Energizer Resources EGZ.T
Share Price…. $0.205
Shares Out… 192.6M
Market Cap… $39.4M
It has been over a year since my visit to Energizer Resources’ (EGZ-T) MadagascarGreen Giant Graphite Project in May, 2012. Even at its earliest stages, this massive graphite property, stretching more than 120km looked like a world class mine in the making. Telltale graphitic staining turned the normally rust colored African dirt to grey everywhere we went. When we visited the Molo site on the second day and walked th e heart of the Molo Zone, a 300 meter trench continuously mineralized at surface; I was convinced that we were standing on a site that would supply a majority of the world’s graphite needs. Not that I really knew much about graphite mining back then, but clearly, there was more graphite in Madagascar than the world could ever need. Even I could see that.
Over the past year the company has completed several key milestones including…
1. Completed an initial NI43-101 resources estimate with 9,246m of drilling.
- 84.0Mt Indicated @ 6.36%C
- 40.3Mt Inferred @ 6.29%C
2. Completed a PEA study indicating robust economics:
- $162M Capital cost
- $421M Pre-tax NPV discounted @ 10%
- 48% Internal rate of return (IRR)
3. Greater than 99.9%C in advanced metallurgical studies
4. 'Large flake’ distributions up to 47.4%
This summer's recent news of excellent flake distributions and high purity have sealed Green Giant as a future mine site. The market may not yet be convinced, with huge price discrepancies and disagreement in the investment community as to which deposits are ultimately the most economic. Graphite stocks like Syrah Resources SYR.A and Zenyatta Ventures ZEN.V are worth $300M and $200M, respectively, in market capitalization. In comparison, other companies like Energizer Resources EGZ.T and Mason Graphite LLG.V, which have arguably just as valuable deposits, if not more, are valued at a paltry $40M and $32M market capitalization. Never have I seen such disparity between companies within a given sector. Companies which will be mining graphite within the next 2 years like Energizer, Focus and Northern Graphite are currently being valued at a fraction of the price of companies which do not have a resource or whose confidence is so low you can complete an economic study. How does that make sense?
Do companies like Syrah and Zenyatta really deserve this type of premium over its peers? Are low cost producers like Energizer, Focus Graphite and Mason Graphite undervalued as potential mining operations? This report compares these companies in order to attempt an answer to some of these questions.
The best of ALL WORLDS… Purity, Flake Distribution and Tonnage
Madagascar graphite is known in the industry as the best graphite in the world. Madagascar sits on a major continental shear zone. This is one of the rarest geological formations in the world, located between two massive continental plates resulting in one of the highest temperature environments for mineral deposition. This high temperature environment led to high purity graphite with very little contaminants being deposited along this shear zone in a hydrothermal process similar to the formation of graphite in the breccia pipes at Zenyatta’s Albany deposit. Green Giant even has brecciated graphite deposits on the property. The biggest difference between Albany and Green Giant; is that in Madagascar, the mineralization is on a regional scale stretching along the entire continental shear zone. The reason the high temperature environment is so important is that it leads to most of the impurities simply being burned away in the deposition process. What makes Madagascar graphite so unique is that both hydrothermal and metamorphic process were involved in the formation of these deposits resulting in both high purity and extremely large flake graphite formation. In the graphite world, that is considered to be the best of both worlds.
Green Giant graphite displays all the typical qualities of Madagascar graphite, especially when it comes to large flake distribution and extremely high purity. The market may not think Energizer has what it takes, but everyone else in the graphite industry does. DRA and Asbury have stated they are impressed with the high quality nature of Energizer’s graphite. The high quality nature lends to the graphite being easily purified and worked which gives Energizer more flexibility to give the end user a specific desired product. It also means processing costs will be low in comparison to other projects which will require more acid to reach the desired purities of the end user.
Energizer has identified three qualities at Green Giant that ensure as a world class graphite mine site in the making.
