Why I’ve finally bought in to this graphite project #ACP

Why I’ve finally bought in to this graphite project #ACP

Armadale Capital is an AIM listed investment company whose primary focus is the Mahenge Liandu Graphite project in Tanzania. At 3.5 pence to buy Armadale’s market capitalisation is £15 million:

(Source: Google Finance)

Armadale Capital

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Market cap £15 million (at 3.4p)
RNS Updated Mine Plan Materially Increases Production
Writer disclosure Long ACP.

I spent last weekend reviewing a large number of pre-revenue mining companies, some of which I discussed in this premium article. One of the companies I reviewed was Armadale Capital (ACP).

There are very few projects with Armadale’s low capex requirement and high IRR that trade at such significant discounts to NPV (let me know if you know of any).

I’ve known about Armadale for some time, even briefly holding the shares about a year ago. Yes, I regret selling them!

Despite the increased valuation, I believe that the shares still offer great value due to the economics of the project.

Why Graphite?

Graphite has a number of uses. Armadale’s website has information but here’s the highlights:

(Source: Armadale.)

Demand for electric vehicles appears to be increasing which is good news for Armadale and a host of other battery metals. More demand for graphite equals higher prices equals higher profits for Armadale.

Mahenge Liandu Graphite Project Economics – Fantastic and getting better

Armadale’s Definitive Feasibility Studyconfirms Mahenge as a long-life low-cost graphite project with US$358m NPV and IRR of 91%”.

The Stage 1 capital cost estimate is $38.6 million, including a 15% contingency (possible unexpected costs).

The plan is to use internally generated cash flows to enable Stage 2, which in turn will further increase cash flows. This plan minimises upfront capex, thereby reducing any dilution of shareholders.

Given the payback speed, an all-debt transaction isn’t impossible to imagine although an equity raise ideally with a respected cornerstone institution (Lombard Odier?) would strengthen the shareholder register.

A high IRR (Internal Rate of Return) means that the invested capital is paid back in just over 1 year. This reduces risk from a lender’s perspective – they could still get paid even if commodity prices drop.

Last week, Armadale announced a revised Mine Plan which will increase annual output by 30%. This should dramatically boost both NPV and IRR. This was the announcement that made me decide that I couldn’t afford not to own ACP.

An updated DFS is due at the end of the month.

Why I view Armadale is cheap
  • Trades at a 95% discount to the NPV.
  • Highly attractive economics and low capex increase the likelihood of the mine being built.
  • Matt Bull (Technical Director) owns more than 8% of the company and should be highly motivated to ensure the project is successful.
  • If the share count were to double to fund the equity portion of the capex, the shares would still trade at about a 90% discount to NPV (depending on share price movement, of course).
Value creation and de-risking events I expect this year
  1. Updated DFS incorporating the 30% increase in output (end of May).
  2. MOU’s converting into off-takes. Armadale Capital has a number of Memorandum of Understandings for off-take. Full conversion into binding off-takes will likely be a requirement for debt providers.
  3. Application for the Mining Licence (Q2).
  4. Project Financing. From the DFS RNS – “DFS delivery has confirmed the commercial potential of Mahenge and will support ongoing discussions for offtake agreements, debt package finance for construction and project level development funding”.

Like any pre-revenue company,Armadale is not without risk.

The combination of low capex, high IRR and a 95% discount to NPV (which will likely grow in the updated DFS due this month) to me makes this a standout project in the resource space.

The project fundamentals mean that I view project financing as more likely than lower return projects, as it is of lower risk to lenders. Should the company finance and start constructing the mine then a 50% discount to NPV (assuming 100% dilution) would see the shares at 17.5 pence, an increase of c. 380%.

I look forward to the upcoming news flow and gradual re-rate of the shares as the company continues to de-risk the project.

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Wordpress (1)
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    This is painfully lacking in analysis of the downside.

    What and where are/will be the big producers of this commodity? What effect will future planned supply have on the price of graphite?

    How greedy is the Tanzanian government going to be (there’s history)?

    And many many more. Simply focusing on a NPV is pretty basic….

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