DT BROOKS THERE I No PROMOTION , so no one knows about it.....
No one trusts Management... to many promises on promotion and have not delivered.....to many people at higher prices and out of dry Powder for ENZR the stock done nothing but go down since the took over YUKR.
Just negative articles like this.....
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Ben Kramer-Miller
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Energizer Resources' Feasibility Study Results Seem Impressive, But Critical Issues Remain
Feb. 23, 2015 7:18 AM ET | 3 comments | About: Energizer Resources Inc. (ENZR), Includes: FCSMF, MGPHF, NGPHF
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Summary
•Energizer Resources' shares failed to react to the recent Molo feasibility study announcement in spite of the impressive figures within, including a 31% IRR and a $390 million NPV.
•The FS is an improvement in some ways over the PEA but new issues emerge such as financing assumptions.
•Issues I raised in December such as geography/shipping logistics, the large amount of production at Molo, and the risk of mining in Madagascar remain.
•Investors should consider also that a strong feasibility study has not led to financing in the graphite space, which requires broader downstream research than other mining projects.
•Despite overall improvements from December I continue to want to stay away from Energizer, and I think there are better opportunities elsewhere.
An Overview of Energizer Resources
Energizer Resources (OTCQX:ENZR) is working towards developing the Molo Project in Madagascar, which is one of the largest advanced stage graphite projects in the world. Its appeal relative to its peers is in its incredible size and its significant exposure to large and jumbo flake graphite, which currently command a premium in the marketplace. Of the companies with similar valuations, Mason Graphite (OTCQX:MGPHF) has a larger deposit at its Lac Gueret Mine and only Northern Graphite (OTCQX:NGPHF) has more large and jumbo flakes.
Despite Energizer's apparent appeal, however, the Molo Project has some serious issues, which I pointed out in December.
1.The Molo Project is in a generally risky mining jurisdiction--Madagascar.
2.The project is located in the proverbial middle of nowhere, and its accessible only by dirt roads that are over 100 miles to the ports that will be used to ship the company's graphite. These roads are muddy during part of the year and are therefore inaccessible on a regular basis.
3.The project's PEA indicated that it would be producing a whopping 84,000 tonnes per year into a flake graphite market whose 2013 demand was <400,000 tonnes. While demand is expected to rise this is a market addition that can change pricing schematics, especially for large flake and jumbo flake graphite, which are small, niche markets.
4.The PEA failed to account for sustaining capex, and its contingency for initial capex and on opex were insufficient.
5.The PEA failed to account for the cost of developing serious commercial roads, which would almost certainly destroy the economics of the Molo Project.
Since then shares have fallen slightly despite the fact that we have seen a couple of catalysts, including a rising graphite price and a recent feasibility study announcement.
The point of this article is to give an overview of the feasibility study. In all I think it shows some improvements over the PEA, especially since it scales down the project and adds sufficient contingency to capital costs. Unfortunately, however, the major issues that I raised in December are still problematic. Furthermore, the company makes a fairly liberal assumption regarding its ability to get debt based financing. Finally, we have seen no evidence thus far that a graphite company can release a strong feasibility study and move on to financing and construction. This is the case even if the company has demonstrated that it can secure an "off-take agreement" or even prove to the market that its graphite can be used to produce a value-added end-product such as spherical graphite--the form of graphite used in lithium ion batteries.
With these points in mind I think investors would be wise to avoid Energizer Resources until it addresses my concerns.
The Feasibility Study
The feasibility study announcement came out on February 6th. A quick glance at it reveals that this is a robust project. It has a post-tax NPV of $390 million using a 10% discount rate, and an IRR of 31.2%. Meanwhile the project will cost ~$188 million to finance and this figure includes a $24 million contingency--something I said was lacking in the PEA.
There are a couple of other positive changes in this study as well.
