EGR 5.88% 18.0¢ ecograf limited

Comments on "Graphite Sector Research - Pattersons Report"

  1. 919 Posts.
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    This has been posted by a couple of posters on some graphite stocks tonight (thank you to those), but I thought I'd start it's own thread for the KNL holders/investors/accumulators who are focused on the FA as opposed to the charts. I also wanted to add my own comments for discussion and to get other comments, ideally from the FA perspective, even though I do like looking at a chart occasionally just to pretend I know what I'm doing. Get a coffee, sit back, and enjoy the read (or perhaps it's just me who takes perverse pleasure in reading and writing about graphite)

    https://www.dropbox.com/s/jtgeh9kpl55x7g6/Graphite Sector 200714.pdf

    Firstly, I must say I'm pleased that KNL is finally getting some recognition for what we have got. As other longer term holders will attest, there have been a few of us bleating about our fundamentals, but the market was just focused on other shiny graphite toys, and KNL just didn't seem to get a look in. Thankfully for us, management just kept their heads down, bums up, and kept working, delivering a binding off-take, excellent drill results with arguably the best flake distribution of graphite hopefuls (I buy the argument that Sovereign has slightly higher "large flake" proportion, but KNL has the highest overall larger flake proportion, or the lowest percentage of amorphous) in the market.

    I just wanted to respond with a few comments on each of the 6 factors that Patterson's used:

    Factor 1 - Deposit Size and Quality

    I would like to have seen this allocated more to quality than quantity. If we compare a basic 20 year mine, then provided each mine has enough resource for 20 years, then any additional resource in the ground is nice, but not immediately relevant. Quality is much, much more important than quantity in graphite deposits. Pattersons made the point "this factor encompasses the traditional size and grade metrics of a normal mineral deposit" which I think is incorrect to apply in the case of graphite, and it applies more to bulk commodity type deposits. This isn't a case of sour grapes either, by the way, because we scored 8/10, equal second only behind SYR, so Pattersons have acknowledged the strength of the size and quality of our deposit. But I think investors should look at graphite much differently to a "normal mineral deposit", because the two are fundamentally different beasts. Just ask a graphite buyer if they are all the same ... or for that matter, whether any 2 graphite deposits are the same.

    Factor 2 - Location

    While I completely agree that Sweden/Australia are very stable places to do business, I also think it's a very broad assumption to make that all of Africa is the same. Tanzania and Mozambique are neighbouring countries, yet the two are IMO at materially different levels of sovereign risk. Tanzania is a mining friendly country, and relatively stable certainly when compared with Moz, yet we are scored the same as if we were Moz. While I don't know our EGT's thinking, I'm sure the fact we were in Tanz, and not another African country, played a part in getting their confidence to commit to an off-take.

    Factor 3 - Flake Size Distribution

    We scored the equal highest on this score, but I think the Patterson's comments and numbers undersell our quality. To be fair to Patterson's, our metallurgical results came out on 7th July, and Patterson's report would likely have been largely written by then. As the results say (which were done in conjunction with our off-take purchaser, btw):

    "Ultra high purity can be reached easily in a single one step process. Importantly, extremely low impurities are recorded (refer table 2) confirming that there is no limitation on the application and uses of Epanko flake graphite."

    For that reason I would have scored us a little higher, but I guess the point is still made .. we have one of the best deposits of graphite companies.

    Factor 4 - Product Purity

    My comment here is that the intent is to show what can be achieved with simple processing, although I'd argue that a one-step processing to get 99.9% purity is still pretty simple, and will refer to the above quote from the previous factor:

    "Ultra high purity can be reached easily in a single one step process. Importantly, extremely low impurities are recorded (refer table 2) confirming that there is no limitation on the application and uses of Epanko flake graphite."

    Factor 5 - Product Off-take

    As an ex banker, I will say that for any project (mine development, property development, selling widgets, etc), being able to sell your product is king. Your product can be complete crap (literally, in the case of manure), but if it sells well, you'll have a profitable business. I would have assigned this a much higher weighting, not equal weighting. As an example, you could have the worst, crappest purity in the market, but if a buyer is committed to buying your product, and is on a binding off-take, then your mine can still make a lot of money. Conversely, the best quality in the world won't mean anything to a banker when you can't sell what you dig up. To get a profitable mine, and to get the funding for that mine, you need a buyer or a number of buyers. If there is only one thing people should take away from me and all my past posts, it's about the importance of the binding off-take. It is the reason that KNL will get into production as a lot of other potential mines never get built. That off-take is the reason that KNL will have a relatively easy time obtaining capital funding for the project. And that off-take is the reason that KNL will make a lot of profit from the project. This factor should be held with the highest importance. Being the first company globally to get a non-China off-take is an even bigger positive, but I won't digress on that just yet. We'll save that for later.

    Factor 6 - Timeframe to production

    I think Pattersons just made a mistake here. I think they looked at the GANT chart which had a 24 month timeframe to construction, and therefore put down 24 months (which amusingly enough means they reckon we'll be starting construction AFTER TON, which is a laugh). I refer everyone to the recent company presentation and the slide on page 16. The company has ticked off every box up to and including July, and notes in bold:

    "Program on schedule and major value drivers expected in short term"

    Based on the GANT chart, we are approx 18 months away from production. I'm not naive enough to think that other delays might not happen, but so far we are on track. We are nearing completion of the environmental and social base line studies, with environmental certificate due at the end of 2014. We are also well underway with resource upgrade and estimation, as many holders are keenly anticipating the newsflow in coming weeks.

    Other factors not mentioned

    1. Type of mine. KNL would have also scored relatively highly due to it's graphite being near surface, amendable to an open pit, with a low strip ratio. This is a pretty big consideration for mine construction.

    2. Management. Drilling a hole and hitting graphite does not make good management, as some hopefuls seem to think. Management have got to act in the best interests of shareholders, and focus on the long term plan, not short term spin. It's a whole other topic, but management score highlight here in my view, and one only needs to spend a phone call with Andrew to come away impressed with his knowledge, and one only needs to look at the regularity of newsflow this year to see the workrate.

    Any others anyone wants to add?

    In overall summary, I am broadly pleased with the positive recognition Kibaran has achieved, and it's a credit to Andrew Spinks and the team. I think Pattersons did a pretty good job, and I commend them for their report, because there is also a lot of information from other sources out there that could be best passed off as manure. I disagree with some of their assumptions and weighting arguments, but the trend for positive recognition is definitely there for Kibaran.

    I've also left out any mention of Merelani to the end of this post. Merelani was a producing graphite mine, with verifiable metrics. Getting that into production is going to be a relatively simple process (relative to a greenfields mine), and the buyers are going to be able to be given samples immediately for testing once we've got the binding deal. It will quickly accelerate Kibaran into a producer, and if it could have been added into the Patterson's report it would have bumped us higher again. I look forward to that game changing announcement in particular!
 
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