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8 March 2017
ASX CODE: GPX
Speculative Buy
Graphex Mining Ltd MOU with Chinese counterparties taking shape...RC drilling returns high
grade intercepts...80% high-grade JORC Resource increase
Offtake/Funding Taking Shape
• The Company announced (25/1/2017) that negotiations with CN Docking (a
subsidiary of China National Building Material Group Corporation-‘CNBM’) and China
Gold Group Investment Co. Ltd (‘China Gold’) were progressing in respect to
providing part or all of the A$100m CAPEX, agreement on GPX’s role as project
manager, the terms of an offtake agreement for graphite concentrates and the joint
arrangement of debt finance from Chinese banks.
• Technical due diligence (including a feasibility study) was completed late last year by
the Chinese parties and we anticipate a definitive agreement in the near term.
Outstanding matters include the completion of commercial documentation, relevant
board approvals and Chinese regulatory approvals for offshore investment.
80% JORC Resource upgrade, high-grade drill results & production upside
• The high grade JORC Resource increased 80% to 16.9Mt @ 10.2% TGC including an
Indicated Resource of 5.2Mt @ 11.9% TGC and Inferred Resource of 11.7Mt @ 9.4%
TGC). Total JORC Resources have increased from 25-53.5Mt over the last two years.
• The RC program completed in late 2016 returned numerous high-grade intersections
including NRC16-186 with 68 metres @ 6.6% TGC from 50 metres downhole,
including 18m @ 13.8% TGC from 80m downhole.
Enhanced financial metrics
• Our mid-case valuation of A$1.33 scenario is based on a 30% discount to our
attributable after tax NPV10 of A$133 million (50% project interest) over an expanded
18 year mine life at an attributable production rate of 34,500 tpa @ 10.85% TGC and
a basket graphite price of A$1,620/tonne. There is potential upside to this basket price
particularly in the expandable graphite market where its application as a flame
retardant material is critical in meeting the new Chinese legislative guidelines. The
emergence of Contemporary Amperex Technology Ltd (“CATL”) with its proposed
50GW factory producing lithium-ion car batteries are likely to further impact battery
grade graphite demand.
Price Catalyst
• Finalisation of project finance and offtake agreements with Chinese counterparties.
Action and Recommendation
• GPX is trading at a 68% discount to our 12 month A$1.33 mid case target based
primarily on our risked NPV10 of Chilalo. RMR is maintaining a speculative buy on the
back of the finalisation of key commercial and permitting agreements, compelling
financial metrics and further JORC Reserve upside/mine life/production increases.
1
Capital Structure
Sector Materials
Share Price A$0.425
Fully Paid Ordinary Shares 56.9m
Options (ex 25c, exp 6/19) 13.3m
Options (ex 20c, exp 6/19) 3.0m
Options (ex Nil, exp 17/19/21) 3.4m
Market Capitalisation (Diluted) A$32.4m
Share Price Year High-Low A$0.595-0.315
Approx Cash A$2.4m
Valuation (Mid Case)
Chilalo A$93.03m A$1.22
Exploration A$20.7m A$0.27
Cash A$2.4m A$0.03
Corporate (A$15m) (A$0.19)
TOTAL $101.1m A$1.33
Directors
Stephen Dennis Non-Executive Chairman
Phil Hoskins Managing Director
Grant Davey Non-Executive Director
Stuart McKenzie Company Secretary
Major Shareholders
JP Morgan Nominees 6.7%
MMG Exploration Holdings 6.2%
One Managed Inv Funds 5.0%
Analyst
GT Le Page +61 8 6380 9200
Share Price Performance EARNINGS PROJECTIONS 2017 2018 2019 2020
Production (Mt) - - 34 34
Cash Cost (A$/t) - - 645 645
Net Profit (A$m) (1.5) (1.5) 17.1 11.9
Cash Flow (A$m) (2.5) (3.0) 28.0 22.8
CFPS (c) (0.04) (0.04) 0.37 0.30
CFM (x) (9.6) (10.6) 1.2 1.4
EPS (c) 0.03) (0.02) 0.22 0.16
PER (x) (16.0) (21.0) 1.9 2.7
DPS (c) - - - -
Div Yield (%) - - - -
INVESTMENT CASE
POSITIVE PFS- ROBUST
ECONOMICS: RMR modelling
indicates a risked post-tax
attributable NPV10 (assuming
50% project interest) of A$133
million (risked NPV10 of A$93
million) based on annual
attributable production of 34,500
tonnes of graphite, an 18 year
mine life and a modest CAPEX
of A$100 million (likely to be
100% funded by Chinese
counterparties/debt). Annual
attributable EBITDA is around
A$30.9 million with metallurgical
testwork supporting a high quality product mix averaging A$1,620 per tonne. GPX is
currently trading at a 68% discount to our 12 month mid-case target of A$1.33 per
Share with potential to significantly increase mine life/annual production rates based on
further JORC Reserve upgrades and increasing graphite demand.
RESOURCE UPGRADE-MINE LIFE
EXTENSION or PRODUCTION INCREASE: RM
Research believes that an increase in JORC
Reserves by a further +15Mt @ 11% TGC could
add over A$30 million or A$0.40 per Share to the
GPX valuation based on a modest EV/JORC
Reserve Tonne of A$18. This is conservative
compared to the weighted average comparable
company of A$35/tonne (refer “Peer
Comparison”). Numerous exploration targets
over 53km remain to be followed up.
