Magnis Resources Ltd
(MNS)
Large flake size drives project economics
Recommendation
Buy
(Initiation)
Price
$0.245
Valuation
$0.33
(Initiation)
Risk
Speculative
Analyst
Fred Truong 613 9235 1629
Stuart Howe 613 9235 1782
Focused on developing graphite production
MNS is currently progressing its 100% owned Nachu graphite project (Tanzania)
through permitting and a definitive feasibility study. A pre-feasibility study supported a
project with graphite in concentrate production of 180ktpa at average 16-year life of
mine cash costs of US$473/t. A maiden JORC resource of 156Mt at 5.2% graphitic
carbon (Cg) was released in November 2014 and around 66% of the resource is in the
Measured and Indicated categories. Our valuation of $0.33/sh is based on a risked
(0.6x) NPV of MNS’s project using conservative graphite flake price estimates. We
initiate research coverage with a Speculative Buy recommendation.
Large flake size drives Nachu’s economics
Prices of natural flake graphite vary according to flake size and purity. Larger flake
graphite commands premium pricing as it requires less processing to produce a high
value product. Although China is the largest supplier of flake graphite, there are supply
constraints in the large and jumbo flake category. We expect strong demand growth
for larger sized flake graphite, driven by increased production of lithium-ion batteries.
Approximately 87% of graphite product produced by Nachu will be sourced from the
large (+180 microns), jumbo (+300 microns) and super jumbo (+500 microns)
categories. MNS has secured offtake for 100% of production through agreements with
Chinese state owned industrial conglomerate SINOMA for 80ktpa over a period of five
years and Sinosteel for 100ktpa over 10 years. These agreements are at market prices
and have options to renew.
Investment view – Speculative Buy, valuation $0.33/sh
MNS provides leverage to an emerging commodity with a solid demand outlook driven
by expected growth in lithium-ion batteries. The company’s key project is expected to
use conventional mining and processing technologies. Under our pricing assumptions,
we calculate an unrisked project NPV of $357m and steady state EBITDA of $125m.
Permitting and definitive feasibility studies are underway for development to potentially
commence in 2HCY2015. We believe the project is economic under current graphite
prices. MNS is a Speculative investment as it carries permitting, development, price
and offtake risks.
Absolute Price Earnings Forecast
Year ending June 2015e 2016e 2017e 2018e
Sales (A$m) - - 188 247
EBITDA (A$m) (6) (9) 94 125
NPAT (reported) (A$m) (4) (6) 44 66
NPAT (adjusted) (A$m) (4) (6) 44 66
EPS (adjusted) (¢ps) (1) (1) 6 7
EPS growth (%) na na na 31%
PER (x) (17.1) (18.9) 4.4 3.3
FCF Yield (%) -9% -230% 29% 34%
EV/EBITDA (x) (10.9) (7.3) 0.7 0.6
Dividend (¢ps) - - - -
Yield (%) 0% 0% 0% 0%
Franking (%) 0% 0% 0% 0%
ROE (%) -71% -14% 38% 36%
Speculative
See key risks on page 3. Speculative
securities may not be suitable for
Retail clients.
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Magnis Resources Ltd (MNS) 25 March 2015
Contents
Risks of investment ....................................................................... 3
Value proposition ........................................................................... 4
Nachu Graphite Project (MNS, 100%) ........................................... 8
Summary of the Graphite market ............................................... 10
Other Assets ................................................................................. 12
Capital structure and major shareholders ................................. 13
Appendix 1: Board and management ......................................... 14
Magnis Resources Limited (MNS) .............................................. 15
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Magnis Resources Ltd (MNS) 25 March 2015
Risks of investment
Risks associated with an investment in MNS include, but are not limited to:
- Government approvals and permitting:
To commence development of the Nachu
graphite project, MNS must receive the necessary Tanzanian approvals and obtain all
the requisite environmental and mining licenses.
- Mine and infrastructure development:
Project development is a key risk in terms of
time and cost over-runs. Delays and cost over-runs can substantially impact the
economic returns of its projects
- Commodity price and exchange rate fluctuations
. The future earnings and
valuations of exploration, development and operating resources companies are
subject to fluctuations in underlying commodity prices FX exchange rates.
- Operating and capital cost fluctuations.
Markets for exploration, development and
mining inputs can fluctuate widely and cause significant differences between planned
and actual operating and capital costs. Key operating costs are linked to energy and
labour costs.
