Armadale Capital (LSE:ACP) has enjoyed a strong start to the year, with its shares rising from 0.85p to their current 1.16p. Aside from favourable macro conditions, the business - which is currently focused mainly on the graphite market – has been boosted by the progress made at its flagship Mahenge Liandu project in Tanzania. Here, with completion of the project’s definitive feasibility study and decision to mine imminent, Armadale’s management explains why the company’s current £4.6m market cap could represent a great value opportunity.

Graphite opportunity

As it stands, Armadale’s primary operational focus is graphite, which it expects to offer significant commercial value over the coming years. One of the lesser represented commodities on AIM, graphite occurs in metamorphic rocks and boasts numerous, highly practical properties. These include high electrical conductivity, the ability to form extremely-strong cohesive bonds, and resistance to heat (up to 3,000ºC) as well as solvents, dilute acids, and fused alkalis.

Thanks to its attractive characteristics, several exciting and growing markets have arisen for the material. Its most traditional application is in the industrial sector, where graphite is put to use in areas like steelmaking and brake lining. It is also being used increasingly in the creation of so-called ‘graphite foil’, an essential component in the production of electronic products like smartphones and tablets.

Critically, recent years have also seen graphite become widely used in the production of lithium-ion (Li-ion) batteries - applied in emerging renewable energy technologies and, most importantly, electric vehicles (EVs). This final market, in particular, is of most interest to Armadale, with the firm expecting demand for EVs market to deliver a paradigm shift in demand for the material. Based on industry forecasts, this looks within reach.

Indeed, according to the International Energy Agency (IEA), the number of EVs on roads globally will hit 125m by 2030 – this compares to just 3.1m in 2017. Alongside falling prices for the next generation of cars – which had previously limited green vehicle access to only the wealthy - this increased uptake is expected to stem from a rise in environmentally friendly policies among governments around the world. Should this growth explosion play out, demand for all of the commodities required in the creation of EVs - most notably their batteries - will also rise. Indeed, forecasts such as the IEA’s have already seen the prices of popular ‘battery metals’ like nickel, cobalt, lithium, and even copper, fly at various points over recent years.

Armadale’s technical manager Matt Bull says graphite is a lesser-known beneficiary of EV’s rise, adding that few in the market are aware that Li-ion batteries, in fact, contain more of the material than they do lithium. Indeed, as the company notes, numerous ‘gigafactories’ have arisen around the world to rush out unprecedented amounts of Li-ion batteries ahead of the EV boom. Notably, it says, Tesla has built a new $5bn battery factory that could drive a 37pc increase in demand for natural graphite by 2020. The forecast output for the factory is 35GWph/y in Li-ion batteries, requiring the consumption of 28,000tpa of spherical graphite - double the size of the graphite market in 2017 alone.

As Bull notes, Tesla’s Gigafactory is just one of many such gigafactories either being constructed or planned globally. As such, batteries now account for a strong 25pc of total graphite demand, a figure that is expected to grow by around 15pc annually over coming years. ‘These are multi-billion-dollar plants, so you can be sure that they are going to want that security of supply,’ he adds.

Meanwhile, on the supply side, nearly all of the world’s natural spherical graphite is currently sourced and processed in China, where output and prices have been growing since 2016 thanks to forecast demand. In spite of this leading position, many think the global superpower will struggle to keep up with demand as the EV boom plays out. Alongside possible supply limitations, increasingly strict environmental regulations and an absence of the ‘high-quality’ graphene required by these new customers are likely to place pressure on the country. Indeed, one estimate suggests that 360,000t is already needed to supply the battery market.


Naturally, many expect both China and its EV customers will look increasingly to other geographies as potential sources of supply that can subsequently be processed. Armadale believes an obvious candidate here will be East Africa, where a growing number of projects are reaching production and offering unprecedented graphite grades.

‘A lot of Chinese operators are being closed out because of environmental issues, so the market responsible for 97pc of production is slowly being cut. Meanwhile, a lot of these Chinese suppliers simply cannot produce graphite of the quality required. These factors are creating a gap between supply and demand, and China is now looking very seriously at external supply,’ says director Steve Mahede. ‘There are quite a few potential producers capable of achieving high grades in East Africa, but very few have yet entered production. We are looking to get exposure to this potential upside.’

Mahenge Liandu progress

Specifically, Armadale plans to enter the market through its 100pc-owned Mahenge Liandu graphite project in Tanzania. Mahenge is a high-grade coarse flake asset that the company expects to become a strategically-valuable ‘world-class’ supplier to the lithium-ion battery sector once it enters production. The 29.9km2 site is based in the Neoproterozoic system of high-grade metamorphic rocks with easy access to strong infrastructure and Tanzania’s most populous city, Dar es Salaam.

According to Armadale, Mahenge is one of the highest-grade, large flake deposits in the world, with a JORC-compliant, inferred mineral resource estimate of 51.1Mt at 9.3pc total graphite. A scoping study completed in March last year gave the site a pre-tax NPV of $349m (£261.7m) and an internal rate of return (IRR) of 122pc; in comparison, Armadale’s market cap currently sits at just £4.61m. What’s more, these calculations are based on a conservative basket graphite price of $1,272/t.

The project has a payback period of just 1.2 years, based on low capex requirements of only $35m after tax and a mine life of 32 years at 400,000tpa (c.49,000tps of graphite concentrate). Armadale believes this life of mine could be increased significantly, with current figures representing just a quarter of Mahenge’s total resource.

