MRL Corporation Ltd is looking to produce graphite and graphene from its Sri Lankan deposits. I bought some shares (ticker MRF, price 7.2¢, undiluted mkt cap $14.2m) on Monday at 5.6¢ and thought it would be useful to outline the fundamentals.
There are 196.6 million shares outstanding, comprising 191.7 million shares listed on ASX and 5.0 million shares escrowed until 24 December 2015. There are also 49.4 million thinly traded ASX-listed options (ticker MRFOA) exerciseable at 20¢ by 17 October 2016 (they last sold at 1.1¢ a week ago, with the current quote spread being 0.6¢-1.1¢). Finally there are some unlisted options, being 54 million exerciseable at 10¢ by 21 May 2017 and 12 million exerciseable at 9.2¢ by 31 October 2017.
MRL had a cash position of $1.05m at 30 June 2015 after spending $0.5m on operating and investing activities in the quarter. The company had raised $1m of equity capital in May by placing 25m shares at 4¢ to “sophisticated” investors.
The MRL board of directors has been relatively constant since its ASX listing in January 2013. The major personnel are mining professional Craig McGuckin (CEO) being the managing director and Peter Yound (CFO) being the other executive director (albeit that Yound stepped down for a period due to bankruptcy proceedings).
There is one substantial shareholder, being Peter Peterson, head of Corporate division for Perth stockbroker CPS Capital. He owns 10.9 million shares or 5.3%. Other significant shareholders are Craig McGuckin and family with 7.1 million shares and Peter Yound and family with 6.9 million shares. Both executives also own a swag of options.
MRL Corporation bought into Sri Lanka in 2013 after it had to give up on coal in Mongolia because the government there had turned against foreign investment (the name MRL is derived from Mongolian Resources Ltd). MRL has since acquired additional tenements in Sri Lanka and currently its many licences cover some 12,000 hectares on my reckoning.
The Sri Lankan deposits were mined some decades ago when the country supplied a significant proportion of the world’s markets for graphite, but operations were interrupted due to the civil war which ran for 26 years until 2009. Sri Lanka currently produces about 5,000 tpa.
The graphite is highly crystalline and is contained within narrow (20-30cm) steeply-dipping, exceptionally high grade (92-99% Cg) veins. This type of deposit is thought unique to Sri Lanka. The veins have to be accessed from underground using overhead retreat stoping and, to allow for a working width, a certain amount of waste rock must be removed to expose the graphite. The graphite can then be stripped off the stope wall and hauled to surface, whilst the waste rock can be left in the stope to support the walls. A number of veins would have to be mined to supply a central process plant in order to get sufficient scale of operation.
No resource estimates can be made with any confidence without a huge amount of drilling, and MRL considers that could not be justified on cost grounds. It drills for structure (and currently, to obtain samples for metallurgical testing), not grade. So there are no estimates of mineral resources, let alone ore reserves.
The cost of mine development prior to production will be low because of the presence of old shafts and workings, which can be rehabilitated. The work is well advanced and extraction of graphite is scheduled by the end of this calendar year.
Mining cost and underground operating risk will be relatively high, but processing cost and capital cost will be low because of the high grade of the ore. Indeed, the ore could be sold in its raw state, if desired; Sri Lankan graphite in this form fetched US$1,750 in 2013/14. MRL expects to incur cash costs of US$290/t for extraction of bulk samples, and full cost including amortisation of capital is put at US$600/t.
Processing the graphite would deliver higher prices than selling it raw. In January it was demonstrated that acid leaching can upgrade 93% purity raw graphite to 99.95% purity, which is battery grade and could fetch over US$5,000/t. Further processing could produce spherical graphite which sells at a much higher price again.
MRL has stated that it expects to make commercial sales of graphite this year from its underground mining operations (and presumably the material will also be used for larger scale metallurgical testing and provision of samples to potential customers). The company has not yet provided any information on intended mining rate, nor capital cost, nor the overall production and sales strategy.
In the absence of such information from MRL, a 19 page report on MRL published in November 2014 by CPS Capital (written by Peter Peterson?) is included on the company’s website and provides some guidance. A table apparently sourced from MRL contains some interesting information. For a basic small-scale operation selling 5,000t run of mine raw graphite of less than 95% purity from a number of mining operations, the assumptions included a capital cost of under US$5m, an operating cost of US$600-650/t and a product price of US$1,700-2,000/t, implying annual EBITDA of at least US$5.5m. Not bad for a company with a market cap of under $20m.
