Graphite Update: Kibaran, Magnis, Syrah, Focus And Stratmin
Aug. 26, 2015 8:40 AM
Summary
- Growth in the use of lithium ion batteries, driven partly by increased production of electric vehicles will increase demand for the materials used in battery manufacturing.
- Graphite is currently the preferred material for the anode of the li-ion battery and demand for graphite is forecast to increase significantly in the next decade.
- China supplies about 70% of the world's graphite, but Chinese supplies are limited, and other sources will be needed if the growth in li-ion battery use follows the forecasts.
- In a previous article I looked at some of the junior mining companies that were more likely to provide that new supply.
- This article provides an update on some of the recent developments in the industry.
New supplies of graphite will have to be brought on line to meet the growing demand for lithium ion batteries.
A
previous article evaluated some of the junior miners who could become suppliers of graphite.This current article provides an update to some of the developments in the graphite mining sector. Readers should refer to the previous article and
previous update for more details.
Investors should be aware that many of these companies have market caps below $100 million, and share prices of less than $1. Investments in junior miners can be rewarding, but is highly speculative.
For the Australin based companies, it is best to use the ASX, where trading volumes are reasonable, rather than the US based OTC boards.
Kibaran Resources
Australian based Kibaran Resources recently issued the results of their
Bankable Feasibility Study for the Epanko graphite project in Tanzania.
Estimated capital costs for the 40,000 tpa mine and processing plant are $77.5 million, an increase of about 30% from the figure published in the scoping study. Operating costs are estimated at $570/tonne FOB port of Dar es Salaam, versus $489/tonne in the scoping study.
The bankable feasibility used slightly higher graphite prices, primarily driven by higher grades and larger particle size assumptions resulting from ongoing process test-work. The estimated Net Present Value (NPV10) of the project is $197 million (compared to previous estimates of $213 million).
Kibaran has its mining permit in place, and has take-off agreements for 75% of its proposed annual production, including a binding agreement for 10,000 tpa with an un-named European graphite trader, and
recently announced an off-take agreement for 20,000 tpa with German conglomerate Thyssen-Krupp who will market the graphite in Korea, Russia and Europe.Thyssen-Krupp is also assisting the company in their efforts to obtain funding for the project.
Kibaran's graphite is very high quality, with a high proportion of large and jumbo flake sizes and a purity that meets or exceeds typical specifications. Tests have indicated that the graphite has superior expansion qualities, and can be upgraded to 99.98% purity with a simple one-step process. It is therefore suitable for both the expandable graphite and the li-ion battery market, two of the fastest growing sectors of the overall graphite market.
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scoping study, published one day before the bankable feasibility study, evaluated the option of upgrading the graphite to produce value added products including battery grade spheroidized graphite. This study estimated a capital cost of $35 million for the upgrading plant, with a pre-tax NPV10 of $115 million and IRR of 51%. Annual production would initially be 6,000 tonnes of battery grade spherical graphite, 5,000 tonnes of expandable graphite and 4,000 tonnes of other purified products. The assumed blended selling price used in the study was $2,550/tonne, and production costs were estimated at $1,350/tonne. The assumed selling price for a 99.98% purity product, including spheroidized battery grade graphite is conservative when compared to studies done by other companies. Zenyatta (
OTCQX:ZENYF), for example, has assumed a blended selling price of $7,500/tonne for a product of similar purity.
Kibaran's market cap of $AUS 31 million ($US 22.5 million) is only 11% of the estimated net present value of the Epanko project, and only 7% of the net present value if the upgrading plant is added. This ratio is significantly lower than its peer companies on the Australian exchange (Magnis, Syrah and Triton), who are also developing graphite projects in Africa. Kibaran is proposing a relatively small initial production rate compared to the others, and has negotiated its take-off agreements with European rather than Chinese companies, both factors which I consider positive.
Given the advanced state of the project, the take-off agreements, the high quality product and the low market cap compared to the value of the project, Kibaran should be considered a speculative buy at the current price of $AUS 0.17.
Syrah Resources (
OTCPK:SYAAF)
Syrah Resources recently issued a
scoping study for the construction of a plant in the USA to produce 25,000 tpa of coated, spherical graphite for the lithium ion battery industry. The obvious target for the product is the Tesla (NASDAQ:
TSLA) giga-factory under construction in Nevada. When it reaches full production the Tesla factory is expected to use upwards of 50,000 tpa of battery grade spherical graphite.
Tesla has stated that they intend to source raw materials locally where possible, and there are no producers of battery grade natural graphite in North America. This has led some analysts to conclude that several new graphite mines will be required to supply the Tesla factory. However, this speculation may prove to be false. Tesla car batteries now use synthetic graphite, and may continue to do so, even though natural graphite is a cheaper alternative.
