Price validation from FMS offtake agreementThe recent big news in the graphite space is the offtake deal Focus Graphite reached with a Chinese company on Dec 20. The agreement is for up to 40,000 t/yr C, which is essentially all of FMS's planned production. The news caused FMS's share price to more than double from $0.26 to $0.64 and FMS now has a market cap ($65 mm) approaching that of ZEN ($122 mm). The real significance of this agreement, with respect to ZEN, is that it provides validation for some of the pricing assumptions built into their preliminary economic assessment. So lets take a another look at the PEA pertaining to the Knife graphite deposit provided by RPA Oct. 2012 (and noting that RPA is the same firm now working on ZEN's PEA).
The Knife deposit has 6 mm tonnes grading 15.6% C. This represents 927,971 tonnes of graphite which is valued at an average price of $4,196/t C. However, almost all of this value (86%) is derived from the fraction of the concentrate that is large flake (+100 micron) and which can be thermally upgraded to battery grade material (99.99 % C). About 40% of the concentrate falls into this category and would yield 338,000 t of battery grade graphite after 15% loss during thermal upgrading. The real eye opener in the PEA however, is the cost of this thermal upgrading. They received a detailed cost quote from an 'established producer' using proprietary technology. The spreadsheet on page 1-12 of the PEA pegs the total cost of thermal upgrading at $2,193,666,000 to produce 338,000 tonnes of battery grade C, or $6,490/tonne. Thus, there is a huge cost associated with this upgrading and since it is provided by an established refiner/producer, it is known relative certainty. What this offtake agreement now does then, is provide confirmation that the finished product (battery grade, 99.99% C) will, in fact, obtain pricing well in excess of $6,490/tonne and probably close to the $10,000/tonne number quoted in the PEA.
The big drag on Zen lately appears to be skepticism regarding the pricing number Zen has been using for their high purity graphite ($8500/tonne). The FMS offtake agreement should go a long way toward lessening those fears. Note that ZEN has about 4 times more high purity graphite (1,418,000 tonnes) compared to FMS's battery grade material (338,000 tonnes) and you've just got to believe that processing costs for ZEN's high purity graphite will be way less than $6,490/tonne C. Both ZEN and FMS deposits are open pittable and both are close to good infrastructure, so capital costs will likely be similar. I expect the implications of this offtake agreement won't be lost on the investment funds, so lets see what happens when the analysts get back to their desks in the next week or so.
The Mookster