- High purity graphite in excess of 99.9%C
- High percentage of large flake of up to 47.6% (+80 mesh)
- Enough tonnage to mine into the 22nd century
Extremely High Purity
EGZ recently reported they achieved 99.9%C on a first-pass single stage hydrometallurgical purification using conventional leach technology test at SGS Canada. The significance of the news and the corresponding 150% SP increase on July 29th is the potential for VALUE ADDED revenue streams at Energizer’s Molo Project. 99.9% purity means Energizer can sell into VALUE ADDED GRAPHITE MARKETS including spherical graphite manufacturers’ who require the highest purity natural flake graphite. Energizer Resources will be able to sell this high purity graphite into the market for products like ‘Lithium Ion Batteries’ and ‘Specialty Graphite foils’ which are destined for applications like energy storage and certain refractory applications. Specialty graphite foils are major components in smart phones, consumer electronics, solar panels, laptops and all flat panel TV and PC screens.
It also means EGZ.T will be able to achieve a high purity with a simple processing flow sheet compared to SYR.A’s Balama which contains vanadium. Vanadium is not a contaminant for many graphite applications, but if they want to sell their product to the battery manufactures or spherical graphite manufacturers, Syrah will have to process the vanadium out. Vanadium is a known contaminant in lithium ion batteries. Balama has low levels of other impurities like Green Giant, but the Vanadium in the deposit will make Syrah go the extra processing step if they want to try to capture the battery market. Currently, the battery market is very small and wouldn’t support Bisset Creek’s production let alone Syrah's. Demand for 99.95% graphite for lithium ion batteries was 15,000 tonnes in 2012 with demand split 50/50 between natural and synthetic. The trend is toward replacing synthetic with natural in the majority of lithium ion battery applications. This market is expected to grow to 120,000 tonnes by 2020.
In addition to achieving 99.9%C purity by leaching the graphite with acid, Energizer upgraded the standard floatation purity results used in the PEA from 94.9%C to 96.3%C. They also achieved a much higher flake distribution by applying a simpler processing technique by using only a soft grind and gentle polish between floatation ,stages. The most recent news release was very promising for improving the economics of the Green Giant project. Not only did Energizer significantly improve results, but they mentioned to me they can even improve upon that! Energizer can be a little bit more aggressive in polishing and grinding to achieve higher purities with a little less large flake distribution. This gives Energizer maximum flexibility in tailoring a product to its end user requirements as a refractory would rather have large flake and 97% purity while battery manufacturers are more concerned about purities.
Ultimately, Energizer’s customers will determine the product mix that the company produces, but the combination of increased large flake distribution and purity will increase average revenue by at least $100 to $200 per tonne from the PEA and decrease operating costs. Processing costs of $22.90 per tonne milled, (80% of the cost of producing a graphite concentrate) will decrease in the next economic study.
- Mining costs….. $4.76/t mined
- Processing costs…. $22.90/t milled
Instead of receiving $1,400 for their large flake, Energizer will receive $1,500 per tonne; they will be receiving $1,300 per tonne instead of $1,100 for medium flake, and between 10% to 15% of the medium flake will sell as large flake, further enhancing revenues. This means that no matter where graphite prices go, Energizer will always receive premium pricing in the industry compared to its peers.
Current Graphite Prices of August 2013
|
|
USD$/tonne
|
(94-97%C)
|
Large Flake
|
$1,400 - $1,500
|
(+80 mesh)
|
Medium Flake
|
$1,100 - $1,300
|
(+100-80 mesh)
|
Amorphous
|
$500 - $700
|
(80-85%C)
|
High Percentage of Flake Distribution
Energizer may not be the highest grading deposit at 6.3% compared with Balama 10.2% or Lac Gueret at 20.4%; however, when it comes to the distribution table, Green Giant is second to none and shows why flake distribution matters a whole lot more than grade. Energizer’s large flake distribution (+80 mesh) at Molo is 47.6% while Syrah’s large flake (+75 mesh) runs at around 8%. Syrah plans on mining 20%C grade ore at start-up while Energizer will be mining 8.5% ore. Even though Syrah is mining grades 150% higher than Energizer, Energizer will actually produce almost 2 and a half times large flake graphite per tonne, as the above table shows is significantly more valuable than medium flake or amorphous.
