In my previous column, I described the iron oxides offerings of Applied Minerals (AMNL) as a "nice business," and with contribution margins of greater than 90%, it certainly has the ability to be a very profitable one.
But the home run here -- and why I'm buying AMNL shares for my clients this week -- is the other product of Applied's Dragon Mine in Utah: halloysite clay.
Halloysite is chemically similar to kaolin, a commonly occurring aluminosilicate clay that is used in porcelains and for filling and coating paper. The key difference between the two is the nanotubular structure of the halloysite clay. These nanotubes can be loaded with macromolecules that can be unloaded via a process of controlled release.
And it is controlled release that is the Holy Grail for a host of applications. AMNL has identified many uses for its halloysite clay, including as an adhesive additive, nucleating agent, foaming agent, flame retardant and molecular sieve. But I'll focus on one particular end market in which AMNL is close to commercialization: cosmetics.
AMNL announced earlier this year that it had signed a term sheet with a "global leader in cosmetics" for a joint venture to use halloysite clay in cosmetic products. Halloysite's qualities allow for the removal of sebum and surface oils from the skin and can be used for re-hydration. But again, the key benefit of halloysite is the controlled release properties conveyed through its nanotubular structure.
I believe the cosmetic formulation will be used to deliver a range of ingredients to the skin; among them will be vitamins, fragrances and medicinal compounds such as acne-fighting salicylic acid. Also, halloysite's natural purity fits into a skin care market where female consumers increasingly are looking for all natural choices such as Bare Minerals.
AMNL management is not permitted to reveal its partner until the joint venture is finalized. Management has noted that it is a large cosmetics company that operates retail stores, which certainly narrows the field of potential candidates.
The joint venture is expected to be finalized later this year, and Applied Minerals CEO Andre Zeitoun always has been adamant that this is a true pharma-style joint venture, not a supply agreement. AMNL will own a share of the skin care brand itself when it is launched by its presumptive cosmetics industry partner. Obviously, though, the halloysite itself will come from AMNL's Dragon Mine, and that will help the facility's utilization rate.
If you remember, I listed my four characteristics for investment in a microcap stock yesterday, and if we look at AMNL's applications for halloysite in cosmetics alone, it fills in all the blanks.
- It participates in an industry that is growing, as measured by unit volume. The global skin care market is estimated at $52.8 billion, with annual growth of about 4%.
- It Is gaining market share in that growing industry. AMNL's Dragontie-PureWhite is the first application of halloysite in cosmetics, so it represents pure market share gain by definition.
- It has proprietary technology and/or intellectual property (e.g., patents) that are defensible. Halloysite is only mined at AMNL's facility in Utah and in New Zealand, so there's no chance for new competition, and Dragonite is protected by several patents.
- It has a clearly defined pathway to profitability. Prices vary widely by end use, but an average price for halloysite is $3,000 per ton. If we assume a cash cost to extract of $300 per ton, we see that AMNL's halloysite should produce a 90% contribution margin, so yes, that's profitable.
One other characteristic that I have added to that list:
- The company is facing a near-term transformational event that will provide a catalyst for the stock.
Great ideas are abundant in MicroCap Land, but the shelf life is not long, especially with stocks that often are thinly traded. The "when" is often more important than the "what." I would expect Applied Minerals to announce the finalization of the joint venture with its cosmetics industry partner soon, and I believe such an announcement would boost AMNL's share price markedly.
So, I'm buying AMNL shares. I'll feature another potential microcap home run in my next column.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider AMNL to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.