Vein Valuations - Light on the Facts This is a long and detailed post, so please bear with me.
A very polarised board. Very little actual substance or discussion though. As for bashers and pumpers I have no idea on that, looks to be both here in spades. Negative sentiment looks to be beaten down from a group organised off board from a private site. We have the enforcer, the pseudo scientist and the valuation guy seemingly working together. Using a combination of derision (anyone who objects to unsubstantiated future price points is either stupid or a FFF?), science presented where vein Graphite is misrepresented almost as not really being Graphite at all (as it is so unique we are told, nothing like flake). Finally, we have valuations and share price predictions that have little basis in fact, either looking at the market (demand) or valuations that consider a range of potential outcomes (both upside or downside). Conversely, the bashers are no better, in-fact they are probably worse. Some folks here seem very upset they missed the boat on this and desperately looking to call this a pump. They also look to have very little in terms factual negative information to provide.
As for me. I do not hold here, it is too early for me as yet. I only look at NI43/NI51/JORC/P level reserves and projects at feasibility stage or later. This is therefore currently above my risk threshold and outside of my investment strategy. I’m an Accountant in the UK and have been in the Graphite space for a few years now. I consider myself pretty knowledgeable regarding the whole industry and have been asked my opinion on ZEN privately on a number of occasions now.
Firstly, I do not think this is a pump. Price movements imo are not driven by postings on bulletin boards. We can all post what we like and there is no effect on price. Prices are driven by much larger market forces and prices rise because a stock’s demand is greater than its supply - period. Whether movements are always rational would be another question all together, the market can certainly be irrational in the short term.
Secondly, I think the recent rise is mainly speculative (imo only). I think in relation to its peers (yes, flake Graphite companies are your peers, I’ll come to that shortly) with defined NPV figures, that this looks a little toppy over $2 (gut feel only). That said, companies trade at all sorts of levels to the information available and if the positive sentiment continues, there is no reason to think this cannot rise further after some consolidation. I make no attempt at judgements or estimates on future prices.
But we do need to explode some myths here. Firstly regarding vein Graphite. From some of the posting here you would think it is not Graphite at all. This is not the case. At a molecular level all Graphite is the same, stacked layers of Graphene, held by weak van der Waals forces. At the micro level, vein graphite exhibits a flake structure, so you all have much more in common with the ‘flakers’ than you think. A good illustration of this comes from the Ashbury Carbons (I hope we can all agree this is a reputable source of information) website. https://www.asbury.com/Vein-Graphite.html
Have a read and look at the pictures at 200um, 50um and 5um (this is 0.005mm) scales. Vein is flaky. At the macro level the morphology is needle like and it does have a more crystalline structure than what we call flake Graphite, but essentially it is the same stuff deep down. The fact that vein and flake are essentially interchangeable in most industrial applications, also leads to the conclusion that both have very similar properties and value (of use) in end markets. Anyone with knowledge of the Graphite industry would know that the vast majority of business is undertaken closely between a supplier and customer anyway. Customer product specification for use in a particular application is by far the single most important factor imposed on a supplier and both flake and vein can generally satisfy most requirements through purification, milling, shaping etc...
Again, I look to Ashbury to provide a good analogy: “In many applications vein graphite may offer superior performance since it has slightly higher thermal and electrical conductivity, which result from its high degree of crystalline perfection. Vein graphite also has the highest degree of cohesive integrity of all natural graphite materials. High cohesive "energy" means that vein graphite is easy to mold and can be formed into solid shapes without the aid of a binder addition”. So there are differences that could make vein use more favourable in certain applications, they may also attract a price premium, but they are not major differences. We need to get away from thinking this product is unique in some way, as it is interchangeable with flake in all applications I am aware of. Indeed large Flake is actually better for certain applications such as fuel cells or others where expanded Graphite (where the Graphene layers are in-dispersed with other chemicals and the flake is pushed apart essentially) is required.
