Last month saw Black Rock Resources (ASX:BKT) reveal binding sales agreements for graphite produced at its Mahenge project in Tanzania. The Australian miner has agreed to supply ‘premium’ graphite with a nominal grade of between 97.5-98.5pc for $1,490/t and ‘ultra’ graphite grading more than 99pc for $2,161/t. Both of these prices come in at a significant premium to the $1,272/t used by London-listed Armadale Capital (LSE:ACP) in the scoping study for its Mahenge Liandu graphite project, which neighbours Black Rock’s Mahenge asset. With Mahenge Liandu sharing many similarities with Mahenge, could Black Rock’s update present a real buying opportunity at Armadale?

Graphite opportunity

Mahenge Liandu is a high-grade, coarse flake 29.9km2 project based in a Neoproterozoic system of high-grade metamorphic rocks with access to reliable infrastructure and Tanzania’s most populous city, Dar es Salaam. The project, which Armadale is currently focused on advancing to production, boasts a JORC-compliant, inferred mineral resource estimate of 51.1Mt at 9.3pc total graphite.

Last March, these figures were used alongside a conservative graphite price of $1,272/t to complete a scoping study that gave Mahenge Liandu a pre-tax NPV of $349m (£261.7m) and an internal rate of return of 122pc. Meanwhile, 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. Armadale believes this life of mine could be increased significantly, with current figures representing just a quarter of Mahenge’s total resource.

Given that Mahenge Liandu is Armadale’s critical project, it is likely that the asset underpins much of the company’s value. If we assume that Mahenge Liandu reaches production under Armadale, then the scoping study figures already suggest that the business could be considerably undervalued – even once project financing is taken into account. Indeed, the firm’s market cap currently sits at £4.8m and a placing bolstered its cash balance in February.

However, if Armadale can secure binding sales agreements at a much higher price than $1,272, then Mahenge Liandu’s fundamentals would be enhanced even further. For example, if it can agree on a graphite sale price of $2,161/t, then the project’s NPV would nearly double. If this occurred, then the argument for Armadale being undervalued would strengthen, and the likelihood of a re-rate could increase.

A look at the performance of Black Rock’s market performance since the beginning of the year highlights this potential even further. Indeed, it has risen from AUD$0.039 to AUD$0.099, giving it a market cap of AUD$55.33m (£30.39m) compared to Armadale’s £4.8m.

Drawing parallels

Encouragingly, there are already several indicators that suggest Armadale can replicate Black Rock’s prices. Firstly, and most obviously, there is the fact that Mahenge Liandu neighbours Mahenge, meaning the projects share the same deposit type and rock unit.

Secondly, work carried out by Armadale at Mahenge Liandu to date has suggested numerous additional similarities between the projects in terms of quality. Indeed, test work at the project has delivered excellent levels of purity of up to 99.99pc total graphite content using conventional treatment. Likewise, graphite from the project has shown demonstrable expandability up to 330cm3/g, confirming its suitability for a range of high-value end uses.

Both of these results are typical for the high-quality product that other operators have enjoyed in the graphite province surrounding the Mahenge Liandu project. Indeed, as the graph created by Armadale below shows, graphite from neighbouring projects in the region is among the purest in the industry. 

Surging demand

What’s more, thanks to favourable conditions in the graphite sector, there is also the possibility that the price companies are willing to pay for graphite in the future could increase beyond those secured by Black Rock. As we have previously written, several growing markets have arisen for the material thanks to its robust characteristics.

Graphite’s most traditional application is in the industrial sector, where it 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) 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.

Likewise, numerous ‘gigafactories’ have arisen around the world to rush out unprecedented amounts of Li-ion batteries ahead of the EV boom. Notably, 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.

Meanwhile, on the supply side, nearly all of the world’s natural spherical graphite is currently sourced and processed in China. However, supply limitations, increasingly strict environmental regulations and an absence of the ‘high-quality’ graphene required by the market are putting the country under pressure. Many expect both China and its EV customers will look increasingly to operators in other geographies like Armadale and Black Rock as potential sources of supply that can subsequently be processed.

Potential catalyst

So, with all this potential upside in mind, what could be the trigger for a re-rate in Armadale’s share price? At the end of May, the business announced that it is fast-tracking plans to commercialise Mahenge Liandu. As part of this, the firm’s management team will hold meetings with current and prospective Chinese parties in early June to finalise binding off-take and project funding agreements.

According to Armadale, securing these agreements will validate Mahenge Liandu and mark the start of the company’s transition from graphite explorer to emerging mining. If these meetings can indicate that Mahenge Liandu is indeed much more prospective than last year’s scoping study suggested, could an accompanying update be the catalyst that catches the attention of UK investors?

Author: Daniel Flynn

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