Evolution Energy Minerals (EV1) - Advanced Graphite with Contracts

Evolution Energy Mining Limited is focused on the development of the Chilalo Graphite Project in South Eastern Tanzania. The company is focused on sustainable graphite products for the global green economy. A DFS (Definitive Feasibility Study) was completed in January 2020, demonstrating the economic viability of the Chilalo Project along with its potential to generate attractive returns.

Matt Gordon caught up with Phil Hoskins, Managing Director, Evolution Energy Minerals. Mr. Hoskins commenced his career at a large international accounting firm and has since gained corporate experience with both Australian and international listed companies. He is a senior executive with 16 years of broad finance and commercial experience across resources exploration, project development, and production as well as large-scale property developments requiring debts and equity financing. He is currently the Managing Director of Marvel Gold Limited.

Company Overview

Evolution Energy Minerals’ flagship asset is the Chilalo Project located in southeast Tanzania. The Chilalo Project is an advanced, development-ready project that is expected to become a premier source of world-class flake graphite products. The company was founded in 2021 and is headquartered in Australia. It is listed on the Australian Stock Exchange (ASX: EV1).

Evolution Energy Minerals is developing the Chilalo Graphite Project in Tanzania. This is a high-grade coarse-flake graphite project. The project is advanced and development-ready. The company is pushing the project towards an FID (Final Investment Decision) in the coming months. It is also looking at some high-prospect downstream opportunities for future growth in a manner that is both sustainable and ESG-friendly.

Cash Position

Evolution Energy Minerals recently raised AUD$13M in capital via a fully-committed two-tranche placement of 40,625,000 fully paid ordinary shares to institutional, and professional investors at a price of $0.32 per new share. Notably, the placement was strongly supported by existing, new, domestic, and offshore investors. The company has access to the ARCH sustainable resources fund that comprises the cornerstone investors and shareholders. The shareholders contributed 25% to the capital raise. The capital raise was carried out as the company wanted the Chilalo mine FID to be funded to completion.

Ongoing Operations

The Chilalo asset currently has an 18-year mine life. The company isn’t looking to extend the mine life but has plans to carry out 30km+ of exploratory drilling to demonstrate the scale and potential of the multi-decade mine. The downstream test work to produce coated spherical graphite for battery anode materials has returned excellent results so far. The company is looking to carry out advanced tests, work qualifications and Feasibility Studies. This work will either run alongside the mine work or soon after.

Despite the long mine life, the company is focused on exploration drilling. It is looking to benchmark the assets against other competing projects. The operating costs for the life of mine are a little bit higher. Notably, the 18-year mine life goes up to 180m in depth. Given the extensive graphite presence at the surface, the company does not see any reason to go below 60m. The strip ratios and the costs of the operation are a bit on the higher side. The recent financing demonstrated the company’s confidence in the extensive near-surface high-grade graphite.

Evolution Energy Minerals is looking to mobilise the drill rig in September. It is important to note for the financiers and off-takers that the asset is expected to be mined for the next 50 years. The graphite reserves will enable the company to double or even its triple production in a growing market. The resource increase will have a direct impact on the project's economics. The company is looking to include the additional graphite into the updated resources and reserves.

The Chilalo Graphite Project is a high prospect coarse flake deposit. Investors need to recognize that coarse flakes can drive significantly higher prices. Notably, the market price for coarse flake graphite jumped by around $900 a ton and it can sell for $3,500 a ton. The presence of high proportions of coarse flake graphite makes it a very-high margin project.

Recently, Northern Graphite acquired the Lac des Iles Mine in Canada and published material pricing. This provides a pricing indicator for slightly coarse graphite products in the market. The company anticipates that despite the inflationary environment, it can achieve much better margins than the DFS numbers. Notably, the graphite prices are up by at least 20% compared to the 2020 DFS numbers. The previous DFS had an estimated $220M NPV (Net Present Value), which is closer to half a billion dollars in Australian dollars.

In addition to the value created through coarse-flake graphite, the company is also looking at downstream opportunities. Coated spherical graphite has performed really well in lithium-ion batteries. Companies have demonstrated a vertical integration for a part of the business that has led to the businesses trading at multiples just for the mine developers. Evolution Energy Minerals is confident that it can demonstrate value moving forward.

