Introduction
On December 15th, Abaxx Technologies will be listed on either the NEO exchange or Toronto Exchange in Canada with the ticker of ABXX, and in the US on the OTC as ABXXF. The listing on the TSX will mark the conclusion of Abaxx’s reverse takeover of New Millennium Iron (OTCPK:NWLNF) which was initially announced on September, 18th 2020. The shareholders of both Abaxx and New Millennium Iron approved the reverse takeover transaction on November 23rd. Following the official approval of the transaction, Abaxx moved forward with a sophisticated Investor Relations plan to launch Abaxx. Part of that plan was to sponsor a weekly podcast hosted by Erik Townsend at Macro Voices called Smarter Markets. Prior to kicking off the first episode of Smarter Markets, Erik provided his own rationale for investing $1.2 million as an angel investor in Abaxx.
Smarter Markets aims to provide listeners with valuable insights into what the future of commodity markets, and the commodity supply chain may look like if certain revolutionary technologies are adopted, specifically distributed ledger technology (i.e., blockchain). The first guest for the program was billionaire Canadian investor and CEO of Ivanhoe Mines (OTCQX:IVPAF) Robert Friedland. Mr. Friedland is also one of the largest angel investors in Abaxx Technologies. You can listen to Mr. Friedland’s interview here. The second guest on the program was Maryam Ayati, who worked for over a decade in the Oil & Gas industry and was integral in starting up a blockchain-based exchange for startup called VAKT. You can listen to Ms. Ayati’s interview here. The third guest on Smarter Markets will be Jeff Currie, global head of commodities research for Goldman Sachs.
Below, I list some thoughts about the potential for Abaxx to disrupt the global commodity supply chain by leveraging their proprietary software and Singapore based exchange. If successful in their business plan, Abaxx would undoubtedly become a multi-billion dollar company – their current fully diluted market cap based on NWLNF’s closing price on 12/4/2020 is ~$285 million CAD. Some of Abaxx’s peers such as Bakkt, and Triterras Fintech (TRIT) already have market caps over $1 billion USD. Should Abaxx achieve a market cap of $1 Billion CAD shortly after their initial listing, then the stock would trade at approximately $14.70 CAD – over a 280% gain from the current share price.
Before moving into a discussion about the Smarter Markets podcasts though, I’d like to provide a brief review of the RTO transaction, and also provide some insight into the potential for the Abaxx Exchange and Abaxx Technologies businesses.
Review of the RTO Transaction between Abaxx Technologies and New Millennium Iron
As previously described, New Millennium Iron and Abaxx Technologies shareholders approved an RTO transaction on November 23rd where the following actions will take place:
1) New Millennium Iron “NML” will reduce their outstanding share count from 181,054,146 to 133,651,238 shares. This action occurred when NML traded their 4.32% equity stake in a direct shipping ore project to Tata Steel, in exchange for Tata Steel trading back to NML Tata Steel’s 47,402,908 shares in NML. Upon completion of this transaction, NML cancelled Tata Steel’s shares, leaving them with only 133.651 million shares outstanding.
2) NML shareholders will trade 12 NML shares for 1 Abaxx Technologies share. Thus resulting in 11,137,603 NML shares or a 17.6% stake in Abaxx.
3) Abaxx Technologies shareholders exchanged their shares for 0.809 shares in the new issuer. This took Abaxx Technologies share total from 63,284,575 to 51,197,221.
4) The above resulted in 63,124,464 million shares outstanding in the new Abaxx Technologies, and a fully diluted total of 68,702,997 (see below image from information circular published on 10/30/2020).
Source: Abaxx information circular filed on SEDAR 10/30/20
5) The resulting Abaxx Technologies will have working capital of approximately $12.7 million (see page 106 of 10/30/20 information circular). It is anticipated that working capital needs will be sufficient to get the company through Q3 2021, at which point it is hoped that revenues from their exchange and technologies businesses will be sufficient to sustain the company.
Source: Company Website
Brief Discussion on the Abaxx Exchange Business
The Abaxx Exchange will be an innovative commodity exchange based in Singapore – probably the best place in the world right now for a commodity exchange. Abaxx believes that their software platform can increase execution velocity, price discovery, and security by leveraging web 3.0 characteristics of deep learning, AI, distributed ledgers (i.e., blockchain tech), and secure web protocols. That sounds like a lot of buzz words (and it is), but these technologies, when combined have significant potential to upend industries – particularly those that have been slow to adopt new technology, are heavily bureaucratic (or both). Global exchanges have few players (i.e., ICE, or LME) and have been slow to adopt new technology, and are thus ripe for disruption. The Abaxx Exchange seeks to seize on this opportunity, gain a foothold, and then build on it from there.