First, the estimated graphite production came down to 53,000 tonnes per year from 84,000 tonnes per year. This, naturally, has had a negative impact on the project's valuation and its IRR (which had been over 40%) but it does make sense. Flake graphite demand in 2013 was ~365,000 tonnes vs. a supply of 600,000 tonnes (I discuss these figures in my Investing In Graphite Part 1 in greater depth). Demand is expected to pick up, particularly as lithium-ion battery demand rises. Furthermore Chinese supply is expected to decline and the Chinese are by far the world's largest graphite producers. But even so 84,000 tonnes per year is an enormous amount to bring onto such a tiny market. Unfortunately 53,000 tonnes will be as well, and I still think this figure is high until we see demand start to rise more dramatically in response to Li-battery demand and other new applications. However I view this development as a positive, as it shows that management is thinking not just about how much graphite it can get out of the ground but about how much it can reasonably expect to sell without destroying its margins.
Second, the company makes a hefty allowance for shipping costs in its opex estimate--$182/tonne for ground transport from the mine to the port and $155/tonne for water shipment. The observation that shipping costs will equal ~20% of the company's revenue coupled with the strong economics of the project is a good sign.
Third, operating cost estimates have come down due to added efficiencies, a decline in energy prices, and weakness in the South African Rand. Opex estimates are at just $353/tonne which is an industry best for those companies that have released feasibility studies.
However, there are some issues. Most of these I discussed in December.
The first is that the FS doesn't have any opex contingency or an allowance for sustaining capital. The latter especially is incredibly unusual for any mining project, and unfortunately I think that this is going to force financiers to turn the company away. Sustaining costs include essential things such as plant maintenance, road maintenance, equipment upkeep and replacement, and so on. The fact that there is no allowance for such things leaves me suspicious of the quality of the feasibility study.
The second is that the press release in no way addresses the issue of the Molo Project's location and the fact that the graphite will have to be shipped over dirt roads which are regularly inaccessible due to the wet climate.
(Source: Molo Project PEA)
This picture is certainly worth 1,000 words, and knowing that these roads are long and often inaccessible leads me to the conclusion that Energizer Resources needs to seriously rethink its shipping logistics. As an investor I would see no value in such a project until I could see that the company could incorporate road construction from the mine all the way to the ports it plans on using. This would include land purchases and permits that are intuitively daunting. Otherwise any plan that includes shipping graphite across such a road over long distances has to be viewed as highly suspect.
Third, Madagascar in general is one of the riskier places in the world to mine, and with so many projects to choose from in Canada and the United States it leads me to think "why bother." As I wrote in December:
“
According to the Frasier Institute's Survey of Mining Executives Madagascar ranks 103/112 countries, states and provinces, with primary investor concerns being the country's legal system and its lack of infrastructure and labor. There's not much that the company can do about the legal system, although the PEA cites the country's new mining code of 1999 and the country's economic revival plan of 2000 as reasons to be optimistic. However investors should be skeptical of attempts made by regimes in developing countries to appease the investing community given the frequency with which we've seen a resurgence of political instability, asset confiscation, or excessive taxation.
Finally, and this is a new development, the company is assuming that it gets 50% debt based financing in its FS's calculation of the project's NPV. This means that it is essentially discounting out half of the expense at a discount rate (10%) that exceeds its expected interest rate (LIBOR + 5.75%, peaking at just under 9% by 2022). Investors have to wonder if this is feasible, especially since no company in the graphite space with a feasibility study has gotten financing despite trying (e.g. Northern Graphite and Focus Graphite (OTCQX:FCSMF)).
This leads me to the final topic I wish to discuss in this article.
Why Energizer's FS Will Not Lead To Financing
If you read the press release you'll find that Energizer is confident that it will receive financing in the relative near term. It does not give a specific time-frame, although it does indicate that it will get financed in the next few months and that it will begin production in 2017.