Moving on to battery tech and the differences between flake and vein in this specific application (as it is an important future use). Firstly the use of flake in this application is well established, so flake also looks to take future market share from synthetic. Synthetic is not the only choice anymore and vein is not the only alternative either. Flake processing has come a long way in recent years. It is firstly upgraded to >99.95%, made spherical and then sometimes a coating is applied to improve the SEI. It is made spherical (generalisation) as a rounded shape provides a much greater density in the finished anode, than packing in unshaped flake. Higher Graphite density leads to a higher charge density for the battery. Spherical graphite can actually come in a variety of different shapes, circular, potato shaped, elongated etc and again it is the customer specification that this production is tailored to. As we know Vein is also suitable for battery applications and as we have seen it may also have slightly advantageous electrical properties which may also demand a higher price. But to suggest as I have seen that purified >99.95% vein can be used in batteries with no further processing is incorrect. We have seen the needle like morphology of vein and further shaping (yes, making it more rounded) would certainly be required for some anode applications. As we know in all commercial endeavours there is the balance of price and performance. Vein may have advantages, but they may also come at a price too. Indeed due to political problems in Sri Lanka there has been a shift away from vein to flake for batteries, so there cannot ultimately be major differences in end performance.
Finally, I suspect the premier material for future battery technology could well not be Graphite for that much longer anyway, the next generation materials are under development now:
https://www.vorbeck.com/news/pnnl.html
https://www.marketwire.com/press-release/grafoid-inc-announces-r-d-agreement-with-hydro-quebecs-ireq-next-generation-lfp-graphene-1730181.htm
So whilst vein and flake exhibit some differences at the macro level, in most uses and real world applications they are essentially the same and interchangeable. Therefore, vein is much more likely to be competing against flake in the market, as they are both natural Graphite products, both can be upgraded to >99.95% and they are essentially suitable for the same applications. Targeting the ‘synthetic’ market is mostly a strap line, marketing segment differentiation essentially, but not really backed up by the facts on the ground. It does though make good press.
I want to move straight on to valuations next. We have a targets being cited on this board of $4.50 (short term) to $55 a share (long term I hope). For a project at such an early stage of development such valuations hold very little merit. A link to a valuation is shown below ($55 a share and a value of $5.5b). To put this into context one of the largest integrated carbon companies in the world SGL is worth €2.6b, I do not believe that a mining operation in Ontario is going to come to the same valuation as SGL anytime soon. A $5.5b valuation is 1/5th the value of Anglo-American, one of the largest diversified mining conglomerates in the world. Finally, we do have companies that already produce vein graphite. They are profitable mid-tier miners, they are not industry giants. You could therefore ‘reasonably’ expect ZEN to also become a profitable mid-tier miner and probably not a world mining conglomerate.
Maybe you can see therefore why I’m a little incredulous at these wild valuations? Have a read by all means, it was a popular post:
https://www.stockhouse.com/bullboards/messagedetail.aspx?p=0&m=32259259&l=0&r=0&s=ZEN&t=LIST
Please then allow me to explain the severe limitations and indeed upside bias to this valuation. I will then present some scenarios that clearly show that when there is so little actual information, how wide the range of expected outcomes could actually be here, based on a variety of assumptions. In essence though, my valuations hold no more merit than the one above. None of them do, hence making judgements here is premature. But that said, prudence goes a long way imo.
There are some fundamental problems with this valuation:
Costs of $1,000/t of finished product have been used and are justified simply as that is the cost NGC use. But that is the cost of getting NGC 2% grade flake to 94-97% levels, not to the >99.95% required to ‘take on’ the synthetic market. Another company FMS has a 16% grade and can achieve similar results for $347 (excluding the PEA 25% contingency) again to 94-97% grades. These costs are made on the basis of both companies using an open pit mining method and both have limited over burden to get to the deposit. Therefore, mining method information is crucial to any valuation of ZEN. I have requested from Zenyatta on 3 separate occasions any information they have on proposed mining methods and have come up blank each time. I suspect they are just not 100% sure themselves as yet, or they don’t want to say. Either way there is a vast difference in valuation based on this one factor. Another factor is that these costs for NGC & FMS are for base processing of Graphite. ZEN ore will also have to be subjected to similar basic costs: blast, mine, haul, crush, separate, mill, bag etc.. with potentially an additional step for manually sorting of the larger lumps (as they do in Sri-Lanka). As the ZEN Grade is looking at maybe being 2-5%, I actually agree the basic processing costs could well be in-line with NGC $1,000/t (if open pit). But, this cost does not include the upgrading to >99.95% processing.
ZEN proposes further processing to achieve >99.95% purity. We know from the NR that the process is established and relatively inexpensive compared to flake purification and indeed the same process (my assumption) is undertaken with Sri Lankan vein, so it is probably nothing new. Please find a link to the Sri-Lankan vein purification process (2013) https://www.gsslweb.org/home/files/101-104amaraweera%20final.pdf
Therefore, post milling there is a leaching process with HCL at a 5-20% concentration at 65 degrees c, it is a chemical/thermal purification method, but much less aggressive than that needed for flake. I heard someone on the board describe this process as “you just dissolve it away and hey presto it’s done”. That is a little misleading, as an upgrading plant is required to do this work. If Flake purification costs around $2,000/t and making the comment of the process being ‘relatively inexpensive’ leaves it wide open. But we could say the costs could be only 50% or $1,000/t. I think this is probably better than adding zero costs to get from say 98% to >99.95%.
