Metallurgical Test Work Significantly Enhances Flake Size
Analyst Comment: Metallurgical test work by the Chinese syndicate of investors far exceeded our expectations, as results show 42% of the flake size is equal to or greater than super jumbo (price increases as flake size increases). The significant improvement in flake size has increased our average basket price from US$1,217/t to US$1,876/t (TSI assumption). This was despite keeping our flake graphite pricing assumptions largely unchanged.
We believe these strong metallurgical results also highlight why the Chinese syndicate of investors led by CN Docking, a subsidiary of CNBM (China National Building Materials) who are responsible for producing more than 50% of China's building materials, were so keen to move ahead with the transaction despite recent legislative changes in Tanzania.
Expandable graphite is a primary product in flame retardant building materials and as we previously highlighted, recent changes to Chinese building regulations have mandated the use of flame retardant building materials for all future constructions in China. We believe having guaranteed offtake from a project which is fast becoming one of the worlds leading expandable graphite projects, for their downstream building production, is in our opinion far more important than small changes to the project's ownership structure.
We look forward to the JV between Graphex and the Chinese syndicate becoming binding in the coming months, which should see a significant re-rating in the company's share price.
The information in this email should not be the only trigger for your investment decision. We strongly recommend you seek professional financial advice whenever making financial investment decisions.
Valuation: We have increased our valuation from $1.40 to $1.90 / share (share price $0.24). The major change in our valuation was updating our flake size distribution in-line with recent test work. And whilst we kept our flake graphite pricing assumptions largely unchanged, the significant improvement in coarse flake graphite material resulted in our basket price increasing from US$1,217/t to US$1,876/t.
Our valuation would have been higher however, we increased our discount rate to 16% (previously 12%) to account for country and JV completion risk. We will review our discount rate assumption once the JV becomes binding.
Finally, we acknowledge there is a significant disconnect between our valuation and Graphex's current share price. One of the major drivers for our valuation per share is the limited future dilution for Graphex shareholders (Future shares on issue - 86m shares vs. current 69m).
As our valuation assumes that the JV proceeds, once the JV partner contribute their equity contribution (US$15 - US$17m) as well as debt financing (JV partner to arrange from China), Graphex's contribution, therefore future capital raising requirement is minimal. Meaning that even minor changes to the projects NPV, can have a significant impact on a valuation per share basis.
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About Graphex Mining Ltd
Graphex Mining Limited (ASX:GPX) is an Australian exploration and development company, focused on advancing the world class Chilalo Graphite Project, located in south-east Tanzania. Chilalo is host to a high-grade mineral resource (with an Ore Reserve) and has demonstrated an ability to produce a premium graphite concentrate with a substantial portion of large and jumbo flake material. Chilalo graphite possesses outstanding expandability characteristics, making it ideally suited to the rapidly growing expandable graphite market.
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