Alabama Graphite — Accessing liquidity and financing optionality

Alabama Graphite — Accessing liquidity and financing optionality

Westwater Resources (NASDAQ:WWR) is set to complete its all-share takeover of Alabama Graphite during CY Q218, subject to necessary approvals. The value of the deal is tethered to WWR’s share price and currently implies a total value for Alabama of c US$9m. This compares to an EV/t value for Coosa’s in-situ graphite resource of US$14m and our tentative, undiluted, post-tax DCF estimate for the project’s Phase 1 of US$71m (using reduced Phase 1 capex of US$30m and a 10% discount rate). The deal is timely; in reality, the financing of Coosa under the Alabama banner was proving problematic and we see a greater chance of WWR developing the asset using its own network of contacts and incumbent financing arrangements.

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Written by

Alabama Graphite

Accessing liquidity and financing optionality

Westwater Resources takeover

Metals & mining

15 March 2018

Price

C$0.07

Market cap

C$10m

US$/C$:0.79

Net cash (C$m) at 30 Nov 2017

0.1

Shares in issue

145.3m

Free float

96%

Code

CSPG

Primary exchange

TSX-V

Secondary exchange

OTCQB/Frankfurt

Share price performance

%

1m

3m

12m

Abs

25.0

(16.7)

(58.3)

Rel (local)

22.4

(14.7)

(59.1)

52-week high/low

C$0.19

C$0.06

Business description

Alabama Graphite is positioning itself as a major sourced-and-made-in-US natural flake battery graphite producer for the LiB supply chain, in addition to the lithium primary, alkaline and lead acid battery markets. Its main project, Coosa, is strategically located in Alabama, US. The company will not sell any traditional graphite concentrate, which is the core business model for all other graphite development companies presently.

Next events

Deal completion

End April/May

Analysts

Tom Hayes

+44 (0)20 3077 5725

Charles Gibson

+44 (0)20 3077 5724

Alabama Graphite is a research client of Edison Investment Research Limited

Westwater Resources (NASDAQ:WWR) is set to complete its all-share takeover of Alabama Graphite during CY Q218, subject to necessary approvals. The value of the deal is tethered to WWR’s share price and currently implies a total value for Alabama of c US$9m. This compares to an EV/t value for Coosa’s in-situ graphite resource of US$14m and our tentative, undiluted, post-tax DCF estimate for the project’s Phase 1 of US$71m (using reduced Phase 1 capex of US$30m and a 10% discount rate). The deal is timely; in reality, the financing of Coosa under the Alabama banner was proving problematic and we see a greater chance of WWR developing the asset using its own network of contacts and incumbent financing arrangements.

Year end

Revenue (C$m)

PBT*
(C$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

08/15

0.0

(2.2)

(2.3)

0.0

N/A

N/A

08/16

0.0

(1.8)

(1.5)

0.0

N/A

N/A

08/17

0.0

(3.2)

(2.3)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Coosa brings a full suite of battery products to WWR

Unlike many of its graphite peers, Alabama is focused on developing a graphite mine and processing plant in Coosa County, Alabama, US to produce battery-ready graphite end-products. It has four viable and proven products for battery applications. These are a purified micronized graphite (PMG, marketed under the name ULTRA-PMG™), a coated spherical purified graphite (ULTRA-CSPG™), a silicon-enhanced ULTRA-CSPG™ and a delaminated expanded graphite (ULTRA-DEXDG™) product.

Alabama’s technical expertise complements WWR

We note the extensive graphite technical expertise of the Alabama board and management team, and also WWR’s retention of Mr Dinwoodie (announced on 1 March 2018) and Dr Gareth Hatch (13 March 2018) as VP of marketing and technical advisor, respectively.

US made, US based and US listed

Coosa is a US-located graphite project, which will feed into US-based battery manufacturers and the burgeoning EV market there. Once acquired by Westwater, it will be part of a NASDAQ, New York listed company. US-sourced demand for graphite is supported by the presidential executive order relating to critical minerals made in December 2017.