- Resource growth and mine life extensions.
Future earnings forecasts and
valuations may rely upon resource and reserve growth to extend mine lives.
- Regulatory changes risks.
Changes to the regulation of infrastructure and taxation
(among other things) can impact the earnings and valuation of mining companies.
- Operating and development risks.
Mining companies’ assets are subject to risks
associated with their operation and development. Risks for each company can be
heightened depending on method of operation (e.g. underground versus open pit
mining). Development assets can be subject to approvals timelines or weather events,
causing delays to commissioning and commercial production.
- Funding and capital management risks.
Funding and capital management risks can
include access to debt and equity finance, maintaining covenants on debt finance,
managing dividend payments, and managing debt repayments
- Sovereign risks:
Tanzania is considered to have a higher sovereign risk than
Australia and MNS will be subject to these risks. Tanzania was granted independence
in 1961 and is the 4
th largest African gold producer. MNS has a high level of
government and local community support and has been operating in Tanzania since
2005.
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Magnis Resources Ltd (MNS) 25 March 2015
Value proposition
Investment view - Speculative Buy, valuation $0.33/sh
We rate MNS as Speculative Buy:
-
MNS is developing the 100% owned Nachu graphite project located approximately
75km west of the coastal city of Lindi, Tanzania. The Nachu project was discovered in
March 2013 by MNS and a mineral resource was delineated in November 2014. The
Nachu tenement covers an area of around 199km
2 in southern Tanzania.
-
Formerly a uranium exploration company, following the 2011 Fukushima incident and
a 200% increase in the tenement retention fee imposed by the Tanzanian government,
MNS has shifted its focus to graphite.
-
A pre-feasibility study (PFS) was completed on the Nachu project in December 2014.
The PFS examined the potential to produce around 180ktpa of graphite in concentrate
over a 16 year mine life at average life of mine operating costs of US$473/t. Predevelopment
CAPEX is estimated at US$171m. Using these parameters, and
assuming 20% higher operating costs, we estimate that at current flake graphite prices
of around US$1,200/t and US$1,400/t for large and jumbo flake sized products, MNS
could generate annual EBITDA of around US$125m.
-
MNS is progressing the Nachu project to bankable feasibility stage. On current
estimates, first production is expected in Q3CY2016.
-
The Environmental Impact Assessment (EIA) has commenced and is on track for
completion in June 2015. MNS is expecting to receive all mining approvals by
Q3CY2015, which will be followed by finalisation of funding arrangements and plant
construction later this year.
-
Prices of natural flake graphite vary according to flake size and purity. Larger flake
graphite commands premium pricing as it requires less processing to produce a high
value product. A significant proportion (around 87%) of MNS’s contained graphite in
concentrate is categorised in the higher value large and jumbo flake sized categories.
-
MNS has secured offtake for 100% of production through agreements with Chinese
state owned industrial conglomerate SINOMA for 80ktpa over a period of five years
and Sinosteel for 100ktpa over 10 years.
-
MNS has also signed a memorandum of understanding (MoU) with SINOMA covering
project financing, engineering and construction of the Nachu project. Discussions are
preliminary and represent a first step in proceeding to a formal binding agreement.
Capital position and near term requirements
-
Following a recent $6.5m placement1 to sophisticated and institutional investors, we
estimate MNS to have around $7m in cash and no debt. MNS is fully funded to
bankable feasibility stage.
-
The Nachu PFS contemplated a US$171m capital project (including a 10%
contingency). The PFS highlighted significant opportunities for improvements in capital
costs. We expect the BFS due mid-2015 will refine this estimate and include potential
CAPEX savings. MNS announced on 2 March 2015 that it has signed a project
financing MoU with SINOMA. As project financing discussions are preliminary, we
have assumed a funding mix of 70% debt (project finance) and 30% equity, and
estimate that MNS will require an additional $82m in equity in 2HCY2015.
1
Disclosure: Bell Potter Securities acted as lead manager for the $6.5m placement in March 2015 and received fees for that service.
Page 5
Magnis Resources Ltd (MNS) 25 March 2015
Key catalysts and estimated timeline
- June 2015:
MNS is targeting final environmental approvals by June 2015.
- June 2015:
MNS is continuing with metallurgical test work which is expected to be
completed by June 2015.
- Mid-2015:
A bankable feasibility study is underway and is expected to be completed
by mid-2015.