Initially, the Abaxx Exchange believes their highest chance for success is to create a mostly novel LNG market in Singapore that will be the hub for all Asian spot market trading of LNG futures. This is extremely lucrative as there are currently few LNG marketplaces, and no dominant player has really emerged. Additionally, the Paris climate accord and green energy revolution mean that global players will be incentivized to move away from dirtier hydrocarbons like crude oil and coal, and towards cleaner hydrocarbons like LNG. Furthermore, LNG is a large and growing market that predominantly utilizes crude oil futures for hedging. This fact means that Abaxx’s LNG exchange will grow as LNG sees increased volumes going forward and as market participants begin to use LNG futures instead of crude oil futures.
Additionally, Abaxx has the potential to use its software platform to move into other commodities like gold, copper, nickel, iron ore, cotton, real estate, and other categories. Once successful with LNG, the shift to other commodities could be very quick, and Abaxx could become a major exchange player globally.
Regarding timeline, in September, Abaxx received regulatory approval for the exchange. Final approval should be received in December, or January. The exchange can be launched as early as Q1, but probably in Q2. One minor hold up described in the information circular is that Abaxx will need to have a $10 million Singapore dollar cash buffer to operate. Abaxx will probably find this cash buffer by selling a small portion of the Exchange to another player. This would drop Abaxx’s equity stake in the Exchange from 81% to a lower stake, but would also de-risk the last hurdle to operation. Should the investor be a major global commodity player, this could also add value to Abaxx by legitimizing their business model and driving business to both the exchange and to the tech platform. Think if Glencore (OTCPK:GLCNF), Trafigura, or ICE were to be involved, that could make things quite interesting.
Regarding valuation for the exchange, an exchange license in Singapore was bought in 2013 by Intercontinental Exchange (ICE) for $150 Million USD. If we give the same valuation to Abaxx, then their 81% interest would be worth $121.5 million USD, or $162 million CAD using an exchange rate of $1 USD to $0.75 CAD. With 68.7 million fully diluted shares outstanding, this would give a fully diluted valuation to the Exchange license alone of $2.35 per post RTO share or $0.197 per pre RTO share.
This valuation doesn’t even account for the lucrative potential of the LNG exchange, or the future commodity exchanges that can be set up by Abaxx Exchange. It is fairly easy to see Abaxx quickly building a market for the LNG contracts and creating revenue of $10+ million within a year and growing quickly from there as their exchange (and software platform) becomes more broadly adopted by market participants.
Brief Discussion on the Abaxx Technologies Business
The Abaxx Technologies business is 100% owned by Abaxx Technologies, and has two interesting arms. The first arm is the Master Licensing Agreement “MLA” and royalty agreement on the Abaxx Exchange. In the information circular, the MLA is described as follows (see 10/30/20 information circular):
“Abaxx Singapore has agreed to pay the Company earnings if in the future it sub licenses the Exchange Technology, in which case as a result of the MLA royalty fees would be as follows:
• An amount equal to 20% of revenues on the first $2,000,000 USD;
• An amount equal to 10% of revenues on the next $3,000,000 USD; and
• An amount equal to 5% of revenue on any excess revenue.”
Additionally, for a price of $10 million USD, Abaxx Technologies has the ability to increase their revenue royalty by 1% to 6% of revenues of the Abaxx Exchange. This disclosure in the circular means that Abaxx Tech is likely going to use royalties from the Abaxx Exchange to fund growth of the tech business going forward. If the Exchange really takes off, this royalty could be very lucrative.
Furthermore, the second arm of Abaxx Technologies has significant plans to monetize their software applications above and beyond just the Singapore exchange. In the information circular, Abaxx indicated that in Q2 of 2021 they plan on creating an online market campaign and an enterprise sales team for their technology applications, specifically the Chat, Verify, and Sign applications (see page 161 of the circular). This is extremely intriguing and, to me, is a major value lever for the company in 2021 and beyond. Here’s why.
Source: See page 161 of information circular published on 10/30/20.