Finally we need to consider the ‘possibility’ of some shaping requirement. The macro morphology as we have seen is irregular and needle like. Is this the perfect shape for batteries? Flake needs to be rounded to provide the required density on the anode and milled and leached vein may also need some shaping? Would there be losses? How much would they be? How much does the process cost? I do not know, the other commentators do not know, it would ultimately be dictated by customer specs anyway. But, I do think it prudent to assume some further processing after upgrading for the battery market, but again a guess $300/t?
So whilst $1,000/t costs are presented in the valuation, this looks to be an extreme upside only. I can apply (imo fairer) assumptions and get to $2,300/t costs. This is still an extremely low production cost for a battery grade product, have no doubt on that. Low even in the lower quartile certainly, which is where a company would want to be.
The next point I would like to make about the valuation is the resource size and annual production. I can just about live with the 20m tonnes, even if there is no evidence to support that yet. My major issue here is with the 100k tonnes per annum production used. Indeed it makes for a massive end valuation, but the current market is only 40k tonnes per annum, so this valuation proposes an immediate expansion of the market by X2.5 to 140k per annum. I would suggest a more appropriate annual production would be additional 20k tonnes per annum, similar levels to the companies currently in production. There is another aspect to production other than customer demand to also consider and that is production capacity. Open pit is fine, you can dig away and move large amounts of ore. If though this is an underground mine, it would be constrained by its production and the fact is we do not know which method will be employed.
Dundee capital provide a good basic presentation on mining methods and costs here, it is written by Ron Stewart, their senior mining analyst (Dec 2012):
https://edrsilver.com/_resources/UG-OTR061212-RWS.pdf
The first point to note is that underground cut and fill could well be used by ZEN. Why? Firstly because that is the method they use for mining vein Graphite in Sri-Lanka (but the deposits are at depth), so there is industry precedent. Additionally have a look at pg21 of Ron’s presentation. Cut and fill is the most common method used for high grade veins and breccias with variable geometries (sounds familiar maybe?). So evidence does suggest they ‘could’ use this method (or not, we don’t know yet!) Ron also kindly provides us with a possible ore output per day (tonnes) and a cost per tonne of ore mined. I will use this in a valuation scenario later.
Getting back to ZEN production, if the max cut and fill output is 2,000t of ore per day (as per Ron) and you have a 3% grade, that is 60 tonnes per day of Graphite, 350 working days year is 21,000tpa, less processing losses. Therefore if cut and fill is used, the mining method becomes the limiting factor on output, not the market demand.
Finally, if we look at the FMS PEA. They had customer interest/correspondence supporting 16,900t per annum of >99.95% production (an indication of the real market demand, to NI43 standards).
So, in a model for ZEN I believe an annual production of 20k tonnes per annum, is far more appropriate than 100k tonnes per annum, for a number of reasons stated above.
Next the valuation uses an 8% discount rate. I’ve been in finance over 20 years and that is a wholly inappropriate rate for a miner at the exploration stage. 8% = low risk, 10% = medium risk, 12% high risk is almost universally accepted. I remember being pretty critical of NGC using 8% in a bankable, I thought that was cheeky. BFS/PEA should use no lower than 10%. Really you should use 12% here (risk) as there is no defined resource, no costs, no mining method etc… In my valuations I’ll use 10% (as I do for NGC & FMS etc..). Next $100m capex. You have mining and base processing. Other companies at PEA/BFS have returned detailed estimates of $110-150m for the base capex costs. ZEN also have an acid leach upgrading plant cost to add on top (so maybe up to $200m total) and I’ve heard $250m quoted a few times (does this come from the Company?). Regardless $100m looks like a major under estimate / upside case figure only.
I’ll move on now to some actual valuations looking at different scenarios and not just a fairy-tale upside. (Don’t worry, there are some very decent outcomes here too).
Scenario 1) Open Pit, $7,500/t revenue, $2,300/t cost, 20 year LOM. 20t per annum, dilution +67m shares ($100m raise at $1.50), $250m capex, NPV10. Please note costs and output are justified above.