DEMAND GROWS FOR EXPANDABLE AND SPHERICAL GRAPHITE: RM
Research believes the PFS assumptions for graphite pricing (driven in part by the
increasing demand for expandable and spherical graphite) at A$1,620 per tonne are
conservative. Furthermore, the demand for graphite is likely to see the projected annual
throughput of 69,000 tonnes increase within the first few years of production. Recent
announcements new China based lithium-ion battery demand player CATL are likely to
lead to heightened demand for battery grade graphite.
METALLURGICAL TESTWORK SUPPORTS HIGH QUALITY PRODUCT MIX:
Chilalo graphite expandability is 1,500 ml/g compared to an average of 250 ml/g for
Chinese deposits. The real value in RM Research’s view is the potential size and
strategic value of JORC Resources at Chilalo that have the potential to match or
surpass Magnis in both quality and size. Metallurgical testwork also indicates Chilalo
graphite is suitable for battery grade graphite.
OFFTAKE AND FUNDING-CNBM AND CHINA GOLD: It appears that there is broad
agreement between the parties on the key commercial terms of the offtake and funding
arrangements whereby the Chinese counterparties will end up with a 50% direct project
interest and an offtake for 100% of Chilalo graphite production. It appears that GPX will
be appointed Project Manager and utilise their operational/technical expertise. RM
Research anticipates term sheets (ahead of formal documentation) will be finalised in
the coming weeks.
TIGHT CAPITAL STRUCTURE WITH SIGNIFICANT SHARE PRICE UPSIDE: RM
Research considers there are a number of key milestones that are likely to see a re-
rating of GPX in the near term, in particular the conclusion of offtake/funding
agreements. With only 76.2m Shares (fully diluted), these outcomes should have a
positive effect on the GPX Share price.
2
Compelling project economics
based on modest production pro-
file and graphite price outlook…
...GPX is trading at a 68% dis-
count to our 12 month A$1.33mid
-case target
We anticipate further JORC Re-
source + Reserve upgrades will
have a significant impact on mine
life and/or annual production
rates...
Metallurgical characteristics are
superior to existing Chinese
graphite deposits
Commercial negotiations appear
to be nearing a conclusion
The emergence of CATL is likely
to increase demand pressures for
battery grade graphite
COMPANY OVERVIEW
Graphex Mining Limited (ASX:
GPX) is in advanced discussions
with CN Docking (a subsidiary of
CNBM) and China Gold in respect
to the provision of project finance
and offtake agreements. Executives
of GPX have spent over 140 days in
China over the past 2 years and
commercial negotiations appear to
be coming to a conclusion. The
negotiations have been fast tracked
with the utilization of experienced
market consultants such as Juyan
Feng.
RM Research believes that the
Company remains on track to be in
production some time in CY 2019
with a high probability of an
expanded production profile well
above the modest 69ktpa (or
34Ktpa attributable to GPX)
contemplated in the 2015 Pre
Feasibility Study.
The Company’s current corporate
structure is set out in Figure 2
3
Figure 1: Location of Chilalo
Graphite Project and other ASX
listed explorers/developers.
(source: Graphex Mining, Corpo-
rate Presentation, July 2016) .
Figure 2: Graphex Mining corpo-
rate structure. (source: Graphex
Mining, Prospectus, 4 April
2016) .
CHILALO GRAPHITE PROJECT Location and Access
The Chilalo Graphite Project is situated in south-east Tanzania (Figure 1) within the
Mozambique belt, host of a number of significant graphite deposits including Syrah
Resources Ltd (ASX: SYR) Balama deposit and Magnis Resources Ltd (ASX: MNS)
Nachu Project.
Infrastructure
The Project is strategically located approximately 220 km from the deep water port of
Mtwara. 160km of this road is sealed and the Tanzanian government is conducting a
feasibility study on sealing the remaining 70 km (Figure 1). The port is suitably
equipped for loading and handling of concentrate and is able to accommodate
Panamax vessels.
Resources & Reserves
The Project comprises a high grade Indicated and Inferred JORC resource of 16.9Mt
@ 10.2% TGC for a total of 1.71Mt tonnes of graphite and total JORC Resources of
53.5 Mt @ 5.6% TGC (Table 1). The current 10 year mine life (2015 PFS) is based
primarily on JORC Reserves of 5.1Mt @ 11.9% TGC. Significantly the Company has
also published an exploration target of 100-350Mt @ 3-11% TGC. On the back of the
recent 80% increase in JORC Resources we are confident of further significant
resource upgrades over the 53km of strike at Chilalo (Figure 3) which should already
support an increase in mine life well beyond the current 10 year mine life to
somewhere in the order of 18 years in our estimate.
4
Domain Classification Tonnes (Mt) TGC (%) Contained Graphite (Kt)
High-grade zone Probable Reserve 4.7 11% 517
Total Ore Reserves Probable Reserve 4.7 11% 517
High-grade zone Indicated 5.2 11.9% 619
High-grade zone Inferred 11.7 9.4% 1,100
Total High-Grade Resources Indicated + Inferred 16.9 10.2% 1,719
Low-grade zone Inferred 36.6 3.4% 1,244
Total Resource Indicated + Inferred 53.5 5.6% 2,996
Table 2: Chilalo Graphite Project
Resources + Reserves. (source:
Graphex Mining, ASX Announce-
ment, 2 February 2017) .
Figure 3: Chilalo Mineral Re-
source Plan Projection. (source:
Graphex Mining, ASX Announce-
ment, 2 February 2017).
The recent increase in JORC
Resources was attributable to
new discoveries to the north and
south west of the existing Chilalo
JORC Resource
The recent increase in the high-
grade JORC Resources should
support an extension of mine life
to somewhere in the order of 18
years…
...from 10 years based on the
2015 PFS
Metallurgy
Metallurgical testwork undertaken in 2015 demonstrated that Chilalo is able to produce a high
quality concentrate with a very high proportion of large—Super Jumbo flakes (Table 3) with a
conservative basket price of US$1,216 (A$1,620) per tonne of graphite. Petrographic
examinations of RC chips from the recently outlined north-east JORC Resource zone (Figure
3) have also confirmed similar flake graphite dimensions to the previous 2015 JORC
Resource estimates.
