High margins, low capital costs and development-ready assets are the holy trifecta for companies wanting to bring their projects into production and luckily for Evolution Energy Minerals Ltd (ASX:EV1), it seems the Chilalo Graphite Project in Tanzania ticks all three boxes.
New front-end engineering and design work, incorporated into an updated definitive feasibility study (DFS), reveals that Chilalo has what it takes to bring sustainably-sourced graphite to a rapidly evolving, battery-centric market over a 17-year mine life.
And investors have responded strongly, sending EV1 shares as much as 21.6% higher this morning to $0.31.
In this article:
- High margins, low capex
- Two-pronged production
- Development-ready asset
- Graphite market heats up
- Establishing ex-China supply
- Next steps
Thanks to Chilalo’s leading graphite flake size and ability to generate high-value concentrate, Evolution believes its Tanzanian graphite play will be a standout project as the world prepares for a graphite supply shortage.
How Evolution compares to its development-ready industry peers.
High margins, low capex
Chilalo’s robust economics headline the updated DFS, with a post-tax net present value of US$338 million and a 32% post-tax internal rate of return leading the pack.
What’s more, the graphite hub is projected to operate at a US$841/tonne (52%) operating margin thanks to its world-leading flake size.
While the future figures are strong, how much will it cost to get the project off the ground?
EV1 estimates initial capex will clock in around US$120 million — relatively low when compared to Chilalo’s peers.
Key economics in the updated Chilalo DFS.
Evolution managing director Phil Hoskins said that historically, securing the finance for development of graphite projects has proven to be challenging but Chilalo’s financing case was particularly compelling.
“We have been particularly encouraged by the multiple expressions of interest received from potential financiers in the process being run by our debt advisor, Auramet International,” he explained.
“With the DFS completed, engagement with these potential financiers will now ramp up as they accelerate their due diligence.
“The timing couldn’t be better to be bringing the development-ready Chilalo Graphite Project towards a financing and construction decision.”
Two-pronged production
Chilalo is poised to generate high-value graphite concentrate to service the burgeoning battery industry. Based on today’s prices, one tonne of concentrate is expected to fetch around US$1,614 on the market.
The DFS highlights two graphite products: a coarse flake output, suitable for the high-value expandable graphite and foil markets (and for which Evolution already has an offtake agreement in place) and a fine-flake product for lithium-ion battery anodes.
Chilalo's graphite sales profile.
Hoskins said pursuing the fine and coarse verticals gave the company room to play on both sides of the graphite market.
“[The DFS] is a strong vote of confidence in the technical work undertaken, including substantial variability test-work and pilot plant tests, confirming Chilalo’s ability to produce a high-value concentrate product,” he noted.
“Evolution has intentionally left its fine flake graphite uncontracted to an offtake agreement and intends to pursue vertically integrated downstream processing into coated spherical purified graphite (CSPG) in the US.
Further information on Evolution’s US-based downstream processing initiative is expected in the coming months, meaning shareholders won’t have to wait long for more development news.
“As an alternative to vertical integration, a portion of the fines offtake could be contracted if the counterparty meaningfully assisted with the company’s project financing plans for Chilalo,” Hoskins continued.
Development-ready asset
With a mining licence and environmental approvals already in play, Chilalo is one step closer to entering construction.
The Evolution team has set up a framework agreement with the Tanzanian Government and now, the company’s attention turns to building expertise internally. It’s hoping to attract team members that can bring delivery know-how, buoyed by its existing leadership council.
Executive director Michael Bourguignon is one such leader — an ex-Syrah Resources project manager for construction and commissioning that can bring Chilalo into its next chapter.
EV1 has also engaged former Syrah firm CPC Engineering, while graphite processing expert Oliver Peters will continue to oversee the process flowsheet, which has largely carried across from the previous DFS.
Overall, Evolution’s focus remains on constructing a management team with real graphite project development and operating experience — one that can realise the potential outlined in this DFS.
Graphite market heats up
While Chilalo’s economics and production metrics stand on their own, Evolution believes they’re best weighed in the context of the global graphite market — an industry characterised by resounding demand and a looming supply crunch.
Demand for graphite has been on the rise since 2017.
For Evolution’s MD, a renewed interest in graphite comes down to the booming battery metals space.
“Graphite represents approximately 45% of a battery’s mass (some seven to 10 times the amount of lithium),” Hoskins explained.
“As widely reported, battery-related demand for graphite is growing rapidly, expected to grow from ~50% of the graphite market to ~70% of the market in the coming 24 months.
“When this threshold was crossed in the cobalt and lithium markets in 2016 and 2020, respectively, price increases of ~350% and 1,300% then followed for those commodities over the ensuing 24-month period.
Charting the meteoric rise of cobalt and lithium.
“Combined with the substantial under-investment in new supply, it is difficult to see how graphite will not experience a supply deficit and rising prices over a similar period.”
Establishing ex-China supply
With a supply crunch on the horizon, Hoskins believes more countries must step up and create a reliable supply chain outside the dominant (and holistic) graphite superpower: China.
“During 2022, China moved to a net importer of flake graphite, reinforcing its strategy to dominate the anode supply chain end-to-end,” Hoskins explained.
“This has resulted in increased demand for ex-China supply sources and with sustainability a key requirement of any new supply sources, both of these factors work in favour of the sustainably produced graphite products from our Chilalo Project.
A focus on sustainability is key for the Evolution team: through the DFS, the company is weighing how it can dry-stack tailings and harness solar power and gas to lower Chilalo’s carbon footprint.
The team is also working to align its environmental and community documentation to globally recognised benchmarks like the IFC Performance Standards and the Equator Principles, meaning sustainability initiatives can be transparently measured.
Next steps
With renewed front-end and DFS work under its belt, Evolution is one step closer to a final investment decision — a pivotal milestone that will trigger 11 quarters of construction and development work, all in a bid to reach nameplate production.
Chilalo's development timeline.
There’s still a way to go, but Hoskins and the team are galvanised for the year ahead.
“I couldn’t be more excited by what 2023 holds in store for Evolution’s shareholders as we strategically assess the financing and development options available to us,” the MD concluded.