size matters

Picked this up on the main thread. worth a read .
Major Chinese steel company Sinosteel Liaoning Co and state-owned China National Materials Industry Import and Export Corp (SINOMA) last year signed up for binding offtake agreements in order to get their hands on the concentrate from Magnis Resources’ Nachu graphite project in Tanzania. The reason: the size of the graphite flakes on offer.

There are experts who will stand up at a graphite conference and speak of the glut of supply to the graphite market, and to a large extent they’re spot on. The price for medium-to-fine graphite product (fine: <150 microns; medium: 150-180 microns) has been on the slide and Magnis chairman Frank Poullas expects the price to drop even lower by the time Nachu makes it into production late next year.

“China has huge reserves of graphite and other companies have over 1 billion tonnes in resources,” Poullas told Mining Journal. “They may have high grade but they have limited amounts of jumbo and super jumbo sized flakes.”

The market is flooded with this smaller size material.

At the same time, however, consumers have been starved of the bigger sizes – the large (180-300 microns), jumbo (300-500 microns) and super jumbo (>500 microns) flakes.

The larger flake size is a major factor in the amenability of graphite concentrates to downstream processing. The rule of thumb is the larger the flake in the concentrate, the more efficient (read: cheap) it is as a feedstock for processors. This is acutely the case for Li-ion battery manufacturers that feed the growing electric car market.

Nachu’s 156 million tonne resource is full of the chunky stuff.

Just as importantly, the resource is free of vanadium and uranium, which are found in many deposits. Though vanadium has its uses in the steel sector so is not always considered a contaminant, uranium is consistently a nuisance. Producers with deleterious material have to grind it out to get a clean concentrate and in doing so grind down the flake size to a less desirable product.

Metallurgical results validated by third party testing have shown that 87% of the Nachu resource is large-to-super jumbo sized flakes. Almost 70% of the resource is jumbo or super jumbo.

This contrasts baldly against the percentages of large-to-super jumbo flakes within the resources of Magnis’ peer group.

The caveat on these comparisons is that the way of classifying flake size and the terminology is not uniform. According to Tech Metals Research, what some companies will refer to as large is what others may term medium and what is jumbo to some may be super jumbo to others, and so on.

To understand Nachu’s superiority, it is best to compare flake sizes in microns then convert back to the Magnis terminology as the standard.

There is daylight between Nachu and the next best resource in terms of flake size. Sovereign Metals’ Central Malawi project is the closest with 33.5% jumbo or above and 29.3% medium-large flakes. Kibaran Resources’ Epanko deposit in Tanzania is also competitive with more than 50% in large or above flakes.

There is more daylight before another grouping of juniors with resources dominated by medium-sized flakes and smaller.

The price the market will pay for larger flakes reflects its desperation. Super-jumbo flakes fetch US$6000/t, jumbo flakes go for US$3000/t, while large flakes are worth US$1400/t.

Meanwhile, medium flakes are worth just US$900/t and fine material goes for about half as much again.

The effect this has on project economics is obvious.

Magnis’ prefeasibility study delivered a couple of months back suggested a net present value (post-tax; 10% discount) of US$1.04 billion, an IRR of 84%, and a payback on capital within 18 months. The capital expenditure is a manageable US$171.4 million with operating costs of less than US$450/t and an assumed basket price for flakes of US$2110/t.

As mentioned, Nachu already has its first customers that have signed binding agreements for all the material (including fine-to-medium sized flakes) at market prices. The deals cover 180,000tpa of production for five (SINOMA) and 10 (Sinosteel) years with options to extend over both.

The company went into a trading halt last Friday and given it is known to be in financing and offtake discussions, further progress on one of these fronts should be expected this week.

Brandon Hill Capital corporate broker Alex Walker said his firm had run the ruler over the handful of small scale producers as well as the crop of emerging graphite players and Magnis was the only one that had impressed.

“There are 30-odd listed graphite companies and I really think this is the only one that will get into production of significant scale,” he told Mining Journal.

“These guys have done in eight months what it has taken most other companies years to do – and most are still not there, yet.”

Magnis plans to have its environmental study and bankable feasibility completed in the first half of this year. Mine approval should follow in the third quarter, which will trigger a 12-month construction period for production at the end of 2016.

Given the industry support and spectacular economics, finance should be a doddle even in current markets.

Should Magnis graduate to producer in 2016 it would represent a rapid advancement from a maiden mineral resource in November last year. This opportunity is only possible because of industry backing, which is only forthcoming because of the Nachu’s jumbo flakes.

This is proof that in the graphite sector it is size rather than grade that is king