Result 1) $573m NPV10, IRR 38.2%, payback 2.6 years.
|
Operating Cashflow & NPV
|
OPEN PIT
|
|
|
|
|
|
|
ZEN
|
ZEN
|
|
Concentrate Upgraded (t)
|
19,950
|
|
|
|
|
|
|
Revenue/t ($)
|
7,500
|
|
|
Revenue ($)
|
149,625,000
|
|
|
Royalty Rate (value t / %)
|
0%
|
|
|
Royality (NGC $20/t, FMS %)
|
0
|
|
|
Net Revenue
|
149,625,000
|
|
|
|
|
|
|
Operating Cost/t Upgrading ($)
|
2,300
|
|
|
Operating Costs/t Ore ($)
|
360
|
|
|
Upgrading Costs ($)
|
52,767,750
|
|
|
|
|
|
|
Operating Margin ($)
|
96,857,250
|
|
|
Margin (%)
|
65%
|
|
|
|
|
|
|
Sustaining Capital (per annum)
|
1,200,000
|
|
|
Closure Costs
|
3,000,000
|
|
|
|
|
|
|
|
|
|
|
Capex ($)
|
250,000,000
|
|
|
Payback (yrs)
|
2.6
|
|
|
IRR
|
38.2%
|
|
|
|
|
|
|
|
|
NPV
|
|
Cost of Capital (%)
|
10.00%
|
572,634,276
|
|
Market Capitalisation Premium over NPV (%)
|
|
|
|
Market Capitalisation ($)
|
|
572,634,276
|
|
Shares in Issue (m)
|
|
125
|
|
Projected Share Price ($)
|
|
4.58
|
|
|
|
|
|
Annual Change in Operating Cashflow (%)
|
0.00%
|
|
|
|
|
|
|
0
|
-250,000,000
|
-250,000,000
|
|
1
|
95,657,250
|
95,657,250
|
|
2
|
95,657,250
|
79,055,579
|
|
3
|
95,657,250
|
71,868,708
|
|
4
|
95,657,250
|
65,335,189
|
|
5
|
95,657,250
|
59,395,626
|
|
6
|
95,657,250
|
53,996,024
|
|
7
|
95,657,250
|
49,087,294
|
|
8
|
95,657,250
|
44,624,813
|
|
9
|
95,657,250
|
40,568,012
|
|
10
|
95,657,250
|
36,880,011
|
|
11
|
95,657,250
|
33,527,283
|
|
12
|
95,657,250
|
30,479,348
|
|
13
|
95,657,250
|
27,708,498
|
|
14
|
95,657,250
|
25,189,544
|
|
15
|
95,657,250
|
22,899,585
|
|
16
|
95,657,250
|
20,817,805
|
|
17
|
95,657,250
|
18,925,277
|
|
18
|
95,657,250
|
17,204,797
|
|
19
|
95,657,250
|
15,640,725
|
|
20
|
92,657,250
|
13,772,910
|
This is a single fixed scenario, so as noted a wide range of results can be attained playing with revenue, costs and LOM. For example:
Reduced 10 year LOM, increased $3,500/t costs to >99.95% = $170m NPV10
Or/ Making a saving of $50m on capex = $623m NPV10 increase etc..
The project certainly does appear to have good potential as an open pit operation (subject to confirmed numbers).
The next scenario I took was looking at underground cut and fill scenario. This is more expensive than open pit and the NPV10 is not as good as a result. Here we use the same revenue and costs but add in the increase in cost for underground cut and fill vs open pit (this is from the Dundee presentation average cost $150/t of ore, less FMS PEA costs at $10/t of ore open pit).
Scenario 2) Cut and Fill, $7,500/t revenue, $2,300/t cost, Additional mining cost $140/t ore, 20 year LOM. 20t per annum, dilution +67m shares ($100m raise at $1.50), $200m capex, NPV10.
Result 2) $-178m Negative NPV10. Project would not proceed.
