SVM is a graphite play in Malawi backed by the best in the business, Ian Middlemas.
Everyone will be aware that graphite plays a crucial role in the battery revolution and I won't spend long talking about the supply and demand. Having said that, batteries currently make up 15% of total demand for the metal (expected to increase) and currently 60% of the demand is in refractories so there is without doubt plenty of extra demand to come for the metal via the battery space.
It is one of the only battery metals not to have had a spectacular run in the spot price. Perhaps it could be next..
The SVM ship is being run by Ian Middlemas as Chairman. Middlemas is one of the best, if not the best, going around when it comes to bringing these projects online and making extreme bags for investors in the process. Look no further than AON, WCP/PLL, BKY for examples of Middlemas multi-baggers. He has filled his boots in the recent placement highlighting the confidence he has in this project - he wouldn't be taking a huge chunk otherwise and always happy to follow inside money. Money speaks more volume than words!
SVM has the luxury of having a soft red saprolite cover hosting the graphite. What this means is, unlike the hard rock deposits in Western Australia, SVM does not require expensive drills and explosives, as well as crushing and sorting machinery which helps to dramatically undercut the capex figures for the project. Speaking of capex, the scoping study has estimated a total capex expenditure of just US$29m. This can be combined with the lowest opex of any graphite mine due to the simple extraction process through the soft saprolitic cover that requires no crushing. Infrastructure is all existing; they are able to share (currently an MoU) Vale and Mitsui's purpose built railway and have easy access to labour given the site is just 20km out of the capital city of Malawi.
The scoping study has estimated opex costs of $300/t. As a conservative estimate a $1200/t graphite price was used indicating $36m in FCF per annum based off annual production of 44,000t p.a. (and a 17 year mine life). Thats $900/t free cash flow! The highest of any worldwide project. Refer chart below.
Given these figures it's not surprising that the payback period on the project is set to be less than 1.5 years. If you include in that the high likelihood of scale benefits (already hinted at by management) which may see the annual production rise to ~75,000t p.a. then you start getting pretty absurd figures in terms of profitability and payback periods on the initial capex. As a result, funding should simply be a quick formality rather than a dragged out painful process.
Because of such low operating costs per tonne, SVM has the advantage of not having to rely on leverage in underlying metal price movements. It minimises the project risk significantly. They can actually market their product using the basis of simply the traditional refractory and other uses of graphite unlike many other graphite plays which require higher graphite prices to supply battery markets. Obviously, at those margins SVM can cater to any market thrown at them.
With graphite, there are 2 key indicators for the price received from the graphite when all is said and done that will ultimately impact bargaining power when dealing with offtake agreements and final buyers. Firstly, the carbonate levels within the graphite. On average carbonate levels tend to be ~95%; SVM hosts approx 97-98% and so falls in the higher range. Secondly, the coarse nature of the graphite. The scoping study has shown SVM to produce coarse graphite, another tick in the box.
As far as geopolitical concerns go, Malawi might not sound like the most stable of jurisdictions, however in actual fact it has proven to be extremely stable to corporate miners. Many big players including Vale are situated close to SVM's project. Corporate tax rates are 30% and the royalty paid to government is 5%. Management, in particular Julian Stephens, has extensive experience with projects in Malawi and has developed the required connections within government to ensure the best possible chance of success. The Minister of Mining in Malawi said this of SVM: "The government actively encourages foreign investment in Malawi's mining industry, and provides a friendly and stable environment for investors. To this end, the Government of Malawi offers its full support and assistance to Sovereign Metals in order to develop Malawi’s first flake graphite operation at Malingunde.”
The share price has seen some selling pressure recently from the placement to instos and sophs however I expect this to be just short term pressure given the potential upside explained above. SVM is set for plenty of newsflow in 2018 beginning with January 2018 assay results from Malingunde and the extension drilling program from South Malingunde. Offtake agreements and further work programs to confirm viability are penned in by mid 2018 and the completion of the PFS slated for late 2018.
The recent selling just provides an opportunity for a cheap entry. Good luck anyone that decides to play it with me.