Company
|
Project
|
Grade %C
|
Purity Achieved
|
Distribution Chart (um)
|
|
|
|
Large Flake
|
Medium Flake
|
Fines/Amorphous
|
Energizer Resources EGZ:TSE
|
Green Giant
|
6.3%
|
99.9% Cgr
|
+80
|
47.6%
|
+15
|
23.5%
|
-150
|
28.9%
|
Syrah Resources SYR:ASX
|
Balama
|
10.2%
|
97.0% Cgr
|
+75
|
8.0%
|
+150
|
45.0%
|
-150
|
47.0%
|
Mason Graphite LLG:CVE
|
Lac Gueret
|
20.4%
|
96.4% Cgr
|
+80
|
30.6%
|
+150
|
14.3%
|
-150
|
55.1%
|
Please note that not all -150 mesh is created equal. Amorphous graphite actually starts at -400 mesh. While Syrah, Focus and Mason all have plenty of -400 mesh graphite, Energizer’s Green Giant has none. Graphite pricing is set by supply contracts and the prices listed in Industrial Minerals reflect that with only the most popular markets being quoted. Energizers fines will receive superior pricing to the ‘amorphous’ graphite of other projects.
If you give zero value to fines/amorphous because it is not certain they have any economic value selling against the Chinese amorphous production, Syrah is mining 150% higher grades, but poor distribution leads to 40% more revenue per tonne for Syrah milled at $114/t vs. $81/t. Syrah is still netting more $$$ per tonne in a straight out and out mining scenario, but the difference between revenues and grades is much less than is implied by grade due to Green Giant’s higher quality flake distribution.
Syrah will net $114 per tonne of ore at 20%C…
- $24 per tonne for large flake @ $1500/t
- $90 per tonne for medium flake @ $1,000/t
- $47 per tonne for fines @ $550/t
Green Giant will net $81 per tonne of ore at 8.5%C…
- $61 per tonne for large flake @ $1500/t
- $20 per tonne for medium flake @ $1000/t
- $12 per tonne for fines @ $500/t
When you factor in Energizer will produce 2.5 times the revenue per tonne of the more desirable large flake, Green Giant has a strategic advantage over a company like Syrah. Amorphous and medium flake markets will be subject to supply shock when Balama comes online while the large flake market is a lot more insulated. Resulting in a much higher pricing risk for medium flake and amorphous graphite markets. Considering other factors like simpler processing, higher purity and the absence of vanadium in the deposit; Green Giant clealy emerges as the favorable mining scenario for graphite compared to Syrah Resources Balama.
When you analyze future revenue streams of these two planned mines… does a $300M valuation for $114/t while a $33M valuation for $81/t make sense?
Not when mining/milling cost is less than $30/tonne.
Tonnage/Geometry/Scalability
Now this is something I have tried to hammer home since I first wrote about Green Giant: this deposit is undeniably one of largest graphite deposits in the world, if not the biggest. Green Giant is so big, you can easily locate the telltale grey staining of the deposit on Google Maps and see the trends stretching the entire property for over three hundred kilometers at surface. Technically Syrah's drilling over a billion tonnes of graphite ore in Mozambique makes them officially bigger; but with mineralization stretching for more than 120km and the deposit being defined for only 1km in strike length Green Giant has more ore on its property than Balama.
Different exploration approaches lead to different results. Energizer chose to drill a small portion on the deposit to do definitive economic studies while Syrah chose the ‘shock and awe’ route of widely spaced holes to demonstrate a large resource. While Syrah has to go back and drill to raise the confidence of the mineralization to complete even the most basic economic reports, EGZ is working full steam ahead towards and updated economic study this winter which will include all the latest results. In the long run, Energizer is further ahead towards building a mine than Syrah at Balama, which must initiate another expensive drill program before showing any economic confidence in the deposit.
Green Giant has the greatest exploration upside of any graphite deposit in the world. It covers a much wider area than Balama or Graphite Creek and the graphite is proving to be the best anywhere in the world. When looking at new mine sites to be the backbone of a developing materials sector like graphite, you want to pick sites that have longevity and the ability to ramp up production in a timely and cost effective manner. But if you want to build the next world class mine in the graphite sector, you need to have tonnage to bring all the pieces of the pie together. Green Giant, Balama, and to a lesser extent Graphite Creek, all exhibit these qualities; have high quality graphite AND the capacity to expand production with the capability to mine into the 22nd century.
