Why have Jangada built a 9.5pc stake in Blencowe Resources?
“…These are exciting times for BRES. A story that has really gathered momentum this year with the publication of a PFS making an eye-catching case for the company’s flagship asset, and, of course, the prospective China deal…”
Blencowe Resources (LON:BRES) has rapidly advanced towards lift-off this summer, close to securing a deal with the capacity to turn its Orom-Cross Graphite Project in Uganda from promise to reality. The company’s value has risen sharply in the past few weeks as it has moved towards supplying a lucrative Chinese market that needs graphite – a vital element for lithium-ion batteries – for the country’s massive net zero programme. Has BRES peaked, or is this a share that could go – much – higher?
The Orom-Cross Graphite Project
BRES acquired the Project, which encompasses an area of some 520,000 hectares in northern Uganda’s From District, back in April 2020. The previous owner had undertaken significant exploration – including field mapping, geophysical surveys, logging and analysis, metallurgical test work, and the setting of exploration target ranges – that highlighted a shallow graphite deposit 19kms long and 2kms wide, three-quarters of it comprised of jumbo-large graphite flakes.
An internal Preliminary Economic Assessment (PEA) published last October began to define a low cost, high margin mining operation with strong NPV and other key performance indicators, based on a JORC Standard Mineral Resource of 24.5Mt at 6.0pc graphite, sufficient for 20 years of mine life. Metallurgical test work has indicated the Project’s 96 to 97pc LOI (Loss on Ignition – a widely used method for measuring organic matter content in soils) concentrate promises to be a premium grade product. BRES gained its first significant institutional investor this April when mining and resources fund RAB Capital took a 10pc stake, investing £0.8m.
But things really began to move for BRES this summer when the company published a Pre-Feasibility Study (PFS) – managed by graphite technical experts Battery Limits – which indicated the extent of the Project’s promise as a robust, long-term, profitable graphite venture. The PFS estimated a NPV (post-tax) of $482m, a 52pc increase over that in the PEA, and an IRR (Internal Rate of Return) of 49pc. Through an estimated 14 year mine life, which the Study indicated could be extended through further drilling, graphite could be produced at a $499/t (per tonne) operating cost, making it ‘one of the lowest cost graphite projects worldwide’, with a $1,307/t weighted average sales price. 36,000 tonnes per annum (tpa) at 96-97pc LOI concentrates would be produced in the first year, ramping up in stages to 147,000tpa. A $1.398bn EBITDA could be delivered over the life of mine at an average $100m EBITDA per annum. The Study also reduced the initial capital requirement estimated in the PEA by 23pc to $62m.
The highly positive report encouraged BRES to target initial production at Orom-Cross by the end of next year, and to concentrate all of the company’s resources on the Project. Earlier this year BRES had announced an earn-in agreement to complement Orom-Cross with the Akelikongo nickel project, also in northern Uganda, from which the company has now withdrawn. The decision to focus solely on Orom-Cross means the company will no longer be required to issue $0.35m of shares to its earn-in partner SIPA, or meet a $0.5m funding obligation. BRES has also got the Project’s Definitive Feasibility Study (DFS) underway, the last of the major studies paving the way to a decision to mine.
A possible Chinese buyer
Last month BRES reported the company was already on the threshold of securing the breakthrough it needs to move the Project into production, receiving an approach from a group in China ‘that has the potential to ultimately provide an offtake, funding and development scenario’. The company is sending an Orom-Cross bulk sample of around 100 tonnes to allow the interested party to undertake detailed metallurgical test work ‘over the next six to nine months’, which it is hoped will lead to non-binding MOUs for offtake, and ultimately binding sale agreements for a substantial portion of the Project’s initial 50,000tpa product. BRES believes the bulk sample trial is ‘potentially a precursor to a full offtake agreement and subsequent project funding’.
The potential partner’s location is another compelling factor: the Chinese graphite market is by far the world’s largest. A World Bank report estimates China will need to invest $14tn in power and transport to meet Beijing’s goal of net zero emissions by 2060, a commitment reaffirmed at last month’s congress of the Chinese Communist Party, where President Xi emphasised ambitions to ‘basically eliminate’ pollution through a ‘green energy revolution’, and reach peak carbon emissions by 2030. The country already controls 60pc of the world’s lithium processing capacity.
BRES has rapidly recalibrated the company’s strategy in response to the prospect, notably postponing plans, which had been costed at $10m, to build an on-site pilot plant facility of 2,000tpa at Orom-Cross. A binding offtake contracts to purchase Orom-Cross graphite would likely remove the need for a pilot plant that had been intended to provide product to would-be offtakers to enable them to assess its viability for their own uses. BRES followed the announcement with a £0.75m fundraise to meet the costs of delivering the bulk sample to China, and secure a year’s worth of working capital. The placing was cornerstoned through a £0.61m investment by South America focused battery miner Jangada Mines (AIM:JAN), which increased its holding from 2pc to 9.5pc, attracted by the Project’s exceptional NPV valuation. BRES’s last interim report to 31 March 2022 stated cash of £968,692 and gross assets of £7,032,220.
Though the Chinese graphite market is the company’s current focus, the potential market for the Project’s graphite is much wider. The EU estimates the energy transition will increase demand for the material 15-fold by 2050, but graphite is yet to witness the price movements of other battery metals such as lithium and nickel, despite being the largest component within the anode of lithium-ion batteries. BRES’s PFS outlined graphite’s market reach, which includes ‘electronics, agriculture, automotive, lubricants, ceramics, government defence, carbon brush and foils products’. Applications beyond lithium batteries include thermal insulation, geothermal, hot metal forging, foundries, aerospace and medical devices. Graphite is also used in cathode and alkaline batteries.
These are exciting times, then, for BRES, a story that has really gathered momentum this year with the publication of a PFS making an eye-catching case for the company’s flagship asset, and, of course, the prospective China deal. The market thinks so too, backing a £0.75m fundraise at a time when junior resource companies have found capital hard to come by, and pushing BRES’s share price up from 3.15p to just over 4p over the past month. The question for prospective investors, of course, is how much future good news is already baked into the price. Not all, perhaps: it’s important to remember that the Chinese contract is far from a done deal, not even at the MOU stage yet. The bulk trial sample will of course be critical, and nothing is guaranteed. BRES’s price looks like it may have peaked again for the time being, so now may be the time to consider taking a chance on a positive outcome, which would surely give the company’s value a new charge. The DFS and progress reports towards initial production offer milestones to look out for in the meantime.