Alabama Graphite — Perfectly located for US electric car market

Alabama has completed primary and secondary processing studies on Coosa’s graphite; these are required steps to confirm the natural graphite can be used in LiB manufacture. Results have been highly positive, with the key reversible capacity factor close to the theoretical maximum (367.21mAh/g vs the maximum of 372mAh/g). Reversible capacity is the capacity of a material to hold charge consistently and reversibly achieved upon cycling.

Located in the US state of Alabama, Coosa should be relatively well insulated from any political risk associated with the sourcing of potentially strategic commodities such as graphite, from outside the US border. Its location plays perfectly to Elon Musk’s (Tesla Motors CEO) stated desire to source all raw materials from within the US for Tesla’s 35GWh output battery-making factory in Nevada. Further, the company announced on 2 March that it has held high-level government discussions, specifically with Alabama state senator, Richard C Shelby. These discussions covered a multitude of topics, including the security of supply of an environmentally friendly and America-sourced supply of battery-grade graphite, and the potential for Coosa to feed into Department of Defense applications.

With an estimated PEA (November 2015) level operating cost for Coosa production stated at US$1,555/tonne, its operating margin on a production weighted basis is 79%. Compared to the operating margins of concentrate-only graphite companies, this would rank Coosa in the top quartile. The PEA NPV calculated using an 8% discount rate is US$444m post-tax and US$320m pre-tax. Coosa’s internal rate of return is 45.7% post-tax and 52.2% pre-tax. Life-of-mine gross revenues are estimated at US$2.4bn, and life-of-mine operating expenses total US$533m. We will assess the valuation when we initiate full research coverage in Q217.

Alabama’s Coosa graphite project stands apart from the majority of its graphite peers on the basis that it is focused on producing natural graphite for batteries rather than simply producing a graphite concentrate that would be sold to third-parties for secondary processing, including purification, micronization, spheronization and surface treatment, to produce a battery-grade graphite product. This is a key differentiator for Alabama which, in combination with being located in the US, means it is very well positioned to serve the country’s nascent but high-growth electric car and battery makers, including US Department of Defense battery manufacturers and contractors. Further to these differentiating factors, Coosa’s graphite has been proven to yield battery-grade material that exceeds current battery-making criteria.

In 2016 Alabama sent graphite samples to an undisclosed (which is not unusual for this type of commodity) North American laboratory for initial purification testing. To be clear, this test work is a step beyond the typical primary flotation testing performed by the majority of graphite peers. The laboratory performed a non-toxic conventional low-temperature thermal purification process, which we believe is crucial to expedite regulatory approval processes.

On 17 February 2017 Alabama announced test results demonstrating that Coosa graphite, via the company’s proprietary low-temperature thermal purification process, can achieve 99.99997% graphite purity. This exceeds the requirements for graphite used in nuclear applications, such as pebble bed reactors. Alabama’s proprietary technology does not use hydrofluoric acids (such as can be used in the manufacture of Chinese graphite products) or sulphuric or nitric acids. Further, the process does not use alkali roasting or caustic soda roasting methods. Alabama states that its proprietary processing methods do not need vast amounts of clean water or energy-intensive, high-temperature thermal upgrading. Its proprietary process method should thus position it well for Coosa’s development in light of the sometimes onerous environmental regulatory approvals required by the US Environmental Protection Agency.

A separate set of purification tests was also performed on Coosa’s concentrate samples created by SGS Laboratories in Lakefield, Ontario. The flotation samples purified by the undisclosed laboratory are stated to be representative of the entire resource. The 99.99% CG purity was also achieved across all flake sizes, further demonstrating that purity, ahead of flake size, is the critical path factor in determining graphite resource suitability for LiB manufacturing purposes. The purification process used is a conventional low-temperature thermal process. Further, the purification process achieved the 99.99% purity level without any need to optimise the method used, demonstrating the ease at which Coosa’s graphite purifies.

