Triton Minerals — Industry interest in Ancuabe increases

Resource definition drilling at the T16 deposit at Ancuabe should now be completed. This drilling was undertaken to provide a significantly higher total graphitic carbon (TGC) grade for mining. The current Ancuabe scoping study (April 2017) used T16 resources to maintain a grade in years 1 to 8 of 7.1% to 7.3%. Following year 8, grades reduce to levels similar to that of the T12 deposit resource tonnages, which average 4.9% and 5.8%.

Drilling out greater tonnages at a greater level of geological confidence will allow Triton to potentially extend the higher-grade years beyond the current ninth year of the scoping study mine plan.

For illustrative purposes only, adjusting the TGC grade to the same level as in years 1-9, through to year 18 would increase our 15.6c Ancuabe DCF to 20.4c, a significant 30% uplift. This underlines the importance of Triton’s current T16 resource definition drill programme.

The latest T16 drill results show there is a strong indication for grades to be even higher than the c 7% used in the above valuation sensitivity analysis. A summary is given in Exhibit 1 below.

Triton’s recent announcements (16 and 29 August) describe two pre-commercial MoUs concerning the potential offtake of Ancuabe graphite output.

The first announcement concerns a framework agreement with Sinoma Overseas Development, a Chinese company that is a subsidiary of China National Building Material Corporation, stated as China’s largest building materials conglomerate and a Fortune 500 company.

The framework agreement covers the potential for Sinoma to off-take 50% of the graphite concentrate production, which at the scoping study output of 60ktpa would be 30ktpa. Other matters covered in the MoU are:

Sinoma Overseas Development is the overseas branch of Sinoma International Engineering, a Chinese government-administered enterprise. Whether this adds weight to the argument that Chinese authorities are active in the refocusing of Chinese company supply chains to sources abroad is up for debate. However, the commitment by the Chinese state to cleaning up its environment, exemplified by President Xi Jinping’s comments to “make our skies blue again” may well lend support to the Chinese wishing to source raw materials from abroad.

Triton will build the Ancuabe project to meet not only Mozambiquan environmental legislation (which is already aligned to western standards), but also to western standards, thereby appeasing the concerns of the western investor as to potential damage that might occur from mine development.

Triton’s other MoU (announced on 29 August) is with Qingdao Tianshengda Graphite Co (Tianshengda) for up to 15,000tpa of Ancuabe graphite for an initial five-year term. Offtake would be for graphite across all flake sizes. Triton is now sending Ancuabe graphite samples to Tianshengda for quality assessment test works – crucial to this MoU being converted into commercial terms.

The two MoUs therefore cover at least 75% of Ancuabe’s future output. Triton states it is 80%, and we can only see this difference as being due to some rounding up of exact figures not explicit in the MoUs.

The negotiations with Tianshengda are especially interesting considering this company is itself a producer of natural flake graphite from its own mine in Shandong Province, China. Indeed, this outsourcing of raw material supply may add support to the widespread media reporting recently that the long-touted clean-up of smaller-scale as well as larger-scale polluting mining operations in China is starting to affect raw material supply and, by extension, prices. It is likely that we could start to see further announcements similar to the MoU agreed between Triton and Tianshengda.

According to Tianshengda’s own website, it currently produces 30ktpa of graphite product from its own mining area (see photos below). This mining area covers 20,000,000 square metres.

As Triton makes the transition from exploration to development and production, the investment opportunity remains clear. The results of the 2017 scoping study of Ancuabe, and the NPV of the proposed mine, also make the current valuation of the company’s shares look attractive. Our valuation assumptions are set out on the next page.

We have based our revenue forecast on the April 2017 Ancuabe scoping study. Broadly, the headline results of the study are as follows:

The following table provides the basket price breakdown for one tonne of Ancuabe graphite concentrate free-on-board (FOB) at the port of Pemba.

Our model assumes that Triton develops Ancuabe as outlined in the scoping study, which states a capex figure of US$83m (A$110m at an A$/US$ forex rate of 1.25) plus a further US$9m two years later. We further assume that the company will pay for the development and construction of the mine on a 75/25 debt/equity basis. For the purposes of our model, to maintain maximum corporate financial leverage (net debt/[net debt + equity]), we consequently make the assumption that Triton will have to raise A$25m in equity. Again, for the purpose of our model, we calculate the equity portion to be raised at the prevailing share price (equating to 74% dilution), on completion of the DFS at the end of 2017. We assume an interest charge on the debt portion of the financing of 9%.

On the basis outlined above, we have estimated the DPS, EPS and dividends from the model Ancuabe mine, from the proposed start-up in 2018 through commercial production to closure at the end of the full modelled mine life in 2045.