Valuation: EV/t basis makes deal look fair value

Our tentative, post-tax, undiluted DCF valuation of Coosa’s Phase 1 based on the 2015 preliminary economic assessment (PEA), with initial Phase 1 capex reduced to US$30m (in line with Westwater’s guidance), is US$71m; our EV/t valuation for Coosa’s resources is US$14m. As such comparing the WWR deal value to the Coosa PEA outcome appears favourable to the acquirer. However, compared to the in-situ value of Coosa’s resource derived using market data, and taking into account uncertainty with funding, we consider the deal near to fair value.

Westwater deal

We take a view on the value of the imminent Westwater takeover of Alabama Graphite using an in-situ value of graphite and a comparison of the deal’s value to our estimate of Coosa’s value on a scenario-driven DCF basis. We also take a closer look at the qualitative benefits of Alabama’s takeover by WWR. We see clear benefit to the Coosa Graphite Project development in the combination of Alabama’s technical graphite expertise with WWR’s greater ability to access capital and fund financing options.

The following exhibit gives a comparison of the deal value as priced following the announcement on 13 December 2017, showing values derived by Edison based on an EV/t approach, a post-tax DCF value of Phase 1 only and a value for Coosa based on both Phase 1 and 2 being constructed.

Exhibit 1: Comparison of WWR deal to Edison’s project valuations

Source: Edison Investment Research

In-situ valuation: Coosa’s resource in line with deal value at outset

The following table provides a value for Alabama’s in-situ graphite resource based on EV/t values derived from a broad unbiased group of graphite peers across the London, Canadian and Australian exchanges.

Exhibit 2: In-situ resource valuation

Parameter

Unit

Value

In-situ graphite value

US$/t

4.02

CSPG shares in issue

Number

145,315,187

In-situ value of Coosa graphite resource

US$m

14,258,940

WWR deal value as priced 13/12/17

US$m

12,787,736

% difference to WWR share price value

%

18

Source: Edison Investment Research  

Our in-situ resource value for Alabama of US$14.3m compares favourably with the US12.8m value of the WWR deal first announced on 13 December, using the then prevailing share price of US$1.11. Our EV/t in-situ graphite value of US$4.02/t reflects market data during August 2017 and, as such, is relatively close to the deal being announced and should also reflect the current state of the unbiased junior developer graphite peer group used relatively accurately.

Coosa DCF value dwarfs deal price

Our DCF valuation, as presented below, has been adjusted to reflect Westwater’s project initial optimisation study announcement on 1 March 2018. The main adjustment we have made to our model is a reduction in planned Phase 1 capex from US$43.4m to US$30m. However, we note that other factors that may affect our valuation are not fully disclosed (eg the exact mix of graphite products to be sold) and we await formal release of this optimisation study to fully reflect any changes in our valuation of Coosa.

Coosa’s unoptimised 2015 PEA contemplates a two-phase development approach, allowing the owner to tailor its output to the requirements of prevailing CSPG graphite market growth rates. This is critical when the size of the electric vehicle (EV) market is still relatively minuscule compared to its fossil fuel counterparts. Phase 1 of Coosa’s development (pending capital raisings) produces 5ktpa; valuing this cash flow stream (with first revenues occurring in FY20) results in the following DCF valuations using a 10% discount rate to reflect general equity risk and assuming no dilution to account for the potential funding options of the project. We note that funding remains one of the key execution risks.

Exhibit 3: Undiluted DCF valuations pre- and post-tax based on adjusted 2015 Coosa PEA

Valuation timeframe

Currency

Discount rate

Value

Pre-tax Phase 1 (to 2027)

US$000

10%

101,796

Pre-tax Phase 1 and Phase 2

US$000

10%

337,134

Post-tax Phase 1 (to 2027)

US$000

10%

70,777

Post-tax Phase 1 and Phase 2

US$000

10%

235,074

Source: Edison Investment Research

Both values use a CSPG price of US$9,000/t, a PMG price of US$2,000/t and a 10% discount rate to reflect general equity risk. Commodity price forecasts remain a concern for any battery metal project. The above valuations do not take account of the US government’s reduction in corporate tax from 35% to 21%, which came into effect on 1 January 2018. We await an optimised Coosa technical study to undertake this analysis.