Just to give you an idea of the capacity of these new graphite discoveries…
Green Giant has the capacity to produce the entire current flake market.
Just think about these dizzying numbers for a second. If you built a mine the size Western Copper’s WRN-T Casino (a 100,000 tonne conventional copper mine plus 25,000tpd heap leach), Green Giant would produce well over 2Mt of graphite per year of all types and purities.
100,000tpd times 0.06%Cg = 6,000 tonnes of graphite per day
6,000 tonnes times 365 days = 2,190,000 tonnes of graphite per annum
With Green Giant’s recent flake distribution numbers and purities:
- 1.04Mt @ 96.8%C (+80 mesh)
- 0.51Mt @ 95.6%C (+150-80 mesh)
- 0.63Mt @ 95.7%C (-150 mesh)
2.19MT of graphite per year!!!
With the large flake averaging the highest standard the industry has pricing for.
Do you get it yet?
That is almost double the current size the ENTIRE GRAPHITE MARKET.
Do you understand why it is "game over" for most flake graphite explorers yet? Especially those with smaller deposits, something that is world class similar to Green Gaint or with grades like Lac Kinfe or Lac Geuret will have to be discovered to ever convince anyone to build a mine when you have BEHEMOTHS like Green Giant and Balama going into production in the next 3 or 4 years. These two monsters can simply pump out flake at a fraction of the cost because they can take advantage of economies of scale that smaller deposits cannot. In the end, the small players just won’t be able to pump out graphite cheap enough to survive and be able to compete with Green Giant or Balama. You are going to have to have a specialty product like lump or show such impressive distributions of large flake AND purities to continue in the game with the ‘Big Boys.’
Not even the Chinese will be able to pump out high purity graphite as inexpensively as Energizer will be able to at Green Giant.
No mine will ever start out producing graphite at that rate because you would drown yourself in graphite stockpiles. The market simply cannot handle and isn’t ready for it. Green Giant is a site that can easily be ramped up over the decades as anticipated demand for graphite grows. The mining industry would be nuts to bank all their hopes on one mine when the whole graphite argument came about because of security of supply. The market could support at least 2 or 3 major mines outside of China, especially when the mines promise to be competitive against Chinese flake production. Why would you risk it all in one mine? It would be absolute craziness. Right now it appears the TWO heavyweights in the graphite industry outside of China will be Balama in Mozambique and Green Giant in Madagascar.
While Balama will be primarily a bulk medium flake producer, Green Giant will be known as a large flake producer and produce the most large flake graphite of any planned mine. This niche makes Green Giant special and unique as it looks like everyone has the ability to achieve high purity results while not everyone possess the large flake that Green Giant does. In fact, Green Giant will produce almost half of the incremental large flake graphite from 4 planned mines; Lac Knife, Lac Gueret, Balama, and Green Giant. EGZ.T and SYR.A planned start-up rates of 220,000 and 84,000 tonnes of graphite per annum, repecitvely, would represent close to a 30% increase in supply of the material over the next few years. AND AGAIN, not to hammer it home or anything, but the big thing, vital for putting down production roots outside China, is that both deposits can easily match ANY INCREASE IN DEMAND unlike Lac Knife or Lac Gueret which are restricted in capacity due to limitations on the size of the resource.
According to Industrial Minerals, graphite demand is expected to increase to 235,000t by 2016 under a base case scenario. Demand is expected to increase to 528,000t under a bullish case scenario. Just between Energizer and Syrah, that is 304,000t. When including from the high grade Quebec mines Lac Knife and Lac Gueret; another 100,000t of incremental supply is added to the market. That is enough graphite from 4 mines to meet 80% of the forecasted demand in the most bullish of cases.
The biggest question in my mind is will it be the right type of graphite? 310,000t of that graphite will be -80 mesh.
| Graphite Mine | Total Graphite Production | Large Flake | Medium Flake | Fines |
| Green Giant | 84,000t | 40,000t @ 96.3%C | 19,720t @ 95.6%C | 24,280t @ 95.7%C |
| Lac knife | 43,600t | 14,600t @ 98.3%C | 12,990 @ 98.2%C | 16,000t @ ~98%C |
| Lac Gueret | 50,000t | 15,300t @ ~96%C | 7,136t @ ~96%C | 27,569t @ ~96%C |
| Balama | 220,000t | 17,600t @ ~97%C | 99,000 @ ~97%C | 103,400t @ ~97%C |
| Incremental Graphite Supply | 397,600t | 87,500t | 138,800t | 171,300t |
A future flood of Medium Flake?
