Zen & the Art of Market Cap Maintenance
Without any negative happenings to justify a down-move, the high-quality graphite mine developer, Zenyatta Ventures has retreated from a twelve-month high of $4 to half that level. This would seem to be a rather harsh punishment by the market of the company. It could be that the advancement of some other stories to production (e.g. Flinders, Elcora) has tempted investors jump over to the Swedish story in particular. However, with a PEA imminent the tide may be about to turn for Zenyatta. Certainly having a healthy market cap as it does makes it easier to finance the company and gives it a good currency to make acquisitions, something its near-peer Flinders Resources, has done in recent weeks.
Zenyatta is developing its crystalline graphite Albany Graphite Deposit in Ontario, Canada. The consultant, RPA, estimate Indicated Mineral Resources, to date, of 25.1 million tonnes at an average grade of 3.89% graphitic carbon, containing 977,000 tonnes of graphite. Additionally, Inferred Mineral Resources delineated to date are estimated to total 20.1 million tonnes at an average grade of 2.20% of graphite, containing 441,000 tonnes of graphite. The upcoming PEA technical data will include among other items: open pit mining methods, metallurgy and processing, infrastructure, environment, manpower requirements, marketing and price assumptions, capital and operating costs, life of mine plan and execution plan. This should go a long way towards fleshing out the project for investors trying to weigh up the alternatives in the space.
Pilot Plants – Elementary Derisking
Scarcely had the post-summer lull finished than Zenyatta shot out a release on the 2nd of September with an update on the pilot plant & metallurgical testing it had previously commissioned from SGS Canada. This continues the growing trend of companies moving to pilot testing of their processing flowsheet to derisk their projects early on rather than waiting until much later. It also puts the process of metallurgical testing far more under the company’s control than in the past where third party metallurgists did their thing often at a significant distance from the company.
The flotation pilot plant results, confirmed earlier bench-scale testing, and additionally produced a concentrate that was upgraded at laboratory scale to a high purity and highly crystalline graphite product using a caustic bake based process. The highlights of the testwork were:
- the Glow Discharge Mass Spectrometry (‘GDMS’) results show less than 0.05% elemental impurities (or >99.95% purity of highly crystalline graphitic carbon (Cg)
- there were no deleterious elemental concerns and verifying good crystal structure (hexagonal with real density of 2.25 g/cc)
- tests produced samples of high purity graphite material for market evaluation & testing by more than 20 prospective end users
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Additional test work is underway to produce a higher grade flotation concentrate feed to further optimize the purification process and provide extra high purity material for testing by interested parties. This optimization work will provide additional information for the flow sheet and the much-awaited Preliminary Economic Assessment which is to be completed in the 4th quarter.
Graphite and the Urge to Merge
The recent bid by Flinders Resources for Big North Graphite was the ice-breaker for consolidation in the graphite space. Flinders is doing what many in the first flush of the REE boom should have done. I am on record as being critical of “one-mine” stories. They always have the inherent danger of something going wrong (even if just a significant delay) and then the stock plunges as expectations are shattered and investors move on, unlikely to ever return. In some cases it can be something far worse that proves terminal to a project such as government capriciousness or opposition by NGOs.
And yet very few companies in the graphite space have a second property let alone having made an acquisition to secure one. Of course, the best positioned parties in any sector to make acquisitions for stock are those with the highest market caps and they happen to be Zenyatta and Flinders. Flinders has launched itself into the fray, would, or should Zenyatta follow suit?
Rather than whether Zenyatta should purse a transaction is what is there that makes a sensible fit? With Zenyatta having staked its claim to leading in the high-purity graphite space, the obvious candidate that springs to mind is Elcora, with its near-production property in Sri Lanka, which I have previously written up here. Elcora owns the Ragedara property has an unrestricted exploration license covering four square kilometres and a mining license for unlimited monthly production. Historically, the Ragedara mine operated (under state-ownership) between 1974 and 1985 and produced as much as 18,000 tons per year of high purity graphite. The Ragedara graphite is of natural crystalline vein type.
Zenyatta’s market cap (excluding dilution) is around $110mn at the current time. With a market cap that is still less than $10mn, a move on Elcora by Zenyatta would not so much be a merger of equals, as a merger of the equally worthy and a bit of a bargain, dare I say it. Curiously, Flinders’ transaction was to get itself some longer term reserves (having the short term production already) whereas the best transaction for Zenyatta would be one that gave it shorter term production as it has the longer-term already covered.
When pondering the recent lassitude in the Zenyatta share price, my mind drifted to a less familiar part of the Zen ritual in Japan and wondered whether Zenyatta shareholders might care to indulge. In Zen Buddhism, the keisaku is a flat wooden stick or slat used during periods of meditation to remedy sleepiness or lapses of concentration. This is accomplished through a strike or series of strikes, usually administered on the meditator’s back and shoulders in the muscular area between the shoulder blades and the spine. The keisaku itself is thin and somewhat flexible; strikes with it, though they may cause momentary sting if performed vigorously, are not injurious.
The gap between resource estimate and PEA can be a tricky patch for companies to traverse when the patience of investors is tested as they await the next level of information on a project‘s viability. Recent weeks have seen the pilot testwork partly fill that gap with some exceedingly positive results, which no longer leave any doubts on the process flowsheet.
In the interim it will be interesting to see whether the game-changing transaction by Flinders proves to be a tempting path for Zenyatta to follow and gain itself some production in the very short term.
Christopher Ecclestone is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten & Company in New York in 2003 ... <Read more about Christopher Ecclestone>