Note that the above DCF valuations are based on the 2015 Coosa PEA and differ from our initial base case DDF (dividend discount) valuation published in our initiation report, as we have also removed the effects of Alabama’s financial accounts from our valuation. For an in-depth view of our original valuation of Coosa based on the project’s 2015 PEA, please refer to our initiation report, Proven battery graphite for the US and beyond, published in July 2017. Note that this valuation includes the effects of Alabama’s financial accounts.

Alabama’s graphite expertise retained in part

We have long viewed the deep technical graphite experience of Alabama’s management team as being core to transforming the complex technology of a graphite project into a fully vertically integrated mine and market supplier of battery-ready graphite products. This has been evident throughout our experience of dealing with the company and reinforces our confidence that the company’s positive technical announcements prove that Coosa’s low in-situ grade graphite resource is indeed a viable option in the US for sourcing graphite for the anticipated electrification of the global automotive fleet and batteries in general. As with any company or project takeover, successful retention of the embedded management knowledge base is a sensitivity, even more so here, given the nature of the product and critical stage of the project’s development. A de-risking event to management’s retention are the recent announcements by WWR that it will retain Mr T Dinwoodie as VP of marketing and Dr Gareth Hatch as technical advisor. Dr Hatch’s experience is detailed below and we view his involvement in the development of Coosa as integral to its success.

Gareth Hatch Retained as Technical Advisor to Westwater Resources

WWR announced 13 March 2018 the addition of Gareth Hatch as a Technical Advisor to its team. DR Hatch is currently CEO of Alabama and is also co-founder, President and Director of Innovations Metals Corp, a private Toronto-based company specialising in cost effective processing solutions for metals used in the high-tech and green energy, such as rare-earth elements separation, lithium, nickel and cobalt. Dr. Hatch is the co-inventor of IMC’s patent-pending purification process for these metals. Dr. Hatch is also a Founding Principal of Technology Metals Research LLC, a well-known advisory and consulting firm operating in the critical-materials sector. He was previously Director of Technology at U.S.-based Dexter Magnetic Technologies, Inc., and holds five patents on a variety of magnetic devices.

During 2014-2016, Dr. Hatch served as Principal Investigator on a multi-million-dollar research program on innovative processes for Rare Earth Elements, funded by the U.S. Army Research Laboratory, part of the US Department of Defense (DoD). He has advised the DoD, NATO, the European Commission, the U.K. Parliament and members of the U.S. Congress on threats to the strategic-materials supply chain. Dr. Hatch has authored numerous peer-reviewed journal articles and has been cited by reports published by the DoD, the U.S. General Accountability Office, the U.S. Department of Energy, the U.S. Geological Survey, the British Geological Survey, the EC and many others.

Viability thresholds met

The nuances of each of the graphite products due to be sold by Coosa (ie ULTRA-PMG™, silicon-enhanced ULTRA-CSPG™, ULTRA-CSPG™ and ULTRA-DEXDG™) are too extensive to cover fully here but are available on the company’s website.

We would highlight the nuclear grade purity (ie 99.99997% total graphitic carbon) achieved in the laboratory environment as a meaningful indication of the viability of Coosa’s graphite as feedstock for in-house processing to downstream battery graphite standards. Coosa’s graphite has also been demonstrated to be easily processed to at least 99.99% purity across all the flake size fractions present in the Coosa resource. Further testing of Coosa graphite has also demonstrated very good ability to hold charge (the term ‘dynamic charge acceptance’ describes a cell’s ability to absorb electrical charge in relation to the capacity of the battery).