A future glut of medium flake and amorphous may be on the horizon. 310,000t of medium flake and fines/amorphous is a lot of supply for the market to absorb, especially when a large portion of incremental demand is going to be for large flake graphite. In the base case scenario of 235,000, if just half the new demand is for large flake, it could even put the squeeze of on large flake prices while medium and amorphous prices fall due to oversupply.
The big elephant in the room regarding medium flake is Syrah’s Balama. Approximately 99,000 tonnes of medium flake graphite will come onto the market when Balama goes into production. Nearly a quarter the entire flake graphite market AND almost triple the combined medium flake production of Lac Knife, Green Giant and LAc Gueret. 99,000 tonnes of medium flake is a lot for the market to handle and could ultimately drive medium flake prices lower, closer to other medium flake producers cost of production.
A 47.6 large flake distribution gives Energizer a huge advantage and leverage as a mine producing a high demand product that other planned mines just cannot produce. This certainly gives Green Giant an advantage in pricing risk vs. Balama and gives a much better assurance of the net present value and return on investment on the project. Large flake prices will be a lot more stable and may even enjoy a larger premium over medium flake in the future.
Potential to be one of the LOWEST COST graphite mines
The new discoveries made in the graphite sector in 2012 promise to be the cornerstones of graphite production for the next century. These deposits represent the low hanging fruit in the industry. They are the biggest graphite deposits in the world. They have excellent purity, grade from 4% to 20%, and are cash cows at current graphite prices. Green Giant, Balama, Lac Knife, and Lac Gueret all have merit as legitimate graphite mining operations. They are world class flake graphite deposits which promise to meet the world’s graphite demands. What makes these projects stand out above the rest is the fact that all these mining operations promise to be some of the lowest cost mines in the graphite industry. Mines with a cost so low, they will be able to compete against Chinese flake producers.
Energizer Resource’s Molo may even be the lowest cost producing large flake graphite mine once fully up in operation.
Mines that could flood the ‘Chinese Flake’ market?!?!?!
One factor you need to look at when building a graphite mine is meeting or exceeding the Chinese cost of production. Chinese graphite mines can produce flake graphite between $350 and $900 per tonne. According to my conversations with Energizer management who have toured the 4 of China’s larger graphite operations, the current Chinese cost of production before freight ranges from $350 to $450 per tonne. The smaller, more remote, mom and pop operations can exceed $900 per tonne which is on par with Northern Graphite’s cost of production and the cost of production threshold for any graphite mine. This certainly puts Green Giant and the smaller higher grade operations competitive against Chinese production of large and medium flake graphite.
Estimates for Green Giant range depending on different variables, but under the most basic scenario Molo is estimated to produce large flake graphite concentrate at around $418 per tonne (ex-freight) which is similar to the lowest cost Chinese producers. The higher grade Quebec operations such as Lac Knife and Lac Gueret are also competitive because they have such a high grade only mine a small amount for a high output. These mines are estimated at $435/t for Lac Knife and $390/t for Lac Gueret.
The $418/t cost estimate for Molo is just for start-up production. Management expects to be able to reduce these costs further by optimizing operations and using synergies with the nearby developing Sakoa Coal Fields. Currently, the Green Giant PEA is not optimized for mining, with initial plans including expensive containerized diesel as primary energy source. Synergies with Sakoa Coal Project could bring costs down close to $250 per tonne with the addition of power, heavy oil and paved roads to the project. The PEA was also done in South African Rand indicating further enhancements converting the PEA to the appreciating USD. Test shipments are being made to the Port of Soalara later this year from Sakoa, which means Green Giant will have access to the cost saving infrastructure sooner than later.