- September 2015:
Final mining approvals are expected to be received by September
2015.
- Mid to late 2015:
MNS expects to finalise its project financing arrangement in mid to
late 2015.
- Late 2015 to early 2016:
MNS could commence construction and pre-stripping
activities in 2HCY2015.
Table 1 – Project development timeline
SOURCE: COMPANY PRESENTATION
Valuation
Our MNS risked valuation of $0.33/sh is based on:
-
Discounted cash flow of the Nachu graphite project, based on production rates of
180ktpa of graphite concentrate at total average operating cash costs of around
US$540/t and CAPEX of US$205m. We have assumed operating cash costs and
CAPEX estimates of around 20% higher than those used in the PFS study. We have
risked our valuation by 0.6x to account for construction, development and financing
risks. We have adopted a nominal WACC of 12%, which is higher than the WACC we
would typically apply to Australian based mining projects to account for sovereign risk;
-
An allowance for corporate costs;
-
Dilution from the exercise of 209.9m ASX-traded options (exercise price of $0.10/sh);
-
A $82m capital raising at $0.22/sh in 2HCY2015 to take into account the project’s
financing dilution. We have assumed a 70%:30% debt:equity split; and
-
Bell Potter long term pricing assumptions as detailed in Table 4.
Table 2 – Sums of parts valuation
$m $/sh
Nachu graphite project 357 0.40
Nachu graphite project (40% risk discount, NPV12) 214 0.24
Corporate overheads (32) (0.04)
Enterprise value 182 0.20
Cash & options (fully diluted, including capital raising) 110 0.12
Equity value (fully diluted) 292 0.33
SOURCE: BELL POTTER ESTIMATES
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Magnis Resources Ltd (MNS) 25 March 2015
PFS supports Nachu’s robust economics
Table 3 summarises the differences in MNS’s assumptions used in the PFS compared with
our estimates. The PFS has been completed to an accuracy of +/-20%, which is more
accurate than typical studies of this kind (accuracy of +/- 25%).
Key differences between our assumptions and MNS relate to operating costs, CAPEX and
pricing assumptions. We have assumed 20% higher operating costs and CAPEX and our
pricing assumptions are around 45% lower than MNS (refer below).
Table 3 – Nachu PFS assumptions vs Bell Potter estimates
Nachu project PFS results PFS study (Dec-14) Bell Potter estimates
First production Q3FY17 Q3FY17
Mill throughput 3.8Mtpa 3.8Mtpa
Production 180ktpa of graphite in concentrate 180ktpa of graphite in concentrate
Recoveries 97% 97%
Average operating cost estimate Years 1-3: US$448/t
Years 4-16: US$478/t
Years 1-3: US$538/t
Years 4-16: US$574/t
Development CAPEX US$171m US$205m
Assumed mine life 16 years 16 years
NPV US$1.04Bn US$357m
IRR 84% 29%
SOURCE: COMPANY DATA AND BELL POTTER ESTIMATES
Graphite price forecasts
PRICING FAVOURS LARGER FLAKE SIZED PRODUCTS
Pricing for graphite products is opaque and is generally negotiated directly between buyers
and sellers who settle through private contracts. Certain industry bodies such as Industrial
Minerals and Benchmark Mineral Intelligence collate pricing data to form broad benchmark
indices.
Prices of natural flake graphite vary according to flake size and purity. Larger flake graphite
command premium pricing as it requires less processing to produce a high value product.
Jumbo flake size commands the highest premium and can trade up to five to 10 times the
price of fine graphite flakes. We understand that fine sized graphite is likely to be in
oversupply and can be difficult to sell.
Having offtake contracts with suppliers and certainty of offtake is crucial to having a viable
graphite project.
NACHU ECONOMICS STACKS UP USING CONSERVATIVE PRICES
The following table summarises MNS’s price assumption used in the PFS compared with
our estimates, spot and industry sources. We have conservatively adopted prices that are
around 45% below those adopted in the PFS and around 25% below Benchmark Minerals
Intelligence’s long term (CY2019+) price estimates. Our price estimates are slightly below
current prices. Under our conservative pricing, cost and CAPEX assumptions, we note that
the Nachu project’s economics look attractive and we estimate an after-tax IRR of 29%.
We believe that a large number of graphite development projects are uneconomic under
our conservative pricing estimates.
Table 4 – Commodity price forecasts
BP est.
