The Most Important Line Item in Zenyatta’s Graphite PEA
Zenyatta Ventures Ltd. (TSXV: ZEN | OTCQX: ZENYF) today released the results of its Preliminary Economic Assessment (“PEA”) on its Albany graphite project, near Hearst, Ontario, offering the markets one tantalizing observation.
A PEA is a standard document in the evolution of a mining property, useful to help the owner of the property obtain further equity and debt funding. The document is exactly what its name suggests it is: an economic assessment based on preliminary information. A well-written PEA gives the reader a look-and-feel for what the mine’s economics could be, knowing in advance that many of the key assumptions and conclusions in the PEA will change over time as more facts are known.
This PEA from Zenyatta indicates the Albany Project could be a low-cost source of high purity graphite, using an innovative “green” purification process, and calls for a 22 year mine life (based on less than 50% of the Indicated & Inferred Mineral Resources); total life of mine gross revenue of roughly $4.8 Billion; an after-tax cash average annual cash flow of $110 Million; and, a base case after-tax Net Present Value at a 10% discount rate of $438 Million yielding an after-tax Internal Rate of Return of 24%.
From a mining economic perspective, the PEA is positive. It encourages management to take the usual next steps in the development process. (Disclosure: GTA Resources and Mining Inc., for whom I’m an insider, has a 82 km long property just to the south of the Albany Project.)
To get these numbers, Zenyatta had to make informed assumptions about the future price per tonne for purified graphite. The price they worked around to $7,500 per tonne. Projected operating costs at the site of $2,046 per tonne would create a gross margin of $5,454 per tonne.
As the troubles in the Ring of Fire have shown, just having a high grade deposit in the ground is meaningless. It has to be economic. And that’s why, to me, of all the numbers in Zenyatta’s PEA it’s this margin calculation that matters the most, and that makes the revenue input the most important line item in the PEA.
Zenyatta provided guidance for its thoughts on the 2017 graphite market:
|Market Segment||2017 Market Demand Estimate (kt)||Price Range||Average Price|
|Batteries||160||4,000 -> 20,000||12,000|
|Powder Metallurgy||20||3,000 -> 12,000||7,000|
|Fuel Cells||15||5,000 -> 10,000||8,000|
|Conductive Polymers||6||3,000 -> 5,000||4,000|
|Carbon Brushes||90||3,000 -> 5,000||4,000|
|Nuclear||30||10,000 -> 35,000||23,000|
|Lubricants||80||3,000 -> 5,000||4,000|
|Super-Capacitors||2||5,000 -> 10,000||8,000|
|Graphite Artifacts||15||3,000 -> 10,000||7,000|
|Electronics||8||30,000 -> 40,000||35,000|
Some of these market segments have the potential for huge swings. Look at the Batteries line: the price is expected to run between $4,000 and $20,000 a tonne! How the pricing actually turns out will have a massive impact on the economics of the mine.
Part of the reason for these pricing variables is that graphite is not an element found on the periodic table – it’s a stable form of carbon. If you buy, say, copper on the commodity exchange, you know exactly what you’re getting – a tonne of copper from Chile is exactly the same as a tonne of copper from Duck Pond, Newfoundland. Not so with graphite – although it is traded globally, it is not a commodity, it does not have a standard clearing house, and one tonne of graphite may not have the same characteristics as a tonne from another deposit.
Graphite is described by its carbon content (as a percentage) and by mesh size (the physical dimensions of the grains). A higher carbon content or a higher mesh size will drive up the value of that graphite. If both carbon content and mesh size are higher than average then the seller can expect to yield a higher price per tonne.
That’s why Zenyatta continually talks about the high purity of its deposit. The higher carbon content should dictate a higher price per tonne for its product, which drives a higher revenue number, which drives a larger gross margin. The project then becomes less risky when compared to other graphite projects.
Although this economic assessment is still preliminary, it does offer a good window into what the Albany Project could be. Keep an eye on the revenue line.
The PEA must be filed at SEDAR within 45 days (as per National Instrument 43-101). The press release can be found here at the company’s website.
Mr. Clausi is an experienced investment banker, executive, director and shareholder activist. A graduate of Osgoode Hall Law School called to Ontario's bar in 1990, ... <Read more about Peter Clausi>