Another big factor is processing, currently at 80% of the cost of producing a concentrate. Energizer achieved better results from the PEA by applying a softer grind to the graphite. A simpler and less intense process could result in further processing cost savings than was initially indicated in the PEA released in February. The PEA was considered extremely conservative to start, but even if Energizer comes close to the targets in the PEA and then add further enhancements and synergies, Green Giant could be mined for $200 to $250 per tonne before they ship it to the coast.
$250 per tonne vs. $350 per tonne?!?!??!
If cost estimates are remotely accurate, this is quite a role reversal from 20 years ago when the Chinese flooded the market with graphite, putting Uley and Kringel out of business while mothballing projects like Bisset Creek and Lac Knife.
The Chinese have lost nearly all advantages that made them low cost producers and they don’t have the biggest advantage of all: limitless graphite resources to source from for the next 100 plus years that will enjoy all the synergies from economies of scale. The current Chinese flake mines are mining flake near the Russian border and trucking ore 3000km to the nearest purification plants at a highly subsidized $100/tonne cost which virtually nullifies Energizer’s transportation cost of $105/t. I expect Energizer will eventually tie into rail to the coast, which will all but eliminate the transportation cost giving Energizer’s Green Giant that much more of a cushion on the Chinese competition.
Consdering these factors:
- Chinese mines are depleting in grade and a quality.
- Chinese have lost a wage advantage mining wages rise towards a global wage
- Energizer has optimal flake distribution percentages at Molo.
- Energizer has the purest flake commanding premium pricing
- Green Giant is the largest graphite deposit defined by area anywhere in the world ensuring limitless supply of graphite for years.
- Molo has the potential to be the lowest cost producer in the industry once in full production.
Low Cost Production Makes You King
Some people say grade is king. Well they are partially correct. Grade is usually king because it makes a low cost producer. So, in my opinion, low cost mining is king. But grade is a good determinant of low cost production. I don’t have to tell you how significant it is to be the lowest cost producer in the industry, especially when 70% of the industry originates in one country. The biggest reason low cost production is so important is that it dramatically reduces the risk of the project’s long term viability through any and all types of markets. It ensures a profit before your competition and it ensures your company a competitive advantage for life. It means that you are king of the miners within that given sector and everyone looks to you to lead the market place. You set the market price. Even in the worst markets, it is your production that still makes it to the end user.
How did the Chinese capture the REE and graphite markets over the last 25 years and put mines like Mountain Pass and Uley out of business?
Simply by having the lowest cost production in the industry.
They could not have flooded the market without the lowest cost production, no matter how much China subsidized the miners. This is why I am so high on specific projects like Green Giant and Balama and Lac Gueret. These projects have all the desired qualities to become world class graphite mines that will lead the industry into the 21st century and display qualities to be low cost industry leaders:
- They are massive graphite deposits which have 100+ year mine lives, with scalability
- They are in strategic locations close to water in Alaska, Madagascar, and Mozambique
- They are high grade deposits with even higher grade cores
- All 3 have excellent metallurgical results and the potential for value added markets, such as spherical graphite and receive premium pricing.
Everything that anyone could want in a graphite mine, these projects have. Tonnage, grade, purity and an ideal location close to water in politically safe jurisdictions. These projects will ensure a cheap and reliable source of flake graphite for years to come.
A typical flake graphite mine in China now mines flake for $350 to $450 per tonne.
| Green Giant | Lac Gueret | Lac Knife |
| Stage of Development | PEA | PEA | PEA |
| | | |
| Mine Size | 3,000tpd | 500tpd | 800tpd |
| Production | 84,000tpa | 50,0000tpa | 43,600tpa |
| Average Selling Price | $1,564/tonne | $1,525/tonne | $4,490/tonne* |
| Production Costs | $418/tonne** | $390/tonne | $435/tonne |
| Mine Life | 20 years | 22 years | 20 years |
| | | |
| Capital Cost | $162M | $107.9M | $154M |
| Pre-tax NPV @ 10% | $421M | $283M | $246M |
| IRR | 48% | 33.7% | 32% |
| Payback | 3 years | 2.5 years | 2.8 years |
*Focus Metals uses $10,000 price for their 99.95%C product, most likely materially overstated.
**$105/tonne freight has been excluded from cost structure for comparison purposes.
Christopher Skidmore
Beat the Market Stock Picks |