Another scenario outlined was production of 11,000 tpa run of mine graphite, upgraded to 10,000 tpa of 99.99% purity, thence upgraded to 5,000 tpa spherical graphite on an assumed yield of 50%. Capital cost was put at US$31m, operating cost at US$1,200/t and product price at US$9,000/t, implying annual EBITDA of US$39m before royalties. The after-tax NPV was put at US$158m using a discount rate of 10%.
These scenarios have been superseded somewhat by subsequent MRL announcements on the potential to produce graphene, which is the holy grail for graphite producers because it could sell for in excess of US$50,000/t once a market is established.
In May MRL announced testwork results on drillcore material which demonstrated that graphene can be extracted in a readily scaleable single-step process using electrochemical exfoliation . The only other graphite company yet to have demonstrated this important advantage is Talga (TLG), using a wet physio-chemical technique on its Swedish ore.
On 3 August MRL announced provisional agreement to pursue graphene commercialisation outcomes with Imagine Intelligent Materials Pty Ltd of Australia. MRL said that the agreement will provide access to a network of advanced manufacturing enterprises and scientific expertise, to investigate the full spectrum of the graphene value chain.
Yesterday MRL announced that further preliminary testwork has suggested the yield of graphene from its graphite could approximate 50%. They went on to state that further testing could increase the yield to more than 90%.
I had thought that because of its graphene potential Talga Resources Ltd (ticker TLG, price 35¢, mkt cap $49m) would be the best performer of all of the ASX-listed graphite companies, but MRL now looks far superior. Here is a quick comparison:
In September 2014 Talga released the results of a scoping study based on an opencut mine at a 4:1 strip ratio producing 250,000 tpa ore grading some 24% total graphitic carbon (TGC). The process plant would upgrade this to 40,000 tpa of graphite concentrate grading 80-85% purity (which could be sold for $480/t) and 7,000 tpa of graphene grading 99.9% purity. However, it was thought that only a limited tonnage of the graphene could actually be sold as graphene because of the limited market for the material at this pioneering stage of the industry, and Talga assumed, for the sake of the exercise, that 1,000 tpa would be sold as graphene with the remainder sold as high quality graphite priced at US$1,600/t. That would result in annual project revenues of some US$84m. Capital cost was put at around $30m. Operating costs were put at $84/t of feed (i.e. $21m annually) and that included processing costs.
MRL could achieve revenue of US$75m from mining say 5,000 tpa (continuing with the example provided by CPS Capital) and producing 1,000 tpa graphene priced at US$55,000/t and 4,000 tpa of high quality battery grade graphite priced at US$5,000/t, at a capital cost probably well under $10m, at much lower operating costs (a cost of US$600/t for the raw graphite would amount to $3m annually, to which must be added the cost of processing) and probably earlier to boot.
The one niggling factor in the back of my mind is that Sri Lanka is far more risky than Sweden. Although economic policies are broadly supportive of business and economic growth, as evidenced in GDP statistics of recent years, ethnic tensions remain a threat, the political system is fragmented with generally weak coalition governments, large fiscal deficits are occurring, public debt is high and corruption is endemic.
Expert Euler Hermes puts Sri Lanka on a C3 (sensitive) rating, the C being for medium term country risk on a scale from AA to D, and the 3 (sensitive) rating being for short term risk on a scale from 1 (low) to 4 (high).
For perspective, PNG and Mozambique both have the same rating as Sri Lanka, while it would come as no surprise that Australia and Sweden are both rated AA1 (low). It helps that the legal system is based on the British common law system and that English is taught and spoken as a second language.
Political risk aside, I know which share I would prefer to own. TLG looks great but MRF looks phenomenal.
I still need to do a bit more work on MRL and on graphite and graphene markets and their potential, not having had time to do so at this point. Among questions I would want answered are:
What other operators are in Sri Lanka and what are their prospects?
Does MRL have the best deposits in Sri Lanka?
Could other producers outside of TLG and MRL produce commercial quantities of graphene as cheaply? Perhaps they haven’t yet tried to do so?
How quickly can the graphene market develop and what prices are likely to be available for the products?
So there are likely to be updates made to this review over time.
Finally, looking at the chart, it can be seen that yesterday the shares jumped from the previous close of 5.7¢ to as high as 9.1¢ before settling at 7.2¢, a rise of 1.5¢. That was in reaction to the announcement on graphene yields. The shares have now established support on the uptrend line I have drawn, while resistance is apparent in the 12-14¢ range.
