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June 11, 2012
In a Faraway Land, There's a Treasure House... and Part of It Can Be Yours!
Dear Energy & Scarcity Reader:
This update concerns a new investment idea for the ESI portfolio that I didn’t want to wait to tell you about. This idea was too hot to let sit and as a result we won’t be sending the usual pdf. to go along with the recommendation.
The company owns what is perhaps the largest graphite deposit on Earth. I'll get into the details below. First, there's something else.
Tough Markets of Late
Many readers have written to ask where things are going in the stock market, especially the junior resource space. I'd love to reply to every inquiry, but I'm restricted from giving "personal" financial advice. So I'll comment here. We'll all be on the same page.
You surely know that we had a miserable stock market stretch this spring. Our ESI portfolio holds many fabulous resource ideas -- energy, minerals, technology angles, etc. Yet despite the merits of each company, the market pummeled share prices.
There's no pretty way to paint the picture. There were weeks in which share prices declined, declined and declined some more. It was more than perplexing or frustrating. It was actually scary to watch positions and portfolios unwind.
So the next question is this: Will resource plays remain out of favor? I don't believe so, at least not such that people should just throw up their hands and walk off. We're in that part of the market cycle where things are low -- the "buy low" part of that old piece of market advice about when to buy and when to sell. Not long ago, a longtime resource investor bragged to me that, "it's times like these when I make my greatest gains."
Contrary to a recent editorial drumbeat in the Financial Times, I don't believe that we've somehow come to the end of the commodity cycle, or super-cycle or whatever else you want to call it. Out of 7 billion people in the world, under a billion live anywhere near a "high" standard of living. Resources still matter, and the fact is that there are NOT enough resources to go around. No way.
Maybe we're coming to the end of a certain monetary and political model that supports the overfinancialization of the world. In that arena, the old model may have outlived itself. Change is due. But we're not coming to the end of large, growing demand for resources.
Looking ahead, more and more people seek a better standard of living. When you look at the world's problems in another light -- literally, riots in the streets of Europe, the Middle East and elsewhere -- it's a sign that people collectively are sick and tired of traditional politicians and political models that take the road to national insolvency. The old guard hasn't delivered on economic improvement, and in a wired world, people know it.
I can't say what changes we'll eventually see. No doubt, we'll live with transformations to political and economic structures in Europe, the Middle East, Asia and even here in North America. The details will unfold in due course. But if the politicians don't deliver, then they're toast.
What will it take to grow economies and improve peoples' standards of living? Start with more resources. More oil, copper, aluminum, concrete and much, much more. More resources to make more stuff.
Despite the gloom and doom, I'm optimistic -- OK, relatively optimistic. The world has problems, but then people react and the problems call forth solutions. Things will rectify, although the process will perhaps occur in fits and starts. But as bad is things are, there comes a time when they start to get better. The resource-investing world definitely is NOT coming to an end.
Across the globe, nations and political systems -- and currency systems -- will have to evolve into something else. But at least things will evolve. We'll see more positive change than not.
So yes, I know that the stock markets are down and "Canadian junior" players have been beaten down. Yet looking ahead, I envision things getting much better over the next few years. Thus, in that optimistic spirit, I have a new investment idea for you.
The Template for a Strong Buy
I've uncovered a mineral play that has a treasure-trove of upside packed into each low-priced share. Indeed, if I had to design an investment with "space shuttle" upside potential, this one would offer a template. I'll give you the name in a moment, but for now, here's the outline.
The share price has been beaten down below reasonable measures. Yes, the market could always mug the shares of this company lower -- markets sometimes do that -- but on the worst day of the week, there's much more upside than downside.
The ore grade is excellent. It's not the "highest" ore grade in the world -- not quite, and we already own the company with that particular mineralogical distinction (which you’ll see below). But this company's ore is a very strong grade. It's better than almost everyone else's, and by a good measure.
So the ore grade is excellent, and the overall resource is... ASTRONOMICAL! I mean immense. Huge. Ungodly big. We're talking about a crack in the Earth's crust that goes down into the mantle. We're talking about mineable ore zones at the surface that are miles long and 1,000 feet deep (likely more). We're talking about a mine life of 100 years, and maybe more.
The location is far away from North America, in an emerging jurisdiction that's starved for investment. There's a certain element of political risk in this country -- after all, we're not in development-friendly California, right? Then again, you'd hardly characterize this place as among the world's trouble spots. It just means that the company has to play the local political games, and stay on good terms with the political class.
The far-away locale also means that the play is that much closer to emerging markets of the future that will use much of the product -- India, China, Korea and more. Besides, the location is right next to a big blue ocean, which makes it easy to ship product.