But we've seen that in the graphite space having a good looking feasibility study doesn't necessarily get you financing. Northern Graphite has had a positive feasibility study since June 2012 and it hasn't gotten financed. Focus Graphite has had one since last summer and it has made little progress. In fact all three companies have made just one step forward, and that is that they have all announced a small amount of financing from Caterpillar (NYSE:CAT) which hasn't led to any piggy-backing. In the case of Energizer a letter of intent was signed in October, 2013 that gives the company financing for 70% of its equipment costs assuming the company uses Caterpillar equipment. It's not much but at least it is something.
So why haven't we seen any developments with these other two companies, and what makes me so sure that Energizer is in the same boat?
I provided an explanation in a recent article I wrote on Mason Graphite. All graphite is different, and in order for graphite to be valuable its owner needs to prove its commercial viability. This means that Energizer needs to prove that its graphite can be used for value-added products such as spherical graphite. Now Energizer has done this, but it has not shown that it can do so economically: the company showed that it can make spherical graphite in a lab. While that's nice it doesn't really help those who might be buying the company's graphite, and in turn potential financiers are going to be skeptical. Furthermore, spherical graphite is one of just over one hundred products that can be made with "commodity graphite." Further, that market is small.
With that being the case I think it is going to be extremely difficult, if not impossible, for Energizer to get financed until it demonstrates that it can economically produce various graphite-based end-products. This will require an extensive study--an effective downstream feasibility study. Given the company's stated intentions this seems far-fetched, and I think financing is going to be out of reach until management realizes this and begins this study.
The Bottom Line
Given that Energizer's feasibility study shows that the Molo Project has an NPV of nearly $400 million vs. the company's mere $35 million market capitalization is not sufficient to get me interested in the company. Energizer is still trying to develop a project in a risky jurisdiction with a lousy geographical setting. While we have seen improvements from the feasibility study to the PEA there is still no allowance for sustaining capital or a contingency on opex. Finally this figure assumes favorable financing terms when other companies in the space with more advanced projects haven't even been able to get financing.
Therefore Energizer still has an enormous amount to prove before I would become interested in investing. The two points that management has to address include:
•Shipping logistics: I want to see exactly how the company is going to deal with these dirt/mud roads. Simply adding a higher cost to shipping isn't enough--there needs to be a plan. Frankly I don't see how such a plan could make sense without commercial road construction, but I am certainly open to other possibilities.
•Downstream logistics: Energizer needs to broaden its study of value-added products, because I don't see how the company will get financed without doing so.
Until we see these developments I am fairly convinced that Molo is not a viable project in spite of what the numbers might say. Even if it is, however, investors still need to consider the project's other shortcomings such as the high risk of mining in Madagascar or the fact that 53,000 tonnes of graphite per year is a lot for such a small market, and the company is at risk of pushing prices lower or failing to sell all of the graphite it produces.
Investors are therefore encouraged to look for other opportunities among junior graphite miners.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
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The Critical Investor , contributor
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"The first is that the FS doesn't have any opex contingency or an allowance for sustaining capital."
This has been mentioned in the FS announcement, although I like to see it specified in numbers as usual:
"Future capital expenditures expected to be incurred has been allowed for in the financial model to cover the expansion of the TSF in Year 2, the replacement of the mine fleet, the replacement of the power plant, and for rehabilitation at the end of the project."
In general: as long as graphite isn't a free market, just like rare earths, I suspect it will be too risky for financiers to go forward in any case.
24 Feb, 08:49 AMReply
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Ben Kramer-Miller , contributor
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Author’s reply » The problem isn't that graphite isn't a free market but that graphite is an industrial mineral and modification into end uses needs to be proven before financiers are going to put up the money. How do you know the graphite is really worth anything until you can prove that it can be economically modified into various end-products? The companies who are waiting for financing simply don't get this and think that a high IRR based on stated prices by Industrial Minerals is sufficient to get financing. This is why companies such as Northern Graphite have been sitting on their FSs for two years without any progress.
24 Feb, 11:43 AMReply
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