Some reflections on recent announcements and discussions

I thought it may be worthwhile to share my review on the Niska announcement and the Benchmark video conference this week. I tend to conduct a full review of any investment I have on the back of any major announcement. This is my personal assessment and therefore readers should undertake their own due diligence. I hold the stock but indicate no sentiment in the thread so that readers can draw their own conclusions.

I will start with Niska since it is an announcement that has been some time coming. I had been expecting a Scoping Study based on around 57,000 tons of anode material as this is what has been hinted at in previous announcements indicating customer interest 300% of the pre feasibility study (PFS) dating from 2019. The announcement details a Scoping Study that is very close to a PFS level exercise with net present value (NPV) of between US$ 2.43 billion to US$ 4.65 billion, internal rate of return (IRR) of 47% (only slightly down from the very commendable 55% in the PFS) and payback period of just 1.7 years clearly stated. Credible companies such as TLG have been at pains to meet not only the letter of ASX requirements, but also the spirit. I was therefore very pleasantly surprised that it came in at almost twice my expectations: 19,000 tons graphite based anode material from the PFS and a new project for 85,000 tons of additional graphite based anode material from the robust Scoping Study; plus an additional 8,500 tons of graphene based anode material for the Talnode-Si product. I assume from previous comments from Mark Thompson, MD of TLG that the bulk graphite based anode material is earmarked for the Talnode-C product. I note that TLG's JORC Indicated Resources of some 6 million tons of graphite have been discounted by 20% before being committed to the Scoping Study. I ignore Inferred Resources as, in my opinion, their quality is not sufficiently delineated. The net present value of both projects from the PFS of US$ 1.056 billion and the Scoping Study of US$ 2.43 billion, to err on the side of conservative caution, amount to around Aus$ 4.6 billion at current exchange rates, which equates to Aus$ 17.45 per share. The current share price represents a 90% discount, which would suggest that TLG is a very long shot likely to fail.

I have listened to the Benchmark conference videos that have been made available via TLG's website. I will summarise my conclusions:

A significant supply side material crunch is looming in virtually all the major raw material components required for EV batteries. Elon Musk implores the world's mining giants to please produce much more nickel asap. The deteriorating geopolitical environment leaves the world exposed to supply chain issues with China, who provide the vast majority of the required graphite battery grade material currently in use and dominate the market. The lithium space has exploded with Independence Group in Australia announcing the US$ 1.4 billion acquisition of the Greenbushes mine in Western Australia, geothermal projects in Cornwall and Germany and major expansion of brine projects in South America. The cobalt story is even more scary with imminent depletion of known reserves at current production levels, never mind the multiples required for forecast demand to the end of the decade. A Benchmark analyst suggests that there will be price pressure on all sources of graphite, even needle coke which is the hydrocarbon starter material for synthetic graphite with all the associated imbedded high level CO2 emissions. This suggests that the price assumptions in the PFS and Niska Scoping Study are extremely conservative as not all the planned gigafactories that are planned will have access the necessary graphite material to run through their plants. This was made patently clear from the discussion by the UK presenters on the last video conference section. In fact the UK has no graphite material of its own, which would explain why the UK government has offered financial support to TLG to supply some of the UK's expected needs of 200,000 tons of graphite anode material and more specifically the high performance silicon product.

This review also needs to address whether the priorities of the customers has changed. The commercial world for EV batteries can be segmented as follows: North America, Europe, Asia ex China and China. My understanding of the priorities in order of importance is as follows:

Price, always price. TLG ticks the box as it is able to compete on price with even the most aggressive Chinese suppliers.
Control of the supply chain. TLG ticks the box as it owns 100% of the tenements in a European Tier 1 jurisdiction.
CO2 footprint. TLG ticks the box as it has natural graphite processed with very low cost 100% renewable energy.
Performance of the material. TLG ticks the box with outperformance in many aspects backed by well established in house R&D.
Ability to execute. TLG ticks the box with agreements with LKAB on mining, ABB on manufacturing and Mitsui & Co on finance and distribution.
Proximity to market. TLG ticks the box with direct rail link to customers in Europe.

The Benchmark conference was also a great opportunity to review the competition. I have dismissed any producer using synthetic graphite on the grounds of underlying imbedded CO2 footprint and potential supply chain risk, even if the manufacturing enjoys the same low cost renewable energy as TLG on the basis that the EU will impose CO2 penalties amounting to higher cost. ELKEM in Norway falls in this category. The MRC's Skaland deposit in Norway mirrors the grade of TLG's deposit, but is very much smaller at around 400,000 tons contained graphite in the ground including all the Inferred Resource representing 75% of the total. Skaland is in production, but not as an upstream graphite anode material and therefore does capture the margin up the supply chain.

TLG has demonstrated that it has attracted financial support from national governments. The financial metrics from the PFS and the Scoping Study are exceptional such that failure for want of finance is most unlikely as TLG has a range of available options open to it. TLG has derisked the execution by associating with major local Swedish companies such as LKAB, ABB and others. TLG has demonstrated its R&D ability with volume higher value products such as Talnode-Si for assessment with users. TLG has a consistent track record executing a strategy to extract the most value from its unique graphite deposit.

The only aspects that may attract a discount are that production is 2 years away and that TLG is a small company in a very big pond. On the latter point I would argue that TLG is taken very seriously as evidenced by its inclusion in any discussion in the European battery grade graphite space. The 90% discount appears excessive in the circumstances, a 75% to 70% discount might be more appropriate on the most conservative basis, reducing to 50% by the end of 2021 as more components fall into place over the next 12 months.

I also look forward to the drilling program outcomes in the next quarter announced in mid September 2020.

As stated above, this review is not a recommendation, it is my personal assessment, so please do your own research.