DocuSign (DOCU), which is the dominant player in the online contract space, indicated in an investor conference in September of this year that the total addressable market for their products is $45 Billion USD per year (see this article from the Motley Fool from earlier this year). The current market cap of DocuSign is $45 Billion USD (based on closing price of DOCU on 12/4/20), with trailing twelve month revenues of $1.1 billion. That means that DocuSign is trading at 39 times their sales from last year! If Abaxx could take just 1% market share from DocuSign in late 2022, then they could generate $11 million USD or $14.7 million CAD in sales from the application. Giving a multiple on that business of 39 would give you a valuation of $572 million CAD. This would equate to $8.32 per post RTO shares, or $0.694 pre RTO shares. Can you imagine if they could take 10% market share from DocuSign? Based on the discussion later in the Smarter Markets podcasts, it is likely that Abaxx will roll out the sign and verify application to participants in their commodity exchanges initially.
Previous Research on New Millennium Iron and Abaxx
For readers who may not be following the Abaxx RTO listing, I encourage you to learn more about Abaxx, as well as New Millennium Iron, by reading one of the below Seeking Alpha articles or blog posts I’ve previously published.
Revisiting New Millennium Iron Corporation: A Former Growth Story Turns Into A Deep Value Play (OTCMKTS:NWLNF)
Published May 13th, 2019.
Initial Thoughts On New Millennium Iron’s RTO With Abaxx Technologies – James Duade
Published September 20th, 2020.
Has The Abaxx Train Left The Station? I Think Yes. – James Duade
Published October 17th, 2020.
Initial Valuation Target For Abaxx: $10.70 Post RTO ($0.89 Pre RTO) – James Duade
Published November 8th, 2020.
Web 3.0, BlockChain, And Abaxx’s Peers Bakkt & Vakt – James Duade
Published, November, 11th 2020.
What’s The Value Of Abaxx’s ESG Exchange? – James Duade
Published, November, 25th 2020.
My Take on How the First Two Smarter Markets Podcasts Apply to Abaxx
If you’re invested (or just interested) in Abaxx, then listening to the Smarter Markets podcast each week will be a must. What an amazing set of interviews over the last two weeks between Robert Friedman, and Maryam Ayati. While the guests don’t specifically talk about the application of their interviews to Abaxx, most of the content is obviously germane. This is particularly true when it comes to how Distributed Ledger Technology “DLT” (i.e., BlockChain) can revolutionize the Environmental Social Governance “ESG” audit trail for the commodity market supply chain. In a previous article I discussed how the Abaxx Exchange is set to potentially profit from Green LNG by creating a market for carbon credits – see the following link for more information on that topic. The above being said, I didn’t appreciate the full potential of Abaxx until I listened to Robert Friedland’s interview last weekend – and many of the concepts were expanded upon during Maryam Ayati’s interview that was released on Saturday, December 5th. Combining those two interviews (along with the Erik Townsend interview linked above), you get the perspective that Abaxx truly has the ability to revolutionize commodity trading by leveraging Ethereum based smart contracts on an Ethereum-based distributed ledger.
Triterras Fintech (TRIT) is another emerging player doing something similar, but they are working in a different commodity space and have a different software platform – by the way, TRIT now has a market cap of over $1.2 billion USD as of market close on 12/4/20. Where Abaxx is going to have to differentiate themselves is on the software applications that they create which will sit on top of the Ethereum smart contracts and allow users to interact with the DLT data. Abaxx’s potentially prescient purchases of various internet protocols (the land grab Maryam talks about in her interview) allows for secure decentralized Self-Sovereign Identity (see Abaxx’s Software and IP Portfolio on page 157 of the circular). Additionally, the unique graphic user interface (GUI) that Abaxx has will allow users in the commodity space to interact with their data in an engaging and meaningful way that is also secure and decentralized. Furthermore, Abaxx’s use of artificial intelligence and machine learning in their software will allow for faster price discovery, increased transparency, and greater insights for end users. Abaxx describes their plan for rolling out their software in their information circular as follows (see circular published on October, 30th posted on Sedar):
Abaxx intends to commercialize its software technology suite and the Software and IP Portfolio through business to business (“B2B”) strategic partnerships where emerging technologies can be applied to specific markets heavily reliant on transactional transparency and transaction execution velocity.
