EDITOR: | September 11th, 2014 | 7 Comments

Zen & the Art of Market Cap Maintenance

| September 11, 2014 | 7 Comments
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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.

Some Reminders

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

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.

Conclusion

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.

zen

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

Editor:

Christopher Ecclestone is the EU Editor for InvestorIntel and is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten ... <Read more about Christopher Ecclestone>


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Comments

  • GMA

    Your comment on ZEN were very positive and are much appreciated. However, I do not understand the logic behind your Zenyatta/Elcora merger suggestion.

    Flinders/Big North merger makes sense. Flinders management brought a old graphite mine and mill back to production at Woxna. The experience acquired at Woxna will help then bring Big North’s El Tejon mine and mill back to production. It must be noted that both of these two flake graphite projects are unlikely to produce the high end high purity graphite material suitable as for batteries and other high value end uses.

    What would be the benefit for Zenyatta to merge with Elcora? Zenyatta will produce hydrothermal graphite suitable for batteries and other high end products. In past news releases management makes it clear that its Albany Graphite will compete with synthetic graphite. Elcora also has high purity graphite. What would be the benefit of a merger or acquisition? Why would Zenyatta need near term production?

    The Zenyatta Albany deposit is proving up to be a one of a kind graphite deposit as it should easily compete head on in the synthetic space which commands $19,000 ton for battery grade graphite.

    No. Let’s hope that Zen management keeps a clear and focused vision of developing its “one of a kind” hydrothermal graphite deposit.

    September 11, 2014 - 10:55 AM

  • jimmer

    Great comment GMA!

    The US is looking to build large manufacturing facilities for lithium ion batteries, and is keen to identify new materials, whether raw, or modified, to gain a competitive advantage over oversea competitors. Top scientists of academic organizations and global corporations are testing and reviewing the Albany deposit. An acquisition of a deposit on another continent would be quite a distraction for a small, focused management team.

    Here are the links to the projects at Oak Ridge National Laboratory where Zenyatta is a raw material supplier:

    http://energy.gov/sites/prod/files/2014/07/f17/es207_daniel_2014_o.pdf
    http://energy.gov/sites/prod/files/2014/07/f17/es164_wood_2014_o.pdf

    http://www.ornl.gov/ornl/news/story-tips/2014/deea420a-b412-48dc-94e0-d9e476d71acd

    The Albany deposit has all the attributes required to garner attention from academics and corporations.

    September 11, 2014 - 1:05 PM

  • Fred

    Chris, what do you think of the merits of Focus vs. Zenyatta?

    September 11, 2014 - 1:28 PM

  • bert.l

    Chris, many thanks for your article.
    (I am also a big fan of that other Christopher Eccleston – the English actor).

    I have followed Zenyatta Ventures and the incredible ZEN team very closely for the past 2 years. It has been stated many times by experts in this field that the Albany deposit is truly a world class – there is no other lump/hydrothermal graphite anywhere else on the planet to match their purity and tonnage.

    (Flinders is a flake graphite – different market)

    I have noticed several key points about Zenyatta – from news releases and interviews in the past week as follows:
    1. The company stated that over 20 potential end users are starting to evaluate your graphite. Where are samples being sent to prospective customers in Europe, Japan and the U.S.

    2. Another 10 or more research institutions and testing facilities are studying our deposit and receiving samples as well.
    2 a/ Zenyatta Graphite is the only natural graphite being used in current studies at the U.S. Dept of Energy – see link>>
    http://energy.gov/sites/prod/files/2014/07/f17/es207_daniel_2014_o.pdf

    3. Zenyatta’s team is in early stage discussions with multiple parties.

    4. Everything is on the table. ***Ken Stowe recently came out of retirement to join Zenyatta ( he’s the Voisey Bay – Diamond Fields guy)

    The above points lean heavily towards a buy out in the coming months by a multi-national, at this time I cannot see a merger with Elcora, though of course – anything is possible.

    I hope to read more of your good insightful posts in the future.

    September 11, 2014 - 2:22 PM

  • Fred

    Per item 4, Diamond Fields sold out to Inco before the general public could make much money on it. The management grabbed the small quick buck, rather than the piles of money that could have been made long term. Even Inco sold out.

    September 11, 2014 - 3:46 PM

  • Tom

    To my mind Lomiko is the most obvious Canadian graphite candidate for take over. This company has documented mineralization, a finger in the graphine pie and most importantly money in hand. Focus seems to have already sold a significant graphite tonnage so how does a Zen-Lomiko partnership sound?

    September 12, 2014 - 10:53 AM

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