As outlined in Graphite Markets (see below), there is reasonable scope for this basket price to
increase based on pricing data provided by Benchmark Mineral Intelligence. A higher basket
price could be justified by the strong demand for both spherical and expandable graphite
(note Chilalo can sell 100% of its product into various expandable graphite markets and up to
47% of its product into spherical graphite markets).
GRAPHITE MARKETS
Graphite has no terminal market and is therefore reliant on offtake agreements between
buyers and sellers. Given the size distribution and the superior expansion rates of Chilalo
graphite (Figure 4), the Company is likely to be able to supply the high value expandable
graphite markets. GPX has also indicated (ASX Announcement, 28/6/2016) its ability to
supply the battery-grade graphite market. Table 4 sets out the various categories of graphite
and importantly, GPX is able to supply all of these product types (refer Table 4).
Expandable Graphite is a compound of graphite that is able to expand to several hundred
times its original size when heated and immersed in acid. This is measured in millilitres per
gram with coarser flakes having better expansion characteristics.
5
Flake Size Microns Mesh Mass Dist Grade Price Basket Sales
(%) TGC (%) (US$/t) Price (US$/t)
Super Jumbo >500 +35 1.9 94 - 97 2,500 47.5
Jumbo 300 - 500 +50 24 94 - 97 2,200 528
Large 180 - 300 +80 22.5 94 - 97 1,400 315
Medium 150 - 180 +100 6 94 - 97 950 57
Small 75 - 150 +200 20.6 94 - 97 700 144.2
Fines <75 -200 25 90 500 155
Weighted Avg Basket Price 1216.7 (Mass dist x price)
Table 3: Chilalo Graphite Project
product specifications and
weighted average basket price.
(source: Graphex Mining, Corpo-
rate, website, August 2016) .
GRAPHITE BATTERIES TRADITIONAL MARKETS EXPANDABLE GRAPHITE MARKETS
SPECS (refractories/foundaries) (eg. foil, sheet, gasket, seals, flame retardants)
Flake Size Fine (< 150 μ) Medium-large (150-300 μ) Mainly coarse (>180 μ)
Purity Higher purity marginally reduces Minimum 94% TGC purity Higher purity (95% TGC)
cost for spherical graphite pro-ducer opens up a number of applications
Other Favourable battery performance N/A Expansion rate, method + temperature
Table 4: Primary graphite markets
and products specifications
(source: Graphex Mining, Corpo-
rate Presentation, February
2017) .
This type of graphite has a number of important uses:
• Flame Retardant: The real market opportunity here is the recommendation by the
Chinese and South Korean governments for the use of flame retardant materials in
future construction. CNBM have indicated that the market for flame retardant building
materials in China is currently around 5Mtpa with expandable graphite representing 5-
50% of these materials depending on the building specifications. Dwindling reserves,
environmental issues and cold weather interruptions are also placing pressure on
Chinese supply. The superior expansion rates of Chilalo have the potential to supply
this growing market. Expandable graphite is added to foam to improve thermal
efficiency and provides the material with natural flame retardant properties. This
premium product currently sells for over US$2,600 per tonne.
• Graphite Foil: This type of graphite is used as a heat shield in electronic devices such
as LED, smart phones and laptops and is produced from high purity and coarse flake
graphite. Foil sells for up to US$50,000 per tonne.
• Graphite Paper/Sheet: Used in sealing gaskets, graphite tapes, packing and
reinforced tapes. This requires high purity and coarse flakes with good expansion
rates.
From a pricing perspective (Benchmark Mineral Intelligence), the demand for expandable
graphite would appear to support high prices in the near term for 32 mesh, 48 mesh and 80
mesh graphite (Figure 5).
6
Figure 4: Expansion rates for
Chilalo graphite (source:
Graphex Mining, Expandable
Graphite Presentation, July
2016).
The Chinese government has
legislated for the use of flame
retardant materials…
...expandable graphite is a key
component
Pressure is mounting on Chinese
supply
Figure 5: Price points for graphite
being sold into expandable graph-
ite markets (source: Benchmark
Mineral Intelligence, July 2016) .
We note that the Company appears to have taken a conservative view on its as-
sumed pricing going forward. Price forecasts in this space are typically across a
wide range.
While prices for small, medium and large flake graphite typically have declined by
over 30% in the preceding two years, prices for expandable graphite have in-
creased 10% over the same period. There is potential for further near term price
upside based on the market dynamics outlined above.
Spherical Graphite: This is produced through fine grinding, purification and pro-
cessing the flat flake into a sphere of concentrate. Spherical graphite is used as an
anode for lithium ion batteries with battery grade spherical graphite having a mini-
mum of 99.95% TGC. Pricing is determined by particle size and shape.
The demand for lithium-ion batteries has been well documented with the Tesla
US$5 billion battery factory in Nevada nearly complete. This plant has the capacity
to double the world’s output of electrical vehicles at 500,000 batteries per annum.
Tesla is likely to require 80-126K of battery grade spherical graphite per annum.
The Tesla Model S has an 85kw battery that consumes170kg of spherical graphite
(425kg of flake graphite). More recently China based CATL has announced plans
to expand their lithium-ion production six-fold to 50 gigawatt hours by 2020 to keep
up with surging Chinese demand. Their output has overtaken LG Chem and is fast
approaching Panasonic and the Warren Buffet backed BYD (Fortune.com, 2016).