The company is 6 weeks away from the updated DFS. The project CapEx (Capital Expenditure) is estimated to be around US$100M. In the Q1 2020 DFS, the project CapEx was estimated at $87M. The jump in project CapEx is largely due to the rising inflation in the last 15-18 months.

In the 2020 DFS, the company had a $750 OpEx (Operational Expenditure) with a $1,500 sales price, which led to a $750/ton margin. The company anticipates that the sales prices will be slightly higher at $1,850, a 20% increase. However, the company isn’t expecting a 20% rise in project CapEx. Overall, it anticipates better project economics and margins. In terms of project scale, the company is looking to produce about 15,000t of graphite concentrate on an annual basis.

In order to fund the project CapEx, the company is currently provisioning a preliminary information memorandum for banks and financial institutions, providing extensive information related to the project. The actual numbers are expected to be finalised by mid-October 2022. The company is cognizant of potential risks such as a Chinese off-take, regulatory issues in Tanzania, or changes in the graphite market.

Recognizing the possible issues in advance enables the company to get ahead of the problem and focus on devising potential solutions. The company had a discussion with the Special Presidential government in Tanzania two weeks ago. It is working on negotiating the final terms of a framework agreement with the Tanzanian government. By late September, a framework agreement is expected to be signed in a presidential ceremony.

The framework agreement has been 5 years in the making. It is a critical de-risking element for the project from a regulatory perspective. Following this, the company will publish an updated DFS that will provide numbers that can be fed into the existing models. This will help the company service certain levels of debt. Following the completion of the DFS, the company has lined up an independent technical engineer for a duration of one month that will be responsible for reviewing all the technical information on behalf of the financiers. By the end of 2022 or early 2023, the company will be appointing a lead manager to complete the due diligence and run the financing.

It is important to note that Evolution Energy Minerals has spent over 250 days in China spread across 30 plus trips. The company has been committed to understanding the market and introducing its product to the end users. The qualification and test work process have been ongoing since 2015. The company has been successful in getting its graphite pre-qualified for the Chinese, European, and US markets.

Off-take Agreements

Evolution Energy Minerals has signed an off-take agreement for its post-flight products. Over the last 6-7 years, the company carried out test work in order to determine the value-added applications for graphite and graphite oil. The company has signed deals for expendables and foils, which is a relatively unknown market. It has also signed with a sophisticated bank that is targeting the lithium-ion battery market. The banks are expected to carry out due diligence. This might involve a site visit to China. The process may also involve assigning independent people to visit and make an assessment of YXGC’s (Yuxing InfoTech Invest Holdings Ltd.) standing in the industry. Notably, YXGC continues to be a global leader recognized by everyone in the industry.

As per the company, the performance of the coated spherical graphite for anode use is at its peak. The company isn’t looking to contract its fines for 3-years and lose its strategic leverage in the downstream market. It is currently in discussion with several off-takers. The company would prefer signing fines with different customers without an off-take agreement in place.

Risk Mitigation

Geographical diversification is an important part of the company’s sales strategy. Interestingly, 70% of the revenue will come from one Chinese off-taker. The US and other economies are desperately trying to reclaim or gain access to critical minerals. Currently, 90% of the expanded graphite market is dominated by China. As the demand continues to grow, countries such as the US are looking to reduce their dependence on China for sourcing critical minerals and other materials used in batteries and EVs (Electric Vehicles).

While the company does plan to sell some coarse flake graphite to Western customers, the buyers cannot purchase such massive product quantities. The company is proud to conduct business with YXGC in China. The US and other jurisdictions have been focused on establishing extra supply chains for sourcing anode materials.

Notably, there has been a jump in the number of established critical minerals funds in recent times. There is already an Australian fund in place. Meanwhile, in the United States, the DoE (Department of Energy) recently loaned $102M to Syrah Resources in order to help fund the establishment of the downstream coated spherical facility in Louisiana. According to Evolution Energy Minerals, this is the beginning of desperation stakes to ensure that the competition does not sell everything to one jurisdiction.

Evolution Energy Minerals is looking to manage risks and diversify. The off-take signed with YXGC is a 3-year update agreement for a 30,000t supply. This accounts for 56% of the company's production. Since the supplied product is of higher value, it is expected to account for 70% of the company’s concentrate revenue. In case of a favourable association, the company is open to signing a new agreement following the end of the 3-year period. The material pricing will be agreed upon once a quarter through a meeting that will be conducted at least 1 month prior to the beginning of each quarter.