Once financed, Ancuabe’s value to shareholders of Triton is now 15.6c in 2017 (previously 13.3c), rising to 20.9c in 2020 (previously 17.7c), and peaking at just under 28c cents in 2023 (previously just over 23c). The peak at 2023 is a function of discounting the cash flows, and has nothing to do with the scheduling of the mine or peak estimated revenue.

The scoping study was based on the increased JORC-compliant resource at Ancuabe released by the company in April 2017. This is to be revised for the company’s recently completed drill campaign (see drill result highlights in Exhibit 1), which should increase T16 tonnages, confidence levels and potentially the average deposit TGC grade.

On the basis of Edison’s average global in-situ valuation attributed to undeveloped graphite resources (US$11.38/t of indicated; US$2.01/t of inferred), the in-situ value of the resource at Ancuabe alone is US$8.5m (A$11.2m), which equates to A$0.013 per share.

Ancuabe is Triton’s initial focus, but the company has code-compliant (JORC 2012) resources for its two Balama North deposits, Cobra Plains and Nicanda Hill, and for Nicanda West. They are outlined in the exhibits below for reference only; they are not the initial focus of Triton’s new battery and expandable graphite development strategy. It is worth noting that they are some of the largest graphite resources (by tonnage) in the world and if the fire-retardant building materials (FRBM) and LiB markets develop in line with forecasts, Triton’s management says it will revisit these deposits to understand their future viability for development.

Valuing the total graphite resource which the company has in inventory shows that, in addition to the resource at Ancuabe, it has a much larger graphite inventory in the region.

We have analysed the above additional graphite resources using company EV/t data viewed against resource size. The following exhibit demonstrates that as a company drills out more in-situ resources, the market, in general, applies a reducing value to them. Further background to this analysis can be found on pages 29-30 of our sector report Normalisation augurs well for exploration, published in October 2016.

On the basis of the above analysis, we have applied a 9c valuation for the 165Mt of additional contained graphite (indicated and inferred) delineated at Balama and Nicanda Hill and Nicanda West.

Nicanda Hill is a combined graphite/vanadium deposit; which is to say that in addition to the graphite resource outlined above, the deposit also contains a world-class vanadium resource.

Triton states it could not develop the Nicanda Hill prospect into a vanadium mine alone; in order to work, the project would have to be shown to be economically feasible as a combined graphite and vanadium operation. It is still staggering to observe that the Nicanda Hill resource contains almost 4mt (8.8bn lbs) of vanadium pentoxide (V2O5). Vanadium pentoxide currently sells in the range of $4.50-6.20/lb with price increases of 11% ytd (source: Bloomberg). This is likely to have been driven by supply-side constraints out of China as vanadium derived from magnetite slags from the steel industry have been replaced by higher-quality haematite iron ores that yield no vanadium as a by-product. Further, this scenario has driven vanadium from a situation of structural oversupply to a commodity now undersupplied.

Although some technical risks remain (resource and reserve certainty, engineering, metallurgy, environmental), the company’s recent scoping study has demonstrated that the proposed Ancuabe mine has the potential to be quite robust. As Triton completes its feasibility study on Ancuabe, we expect that these technical risks will fade further into the background over the remainder of 2017. A key de-risking event will be the release of the definitive feasibility study by the end of 2017.

China’s own revised building regulations resulted from a similar tragedy to the one London experienced in June 2017 (at Grenfell Tower). Management states there is renewed interest and reported demand for expandable graphite for use in flame-retardant building cladding materials in China. Following a tower block fire in Shanghai in 2010, China forced changes to building regulations, including the removal of non-mineral core flame retardants. Mineral core-type flame retardants are now the standard, and predominantly use expandable graphite as it acts both as a barrier and suppressor to the spread of fire.

We have performed a quantitative sensitivity analysis of our base case valuation. As can be seen, the greatest sensitivities lie in achieved revenues, and in the share price assumed in the event of a potential equity raise (our base case assumes the current share price of 9c).

Triton had cash at hand of A$3.4m at 30 June 2017, following H1 net cash outflows from operating activities of A$1.2m, net cash outflows from investing of A$2.3m (predominantly capex) and a minor A$0.1m in net proceeds from raising share capital. Post balance sheet date, Triton Minerals announced (on 29 August 2017) that it had received A$1.22m from its Creditors’ Trust, which was established during an earlier period of voluntary administration. In addition, Triton’s cornerstone investor, Shandong Tianye, committed A$1.23m via a placement using the creep provisions of the Corporations Act (announced on 10 July). We consider that Triton’s cash position at current cash burn rates should be sufficient to complete its feasibility study, following which we would expect the company to enter into discussions with future graphite customers, as well as to explore more conventional debt and equity routes to secure Ancuabe development capital.