As for the management team, I've met the staff, and they're can-do guys. The geology is first-class. It's by the book, and in this case, the results are superb. Indeed, on a recent visit, I actually witnessed a bench-scale operation that crushed and screened raw ore that's basically ready to ship, without any fancy upgrading.
Overall, this project is absolutely doable. It's so doable that there's no doubt in my mind that we're looking at a short time frame to an up and running operation, with significant cash flow.
It all gets back to that A-B-C-D approach to analysis. The asset is staggeringly good. The business plan is very doable. The company has cash in the bank, with no need for near-term fundraising and no dilution. And the management can do it.
Get Energized
No more beating around the bush. The name of the company is Energizer Resources Inc. (EGZ: TSX), with offices in Toronto. Despite the name, this group is not connected to the battery company of the same name, nor does it make the "bunny rabbit" batteries that you buy in the store.
Energizer is a mining firm. Its key asset is a graphite deposit in Madagascar, of which I'll detail more in a moment.
Graphite? We already own Focus Graphite (FMS: TSX-V) in the ESI portfolio, and if one great graphite play is good, why not two?
The Focus deposit at Lac Knife, Quebec, has what may be among the highest-grade graphite in the world -- the "official" number is in the 16% range. It makes for great graphite, and Focus is directing its efforts to the high-end tech side of things. Focus wants to take its high-end graphite and transform the product into super-valuable materials. It's a strong investment story, and I've been covering it for well over a year.
The Energizer graphite ore grade is slightly less than that of Focus. The ore grade for Energizer is more like 12% to perhaps 14% -- and on that point, I'm using my own geologic license to scope the number. In my view, the Energizer grade is close to the Focus number, but not quite there. Still, with both companies, the grade calculation is still in flux as more drill results come in and the company geologists do their calculations.
On this "ore grade" point, you have to appreciate that some zones -- whether in Lac Knife or Madagascar -- offer almost pure graphite in massive swaths. That's the high-grade side of things. But elsewhere in the deposits, you encounter lower grades. At the end of the day, the "qualified persons" have to crunch the numbers, add everything together and apply informed engineering judgment to reach a grade number that can go public.
Big Resource -- Really Big!
In terms of resource -- mineable material -- Focus is also still defining its scope of its deposit. Right now, Focus is in the 20-million-ton range, and likely to increase with more drilling this summer.
Meanwhile, Energizer is already looking at the 100-million-ton resource range, with more to come as more drilling results hit the books.
When you compare Focus with Energizer, Focus has a large ore body of high-grade material. While Energizer has five times the tonnage, although at a slightly lower ore grade.
Here's an example of why it's hard to nail things down for the overall Energizer graphite resource. Start with the fact that Energizer's numbers are upwardly moving targets. The numbers are big, and getting bigger. For example, Energizer recently announced that one drill core hit 434 meters -- over 1,400 feet! -- of graphite mineralization that extends down at least 300 meters -- almost 1,000 feet.
How much mineralization is that? Let's visualize. Think in terms of volume. Let's say that an aircraft carrier is 1,000 feet long, and 200 feet from keel to the top of the island. Now try to envision part -- just part! -- of a graphite deposit that's the size of seven aircraft carriers. And for Energizer, that's just one part of one section of one mineral claim. There's much, much more.
How much mineralization does Energizer control? Having been there last month, I can say with complete assurance that Energizer controls literally miles of mineral claims in southern Madagascar, as I'll describe below. Heck, I spent three days driving all over the sites, and just barely scratched the surface.
Basic Metrics
Before I get too far along into the geology details, here are some numbers concerning the Energizer shares. Energizer shares are currently trading at about 25 cents each, down from a 52-week high of 55 cents. The low was 15 cents at one point.
Energizer has about 190 million shares outstanding, which is relatively high for a junior resource developer -- but I can live with it, considering what else is going on in terms of development to date, and the very big ore resources.
With upward of 100 million tons of resource, look at the current share price as paying perhaps 2 cents for each ton of graphite ore. Two pennies per ton? And you're buying into a development project in which a ton of high-quality graphite goes for $1,500 and more -- sometimes much more.
Energizer has about $6.5 million in the bank. It's enough to do what needs to happen, based on the current burn rate. The engineering program is on time and budget, with a target of $3.5 million, leaving $3 million for the next phase of things.
From what I've seen, when Energizer spends its funds, value creation is phenomenal. That is, based on the drilling program and exploration effort to date, Energizer has created a world-class asset. It's true bang for the buck. Every drill hole adds more tons and greater dimensions to the resource.
What's Next?
Energizer is preparing to move to a bankable feasibility study, which will be an invitation for outside graphite users to come in and enter a venture. Says who? For as much as I don't want to put words in somebody's mouth, so says Stephen Riddle, the CEO of Asbury Carbons, one of the largest carbon and graphite companies in the U.S. -- and a critical global player.
