Volt Resources — Positioning for the next phase

Publicity surrounding the ethical use of certain metals in the manufacture of electric vehicles has increased in recent weeks. The most publicised example being the artisanal mining of cobalt in the Democratic Republic of Congo (DRC). Cobalt is used in the manufacturing of cathode material for use in lithium-ion battery production. While the media stories surrounding the DRC tend to reflect on the use of child labour, the broader issues of ethical mining extends to other high-tech and green-tech relevant commodities.

China’s mining of graphite may not relate to the issues surrounding mining practices in the DRC; instead its ethical concerns relate to the environment – a deeply political issue in China and one that has been addressed in recent years by state authorities closing down polluting, illegal, artisanal mining operations. This has affected not only graphite producers, but also the more strategically important rare earth element miners that have now been consolidated under a handful of state-owned enterprises. The high-temperature, thermal purification of petroleum coke into synthetic graphite is a major component of global battery-ready graphite supply. An example of the polluting practices of unregulated graphite production was reported by the Washington Post in an article dated 2 October 2016, entitled, In your phone, in their air.

The Chinese companies that Volt is currently looking to engage with in terms of securing offtake agreements on commercial terms may indeed reflect a migration of Chinese graphite investment from domestic to international graphite projects. This is likely to be a result of Chinese authorities following through on mine closures and forcing companies producing finished graphite goods to obtain their raw materials from elsewhere. The interest in east African graphite projects by Chinese companies could be seen as the start of a general migration of raw-material sourcing abroad. To this end, western-listed mining companies, including Volt, with their adherence to international accounting guidelines and environmental standards, pave the way for a far more ethically robust supply of a naturally sourced (though artificially purified) graphite for use in green-technology applications.

A delay in getting core samples out of Tanzania has caused a delay to the development of mine schedules and production estimates, mining operating costs and revenue calculations, which are all based on the Stage 1 pit shell developed using the resource and reserve estimations calculated using drill data. Volt’s management states the aforementioned delays should not impact the overall development timeline to produce first graphite at Bunyu in 12 to 15 months’ time (ie mid-2019). This will depend on a successful financing round for Stage 1 capex and obtaining off-takes on commercial terms.

As stated by the company in its quarterly activities report to 31 March, the Bunyu project is progressing on a number of fronts, including:

Completion of the above in good time will be critical to the company achieving first production at Bunyu within its stated “12 to 15 months” timeframe.

The announcement of the Stage 1 Bunyu FS will be the first opportunity to apply value to Volt after the release of its outdated Namangale (the former name of Bunyu) PFS, released December 2016. This study contemplated output of 170ktpa of graphite concentrate for use in the lithium-ion battery sector. However, the size of the Namangale project was out of step with current demand for graphite to be used in lithium-ion batteries and Volt now considers a far smaller operation to be more viable (see the illustrative Phase 1 valuation presented on page 4). A smaller operation would better match Bunyu’s graphite supply to current demand as well as providing for a lower funding hurdle, operating experience that can be used to scale-up the operation as expected increases in graphite demand take hold. The delivery of graphite to customers is also crucial and getting Volt’s graphite sold into the market place will help significantly de-risk Stage 2 development.

The production of a graphite concentrate via flotation to a 95% total graphitic carbon (TGC) purity level should be relatively simple for the majority of junior graphite developers, especially within a highly controlled laboratory environment. The production of higher-purity graphite beyond 95% has exponentially higher energy requirements for every extra percentage point in purity gained. The other major factors in determining the quality of graphite concentrates are the inclusion of impurities and the crystalline structure of graphite, which determines, in part, its effectiveness in holding and discharging electrical charge. If the graphite is to be used for fire-retardant applications, another critical factor is how well the graphite expands.

Volt has demonstrated its Bunyu North (which will be the focus of Stage 1 development) graphite to be highly satisfactory in all these areas:

Critical to the development of any project looking to trade products on a bilateral producer-customer basis is the agreement of long-duration offtake contracts with commercial terms. To this end, Volt has undertaken numerous marketing efforts, predominantly in Asia, but also across the Americas and Europe. The current status of Volt’s various agreements is given in the following exhibit.

While the company completes its FS on Bunyu (expected in the March quarter of 2018), our previous earnings forecasts and base case valuation remain on hold. However, a number of data points are available (see Volt’s press release dated 18 May 2017) concerning the scope and size of the new, smaller Bunyu Phase 1 operation to be built, as well as resource and cost data that can be taken from the now outdated Namangale (Bunyu’s previous name) 2016 PFS. As such, we have made an attempt to generate an illustrative potential valuation for Phase 1 only of Bunyu’s future development.

We use the following valuation assumptions to build our financial model of Phase 1:

Based on the aforementioned data points and inputs, we consider that a purely illustrative value for Bunyu Phase 1 could be worth 7.90 cents on an FY19 basis using a 10% discount rate to reflect general equity risk. This does not assume any build out of Phase 2, or reflect the potentially accretive value project expansion would bring. We look to the release of Volt’s new FS to provide precise costing and the exact scope for Bunyu Phase 1 development, which will allow us to update our base case valuation.

Volt’s Appendix 3B to end-March 2018 provides abridged detail over the company’s financings and level of expenditures. At end-March, Volt recorded cash of A$2.8m, a q-o-q decrease of 46% (Q2: A$4.1m).

Net cash used in operating activities was negative A$5.8m. The majority of this was spent on exploration and development of the Bunyu graphite project, with a further A$2.3m of expenditure on staff and central costs.

Year-to-date, Volt has bolstered its coffers with financing, including the exercise of options and equity issuances totalling A$7.5m, and a convertible loan note valued at A$1.0m.

With expected Q418 expenditure stated in the Q3 Appendix 3B of A$2.4m, Volt’s current cash balance should adequately cover these planned costs. However, it is clear that the company will want to dovetail its current financial position with the construction phase for Stage 1 of Bunyu using the potential Tanzanian Note issue for US$40m.