Another potential growth market is the introduction of the Powerwall home battery
market with projected annual production of 15GWh per annum.
Offtake Negotiations with CN Docking and China Gold Given China produces
80% of the world’s expandable graphite with a well publicized shortage of coarse
flake graphite, the Chinese are key players in this sector. RM Research noted the
ASX announcement by GPX (ASX Announcement, 25/1/2017) updating the market
on the status of advanced negotiations that appear to have reached broad agree-
ment on:
• Taking a 50% joint venture interest in the Tanzanian subsidiary
Ngwena Tanzania Limited via a cash injection into Ngwena.
• Finalising an offtake agreement for 100% of Chilalo graphite.
• The parties jointly working on a debt funding package.
• GPX acting as project manager, and
• GPX providing technical expertise for the Project.
It appears CNBM (the owner of the worlds largest amorphous graphite supplier
South Graphite Co Ltd) will be taking the lead in this funding/offtake process
which could also see some downstream processing of concentrates from Chilalo
within Tanzania. CNBM control the building material industry in China producing
50% of all building materials. The use of the Chilalo material to produce expanda-
ble graphite for flame retardant building materials explains the reason for their in-
terest in the product.
Through experienced marketing consultant Mrs Juyan Feng, who was responsible
for the CNBM/China Gold introduction, GPX appear well placed to conclude what
would amount to China’s first commercial agreement with an offshore graphite de-
veloper.
7
Electric Vehicles likely to drive
spherical graphite demand
Chilalo graphite is superior to
Chinese graphite…
...this is likely to motivate China
Gold and CN Docking
GPX is very close to finalising
offtake and funding agreements
for Chilalo
FINANCIAL OVERVIEW
Revised 2015 Pre Feasibility study
A pre-feasibility study was completed in
November 2015 which we have since revised
and further expanded to an 18 year mine life
(from the 2015 PFS mine life of 10 years) as
summarised in Table 4. The financial metrics
in this table are based on a conservative
production profile of only 69Ktpa. The project
shows a relatively fast payback of under two
years, a healthy internal rate of return of 50%
and a positive NPV10 of US$204 million
(US$102 million attributable to GPX based on
a 50% project interest).
RM Research believes (Sensitivity Analysis
based on the 2015 PFS) that there is near
term upside particularly with the possibility of
increased production rates and graphite
basket price upside given the positive outlook
for expandable graphite and the recent 80%
high- grade JORC Resource upgrades.
For the purpose of our valuation (Estimate of Value) RM Research has assumed a 50%
project ownership based on the recent ASX Announcement (25/1/2017). We anticipate further
updates on commercial negotiations in the near term.
Sensitivity Analysis 2015 Pre Feasibility Study
Table 5 and Figure 6 (based on
the 2015 PFS study over a 10
year mine life) shows the project
is relatively insensitive to CAPEX
however a 20% lift in graphite
basket prices has a significant
impact on the pre-tax NPV which
increases by almost US$100
million. The project is very
sensitive to grade variability
which we consider as less of a
risk given the Reserve status.
8
Table 4: Financial summary for
the Chilalo Graphite Project re-
vised Pre Feasibility Study
(source: Graphex Mining, web-
site, March 2017 and RM Re-
search modelling).
FINANCIAL SUMMARY MID CASE
Mine Life yrs 18
Avg Annual Production tpa 69,123
Plant Feed tpa 630,000
Avg Head Grade (LOM) % TGC 10.85
Avg Recovery % 94.00
LOM Revenue US$m 1,222.10
Avg Annual EBITDA US$m 39.70
Graphite Basket Price US$/t 1,217.00
OPEX/tonne conc US$/t 490.00
Op Margin US$/t 727.00
CAPEX US$m 74.00
Payback (Pre Tax) yrs 2 yr
NPV10 (after Tax) US$m 204.00
IRR (after Tax) % 50.00
OPEX CAPEX Mill feed grade Basket price
Factor NPV Factor NPV Factor NPV Factor NPV
80% $104.48 80% $235.89 80% $214.71 80% $112.51
85% $128.28 85% $226.84 85% $210.96 85% $134.31
90% $152.09 90% $217.80 90% $207.21 90% $156.11
95% $175.90 95% $208.75 95% $203.46 95% $177.91
100% $199.71 100% $199.71 100% $199.71 100% $199.71
105% $223.51 105% $190.66 105% $195.96 105% $221.51
110% $247.32 110% $181.62 110% $192.20 110% $243.30
115% $271.13 115% $172.57 115% $188.45 115% $265.10
120% $294.94 120% $163.53 120% $184.70 120% $286.90
Table 5: Chilalo Graphite Project
2015 Pre-Feasibility Sensitivity
Analysis.
80%
80%
120%
120%
120%
120%
80%
80%
80 90 100 110 120 130 140 150 160 170 180 190 200 210 220 230 240 250 260 270 280 290 300
Basket price
Mill feed grade
Operating costs
Capital costs
Pre-Tax NPV (US$M)
Sensitivity TornadoFigure 6: Chilalo 2015 Pre Feasi-
bility sensitivity tornado .
ESTIMATE OF VALUE
Our valuation scenario (Table 6, Figure 7) assumes a fully funded Chilalo Project leaving
GPX with a 50% equity interest and no further dilution of the Company. In the alternative, a
A$30 million equity raise around current prices together with say A$70 million of project
funding (refer 25/1/2017 ASX Announcement) would have a similar effect on an earnings per
share basis given the current market capitalisation of GPX. We consider the upside is the
exposure to the high value expandable graphite together with the likely increase in plant
throughput/mine life to meet graphite demand.