In a recent interview in The Critical Metals Report, Mr. Riddle noted that "From experience, I know the quality of graphite that comes out of Madagascar has been extremely good, so I'd like a company that can mine it cost-effectively and set up a production plant there."
Oh really? News flash -- that can ONLY be an endorsement of Energizer.
It's a Long Way to Madagascar
In May, I went to Madagascar. It’s far, far away. Go to Johannesburg, which is a long haul -- 17 hours on Delta from Atlanta, or 12 hours from Amsterdam on KLM, after seven hours from New York. But once you’re in Johannesburg, you’re not even all that close. The trip still has a long ways to go.
It’s about four hours by jet from Johannesburg to Antananarivo -- the national capital of Madagascar (and no, don’t feel bad if you never heard of the place). In terms of distance, Johannesburg to Antananarivo is about the same mileage -- 1,400 -- as flying from Brownsville, at the southern tip of Texas, to Washington, D.C.
Antananarivo is a (very!) crowded, sprawling city for which the term “third world” is entirely applicable. It’s located in the central mountainous part of Madagascar at about 4,500 feet above sea level. Human development has blanketed a series of hills and valleys. In a reflection of geographic-demographic fact, the valleys are mostly occupied by rice paddies, with the urban structure built out on the hills.
 Antananarivo, Madagascar from the air
From Antananarivo, I flew another four hours -- by prop job -- to a site near the southeast coastline. I was visiting the Amponihy Transpressive Lithospheric Shear System. "It is not down in any map; true places never are," as Herman Melville noted in Moby D.
Geology Class
OK, it's time for geology class. The Amponihy shear system is almost north-south in orientation, and down at the southern part of Madagascar, about midway across.
 Madagascar Landsat Image -- NASA
Basically, the "Transpressive Lithospheric Shear System" name is a fancy term for a fault zone, but not just any fault zone. This particular crack in the crust extends from surface level about 100 miles down, deep into the mantle.
That is, this is a tear in the outer fabric of the planet. It's a pathway by which the hottest, richest metal-bearing liquids have migrated up toward the surface. Thus, this shear system makes Madagascar a mineralogical and resource treasure house. And wow, did I ever see some treasures on my trip. (There's MUCH more than graphite, but I don't want to go off topic.)
The fact is that Madagascar is so isolated that it's never been well explored. The old French colonials just surface-mapped the place, looking for whatever they could stumble over -- and they missed a lot. As for modern techniques? Nope, not until very recently.
In the modern era, Madagascar was pretty much off-limits to Western mining and energy interests. It’s a long tale of isolationist politics keeping an entire nation living in the distant past -- although the story has changed in recent years.
 I was curious about the rocks. The locals were curious about me.
The Energizer Effort
Energizer has been working on an extensive set of mineral claims for well over three years. The claim area pretty much blankets the actual transpressive shear. To all appearances, it's excellent land work. Energizer has the sweet spots, and then some.
Meanwhile, the government is supportive of development. There are no national parks nearby, so the environmental problems are not big. In fact, the locale is fairly low population density, and quite amenable to mining. Along those lines, there are basic roads passing through -- nothing fancy, but more than adequate for heavy trucks to the nearby coast.
The land under claim is mostly dry, rolling hills. The population is very poor and gets by with simple farming and herding. As with all modern developments, Energizer has made inroads to support education and public health measures. That and employing many locals at prevailing wage rates -- paying them, and feeding them, which matters a lot in this culture.
The climate offers a rainy season and dry season, and thus there's water in the water table, despite the dry appearance of the surface. Also, due to the dry climate in most months, the surface is highly distinctive based on soil profile -- in that you can tell where the graphite ore is because the termite mounds are gray in some places, versus a lateritic red in other locales. It's sort of "termite geochemistry."
 Termite mounds kick up gray graphite.
Energizer has performed an impressive array of geochemistry (way over and above the termite thing!) and geophysics on the entire claim area. It's exactly what needed to happen -- just a textbook application of exploration techniques.
The overall exploration effort has been systematic and comprehensive. Even better, the bedrock geology is such that remote sensing gives an excellent picture of the actual rock structures and -- even more important -- reflects the mineralogy.
The bottom line is that the Energizer geologists have the place mapped down to the square meter. They knew pretty much exactly what they were looking for before they sited the first drilling rig. Then the drilling was efficient and effective. They technical guys have their arms and brain wrapped around this ore deposit good and tight.
The mineralogy is distinguished by extensive graphite mineralization -- along with significant vanadium. In fact, this operation started a few years ago as a vanadium play, but then the graphite assays came back. The vanadium is still out there for future exploitation, but for now the shortest route to production and cash flow is via graphite.