Electric vehicle market growth – the key factor

According to the International Energy Agency’s (IEA) Global EV Outlook 2017, the worldwide stock of electric vehicles rose to over 2m in 2016, having reached 1.26m in 2015. Further, global electric vehicle stock rose by >70% between 2014 and 2015 (IEA data), with 750,000 electric vehicles sold in 2016 representing a y-o-y growth of 36% and market penetration of 0.2% compared with total global stock of cars, regardless of type. This small market penetration is of course expected to grow as mass adoption of electric vehicles is achieved via lowering of electric vehicle prices, as well as the installation of required infrastructure, and the optimisation and refinement of existing electric vehicle technologies to drive confidence in consumer appetite.

A negative against the rise of electric vehicles and the demand for raw materials needed to build these EVs is the declining rate in electric vehicle sales y-o-y. In 2016, the electric car stock growth was 60%, down from 77% in 2015 and 85% in 2014. Although this growth rate is declining, the 60% increase for 2016 is still very healthy. It is of course noted that these growth rates reflect a relatively small sales base and growth rates inevitably reduce as the electric vehicle stock increases.

Financials

Alabama’s last reported financial statements covered the period ending 30 November 2017. As of this date, the company had cash of C$64k, after expenditures of C$0.6m. As a result of the proposed WWR takeover, no further financings have been secured by Alabama, which would normally throw doubt on its ability to continue as a going concern. However, assuming the takeover goes ahead as planned, future project financing will be the responsibility of Westwater which, as mentioned above, has now published (on 1 March 2018) its Coosa Project initial optimisation study. Compared to the 2015 PEA, financially, this points to lower capex (US$30m vs $43.4m), revenues starting from 2020 and positive cash flow now expected from 2021.

WWR issues convertible loan note to Alabama

Meanwhile, with current financing constraints starting to affect Alabama’s ability to maintain itself as a going concern, WWR provided a working capital solution by issuing a convertible loan note to Alabama for up to US$2.0m. The note either converts to shares in Alabama (at WWR’s discretion) or matures on 30 June 2018. The note carries an interest charge of 3%. With the acquisition expected to conclude after WWR’s shareholder vote on 19 April 19 2018 following WWR’s AGM, these funds should satisfy Alabama’s current financial commitments and expenditures.

Should the secured loan be converted into Alabama shares, WWR would hold approximately a 7.5% interest in Alabama Graphite, assuming the full $2.0m is outstanding at the time of conversion.

Potential WWR capital sources for building out Coosa

As we have said previously, Coosa’s viability as a battery-ready graphite project appears robust from the considerable amount of laboratory-scale testing undertaken so far. Therefore, in our view, the successful development of the Coosa project crucially depends on the securing of offtake agreements on commercial terms for the project’s output. However, as for any project at this stage this is a chicken-and-egg situation in so far as potential customers may require firm signs of commitment that the project in question will be built. In its 1 March release, WWR announced the appointment of Alabama Graphite’s president Tyler Dinwoodie to be vice president of marketing, effective on close of the acquisition.

So far, Alabama has secured non-commercial agreements and letters of intent for the purchase of Coosa’s battery-ready graphite products. Note that the wider junior graphite development sector mirrors Alabama’s difficulty in securing commercial offtake.

If WWR successfully acquires Alabama, it has two potentially adequate sources of capital to satisfy its revised capex estimate of US$30m for development of Phase 1 (ie an initial 5ktpa output of refined battery-ready graphite products). In committing to funding at least Phase 1 of Coosa and building its customer base, WWR may be better positioned to secure offtake agreements on commercial terms.

WWR announced on 27 September 2017 that it entered into a common stock purchase agreement with Aspire Capital Fund, LLC. During the 30-month term of the agreement, Aspire Capital has committed to purchase, at WWR’s request, up to US$22m of its common stock.

WWR registered for sale up to 30m shares of common stock by Cantor Fitzgerald under a controlled equity offering sales agreement dated 14 April 2017. The number of shares ultimately offered for sale pursuant to this agreement is dependent on the number of shares WWR elects to sell.