Finally, a look at our peer analysis leaves RM Research in no doubt that the recent JORC
Resource increase should have a very significant impact on the valuation, and in turn the
share price of GPX in the short to medium term given the A$311 million enterprise value for
Magnis Resources (based on the Nachu Graphite Project JORC Reserves of 76Mt @ 4.8%
TGC for 3.6Mt of contained graphite). This equates to an EV of around A$90 per tonne of
contained JORC Reserves. The weighted average EV/tonne JORC Reserve of contained
graphite for the sample of companies is A$32/tonne.
Our scenarios for exploration factor in attributable JORC Reserve increases of 10Mt, 20Mt
and 30Mt (attributable of 5Mt, 10Mt and 15Mt) @ 10.87% TGC for our lower case, mid case
and upper case scenarios based on an EV/tonne of JORC Reserve of a median of A$18/
tonne for our comparable companies (Table 6). Our valuation of the operating mine assumes
the base case scenario as set out in the Pre-Feasibility Study.
Our Upper Case scenario of $1.98 per Share (Table 6, Figure 7) represents our un-risked
attributable NPV10 based on a A$133m attributable NPV10 over an 18 year mine life
(assuming a constant annual OPEX for the life of mine). This is not unreasonable given the
similar grade and configuration of the high grade JORC Resource. Our mid-case scenario
discounts this by 30% for completion risk and our lower case variable is the risked NPV10 on
the most recent 10 year mine life scenario (2015 PFS). We believe annual production
increases are highly likely given the current tightness in graphite markets.
9
VALUATION Mid Case Lower Case Upper Case
$ $/Sh $ $/Sh $ $/Sh
Chilalo (NPV10) $93.03 $1.22 $65.12 $0.85 $132.89 $1.74
Exploration $20.65 $0.27 $10.33 $0.14 $30.98 $0.41
Cash + Liquid Sec $2.40 $0.03 $2.40 $0.03 $2.40 $0.03
Corporate -$15.00 -$0.20 -$15.00 -$0.20 -$15.00 -$0.20
TOTALS $101.08 $1.33 $62.84 $0.82 $151.27 $1.98
Table 6: Graphex Mining Valua-
tion mid case, lower case and
upper case scenarios.
Figure 7: Graphex Mining Valua-
tion Summary.
An increase of 30Mt in JORC
Reserves (15Mt attributable to
GPX) could add in excess of 40
cents per Share to the current
GPX share price…
...the Chilalo mine life would likely
be increased well beyond 18
years based on JORC Reserves
of >15Mt @ +10% TGC
PEER COMPARISON
Table 7 and Figures 8 and 9 provide an overview of the more advanced ASX listed graphite
developers/producers. While earnings valuations are difficult to project, due to the non-
transparent graphite markets and variability among graphite deposits (not to mention the lack
of operating history for graphite producers generally), a comparison of Enterprise Values and
premium/discount to NPV gives us some insight. The market is generally discounting long
10
Table 7: Comparable ASX listed
graphite explorers/developers
based on EV/tonne of JORC Re-
serves of graphite.
Figure 8: ASX listed Graphite
Developers EV/T Reserve of con-
tained graphite.
Figure 9: ASX listed Graphite
Developers Premium/Discount to
NPV.
Company ASX Code
Share Price ($)
EV ($m) Graphite (Mt) Gr Prod Ktpa
NPV Premium/Disc
EV/Mt Re-serve
Project Status
Graphex Mining GPX $0.425 30.1 1.72 69.1 $101.0 -70.2% $17.44 PFS
Syrah Res SYR $2.49 493.6 19.0 380.0 $1,466.7 -66.3% $26.0 Develop
Magnis Res MNS $0.575 330.3 3.7 220.0 $2,248.0 -85.3% $90.5 Feas
Walkabout Res WKT $0.097 6.9 1.4 40.0 $430.7 -98.4% $4.99 Feas
Kibaran Res KNL $0.165 44.0 2.2 36.4 $262.7 -83.2% $19.79 Feas
-
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
20.00
$-
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
$80.00
$90.00
$100.00
Graphex Mining Kibaran Resources Syrah Resources Magnis Resources
Co
nta
ined
Gra
ph
ite (M
t)
EV
/T G
rap
hit
e (
A$)
ASX Listed Graphite Developers-EV/Tonne contained Gr Reserves
Contained
Graphite
-
50.00
100.00
150.00
200.00
250.00
300.00
350.00
400.00
-120.0%
-100.0%
-80.0%
-60.0%
-40.0%
-20.0%
0.0%
Graphex Mining Syrah Resources Magnis Resources Walkabout Resources
Gra
ph
ite C
on
c P
rod
ucti
on
(K
tpa)
Dis
co
un
t/P
rem
ium
to
NP
V
ASX Listed Graphite Developers-Prem/Disc to NPV vs Gr Production
Annual Production
Disc/Prem NPV
mine life/industrial minerals companies due to the lack of a terminal market for the product, in
this case graphite, and the lack of any earnings history. Furthermore the long mine lives do
tend to inflate NPV calculations.
Notwithstanding the above, we note that GPX is trading at a discount of approximately 66% of
NPV compared to KNL at 83% and MNS at 85% however we consider the MNS production
profile, for example, to carry more risk given the projected larger concentrate output and more
risk associated with having to secure offtake agreements. We also note that the NPV
calculations for MNS are derived from significantly higher basket graphite prices and have
therefore inflated valuations compared to our basket of comparable companies. RM
Research notes that MNS are assuming US$3,400 per tonne for >500mm compared to our
figures for GPX of US$2,500 per tonne for >500mm graphite.