In terms of pure science, there's a fabulous earth history story to be told about the rocks and minerals. Indeed, there's great work -- and many master's and Ph.D. theses -- awaiting future grad students in the Madagascar play.
For now, however, the best explanation of what happened is that is that the rocks at the surface were deeply buried and metamorphosed. At great depth and pressure, the transpressive shear system allowed heat and fluids to seep up from the earth's mantle -- meaning we've got exotic chemistry at super-high temperatures and significant pressures.
Apparently, the strong graphite mineralization is due to carbon from the earth's mantle moving into the rocks (perhaps as carbon dioxide) and crystallizing out. The fluid nature of the original carbon is apparent -- which is important in terms of ore quality and eventual utility to downstream buyers.
That is, the graphite mineralization yields large flakes -- the kind that command the best prices. Specifically, under magnification, the graphite is well-formed with beautiful x-y axis crystallization, clean hexagonal terminations and tight z axes. It's just beautiful "large flake" product.
Even better, the metamorphism and subsequent uplift has made the host rocks very mineable. That is, there's extensive alteration that makes the rock relatively easy to mine. And crush. And grind.
How easy? When I was at the Energizer camp, we actually performed a bench-scale crush-grind circuit on samples that I picked up in the field.
 Bench-scale test yielded 13.7% large-flake ore grade.
The yield was a beautiful sample of high-purity large-flake graphite -- without flotation at all! -- and this was in the field with rough equipment and no fancy separation or upgrading. Just imagine what you could get if you threw some industrial quality control at the process.
Lost Gondwana Comes Back
All in all, I spent the three days driving, walking and climbing across the Amponihy Transpressive Lithospheric Shear -- the dividing line between two ancient continents.
Long, lonesome, dusty dirt paths -- to mineral bonanzas.
The graphite play is based on metamorphic rock that formed the core of a mountain range of the lost Gondwana that was, in its day, higher than the Himalayas. The age of origin is the Precambrian-Cambrian period, about 600 million years ago.
The ancient rocks were heavily metamorphosed by intense heat and pressure deep within the Earth. The result today is astonishing metamorphic and mineralized structures. The high-grade graphite ore zones are literally hundreds of yards wide at the surface and extend far into the depths.
Indeed, there’s one ore body after another, after another. The play goes for mile after mile, down dusty dirt pathways as far as the horizon.
Each mineral zone is world-class in its own right. As a developable resource, what I saw is mind-boggling. And it all comes courtesy of that ancient shear zone, and the heat and mineralization from the mantle.
There may be other places like this Madagascar mineral zone elsewhere on Earth, but I assure you that they’re few and far between. It is my supreme privilege to see things like what I saw earlier this week in Madagascar.
On that score, I am blessed. And I’m happy to add that I can take these trips because I’m looking for investment ideas for people who read Agora Financial newsletters like ESI and Outstanding Investments.
Looking Ahead
What comes next? As I mentioned above, a bankable feasibility study. Of course, Energizer management is already shopping the project around -- and on that topic management doesn't share the details with me.
Still, in my view, any of numerous carbon and graphite companies across the world would be utterly negligent not to give serious consideration to Energizer at this stage. Energizer's massive resource is a company-maker, and a source of high-grade graphite supply for the next century, and likely longer.
As with all developments, there are many moving parts. It's difficult to say exactly how it will play out, because things could go any of many different ways. It's up to management to swing at the best pitches and connect.
But for now, there's a world-class graphite asset -- perhaps THE world-class graphite asset, in terms of size of resource. The ore grade is seriously good. The rock is mineable. The separation is quite doable.
The Madagascar locale means that you're working in a very distant (from us) and underdeveloped part of the world. But other players are doing other developments on Madagascar, including Rio Tinto and Sherritt. So it's not as if Energizer has to invent new mining law for an entire country.
On and around the mining claims, there's adequate water. There are roads, which are getting upgraded over time. There are two possible port facilities for loading ore. There's no electricity -- other than what you get from a portable generator -- so Energizer will have to set up that aspect.
Then again, the weather is great for mining. It's dry for most months, and it's always warm in the near-equatorial latitude.
There's much more to tell you about this exciting effort. But for now I want to get the Energizer name out to you. I'll continue to follow Energizer in the ESI portfolio. I'm sure that I'll have much more news -- good news -- to relate as the overall effort plays out.
As with all small-cap mining developers, watch the buy limits – as I said above shares are trading around 25 cents today. Don't tail-chase the shares upward. This company has a 12-24-month development time line. There will be good and bad days in the market – which will offer plenty of opportunity to get in below the buy-up-to price listed below. I expect the current share price to recover over time and build back up. After all, you're buying a piece of a mineral treasure house.
Action to take: Buy Energizer Resources (EGZ: TSX) up to 35 cents.
Thanks for reading,
Byron King |
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