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Research Report: Alabama Graphite - Oct 31st-2016

|Includes: Alabama Graphite Corp. (CSPGF)
 

Alabama Graphite Corp.

ALP-V: C$0.13 (Oct 28th-2016)

 
 

BUY, Speculative Risk

Target: C$0.63

Projected Return: 385%

DCF Multiple: 0.60x

We recommend Alabama Graphite as a BUY with a C$0.63/share target.

(This assumes an estimated future 2017 outstanding share count of 225 million to account for further dilution for capital raises. This is also based on a more conservative 10% discount rate compared to the 8% base case used in the PEA, which gives a post-tax NPV of $236 million. $236 million / 225 million shares outstanding = $1.05 per share, then applying a further 0.60 DCF multiple gives a price target of $0.63).

Company Data:

In Canadian Dollars, as of September 21, 2016

Share Price (Oct 28-2016): $0.13

Market Capitalization: $17.1 million

52-week range: $0.11 to $0.24

Shares (issued & outstanding): 131.4 million

Options: 11.9 million

Warrants: 29.7 million

Total Shares (fully diluted): 173.0 million

 

· Graphite is a critical strategic mineral (the USA has declared graphite a supply critical mineral; the European Union declared graphite a critical raw material)

· Although there are ~200 graphite applications, the one with the most significant and enduring future demand is lithium-ion batteries (graphite is used to manufacture the anode in a lithium-ion battery)

· Graphite, specifically, Coated Spherical Graphite - or 'CSPG' - is used to manufacture the anode in a Lithium-ion (Li-ion) battery

· Each electric car contains 100 to more than 200+ pounds of CSPG

· It takes 10 to 30 times more graphite than lithium to make a lithium-ion battery - the minimum graphite purity required is 99.95% Cg

· Future graphite demand is driven primarily by the expanding lithium-ion battery markets (transportation and stationary battery markets)

       

Company Overview:

· Unique - core business model is based on the production of battery-ready graphite (CSPG)

· American sourced and manufactured solution

· Strong interest from U.S. Department of Defense (NYSEARCA:DOD) Li-ion battery manufacturers

· The most experienced team in the graphite development space

· Fast-tracking development of the most advanced flake graphite project in the United States of America

· Ideal location and logistics - both graphite projects are located in a geopolitically stable, mining-friendly jurisdiction with excellent established infrastructure

· Hospitable climate, ideal for year-round mining operations

· Rapidly expanding U.S. Lithium-ion battery and green energy industry does not have a U.S.-based supplier of specialty battery-ready graphite.

· Alabama Graphite Corp. (AGC) is the only battery-grade graphite project in the contiguous U.S.A.

· AGC's business model is focused on high-value CSPG, and not on producing unsellable quantities of low-value graphite concentrate at unrealistic selling prices.

The Largest Indicated Mineral Resource in the United States:

Resource Category

Tonnage

Grade

Contained Graphite

Indicated

78,488,000 TONS

2.39% Cg

1,876,000 tons Cg

Inferred

79,433,000 TONS

2.56% Cg

2,034,000 tons Cg

• Utilizing a cutoff grade of 1% Cg • Announced October 13, 2015 / • AGC's Prelimiary Economic Assesment (PEA) is based on a Life of Mine plan of 27 years based on mining ~10% of Mineral Resource Estimate

 

Preliminary Economic Assessment - Highlights

All Figures in US dollars (Nov-2015)

Pre-Tax

 

Post-Tax

   
 

NPV at 8% Discount Rate

$444 M

 

$320 M

   
 

Internal Rate of Return (NYSE:IRR)

52.2%

 

45.7%

   
 

Payback Period

1.9 years

 

2.0 years

   
 

ANNUAL CASH FLOW

$67.5 M

 

$49.7 M

   
 

Average annual graphite concentrate production

Phase One: 5,000 tonnes (yrs 1-5), 10,000 tonnes (yr 6)

Phase Two: 15,000 tonnes (yrs 7-27)

   
 

Average production costs of graphite concentrate

$1,555 / tonne

   
 

Weighted average selling price

$7,250 / tonne (blended selling price 75% CSPG & 25% PMG)

   
 

Revenue (Life-of-Mine Gross Revenues)

$2.4 Billion

   
 

Life of Mine

27 yrs

   
 

Waste-to-Ore stripping ratio

0.11:1

   
 

Total CAPEX

Phase 1: $43.2 M (initial Capex yr 1-5)

Phase 2: $84.4 M (after yr 5 - funded from cash flow) TOTAL CAPEX = $127.6 M

   
 

Feasibility Study

1 year beginning Q1 - 2017

   
 

Projected construction period

6 months beginning Q1 - 2018.

Commercial Production Q4-2018

   
     
 

Risks:

Financing risk: Project financing is the key risk. LOI or Off-Take agreements will likely increase the company's ability to

secure financing on favourable terms. Feasibility Study will be a major financial de-risking step. Financing alternatives,

such as royalties and strategic partnerships should be considered. Operating margins are high, so royalty companies may

consider providing AGC with upfront funding, especially with the company's scalable production. The PEA only assumes production from 10% of mineral resource estimates.

General:

This research report is for informational purposes only to residents in Canada. It is not meant as advice to buy or sell the security discussed. The information in this report is prepared from publicly available sources, but has not been validated with respect to the accuracy and so should not be relied upon. Past performance does NOT guarantee future performance.

Investors may lose part or all of their investment principal. We accept no responsibility for any loss based upon the contents of this report. Before acting on any info in this research report, it is recommended investors seek advice from a financial advisor.

There is no legal, accounting or tax advice in this report.

                 

Disclosure: I am/we are long ALP.V.