We believe the recent JORC Resource increases should lead to an increase in the JORC
Reserve inventory and translate ultimately into further mine life extensions and/or an increase
in annual production. This should in turn lead to higher NPV’s and therefore higher valuations
as indicated in our sensitivity analysis. Furthermore we anticipate that, in a normalised market
for the majority of production situations, and subject to operating performance, market
valuations for these companies should approach NPV.
In the short to medium term however MNS represents the most meaningful comparison to
GPX which would lead us to conclude the strong potential for a re-rating following the
conclusion of commercial arrangements with the Chinese counterparties.
CORPORATE Not much corporate activity since the listing of GPX in June 2016, however the Company did
report a cash balance of A$2.6 million for the 31 December 2016 Quarterly Report.
11
The recent JORC Resource up-
grades at Chilalo is likely to see a
re-rating of GPX in the short to
medium term…
….and should lead to an exten-
sion of mine life and/or annual
throughput
RISK ANALYSIS
POLITICAL RISK: A press release by the Ministry of Energy & Minerals (Tanzania) on 3
March 2017 stated that the Tanzanian Government intends to ban the export of mineral
concentrates and metallic ores (such as gold, copper, silver and nickel). The objective of the
Tanzanian Government is to undertake more value adding downstream processing in country.
Given that graphite is already processed to a high degree of purity, we believe that the policy
(yet to be legislated) is more likely targeted at metallic ores rather than Industrial minerals.
We believe that in country manager Heavenlight Kavishe (see Board and Management) will
seek further clarification on this press release in the near term. At a more general level,
Tanzania is considered by RM Research to be one of the more stable countries in Africa to
undertake mining and exploration activities with a favourable corporate tax rate (30%),
accelerated depreciation schedule and reasonable royalties (3% on graphite).
PROJECT TENURE: The Company already has a granted Mining License so we consider the
risks, subject to compliance with Tanzanian mining laws, to be minimal.
INFRASTRUCTURE RISK: Chilalo has a number of significant infrastructure advantages
including being connected by road 220km from a deep water port (capable of handling
Panamax sized vessels) at Mtwara. While 160km of the road remains unsealed, we
understand the government is likely to provide some funding for a road upgrade.
GRAPHITE OUTLOOK: GPX is focussed on the supply of graphite into the expandable
graphite market which is a highly specialised and non-transparent market. Graphite relies on
sales by contract/offtake agreements that are difficult to benchmark or project. GPX therefore
could be subject to pressure by end-users or offtake arrangements with larger players in the
market. We note however that the risks, given the supply side pressure and rapidly increasing
demand for both products, remains skewed to the upside.
METALLURGY/PROCESS RISK: RM Research considers the flow sheets (crushing,
grinding, flotation and screening) associated with the Chilalo project are relatively simple
compared to many metalliferous projects/refractory ores that are reliant on more complex
chemical and mechanical processes. Testwork by metallurgical consultants BatteryLimits
Pty Ltd has so far returned very encouraging results in respect to grade, flake size
distribution and purity with coarse flakes (50% flakes > 180 microns) exhibiting very good
expansion characteristics.
RESOURCE RISK: Given the high quality grade nature of the Shimba Deposit with its
favourable metallurgical characteristics, RM Research considers this risk to be low. The risks
here are on the upside with over 53km of prospective strike length remaining to be explored.
The Company is targeting resources in excess of 100Mt @ 3-11% TGC.
FINANCE RISK: At approximately US$74 million (A$100 million), Chilalo is considered by RM
Research to be a low capital cost operation whose project economics are not particularly
sensitive to CAPEX variability. More importantly the operating margins, at a range of
sensitivities, are robust. As with many resource projects, the economics are particularly
sensitive to the graphite price together with exchange rates. There is a risk however, in the
event of a plant expansion, that GPX may be unable to meet its financial commitments in a
timely manner.
MARKET RISK: The market risk, as it relates to GPX, remains skewed on the upside with
limited supply and rapidly expanding demand likely to see companies like GPX trading at a
premium to NPV (at base case production assumptions). Furthermore, the significant
resource upside, combined with the strategic value of the deposit, are likely to diminish the
market risk.
The primary risks for this type of industrial mineral are the ability to market and sell the
graphite in a non-transparent market to end-users and/or traders with significant market
financial and political resources. The key benefit for GPX is the high quality product which
does give the Company some leverage in commercial negotiations and dealings.
12
GPX will seek further clarification
from the Ministry of Energy Min-
erals in respect to press release
outlining the proposed ban on the
export of mineral concentrates
and metallic ores…
...RM Research does not believe
this policy is targeting industrial
minerals
Chilalo is well placed in respect to
existing infrastructure
We believe that project finance is
likely to be provided by China
Gold and/or CN Docking in re-
turn for direct project equity
Chilalo has returned favourable
metallurgical results particularly
with regard to grade and flake
size
DIRECTORS AND MANAGEMENT
Stephen Dennis, B.Com, LLB, GradDipAppFin (FINSIA) NON EXECUTIVE CHAIRMAN
Stephen has 30 years experience in mining including senior positions with MIM Holdings
Limited, Minara Resources Limited and Brambles Limited. He was also recently
Managing Director of CBH Resources. He is currently a non executive Chairman of Heron
Resources Limited, Rox Resources Limited and Cott Oil & Gas Limited.
Phil Hoskins, B.Com, CA, GradDipAppFin (FINSIA) MANAGING DIRECTOR
He is an experienced chartered accountant and senior executive with 14 years of broad
finance and commercial experience across resources exploration, project development and
production as well as large-scale property developments requiring debt and equity financing.