Exhibit 4: Financial summary

Accounts: IFRS, year-end August (C$000s)

2015

2016

2017

Total revenues

0

0

0

Cost of sales

0

0

0

Gross profit

0

0

0

SG&A (expenses)

(1,869)

(1,752)

(3,209)

R&D costs

0

0

0

Other income/(expense)

0

0

0

Exceptionals and adjustments

0

0

0

Depreciation and amortisation

(2)

(1)

(1)

Reported EBIT

(1,871)

(1,753)

(3,211)

Finance income/(expense)

3

0

0

Other income/(expense)

153

24

4

Exceptionals and adjustments

(482)

0

0

Reported PBT

(2,198)

(1,729)

(3,207)

Income tax expense (includes exceptionals)

0

0

0

Reported net income

(2,198)

(1,729)

(3,207)

Basic average number of shares (m)

97

117

137

Basic EPS (C$)

(0.02)

(0.01)

(0.02)

Balance sheet

Property, plant and equipment

4

3

2

Goodwill

0

0

0

Intangible assets

5,568

6,867

7,563

Other non-current assets

26

0

0

Total non-current assets

5,599

6,870

7,565

Cash and equivalents

2,086

96

509

Inventories

0

0

0

Trade and other receivables

40

38

49

Other current assets

229

182

94

Total current assets

2,355

315

652

Non-current loans and borrowings

0

0

0

Other non-current liabilities

0

0

0

Total non-current liabilities

0

0

0

Trade and other payables

424

521

496

Current loans and borrowings

0

0

0

Other current liabilities

0

0

0

Total current liabilities

424

521

496

Equity attributable to company

7,529

6,663

7,721

Non-controlling interest

0

0

0

Cash flow statement

Profit for the year

(2,198)

(1,729)

(3,207)

Taxation expenses

0

0

0

Net finance expenses

0

0

0

EBIT

0

0

0

Depreciation and amortisation

2

1

1

Share based payments

664

222

795

Other adjustments

482

0

0

Movements in working capital

(273)

330

43

Interest paid / received

0

0

0

Income taxes paid

0

0

0

Cash from operations (CFO)

(1,323)

(1,176)

(2,368)

Capex

(1,826)

(1,395)

(748)

Acquisitions & disposals net

0

0

0

Other investing activities

(5)

(60)

60

Cash used in investing activities (CFIA)

(1,831)

(1,455)

(688)

Net proceeds from issue of shares

4,211

641

3,470

Movements in debt

(258)

0

0

Other financing activities

0

0

0

Cash from financing activities (CFF)

3,953

641

3,470

Currency translation differences and other

0

0

0

Increase/(decrease) in cash and equivalents

799

(1,990)

413

Currency translation differences and other

0

0

0

Cash and equivalents at end of period

2,086

96

509

Net (debt) cash

2,086

96

509

Movement in net (debt) cash over period

2,086

(1,990)

413

Source: Company accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Alabama Graphite and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Limited (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
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Germany

London +44 (0)20 3077 5700

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US

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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Frankfurt +49 (0)69 78 8076 960

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Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

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10017, New York

US

Sydney +61 (0)2 8249 8342

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95 Pitt Street, Sydney

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Nuevolution — Pipeline and strategic execution drives prospects

Nuevolution’s 2017 was defined by internal progress of the RORγt inhibitor and BET-BD1 programmes (expected to be clinically ready in 2019). In 2018 we anticipate value will be driven by new and existing partners, for example we expect Almirall to initiate a RORγt inhibitor Phase I trial in late 2018, making it the first Nuevolution product candidate to enter the clinic. In addition to existing collaborations, a new partnership is anticipated by Nuevolution in the next three to nine months. If achieved, revenue from these events will aid Nuevolution’s strategy of transitioning into a clinical stage biotech. We value Nuevolution at SEK21.0/share or SEK901m from SEK21.4/share (SEK917m) previously.

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