Based on this description, and combining that with what Josh said on the NML call (i.e., that the SaaS application will likely start in the ESG space) as well as the Robert Friedland interview, we can safely assume that Abaxx has a bigger vision that “just” creating an LNG and Green LNG exchange. It appears that they want to create exchanges for a variety of other commodities including Gold, Copper, Nickel, and other battery metals. In Robert Friedland’s interview, he described it as follows (source: Robert Friedland Smarter Markets Interview Transcript):
“I think Abaxx is the type of startup that has some real industry veterans and they’re going to start in a series of verticals. So liquefied natural gas as a transition fuel. As you get away from crude oil, it’s one of the world’s biggest fungible markets. They can make that market and drive down the cost of LNG and make it transparent. Then they could go to gold and silver and copper and nickel and make very transparent markets for different grades of gold, silver, copper, and nickel based on how much global warming gas is associated with it. And here you have, a favorable forward looking host government (Singapore) that wants to make these electronic markets”
When he says a “series of verticals”, he is talking about how iron ore used to be a single benchmark, but now, they have different exchanges for different grades and qualities of iron ore. For instance, now iron ore buyers can purchase high grade (i.e., 65% Fe), average grade (62% Fe), and low grade (58% Fe) ores. Iron ore markets get sliced even thinner now that you have exchanges where buyers can find concentrate, pellets (don’t forget DR pellets), or lumps, or even high alumina, or low alumina. Robert Friedland is envisioning a market where there are verticals for copper based on ESG grades indicating that the commodity producer is hitting certain requirements such as carbon output during the mining process, and whether or not they have been audited and received a passing grade from international and other government agencies for various ESG policies. Commodity buyers and commodity end users can then choose to pay a premium for commodities which have a high ESG grade relative to their peers. These verticals for ESG have not been created previously because the technology really wasn’t there to support this goal – mostly an inefficient paper system shuffled between various buyers and sellers along the commodity chain. The whole process was opaque and inefficient. That being said, Distributed Ledger Technology “DLT” (i.e., blockchain) now makes the above possible because every transaction along the block chain is instantly auditable.
Furthermore, smart contracts on a block chain allow users to create rules for when and how a block (aka token) is created on the block chain – in this instance maybe users need to have appended a series of approved ESG certifications via the Abaxx Sign and Verify application (!). This smart contract token, will then pass hands from one buyer to the next until it gets to its final end user, who can review and keep for their records the appropriate ESG documentation contained in the token. Should that end user get audited by their own government agency, they can then produce all of the tokens and ESG documents for all of their commodity purchases over a given period of time. Imagine how much that simplifies compliance and builds trust that ESG practices are being followed and adhered to!
As an example, imagine that you are Ford Motor Company (NYSE:F), and you have investors and consumers who want you to reduce your carbon footprint and source more of your supply chain in a manner consistent with ESG principles – remember from my previous ESG post that there is a growing global movement towards this end. Right now, it is likely a huge headache for Ford to vet all of their suppliers and obtain the appropriate ESG documentation from said suppliers in order to illustrate to their own investors and regulators that they are meeting a certain ESG threshold. Instead of doing all that, if they could show through blockchain that all of their copper and steel are sourced from sustainable sources via all the commodity tokens they’ve purchased, then this aggregates all of their compliance documentation and reporting into a single location and eliminates a lot of administrative burden (e.g., compliance costs). While Ford may pay more for the commodities, they are also saving money on compliance costs and they can pass along some of those premium costs to customers whom they can show the ESG credits to when they purchase their own ESG vehicles. Maybe Ford could go so far as to make certain vehicles that are 100% ESG sourced and then market and sell these to customers who value that type of product.
Conclusion
Abaxx is well positioned to not only create these vertical commodity exchange markets as Robert Friedland suggests but also to deliver the SaaS applications that can allow these markets to be broadly adopted by commodity buyers and sellers in a number of industries. Let that sink in. Abaxx Technologies can provide the SaaS applications that allow commodity producers to sign and verify their ESG certificates, which they can then append to the ESG commodity token that they are trading on the Abaxx Exchange. In my view, that hand-in-hand synergy is what Abaxx is going after, and it’s not just a $1 Billion or $2 Billion, idea it’s a multi-billion dollar idea. Of course, this will take time to play out, they aren’t going to change the world overnight, but if successful this could be as Eric Townsend suggested in his rationale for investing in Abaxx, an Amazon (NASDAQ:AMZN) type opportunity. As always, please do your own due diligence before making any investment decision.
Disclosure: I am/we are long NWLNF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long NWLNF, and will be long Abaxx (ABXXF) once the RTO transaction is finalized.