|
Operating Cashflow & NPV
|
CUT AND FILL
|
|
|
|
|
|
|
ZEN
|
ZEN
|
|
Concentrate Upgraded (t)
|
19,950
|
|
|
Tonnes of Ore Mined per Annum
|
665,000
|
|
|
|
|
|
|
Revenue/t ($)
|
7,500
|
|
|
Revenue ($)
|
149,625,000
|
|
|
Royalty Rate (value t / %)
|
0%
|
|
|
Royality (NGC $20/t, FMS %)
|
0
|
|
|
Net Revenue
|
149,625,000
|
|
|
|
|
|
|
Operating Cost/t Upgrading ($)
|
2,300
|
|
|
Operating Costs/t Ore ($)
|
360
|
|
|
Upgrading Costs ($)
|
52,767,750
|
|
|
|
|
|
|
Additional Mining Cost (Cut and Fill)
|
|
|
|
Per tonne of Ore mined ($150-$10=$140) $
|
140
|
|
|
Annual Additonal Mining Cost ($)
|
93,100,000
|
|
|
|
|
|
|
Operating Margin ($)
|
3,757,250
|
|
|
Margin (%)
|
3%
|
|
|
|
|
|
|
Sustaining Capital (per annum)
|
1,200,000
|
|
|
Closure Costs
|
3,000,000
|
|
|
|
|
|
|
|
|
|
|
Capex ($)
|
200,000,000
|
|
|
Payback (yrs)
|
53.2
|
|
|
IRR
|
-11.5%
|
|
|
|
|
|
|
|
|
NPV
|
|
Cost of Capital (%)
|
10.00%
|
-178,442,143
|
|
Market Capitalisation Premium over NPV (%)
|
|
|
|
Market Capitalisation ($)
|
|
-178,442,143
|
|
Shares in Issue (m)
|
|
125
|
|
Projected Share Price ($)
|
|
-1.43
|
|
|
|
|
|
Annual Change in Operating Cashflow (%)
|
0.00%
|
|
|
|
|
|
|
0
|
-200,000,000
|
-200,000,000
|
|
1
|
2,557,250
|
2,557,250
|
|
2
|
2,557,250
|
2,113,430
|
|
3
|
2,557,250
|
1,921,300
|
|
4
|
2,557,250
|
1,746,636
|
|
5
|
2,557,250
|
1,587,851
|
|
6
|
2,557,250
|
1,443,501
|
|
7
|
2,557,250
|
1,312,274
|
|
8
|
2,557,250
|
1,192,976
|
|
9
|
2,557,250
|
1,084,524
|
|
10
|
2,557,250
|
985,931
|
|
11
|
2,557,250
|
896,301
|
|
12
|
2,557,250
|
814,819
|
|
13
|
2,557,250
|
740,744
|
|
14
|
2,557,250
|
673,404
|
|
15
|
2,557,250
|
612,185
|
|
16
|
2,557,250
|
556,532
|
|
17
|
2,557,250
|
505,938
|
|
18
|
2,557,250
|
459,944
|
|
19
|
2,557,250
|
418,131
|
|
20
|
-442,750
|
-65,812
|
A totally different and opposing result. But again this can be brought easily to a relatively decent result, with some changes in assumptions (reasonable ones).
Increase revenue to $9,000/t and reduce >99.95% processing costs to $1,300/t = $276m NPV10
Hopefully you can see how sensitive the project is to certain inputs and just how wide the range of possible outcomes may be.
In Conclusion:
There is a lot and I mean a lot of BS on this board. Heavy promotion from some and serious bashing from others. Most of the information presented on this board has either one of these purposes or another (promote or bash) and is written in a contrived fashion from the outset.
Vein is not some unique product. I would suggest ZEN is competing more against flake than it is synthetic, so there is some promotional hype here for the uninitiated that is not warranted. The project is at such an early stage that valuations can be reasonably justified from a negative NPV10 right up to $900m NPV10. More information is needed before any accurate valuations can be calculated, but beware of those that push this up to ludicrous levels, or those that say it will never reach production, because neither party has a Scooby.
This project has very good potential, for me it is probably the most interesting exploration play in the space and +$5 a share is certainly an outcome we could see here (long term). But I do not think that is justified quite yet. More information is required in nearly all areas before this can move this beyond being a market driven speculative opportunity. Go look at the other (decent chance NGC, FMS) Graphite companies graphs, they had their inflationary periods also pre- NI43/PEA/BFS also, as people bought into a story. Also be wary on the release of NR here and the reasons for it. Why put out a >99.95% purity NR, before even having a defined resource, that strikes me as a little odd, putting the cart before the horse?
Critical information needed for an accurate valuation:
Resource = total and grade, leading to LOM. Unlikely until NI43 resource estimate.
Mining method = imo the most important information to define. Open vs underground provides 2 very different valuation scenarios (both can be profitable though).
Upgrading Costs = relatively inexpensive needs to be clearly defined as it makes a massive impact on the result. Unlikely to have firm info until PEA.
Capex Requirement = $150m to $300m would be a valid range, resulting again in highly material differences in end valuation. Again look to PEA.
Apologies for any errors above and please DYOR/GLTA.