Current prices
as at Jan-15
(China, FOB)
Benchmark
Minerals
(long term)
MNS forecasts
(long term)
Super Jumbo (97-99% TGC) >500μ, +35 mesh US$/t 1,700 n/a n/a 6,000
Jumbo (96-98% TGC) >300μ, +50 mesh US$/t 1,400 1,430 2,440 3,000
Large (94-97% TGC) 180-300μ, +80, -50 mesh US$/t 1,200 1,250 1,440 1,400
Medium (92-96% TGC) 150-180μ, +100, -80 mesh US$/t 1,000 950 1,125 900
Fine (90-94% TGC) <150μ, -100 mesh US$/t 500 800 1,075 500
Weighted average basket price US$/t 1,165 n/a n/a 2,119
SOURCE: COMPANY DATA, BENCHMARK MINERALS INTELLIGENCE (AS REFERENCED BY SYRAH RESOURCES) AND BELL POTTER ESTIMATES
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Magnis Resources Ltd (MNS) 25 March 2015
Figure 1 – Historical movements in graphite prices (FOB China)
SOURCE: INDUSTRIAL MINERALS AND BENCHMARK MINERALS (AS REFERENCED BY SYRAH RESOURCES), BELL POTTER ESTIMATES
Sensitivity analysis – NPV and steady state EBITDA
Table 5 outlines our MNS’s unrisked project NPV and steady state EBITDA under a variety
of currency and weighted average basket price assumptions.
Table 5 – Unrisked NPV (EBITDA) , A$ millions
Weighted average basket graphite prices
US$1,000/t US$1,167/t
(base case)
US$1,500/t US$2,000/t US$2,500/t
Currency A$/US$
0.75 238 (103) 436 (142) 842 (223) 1448 (343) 2054 (463)
0.80 208 (96) 394 (133) 777 (209) 1348 (321) 1919 (434)
0.85 181 (91)
357 (125) 719 (196) 1259 (302) 1799 (408)
0.90 157 (86) 324 (118) 668 (186) 1181 (286) 1693 (386)
0.95 135 (81) 295 (112) 622 (176) 1111 (271) 1599 (365)
1.00 116 (77) 268 (107) 581 (167) 1047 (257) 1513 (347)
1.05 99 (73) 244 (101) 544 (159) 990 (245) 1436 (331)
SOURCE: BELL POTTER ESTIMATES
Recent quarterly cash flows
The following table summarises MNS’s quarterly spend over the past 21 months. MNS has
spent on average $567k on administrative expenses a quarter ($2.3m a year).
Table 6 - Recent quarterly cash flows
Jun-13(a) Sep-13(a) Dec-13(a) Mar-14(a) Jun-14(a) Sep-14(a) Dec-14(a) Mar-15(e)
Exploration & evaluation $k -488 -649 -652 -714 -441 -2,074 -2,183 -1,050
Administration $k -296 -511 -434 -446 -885 -637 -758 -800
Capital raised $k 1,695 253 1,909 2 4,926 212 3,106 6,240
1
Other $k 85 117 121 46 7 -215 -123 0
Total quarterly cash flow $k 996 -790 944 -1,112 3,607 -2,714 42 4,390
Quarter end cash $k 1,999 1,209 2,153 1,041 4,648 1,934 1,976 6,366
SOURCE: COMPANY DATA
NOTE: 1. INCLUDES RECENT CAPITAL RAISING OF $6.5M NET OF COSTS
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Magnis Resources Ltd (MNS) 25 March 2015
Nachu Graphite Project (MNS, 100%)
Location and background
Nachu is located approximately 75km west of the coastal city of Lindi, Tanzania. The
Nachu project was discovered in March 2013 by MNS and a mineral resource was
delineated in November 2014. The Nachu tenement covers an area of around 199km
2 in
southern Tanzania.
The Nachu mineral resource is split into 5 deposits, namely Block B, D, F, FSL and J.
Approximately 87% of graphite in ore is located in the large and jumbo flake sized
category. A pre-feasibility study on the Nachu project was completed in December 2014. A
definitive feasibility study is expected to be completed by mid-2015. An environmental
impact study is progressing and receipt of mining approvals is expected in Q3CY2015.