Using raw materials from its Balama graphite project in Mozambique, Syrah estimates that the capital cost of a plant to produce coated, spherical graphite in the USA would be $80 million, and the estimated free cash flow from the operation would be $104 million/year. That equates to an IRR before tax of 130% and an NPV of about $700 million, which at first glance seems like an incredibly good investment. The drawback of course is that outside of Tesla, there is no significant demand for battery grade graphite in the USA.
Most battery makers in Japan and Korea typically buy uncoated spherical graphite from China, and use their own proprietary coating processes. There is very little trade in coated spherical graphite, and the assumed selling price of $7,000/tonne may not hold up in a market that is based on open competition with multiple suppliers. The US based coated spherical graphite plant should be looked on as a future opportunity, but it adds little value without some kind of sales agreement to back it up.
Syrah also announced a share offering to both institutional and retail investors, with the intent of raising $AUS211 million to finance the development of the Balama graphite project. As of August 21st, the institutional component of the offer had raised $AUS166 million, the retail offer closes August 26th
Syrah will very likely be the first of major graphite mines to enter production, but one key question remains to be answered. The proposed annual capacity of the Balama plant is 370,000 tonnes per year which is about 60% of the total world graphite supply and almost 100% of the world's flake graphite supply. Selling 370,000 tonnes per year into the traditional graphite markets is obviously not a viable plan, even allowing for reductions in Chinese supplies and high growth in li-ion battery use.
Presentation materials prepared for the capital raising provide a partial answer to their intent. About 220,000 tonnes per year is targeted to be sold to the iron and steel industry as a recarburizer, where it will compete with calcined petroleum coke as the material of choice. That market is over 3 million tonnes per year. An MOU with European trader Asmelt for 100 to 150,000 tonnes per year is key to that market penetration. An announcement of successful completion of test-work, and conversion of that MOU into a binding agreement is likely to give the share price a boost. However, if that doesn't happen, doubts about the potential volume of sales may well create significant headwinds.
Stratmin Global Resources
Stratmin Global Resources has been struggling for some time to achieve the design production rates and graphite quality at their Loharno graphite mine in Madagascar. The mine and processing plant was built on a shoestring budget, and mistakes were made in the initial design which have proven difficult to remedy.
Stratmin recently teamed up with Indian graphite supplier, Tirupati Carbon and Chemicals, who have provided technical expertise to the project. Production was recently reported to be up to 900 kg/hr, equivalent to about 7,500 tonnes per year. Although not likely to have much of an impact on the graphite market, that level of production will be enough to provide a positive cash flow and a chance to expand in the future using cash flow from the existing operation.
I would not invest in Stratmin until they demonstrate that they can produce the design volumes and quantities at the Loharno mine. However, I am keeping it on my watch list, with an intent to invest when I see proof that they have overcome the technical problems at Loharno.
Focus Graphite (
OTCQX:FCSMF)
Focus recently
parted company with CEO, Don Baxter, and replaced him with Gary Economo who is also CEO of affiliate company Graphoid. This move was followed by an announcement of
two non-binding off-take agreements between Focus and Graphoid for a total of up to 26,000 tonnes per year of production.
I don't think anyone was fooled by this ploy. Focus has been trying desperately to raise financing for the Lac-Knife project since issuing their feasibility study over a year ago. Signing a non-binding agreement with an affiliated company that has no meaningful revenue, and may or may not have a use for the materials is not likely to make any impact with prospective investors.
Focus' problems illustrate the difficulty of financing projects on the TSX at the moment. They have a viable graphite deposit, with an acceptable rate of return and a product which is at the high end of the quality spectrum. However, there is simply no money available to advance the project, and all the company can do is raise small amounts of cash to keep itself alive, hoping for a turn-around in fortunes.
I would steer clear of all of the TSX listed graphite juniors, for the same reason.
Magnis Resources (
OTC:URNXF)
In a previous article I recommended Magnis Resources as one the better investments in the graphite space. On July 22nd, a
positive report in Australian Financial Reviewgenerated some interest in the company and the share price has since more than doubled on higher than average volume.
Magnis has also recently
achieved up to 99.2% graphite purity in a flotation concentrate, without any chemical upgrading. This means they will be able to produce graphite for higher priced, high purity applications at very low cost.
However, the recent increases in Magnis' stock price has raised its market cap to over $US100 million, and the shares could be significantly diluted in the future by the exercise of a huge number of outstanding 10 cent options.
In view of the recent price increases, I am reducing my holding in Magnis, and using the proceeds to invest in Kibaran.
Disclosure: I am/we are long SYAAF.
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 have long positions in Syrah, Magnis and Triton on the Australian exchange and intend to initiate a position in Kibaran.
http://seekingalpha.com/article/3467616-graphite-update-kibaran-magnis-syrah-focus-and-stratmin
Nice to see word getting out there at how undervalued KNL is.