He was appointed as the IMX's Managing Director in October 2015 after being Chief
Executive Officer since September 2014, before which he spent almost three years as IMX's
Chief Financial Officer. Mr Hoskins commenced as Managing Director in mid CY 2016.
Grant Davey, B.Sc. NON EXECUTIVE DIRECTOR
Mr Davey has in excess of 20 years’ experience covering construction and operation of gold,
platinum and coal mines in Africa, Australia, South America and Russia. More recently he has
been involved in venture capital investments in several Canadian and Australian listed
exploration/mining projects. Grant was instrumental in acquiring the Honeymoon Uranium
project (South Australia). He was the managing director of Cradle Resources Limited and
founder and managing director of the Panda Hill niobium project (Tanzania) which is expected
to go into construction during 2016. Grant is currently an executive director of ASX listed
Boss Resources Limited.
Nicholas Corlis, B.Sc. (Hons), MSc, MAIG GENERAL MANAGER-TECHNICAL
Nick is a geologist with over 20 years of domestic and international experience in the
resources covering gold, iron ore, base metals, graphite and coal. He has significant
experience in mineral exploration and project management; from project generation/M&A,
discovery and resource definition, through to feasibility and development. His previous role
was General Manager Business Development for Flinders Mines where he oversaw the
discovery and delineation of the iron ore project. Prior to that, he held senior roles with
Perilya Limited, Golder Associates and WMC Limited. He is currently also the exploration
manager for Indiana Resources.
Christopher Knee, LLB, B.Ec. (Hons) ACIS CHIEF FINANCIAL OFFICER
Chris has over 10 years' experience working as a Chartered Accountant in senior finance
roles. He commenced his career with a large multi-national accounting firm working both in
Australia and the US, in consulting, audit, corporate finance and technical roles. His most
recent role was as CFO of Manas Resources Limited. He is currently also the CFO of
Indiana.
Stuart McKenzie, BCom, CA CO SECRETARY/COMMERCIAL MANAGER
Stuart has in excess of 25 years commercial experience including 6 years as Company
Secretary for Anvil Mining Limited. Prior to that he held senior positions with Ok Tedi
Mining Limited, Ernst & Young and HSBC.
Heavenlight Kavishe, MSc (Mech Eng), PhD (Eng) COUNTRY MANAGER (TANZ)
Kavishe is Tanzanian and has extensive senior management experienced including the
National Development Corporation (NDC) and the Parastatl Sector Reform Commission
(PSRC). In 2006, Kavisch established Kicheko Ltd and is regularly invited as a guest lecturer
on entrepreneurship at various Tanzanian Universities and centres of higher learning.
13
Phil has over 14 years in financial
and commercial experience in-
cluding resources...
Grant Davey has development
experience with specialty metals
companies in Africa
Nick is a geologist with over 20
years experience
Kavishe is an important conduit to
the Tanzanian Government...
14
CAPITAL STRUCTURE 2017 2018 2019 2020 SURPLUS FUNDS 2017 2018 2019 2020
# Shares (m) 56.6 76.3 76.3 76.3
Net Profit (1.5) (1.5) 17.1 11.9
Options (m) 19.68 - - -
+ Working Capital Adj - - - -
Proceeds from Options (A$) 0.00 2.43 0.00 -
+Dep/Amort - - 12.5 12.5
Total Shares on issue (m) 56.6 76.3 76.3 76.3
+Asset Sales - - - -
Share Price (A$) 0.425 0.425 0.425 0.425
+Premium Income - - - -
Market Cap (diluted) (A$m) 32.4 32.4 32.4 32.4
-Exploration Expenditure 1.0 1.0 1.1 1.1
-Capex - 0.5 0.5 0.5
PRODUCTION FORECASTS 2017 2018 2019 2020
-Loan Repayment - - - -
Attrib Gr Throughput (Ktpa) - - 315 315
-Dividends - - - -
Grade (%) - - 10.87% 10.87%
-Assets Purchased - - - -
>500um (ktpa) - - 0.7 0.7
CASH FLOW (2.5) (3.0) 8.0 22.8
300-500um (ktpa) - - 8.2 8.2
+Equity (Rts,plc,opts) - - - -
180-300 (ktpa) - - 7.7 7.7
+Loan Drawdown - - - -
150-180um (ktpa) - - 2.1 2.1
TOTAL SURPLUS (A$m) (2.5) (3.0) 28.0 22.8
75-150um (ktpa) - - 7.1 7.1
<75um (ktpa) - - 8.6 8.6
EARNINGS RATIOS 2017 2018 2019 2020
CFPS (c) (0.04) (0.04) 0.37 0.30
PROFIT & LOSS 2017 2018 2019 2020
CFM (x) (9.62) (10.65) 1.16 1.42
A$:USD$ AUD 0.76 AUD 0.76 AUD 0.76 AUD 0.76 EPS (c) (0.03) (0.02) 0.22 0.16
>500m (USD$/t) USD 2,500 USD 2,500 USD 2,500 USD 2,500
PER (x) (16.04) (20.98) 1.90 2.72
>500um (A$/t) AUD 3,289 AUD 3,289 AUD 3,289 AUD 3,289
DPS (c) - - - -
300-500um (USD$/t) USD 2,200 USD 2,200 USD 2,200 USD 2,200
Div Yield (%) - - - -
300-500um (A$/t) AUD 2,895 AUD 2,895 AUD 2,895 AUD 2,895
180-300 (USD$/t) USD 1,400 USD 1,400 USD 1,400 USD 1,400 ASSET VALUATION A$m A$/sh
180-300 (A$/t) AUD 1,842 AUD 1,842 AUD 1,842 AUD 1,842
Chilalo Project (50% Int)
$93.03 $1.14
150-180um (USD$/t) USD 950 USD 950 USD 950 USD 950
Exploration - (50% Int)
$20.65 $0.27
150-180um (A$/t) AUD 1,250 AUD 1,250 AUD 1,250 AUD 1,250
Cash + Liquid Sec
$2.40 $0.03
75-150um (USD$/t) USD 700 USD 700 USD 700 USD 700
Corporate
-$15.00 -$0.20
75-150um (A$/t) AUD 921 AUD 921 AUD 921 AUD 921 TOTAL
$101.08 $1.33
<75um (USD$/t) USD 500 USD 500 USD 500 USD 500