Figure 2 - Location of Nachu Project Figure 3 – Location of Nachu deposits
SOURCE: COMPANY PRESENTATION SOURCE: COMPANY PRESENTATION
Geology, resources and reserves
Mineralisation is hosted in graphitic schist within a sequence of meta-sedimentary schists
with minor un-mineralised dolomitic marble and gneisses within the greater Mozambique
Metamorphic Belt. Mineralisation occurs at or near surface across all five deposits. Over
85% of the total mineral resource occurs less than 150m from the surface making it
amenable to open pit mining.
MNS’s tenement is largely unexplored and the mineral resource makes up only 2% of the
Nachu tenement area. A large proportion of the flake graphite size is categorised in the
higher value large and jumbo categories. In particular, the Block F deposit is significant in
size and has been identified as the area hosting the largest resource of graphite. Block F
contains up to 88% of product in the large and jumbo flake graphite categories.
Nachu’s initial 16 year mine life is based on the Blocks F and FSL deposits. There is scope
to increase mine life to up to 40 years, should the other deposits be included in the mine
schedule and feasibility study.
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Magnis Resources Ltd (MNS) 25 March 2015
OPEX and CAPEX estimates
The following table outlines MNS’s CAPEX and operating cost estimates for the first three
years of production. The average life of mine cash costs are higher at US$473m and
reflects some higher strip rates in subsequent years.
Table 7 – Nachu CAPEX estimates Table 8 - Nachu operating cost estimates (first 3 years)
Capital costs US$m
Process plant directs and indirects 88.7
Associated infrastructure, dams, camp, port facilities 37.8
Power Plant 8.3
Pre-production owners, roads, environmental, social 20.0
Contingency 16.6
Total 171.4
Operating costs US$/t
Mining 153
Processing 111
Power 64
General and administration 48
Product logistics 72
Total 448
SOURCE: COMPANY REPORTS SOURCE: COMPANY REPORTS
Offtake secured for 100% of production
MNS has secured offtake for 100% of production through the following offtake agreements:
- SINOMA offtake for 80ktpa:
On 17 December 2014, MNS signed a binding offtake
agreement with China National Materials Industry Import and Export Corporation
(SINOMA). SINOMA is the subsidiary of the major state owned enterprise, China
National Materials Group Corporation and is a major supplier of graphite to the Japan
and China battery market. The offtake agreement follows SINOMA’s evaluation of
graphite samples and covers 80ktpa of graphite flake over an initial period of five
years, with an option to renew for a further five years.
- Sinosteel offtake for 100ktpa:
On 29 December 2014, MNS signed a binding offtake
agreement with Sinosteel, Liaoning (Sinosteel). The offtake covers 100ktpa over an
initial period of 10 years, with an option to review for a further five years. Sinosteel
intends to process the graphite for the electric vehicle market.
The above offtake agreements will be linked to the prevailing market prices at the time of
sale.
Mining, processing and infrastructure
MINING AND PROCESSING VIA STANDARD PROCESSES
Extraction of mineralised ore will be undertaken via shallow open cut mining (using truck
and shovel) of Block F and then the F South resource, through owner mining. The life of
mine strip ratio is estimated at 2:1. Mining nameplate throughput rates are estimated at
around 4Mtpa life of mine.
The processing plant is based on a relatively standard crushing, rod mill grinding and
flotation process. Several stages of regrind and cleaner flotation have been included.
Recent metallurgical testing regularly resulted in a graphite concentrate grading up to
94.4%. Total Graphitic Content (TGC) can be produced using basic flotation, with
subsequent caustic leaching of the concentrate refining the graphite up to 99.4%. No
deleterious elements or materials such as vanadium or uranium were found in metallurgical
tests to date.
INFRASTRUCTURE AND PORT
The Port of Mtwara is located approximately 200km from the Nachu site by road, and has
an export capacity of 400ktpa, with only approximately 136ktpa currently being utilised.
Water will either be sourced by a borefield supply or water abstraction and storage from
the Mbwemkuru River, located close to the project. Power will be supplied by onsite
generators capable of operating with heavy fuel oil or diesel. A camp close to site will be
established to accommodate the local workforce.
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Magnis Resources Ltd (MNS) 25 March 2015
Summary of the Graphite market
Graphite is one of two naturally occurring allotropes of carbon (diamond is the other) that is
used in a number of high end industrial applications. It is considered a good conductor of
heat and electricity and has the highest natural strength and stiffness of any known
material. Graphite occurs in metamorphic rocks as a result of the reduction of sedimentary
carbon compounds during metamorphism. Some graphite occurs in igneous rocks, and
can also form as a result of thermal metamorphism of coal. The global graphite market is
currently around 2.2Mtpa in size, split evenly between natural and synthetic graphite.