Aside from the project’s long mine life and abundant resource, Bull tells us the Mahenge province is known for its mineralisation, from which high purity concentrates can be produced that are market-leading in the graphite sector. As he explains, this quality enables Mahenge’s product to be used in many areas, widening Armadale’s potential customer-base considerably.

Graphite prices are largely a function of flake size and purity. So, a significant factor for us was that the graphite from Mahenge is the highest purity in the market with an excellent flake size. People want to buy the highest purity because it makes it easier to process. There are more applications for high purity graphite than there is for lower purity graphite – indeed, Mahenge’s graphite can be used in any area of the market, all the way from EVs to steelmaking.’

The past year has seen Armadale step up the pace at Mahenge as it works to confirm the project’s viability through the completion of a definitive feasibility study (DFS). In an update earlier this month, the organisation said this DFS work is well advanced, with completion expected in the final quarter of the year.

To date, Armadale has completed drilling to achieve ten years of planned production in the measured JORC-compliant category and updated its mine planning process accordingly. It has also sent 1.6ts of diamond core to Perth, where it will undergo metallurgical testing to enable the completion of final plant design. Elsewhere, the company has finalised its Environmental Social Impact Assessment and Relocation Action Plan for Mahenge and expects to submit this to the National Environment Management Council later this month. It also plans to submit an application for a mining lease in August.

Outside of the project, Armadale said it has also made steady progress on the offtake front. It has begun a test work programme aimed at progressing the MoU for the offtake of 30,000tpa of graphite concentrate into a binding agreement. This MoU, signed with a Chinese partner called the Matrass Group, was announced in February several months after Armadale hired a Beijing-based marketing consultant to assist it in offloading its product. Meanwhile, the business said discussions are progressing with other offtake partners for the remaining 19,000tpa of graphite production.

To complete the DFS, Armadale must now carry out product marketing, update Mahenge’s resource, and develop transport and logistics pathways at the project. It raised £795,275 in February by placing shares at 1.1p each to support it in doing this. Critically, the results of the DFS will contribute to the company’s ultimate decision on whether to mine the project, which it expects to make later this year.

Mahede says investors can expect plenty of newsflow throughout the remainder of the year as this work completes. Both Armadale and investors alike will be hoping that this can help the firm sustain the strong market performance it has enjoyed over recent months. Indeed, the company has managed to mostly shake the sector-wide bear market towards the end of last year that has continued to leave many of its mining peers on their knees. Shares have risen from 0.85p to their current 1.16p so far this year, peaking at 1.7p.

‘There is plenty of positive news flow to come. Particularly if we can advance the off-take agreements, secure permitting, and if we can get project development funding, something we have begun to look into. Those are probably the most important things looking forward,’ says Mahede. ‘Aside from progress at Mahenge, I think one of the drivers will be conditions in the EV market. Usage of the vehicles is rising, and ongoing policy developments around the world – particularly in China – are really pushing the area forward.’


Although Mahenge is Armadale’s primary asset, it is worth noting that the firm was not set up solely to get exposure to the graphite market. Indeed, the outfit’s overall aim is to give investors exposure to any high-quality resource projects in Africa. With this in mind, the company has several additional interests.

One of these is the Mpokoto gold project in the Democratic Republic of Congo, which was sold to Arrow Mining in January. The project has a current total mineral resource of 678,000oz gold from 14.58MMts at 1.45g/t gold and is expected to produce c.25,000oz a year over a nine-year mine life. With Armadale retaining a 1.5pc royalty on all future gold sales at Mpokoto, the Arrow deal provided the company with ongoing exposure to the gold market alongside an increased focus on Mahenge’s development.

Meanwhile, Armadale also maintains a small portfolio of quoted investments to diversify its exposure away from graphite and Mahenge. It invests primarily into gold production organisations where it sees an opportunity for capital gain and reviews these allocations regularly. Elsewhere, Armadale says it is open to entering additional projects in the future. However, Bull says that Mahenge will remain its primary focus for the time being.

Supporting Armadale in its efforts to generate value across its portfolio is a highly experienced management comprising decades of sector-specific experience. For example, Mahede is an experienced mining CEO in Tanzania, having been born in the country and remaining a patron to the Tanzanian Community in Western Australia inc. Meanwhile, fellow non-executive director Nicholas Johansen has spent his career as a senior legal practitioner in the Australian mining sector.

Elsewhere, Bull has senior experience at numerous related businesses such as Volt Resources, International Graphite, and Linden Resources. He also owns around 8.4pc of Armadale, which, when put alongside the ‘skin-in-the-game’ offered by other employees and consultants, helps to align management with shareholders.

Finally, and most recently, Armadale added AIM veteran Paul Johnson to its board as a non-executive director. Johnson is an experienced public company director who currently serves as chief executive of African Battery Metals. He has previously served as chief executive of Metal Tiger, Metal NRG, and China Africa Resources. He has also been chairman of ECR Minerals and non-executive director of Greatland Gold, Papua Mining, and Thor Mining.

Where to next?

Armadale has a clear work schedule for the remainder of the year that will culminate in an all-important decision on whether to mine. This is likely to create a lot of newsflow, which could be highly value-generative if it goes the way the business plans.

At the same time, Armadale is flattered by its exposure to the popular ‘EV boom’ investment strategy within a sector where a severe supply deficit looks to be forthcoming. Indeed, such a firm footing in a top-quality project in East Africa could serve Armadale particularly well when the likes of Tesla step up their search for graphite. With the backing of an experienced management team, it will be interesting to see what Armadale makes of the attractive opportunity in its possession.

Author: Daniel Flynn

The Author does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the piece.

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