heard with that. So you've got the gap. You're funding that at a subsidiary level, not at the CalX, stock or head co-level. You've talked about on the call that your confidence still of doing that in the near term. Yep. What gives you that confidence? So, technically, we've had due diligence done by arena, due diligence done by Rio, and often with these types of deals, where you're looking at impact frames to come in, they're looking for someone to have led that to the risk, de-risk the technical part of it. And so we're starting to build the technical credentials to have the deal be realistic or risked appropriately from that perspective. In terms of the project itself, is it going to be hugely more expensive than you planned, or have you not got the hydrogen bit sorted out, or all of those are the project related risks, and they're all now manageable. And so getting those to that point was very important as well. So there's a couple of big ticks we've started to get sorted out that gives the momentum we need to get the financing sorted. So we've been at this for quite some time, and we've been fully aware from the feedback from potential investors of exactly what they want to see. So we're not just starting from a standing start, he's home, and we're quite progressed and having ticked those boxes now. That's what's giving us the confidence that we could pull us together now. Closing, you started with a little bit less gray hair, I would say. It's been a roller coaster. Yeah, how long have you been in the company for now? 2013, early 2013. I can't do it now. It's been 13, 14 years. It's still by the same drive and motivation that you're on the right track. I'd have to ask you, Solbin. You've known me for quite some time. I feel like there is, but it's in terms of, it's pretty hard when the stock's being beaten up. I know that's just a scoreboard, but does it make it more motivational to actually deliver in terms of these key milestones, not to stick it up people, but just to, I guess, reward those that have, back to the company for a long time and staff and employees and the rest of it as well. No, management staff, we've got 11% in stock ourselves, and most of that we put the money in ourselves, by the way. The company nearly went under in 2014 and pull it back from the brink and get it to where it is today. It's been a remarkable feat by everyone involved, so no listening of the passion, no listening of the belief, only more of it, because we can taste it, it's that close. So yeah, despite the fact that you go with this roller coaster, it's like, how can I describe it? When the company's share price was flying very high, it's like, I equate it to something like first class. If you've ever flown first class in an airline by the way, and I did when I was in my shell days, I've flown economy for 13 years. I've gone to the back of the plane for 13 years. And so it sort of feels like you get a taste of what anyone you want to get back there. Absolutely, absolutely. And so, you know, I know that share price and doing is making it more of a reality. And so, you know, we're making that more of a reality, but the key thing that is kind of enabling us to do that and to see it through is the fact that the technology is also valuable today. It also has economic reasons to be deployed today. So focusing on that, focusing on growing the magnesium revenues, and then down the track, as and when clean tech actually becomes important again, we'll have plants deployed. We'll be coming off a base that is far far better than anyone else before. And it will be fully funded with a bunch of other businesses. Correct. So, that's a future I see, so I'll put on that note, lessening a passion here, and just so much closer to it too. Bring it on. Good luck for the rest of the year and the rest of the fun edge here. Thanks so much. Thanks so much. Cheers.