Dare I state that a breakout above that level would suggest a target of about $1 per share?
This chartist mirrored what I have been saying for a long time and the facts continue to emerge. It is completely rational calculations looking at it really running and anyone who does some work here on a Peer comparison will see what I mean.
I think the first break out will be the market accepting MRL Corporation is superior to Talga even thought they don't clash. SL Vein is unbelievable....
It surprises me that every day people are not jumping up and down after the results converting ORE into GRAPHENE !!!
In my opinion this is really text book; a classic example of the irrational market....
In response to your post Insaf I submit the Facts from which we can make many Deductions....
Far East Capital executive chairman Warick Grigor followed the theme, beginning the first presentation of the day with a focus on seeking value in the lead up to the inevitable market upswing, despite it's unpredictable time-frame.
"To kickstart the next cycle, we need optimists who can see opportunity," he said.
Grigor was critical of investors he said had confused the concept of relative value of companies in the mining sector, saying there were too many who had failed to take into account the bigger picture of the market.
"We're at the same place we've been many times before: we're at the bottom of the cycle, and the turning point is somewhat elongated as we seek to flush out the excesses of the previous bull market," he said.
"There are too many junior companies that serve no purpose, and need to fail, because they're distracting us from those that have a future."
Grigor said the current market climate was similar to that of the Dot.com boom of the early 'Noughties', and that today the best way for miners to enhance their stock value was to announce a technology deal.
The long term future of the market would lie with the disruptive potential of nanotechnology, particularly in the case of the nanomaterial graphene, he said.
"Graphene presents us with a generational change in technology, taking the field of nanoscience one step further.
"Nanoscience has given us the ability to identify and seperate the materials which can be combined with other materials for performance levels not otherwise thought possible."
With a barrage of examples of the uses and patented inventions made possible by graphene, Grigor explained that the supermaterial had the distruptive potential to affect demand for other mined commodities.
Graphene can be added to existing materials and products to enhance their function and performance, and reduce the quantites required in production; such as when graphene is added to copper it can increase conductivity and reduce the material need for the tradtional commodity by up to 80 per cent.
It can also be used in the manufacture of concrete, increasing it's strength and precluding the need for steel reinforcing altogether.
Grigor also explained that the material strength of graphene, 200 times that of steel by weight, meant it could be used to create vastly stronger steel which would reduce the amount of iron ore required, and also reduce transport costs on the final product.
"There has been an explosion in the number of patents being taken out, as industry has been preparing to take advantage of a new and deeply disruptive graphene age."
The ability for miners to take advantage of this new market was limited to contributing graphite to the front end of the supply chain, sending it to specialist producers for manufacturing into usable graphene, Grigor said.
However, he noted two exceptions to this problem, flagging Talga Resources as a potential leader in global graphene supply thanks to an "unusually high grade deposit of graphite in Sweden" and plans for a graphene production plant in Germany,as well as MRL Corporation in light of recent test work on their ultra-high grade deposit in Sri Lanka, and their potential for low-cost production of graphene.
"Both of these companies could bring product to the market and massively undercut the price of graphene; in doing so they will be important facilitators to the large-scale commercialization of graphene," he said.
"Whether these companies become vertically integrated to benefit from multiple points in the value chain will depend on management and corporate objectives."
( In my opinion this has never been more significant then now as we await the next phase of the development. )
Here is some vital DATA Points For MRL Corporation and all other FLAKERS !
AM: It's similar to what a lot of other companies are trying to do, and that is show that their material can be used in specialist markets. Most graphite juniors must now prove they have a viable blueprint for their material in the value-added markets, where there are much higher margins. Those are the growth areas. SM: There are two paths to success in graphite: the volume route or the value-added route. If you get caught in the middle, that's a problem.
AND
TGR: Please share one tidbit for investors to keep in mind as they conduct their due diligence on critical minerals equities. SM: Don't treat critical minerals like commodities. The basic process of analyzing commodities has relevance to specialist minerals but they're not entirely the same. Critical minerals are niche products at this stage that require a long-term outlook. It is no surprise that the people that invested in the critical minerals supply chain in the past—namely Japanese and Korean companies—are long-term thinkers. These companies now control the majority of these supply chains. A longer-term way of thinking is crucial.
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