Special Report: The current valuation of graphite explorer Black Rock Mining is “unjustifiably cheap”, according to a new report.

A comprehensive 68-page report from Orior Capital has put a valuation target of between 16c and 40c per share on Black Rock Mining – a massive 300 per cent to 900 per cent increase on the current share price.

Black Rock Mining (ASX:BKT) owns the advanced Mahenge graphite project in Tanzania, which is on track to deliver its first product in 2020.

A comprehensive definitive feasibility study (DFS) on the Mahenge project conservatively anticipated a post-tax net present value (NPV) of $US895 million ($1.24 billion), and an internal rate of return (IRR) of about 43 per cent.

IRR and NPV are used to estimate the profitability of a potential operation.

In this case, the numbers are very good, says Orior Capital analyst Simon Francis.

Mahenge’s NPV is about seven times larger than the projects initial development costs of $US115 million ($160 million).

As a broad rule of thumb, projects that are one year or less away from cash flow, fully financed and fully approved, can attract valuations of between 30 to 50 per cent of NPV, Mr Francis says.

But Black Rock Mining’s market capitalisation is currently less than 2 per cent of the NPV — the biggest valuation gap in the sector.

Turn down the noise

Mr Francis said ‘noise’ in the graphite space – with lots of companies all claiming to have strong projects – was making it difficult for investors to discern real value.

“It’s obvious that beyond Syrah Resources and Magnis Energy Technologies, investors are not discriminating between the other Australian owned projects in Africa, irrespective of location, stage of advancement, or the prospects for achieving funding,” he says.

In a sample of eight ASX-listed African graphite developers, there is only a $US16 million ($22 million) difference in market capitalisation between the largest and smallest, he says.

“This probably reflects a general sense of ‘project confusion’ among investors, and a poor year in junior mining generally,” Mr Francis says.

“It also suggests that, so far, the market has failed to take advantage of the opportunity that Black Rock Mining presents.”

What sets Black Rock Mining and Mahenge apart?

The report explained that Mahenge could produce “industry-leading” graphite of up to 99 per cent concentrate for at least 31 years.

Black Rock Mining is the only graphite developer with a DFS – an advanced project study which essentially de-risks the development.

The company is now working to secure funding and says it’s in talks with multiple potential financiers.

“We have the trifecta — geology that delivers the best concentrate on the market, geography that delivers the lowest cost to customer in East Africa, and the team to put it together,” chief executive John de Vries told Stockhead.

Bringing it all together, Black Rock has also announced three crucial “offtake” deals.

Two of these offtakes are believed to be the largest signed by any graphite company, either in production or development.

The agreements represent about 85 per cent of the proposed steady state annual production of 240,000 tonnes per annum.

Mr Francis says these agreements will help Black Rock Mining establish branding in the emerging energy storage market.

“The agreements are a testament to Black Rock Mining’s notion that Mahenge graphite has unique properties that make it highly desirable to end-users,” he says.

Black Rock Mining now plans to shorten its development schedule and is working on a fourth self-funding module to take proposed annual production to over 300,000 tonnes per annum.

Graphite is set to boom 

The emerging electric vehicle and energy storage markets have transformed the graphite market from a mature one, to one with rapid growth prospects, Mr Francis says.

“Both these industries are embryonic in nature, and growing at a terrific pace,” he says.

“There is also huge pent-up demand for expandable graphite for use in the foil and fire-retardant segments.

“Demand for fire retardants is being driven by technological developments and more stringent safety standards in automotive, aerospace, and in building and construction after a number of large fires.”

These applications require large flake and pure graphite, which is in short supply.

The Mahenge project is biased towards large, pure flake graphite — providing Black Rock Mining with immediate cash flow opportunities as it progresses the opportunity presented by the EV revolution. .

Demand for natural flake graphite could more than double over the next decade, from about 630,000 tonnes per annum in 2017 to about 1.4m tonnes per annum in 2027, Mr Francis says.

“Even before accounting for any further curtailment in Chinese supply, the world could need the equivalent of three “Mahenges” to meet demand over the next decade.


Black Rock Mining is a Stockhead advertiser.
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