Reversible capacity is the capacity of a material to hold charge consistently and reversibly achieved upon cycling. This is a critical path factor in determining the suitability of natural graphite for use in LiB manufacturing. Alabama’s positive results (Exhibit 3) were close to the theoretical maximum.

Alabama’s code-compliant resource estimate is presented in Exhibit 4 below. While this is a much lower grade in terms of raw graphitic carbon content, it should not be dismissed as marginal or un-economic at this stage (Alabama is yet to produce a feasibility study on Coosa). Indeed, the company’s Coosa project is located in a well-known historical graphite producing region, and while mining and processing techniques would have been primitive during the 19th and early 20th century, compared with today’s mining standards this past production at least suggests potential economic viability for mining Coosa again. Indeed, the soft and shallow depths seen over Alabama’s graphite resource bodes very well for free digging a significant portion of the resource, which should translate into lower mining costs and help offset the lower graphite grades present. Coosa’s strip ratio is a very low 0.11:1 (waste to ore). Further, mining (as per the PEA, page 4) could potentially initially only take place over 10% of the resource within the highly weathered and soft oxide zone.

Alabama published a preliminary economic assessment on Coosa in November 2015; however we expect revenue and cost assumptions to change in any upcoming feasibility study performed on Coosa, with special recognition that price assumptions used in the PEA may not adequately reflect the current expectation of battery manufacturing growth. The PEA study outlines the development of a conventional surface, open-pit operation using standard excavating and haulage equipment. The mining of Coosa graphite will take place over a planned 27 years. Material will be sent to the company’s secondary processing plant, 19 miles south of the Coosa project to Rockford, Alabama initially to produce 5,000tpa of high-value secondary purified graphite products for sale into the LiB manufacturing sector and also potentially to the US Department of Defense for military applications. The company has not yet defined a code-compliant reserve estimate that would allow us to call the material ore. This initial phase of development is estimated to cost a very low US$43.2m. We have not provided a capital intensity figure (US$/t of product) as Coosa will not produce a concentrate, which is the current norm for its graphite peers.

Per the PEA, a secondary phase of expansion is planned in year five of the mine’s operation, costing an additional US$84.4m, and adding a further 11,000 tonnes of production capacity. Alabama Graphite intends to fund this expansion via the company’s free cash flow.

The PEA NPV calculated using an 8% discount rate is US$444m pre-tax, and US$320m post-tax. Coosa’s internal rate of return is 45.7% post-tax and 52.2% pre-tax. Life-of-mine gross revenues are estimated at US$2.4bn and operating expenses total US$533m.

We will include this data in our proprietary financial model and generate a fully diluted base-case valuation and full suite of sensitivities analyses when we initiate full coverage on Alabama Graphite in Q217.

The future Coosa operation outlines the production of two high-value, high purity graphite products. The first will constitute 75% of planned output and be a CSPG product, with the remaining 25% of output being purified micronized graphite (PMG) product. According to Alabama, the selling price for CSPG is US$8,165/ton (US$9,000/tonne) with PMG US$1,814/ton (US$2,000/tonne). The sale of CSPG at around US$9,000/tonne compares with flotation concentrate selling prices that currently trade below US$1,000/t.

With an estimated PEA level operating cost for Coosa production stated at US$1,555/tonne, its operating margin on a production- weighted basis is 79%. Compared to the operating margins of concentrate only graphite companies, Coosa would rank in the top quartile. We will provide further detail of this analysis in our full initiation report.

We highlight the extensive and crucial experience of Alabama’s current CEO, Don Baxter. Mr Baxter, formerly president and COO at Focus Graphite, has over 25 years of specialist graphite industry experience, from mining, exploration and development through to sales, marketing and business development. This is highly advantageous to Alabama and the development of Coosa, particularly with graphite being very complex to understand and develop.

We also highlight the following Alabama management and note the in-depth graphite experience of the team.