Natural graphite market (approx. 1.1Mtpa market size)
There are three principal types of natural graphite:
- Flake graphite (approximately 500ktpa):
Flake graphite is the most common form of
high-grade graphite and makes up around 45% of the natural graphite market. It
occurs in host rocks such as quartz-mica schist, felspathic or micaceous quartzite and
gneiss. Flake graphite is found in relative abundance and commands the highest
demand due to its versatility. Prices of graphite vary according to flake size and purity
with larger sized flake products commanding premium pricing. Flake graphite usually
has a graphitic carbon range of 80-98% and is generally used in higher end
applications such as battery anodes, lubricants and brake linings.
- Lump or vein graphite (approximately 10ktpa):
Lump or vein graphite is the rarest
and most valuable form of graphite and is a true vein mineral. It occurs in commercial
quantities in Sri Lanka and represents only 1% of the graphite market.
- Amorphous graphite (approximately 600ktpa):
Amorphous graphite is the least
valuable and most abundant form of graphite, accounting for around 55% of the
natural graphite market. It usually occurs within coal seams, is difficult to extract and
results in a lower quality and priced product. It is typically higher in ash than other
forms of natural graphite and generally has a graphitic carbon range of 75-85%.
Amorphous graphite is mainly used in refractory applications.
Synthetic graphite (approx. 1.1Mtpa market size)
Synthetic graphite is produced by high-temperature treatment (2,800-3,000 Celsius) of
amorphous carbon materials, such as calcined petroleum coke and coal tar pitch. High
purity levels can be achieved through the production of synthetic graphite and the
electrochemical properties are roughly the same as those of natural graphite.
Synthetic graphite is used in a number of applications including in electric arc furnaces,
lithium-ion batteries, lubricants and brake linings. Synthetic graphite holds a large
percentage of the high-end lithium-ion batteries market used in electric vehicles, yet costs
significantly more (five to 10 times) than the cost of making spherical graphite (for use as
anodes in lithium-ion batteries) using natural graphite.
Supply: The majority of graphite is produced by China
China is a major producer of both flake and amorphous graphite. Approximately 67% of
global natural graphite supply was produced by China in 2012. Of this amount,
approximately 70% is lower value fine sized flake and amorphous graphite.
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Magnis Resources Ltd (MNS) 25 March 2015
The majority of Chinese graphite mines are small and seasonal. Labour and environmental
standards are typically sub-standard. We understand that the Chinese government has
announced plans to consolidate and rationalise its 230 mines down to around 20 to
address environmental concerns, which is expected to reduce production capacity by
around 15%.
Figure 4 – Mine production market share 2012 (natural graphite) Figure 5 – historical mine production (natural graphite)
SOURCE: UNITED STATES GEOLOGICAL SURVEY SOURCE: UNITED STATES GEOLOGICAL SURVEY
Demand: Lithium-ion batteries to drive future growth
Graphite demand has grown at an annualised rate of around 5% over the past decade.
Due to its thermal and electrical characteristics, graphite is used in a number of industrial
applications. The majority of graphite demand currently comes from the steelmaking and
refractory industries, accounting for 41% of demand.
Batteries currently make up a small proportion of graphite demand. Graphite use in lithiumion
batteries is expected to drive the future growth in the graphite industry in the medium to
longer term. Lithium-ion batteries are being used in hybrid electric vehicles (HEV), plug-in
electric vehicles (PEV) and all electric vehicles (EV). The average HEV uses up to 10kgs of
graphite and the average EV uses up to 70kgs. Industry bodies estimate flake graphite
demand to grow at an average rate of 20% per annum in the medium term, as more
electric cars come onto the market. Only high quality flake or synthetic graphite which can
be upgraded to 99.9% purity can be used to make spherical graphite used as anodes in
lithium-ion batteries.
US electric vehicle manufacturer, Tesla Motors, is planning to construct a US$5Bn
production Gigafactory, due to be operational in 2016, which is expected to increase its EV
production from 35,000 vehicles in 2014 to around 500,000 vehicles by 2020.