<75um (A$/t) AUD 658 AUD 658 AUD 658 AUD 658
DOMAIN Classif Mt TGC (%) Cont Gp
TOTAL REVENUE - - 54.8 54.8
High-grade zone Prob Res 4.7 11.0% 517.0
Operating Costs (A$m) - - 22.1 22.1
Total Ore Reserves Prob Res 4.7 11.0% 517.0
Dep/Amort (A$m) - - 12.5 12.5
High-grade zone Ind 5.2 11.9% 618.8
Royalties - - 1.6 1.6
High-grade zone Infe 11.7 9.4% 1099.8
Corporate Overheads (A$m) 1.5 1.5 1.5 1.5
Total High-Grade Resources Ind + Infer 16.9 10.2% 1718.6
EBIT (A$m) (1.5) (1.5) 17.1 17.1
Low-grade zone Infer 36.6 3.4% 1244.4
Interest Expense (A$m) - - - -
Total Resource Ind + Infer 53.5 5.5% 2963.0
EBT (A$m) (1.5) (1.5) 17.1 17.1 Resources are inclusive of reserves and are not equity accounted
Abnormal Gain (A$m) - - - - Reserves and resources are depleted by production
Operating Profit (A$m) (1.5) (1.5) 17.1 17.1
Tax (A$m) - - - 5.1
EARNINGS FORECASTS 2017 2018 2019 2020
NPAT (1.5) (1.5) 17.1 11.9 Production (ktpa) - - 34 34
Cash Cost ($/t) - - 645 645
FINANCIAL POSITION 2017 2018 2019 2020
Net Profit (A$m) (1.5) (1.5) 17.1 11.9
ASSETS
Cash Flow (A$m) (2.5) (3.0) 28.0 22.8
-Cash + Debtors (A$m) (0.1) (0.7) 27.3 50.2 CFPS (c) (0.04) (0.04) 0.37 0.30
-Property, Plant & Equip (A$m) - 50.0 38.6 27.2 CFM (x) (9.6) (10.6) 1.2 1.4
TOTAL ASSETS (0.1) 49.3 65.9 77.3 EPS (c) 0.03) (0.02) 0.22 0.16
LIABILITIES PER (x) (16.0) (21.0) 1.9 2.7
Debt (A$m) - - - - DPS (c) - - - -
Trade Creditors (A$m) - - - - Div Yield (%) - - - -
TOTAL LIABILITIES - - - -
NET ASSETS (0.1) 45.0 61.6 73.0
Disclaimer / Disclosure
This report was produced by RM Research Pty Ltd, which is a Corporate Authorised Representative (343456) of RM Capital Pty Ltd (Licence no. 221938). RM Research received a payment for the compilation and distribution of this research report. RM Research Pty Ltd has made every effort to ensure that the information and material contained in this report is accurate and correct and has been obtained from reliable sources. However, no representation is made about the accuracy or completeness of the information and material and it should not be relied upon as a substitute for the exercise of independent judgment. Except to the extent required by law, RM Research Pty Ltd does not accept any liability, including negligence, for any loss or damage arising from the use of, or reliance on, the material contained in this report. This report is for information purposes only and is not intended as an offer or solicitation with respect to the sale or purchase of any securities. The securities recommended by RM Research carry no guarantee with respect to return of capital or the market value of those securities. There are general risks associated with any investment in securities. Investors should be aware that these risks might result in loss of income and capital invested. Neither RM Research nor any of its associates guarantees the repayment of capital.
WARNING: This report is intended to provide general financial product advice only. It has been prepared without having regarded to or taking into account any particular investor’s objectives, financial situation and/or needs. Accordingly, no recipients should rely on any recommendation (whether express or implied) contained in this document without obtaining specific advice from their advisers. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. Where applicable, investors should obtain a copy of and consider the product disclosure statement for that product (if any) before making any decision.
DISCLOSURE: RM Research Pty Ltd and/or its directors, associates, employees or representatives may not effect a transaction upon its or their own account in the investments referred to in this report or any related investment until the expiry of 24 hours after the report has been published. Additionally, RM Research Pty Ltd may have, within the previous twelve months, provided advice or financial services to the companies mentioned in this report. As at the date of this report, the directors, associates, employees, representatives or Authorised Representatives of RM Research Pty Ltd and RM Capital Pty Ltd may hold shares in this Company.
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RM Research Recommendation Categories
Care has been taken to define the level of risk to return associated with a particular company. Our recommendation ranking system is as follows:
Buy Companies with ‘Buy’ recommendations have been cash flow positive for some time and have a moderate to low risk profile. We expect these to outperform the broader market.
Speculative Buy We forecast strong earnings growth or value creation that may achieve a return well above that of the broader market. These companies also carry a higher than normal level of risk.
Hold A sound well managed company that may achieve market performance or less, perhaps due to an overvalued share price, broader sector issues, or internal challenges.
Sell Risk is high and upside low or very difficult to determine. We expect a strong underperformance relative to the market and see better opportunities elsewhere.
15