Expanding Global Assay Network Will Eventually Pressure Margins And Earnings Potential

Catalysts

About Chrysos

Chrysos develops and deploys PhotonAssay technology that provides high speed, high accuracy mineral assay services through a growing global fleet of units.

What are the underlying business or industry changes driving this perspective?

• Reliance on a single assay technology with high upfront build costs per unit exposes Chrysos to a scenario where competing analytical methods shorten asset lives, forcing earlier write downs and constraining revenue growth from future deployments.
• Rapid geographic expansion into new mining regions, including Latin America and emerging markets, risks overstretching hub and maintenance networks, driving higher support costs and eroding gross margins from the current 70 to 80 percent range.
• Increasing dependence on MMAP contracts and exploration linked additional assay charges could become a liability if mining capital expenditure and greenfield exploration cycles weaken, reducing utilisation rates and pressuring EBITDA growth.
• The next generation XN program, while promising lower install and maintenance costs, could encounter technical delays or underperformance, extending payback periods on legacy units and dampening earnings momentum from efficiency gains.
• Growing international tax complexity and rising receivables tied to a diversified customer base may drive structurally lower cash conversion, elevating working capital needs and limiting the proportion of EBITDA that translates into free cash flow.

Assumptions

This narrative explores a more pessimistic perspective on Chrysos compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Chrysos's revenue will grow by 34.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -12.4% today to 8.4% in 3 years time.
• The bearish analysts expect earnings to reach A$13.4 million (and earnings per share of A$0.12) by about December 2028, up from A$-8.2 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as A$29.8 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 70.8x on those 2028 earnings, up from -105.7x today. This future PE is greater than the current PE for the AU Professional Services industry at 19.1x.
• The bearish analysts expect the number of shares outstanding to grow by 0.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.86%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• PhotonAssay is seeing strong, broad based adoption with total revenue up 46 percent year on year to 66.1 million dollars and Americas and EMEA growing 138 percent and 44 percent respectively, suggesting a durable global growth runway that could continue to lift revenue and earnings over the long term.
• The business model is increasingly de risked by minimum monthly assay payments making up 85 percent of PhotonAssay revenue and additional assay charges providing cyclical upside. Together these support recurring, visible cash flows and may sustain or expand net margins over time.
• EBITDA grew 80 percent year on year to 16.1 million dollars with margins rising from 20 percent to 24 percent while revenue outpaced operating expense growth, indicating operating leverage that could continue to expand profitability and earnings as the installed base scales.
• The next generation XN unit is designed to reduce installation, transport and maintenance costs while maintaining assay performance. If successfully deployed, this could structurally improve unit economics and support higher long term EBITDA margins and free cash flow.
• A robust balance sheet with 99.1 million dollars in cash and available debt, improving operating cash flow from 3.6 million dollars to 8.8 million dollars and no sustaining capital expenditure required for the PhotonAssay fleet positions Chrysos to self fund growth. This may support sustained revenue expansion and rising earnings over the long term.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Chrysos is A$6.5, which represents up to two standard deviations below the consensus price target of A$8.62. This valuation is based on what can be assumed as the expectations of Chrysos's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$10.0, and the most bearish reporting a price target of just A$6.5.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be A$160.2 million, earnings will come to A$13.4 million, and it would be trading on a PE ratio of 70.8x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of A$7.46, the analyst price target of A$6.5 is 14.8% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.