Figure 6 – Natural graphite demand 2012 Figure 7 – Global forecast production of EVs/HEVs (000’ units)
SOURCE: UNITED STATES GEOLOGICAL SURVEY SOURCE: ROSKILL (2012)
Brazil, 7%
Canada, 3%
China, 67%
India, 15%
Korea,
North, 3%
Other, 7%
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Million tonnes
China India Brazil North Korea Canada Other countries
Steel and
refractories,
41%
Carbon
brushes, 11%
Automative
parts, 14%
Lubricants,
14%
Batteries, 10%
Other, 10%
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Magnis Resources Ltd (MNS) 25 March 2015
Other Assets
Mkuju Uranium Project
The Mkuju Uranium Project (MNS, 100%) is located in Southern Tanzania and comprises 6
granted licences and applications and covers a total area of around 730km
2. Mkuju
consists of five separate prospect areas containing extensive uranium anomalism including
Likuyu North (5km strike length), Likuyu South (18km), Mteramwahi South (19km) and
Mteramwahi North (17km).
A mineral resource for the Likuyu North project was completed in April 2012 as shown in
Table 10. Mineralisation remains open in a number of directions at Likuyu North.
Table 9 - Mkuju mineral resource estimate
Cut off
U3O8ppm
Grade
U3O8ppm
Contained
U3O8
(million
pounds)
Mkuju 100 237 6
Valuation – risked discounted cash flow of Nachu project
Our MNS risked valuation of $0.33/sh is based on:
Discounted cash flow of the Nachu graphite project, based on production rates of
180ktpa of graphite concentrate at total average operating cash costs of around
US$540/t and CAPEX of US$205m. We have assumed operating cash costs and
CAPEX estimates of around 20% higher than those used in the PFS study. We have
risked our valuation by 0.6x to account for construction, development and financing
risks. We have adopted a WACC of 12%, which is higher than the WACC we would
typically apply to Australian based mining projects to account for sovereign risk;
A $82m capital raising at $0.22/sh in 2HCY2015 to take into account the project’s
financing dilution. We have assumed a 70%:30% debt:equity split; and
Bell Potter long term pricing assumptions.
Risks of investments
- Government approvals and permitting:
To commence development of the Nachu
graphite project, MNS must receive the necessary Tanzanian approvals and obtain all
the requisite environmental and mining licenses.
- Mine and infrastructure development:
Project development is a key risk in terms of
time and cost over-runs. Delays and cost over-runs can substantially impact the
economic returns of its projects
.
- Commodity price and exchange rate fluctuations
. The future earnings and
valuations of exploration, development and operating resources companies are
subject to fluctuations in underlying commodity prices FX exchange rates.
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Magnis Resources Ltd (MNS) 25 March 2015
- Operating and capital cost fluctuations.
Markets for exploration, development and
mining inputs can fluctuate widely and cause significant differences between planned
and actual operating and capital costs. Key operating costs are linked to energy and
labour costs.
- Resource growth and mine life extensions.
Future earnings forecasts and
valuations may rely upon resource and reserve growth to extend mine lives.
- Regulatory changes risks.
Changes to the regulation of infrastructure and taxation
(among other things) can impact the earnings and valuation of mining companies.
- Operating and development risks.
Mining companies’ assets are subject to risks
associated with their operation and development. Risks for each company can be
heightened depending on method of operation (e.g. underground versus open pit
mining). Development assets can be subject to approvals timelines or weather events,
causing delays to commissioning and commercial production.
- Funding and capital management risks.
Funding and capital management risks can
include access to debt and equity finance, maintaining covenants on debt finance,
managing dividend payments, and managing debt repayments
- Sovereign risks:
Tanzania is considered to have a higher sovereign risk than
Australia and MNS will be subject to these risks. Tanzania was granted independence
in 1961 and is the 4
th largest African gold producer. MNS has a high level of
government and local community support and has been operating in Tanzania since
2005.
Page 17
Magnis Resources Ltd (MNS) 25 March 2015
Magnis Resources Ltd
as at 25 March 2015
Recommendation
Buy, Speculative
Recommendation structure
Buy:
Expect >15% total return on a
12 month view. For stocks regarded
as ‘Speculative’ a return of >30% is
expected.
Hold:
t total return between -5%
and 15% on a 12 month view
Sell:
Expect <-5% total return on a
12 month view
Speculative Investments are either start-up
enterprises with nil or only prospective
operations or recently commenced
operations with only forecast cash flows, or
companies that have commenced
operations or have been in operation for
some time but have only forecast cash
flows and/or a stressed balance sheet.
Such investments may carry an
exceptionally high level of capital risk and
volatility of returns.
(20min delay)