In case there are price disagreements, the company plans to appoint an independent consultant to come in and arbitrate. In case of a disagreement, the company’s Chinese consultant will serve as a mediator. Notably, the consultant is trusted by YXGC and was the person responsible for introducing the deal. Outside of the fines, the company is also expecting to see reliance on the fast market. Some of the reputable western price trackers are expected to play a role in the negotiations between graphite buyers and sellers.

The company has been involved with the Chinese market before it dominated certain commodities. As a result, it has limited exposure to producing assets. Out of all the battery metals, China has the biggest hold over graphite. In fact, between 70%-80% of the raw material supply and 100% of the downstream processing, purification, and experimentation on graphite is carried out in China. There isn’t a lot of publicly available information on these companies.

East African graphite is known to be of the highest quality in the world. Tanzania graphite is exceptional in terms of flake size and purification ability. This graphite can achieve 99%+ purity through flotation. It is widely agreed that numerous graphite mines in the region need to come online. Companies such as Benchmark Mineral Intelligence are looking at a 650,000t graphite shortfall by 2025. The graphite prices continue to surge and as a result, Evolution Energy Minerals is looking to quickly make an investment decision.

Currently, fine flake graphite is trading at $900 per ton. Interestingly, the material was trading at a price of $500/ton just 9 months ago. By the end of October, production in China is expected to slow down with the onset of the winter season. While the prices are lower at the moment, the company expects them to surge once again. The changes in price are expected to fundamentally change the supply-demand imbalance.

Evolution Energy Minerals expects to have offers on the table by the end of 2022 or early 2023. The company anticipates that investors are looking for a few contracts to be signed to demonstrate investment viability from a risk perspective. The company has been able to achieve this to some degree with its cornerstone investor in the Sustainable Resources Fund.

ESG Considerations

According to the company, The financiers also need to see the ESG (Environmental, Social, and Governance) side of the operation for companies that are currently working on Feasibility studies and framework agreements. The company’s Board is actively working on the ESG component. Recently, the company successfully signed a relocation action plan. Other companies are also being asked to work on similar relocation plans. Evolution Energy Minerals’ relocation plan is in accordance with the IFC (International Finance Corporation) standards. It offers livelihood restoration and programs that will continue for a long period of time.

Historically, Tanzania has been a recipient of Ukraine. The Russia-Ukraine conflict has caused significant disruptions. Evolution Energy Minerals is putting programs in place that would replace some of the growth, particularly for the local communities in the area. The company has carried out the work to an exceptionally high standard. Having a financier on board will serve as huge confidence for the company that is focused on developing its project in the right way.

Targets 2022 and Beyond

The Chilalo Graphite Project has an estimated build period of 12 months. If the company begins construction in Q1, 2022, with a few months of commissioning, the project is expected to be completed by mid-2024. This is when the project will start generating cash flow. The company anticipates that the money made on the share price will largely be based on the project being viewed purely as a mine. The coarse flake graphite will be a very-high margin producer. Due to these high margins, the company wouldn’t need the prices to go up, as the prices are already past the incentive levels. Following the release of project economics for downstream processing and a Feasibility Study, the company is expecting an AUD$500M+ NPV.

Evolution Energy Minerals has access to companies that have the technology to process the material directly from the mine site and develop it into a finished product. In this scenario, the company can directly negotiate with Tesla, Volkswagen, or CATL (Contemporary Amperex Technology Co.) battery manufacturers. The company has the required funding in place to advance the studies. It is focused on getting the mine into production and starting to generate a cash flow.

The company has the flexibility to generate capital from the standalone mine. The pure grain would serve as a value add-on. For downstream processing, the company is looking at thermal purification. It is looking to develop a futuristic facility either in the US or Europe that would have the capability to develop fine flake concentrate from the mine and turn it into coated spherical graphite.

In order to achieve purification, the entire industry is known to employ hydrofluoric acid, which is toxic, difficult to handle, and harder to dispose of. Evolution Energy Minerals is using a thermal purification process that is significantly more environmentally friendly. Thermal purification involves heating up the graphite to very high temperatures. Since graphite has very high heat resistance, thermal purification can take a 95% pure product to 99.95% purity. This process is not only better from an environmental and sustainability perspective, but it also offers much more favourable project economics.

To find out more, go to the Evolution Energy Minerals website