What does this mean for GPX’s Chilalo large flake graphite...

What does this mean for GPX’s Chilalo large flake graphite project?

• The failure of SYR’s Balama project will have given the market good reason for concern. If a so-called Tier 1 project (which in our view it is not) can fail, surely all other graphite projects are destined for difficulty. This is not the case, in our view.

• The following table summarises GPX’s price deck from the PFS reported in September 2018. (See Appendix 2 for conversion of mesh sizes to microns).

• LSTM are suggesting that prices of over US$3000/t (FOB) can be achieved for +32 mesh materialcompared to GPX’s price deck of US$2540. + 50 mesh (and less than 32 mesh) prices from LSTM have been the strongest performer recently, at around US$2400/t. GPX’s assumptions are around US$1750/t for this size fraction. Could there be upside to the GPX price deck. LSTM’s numbers suggest that.

• And to the fine flake products, under 150 microns (or -100 mesh): GPX’s assumption of US$583/t doesn’t look out of the ballpark. It does against prices SYR have achieved, prices which represent the activities of a forced seller.

• To conclude, we believe GPX’s price deck is realistic, and possibly even conservative. The message from the failure of the SYR/Balama strategy is (1) know your market and (2) manage your way into that market by not overwhelming that market with unwanted product. GPX’s CEO Phil Hoskins has been preaching this to the market for many years.

• There could well be a price and volume ramp-up period, perhaps over a year or 2. We await further clarity on this matter in the Chilalo BFS.


Our investment thoughts on GPX

The following comments are updated from our August 2019 research report on GPX. A copy of this report can be made available.

• Based on our assumptions, GPX is remarkably inexpensive. Even if we assume our valuation is wrong by a factor of 2, or even 3, the stock is still dramatically under-priced.

• We understand that Tanzanian resources exposures should trade at a discount. But with an imminentresolution of the Acacia situation (the takeover by Barrick is due to complete on 17/9/19), we believe the country is open for business. Our country visit earlier in the year confirmed this view.

• We also note that Orecorp, owner of the Nyanzaga gold project received key approvals from the Tanzanian Government on 16 September. The re-activation of the Tanzanian mining industry appears to be underway.

• Our recent experience in the graphite sector suggests investors still do not understand the graphite sector. It is a small industrial mineral sector, and commodity supply/demand dynamics are far from clear. To use Syrah Resources as a benchmark is simply comparing apples and oranges. GPX is not trying to participate in the fine flake graphite market.