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NextSource Materials Inc: THE INVESTMENT CASE

NextSource Materials’ plans for modular mine construction represent a paradigm shift

Most graphite companies either hunkered down in an ill-conceived attempt to ride out the storm..
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INVESTMENT OVERVIEW: NEXT The Big Picture
Graphite is used in electric car batteries

Take a close look at the capital cost (CAPEX) number put out by NextSource Materials Inc (TSE:NEXT) for its Molo graphite project in southern Madagascar.

As confirmed by a SEDAR filing this week, a feasibility study has estimated that it will take just US$18.4 million to get Phase One of the Molo project into production (targeted for 2018) at a planned initial output of 17,000 tonnes per year (tpa).

That confirms Molo as the lowest cost planned graphite mine build anywhere in the world by a significant margin, and it’s a number made all the more impressive by previous estimates that had the CAPEX initially set at US$188 million for a planned 53,000 tonnes per year.

That’s right, US$188mln, or to put in even simpler terms, roughly ten times the amount it will now cost.

How has the company been able to get costs down so low?

To answer that question, we first have to go back a few years, to when the global graphite market was riding high and everyone was punching in numbers for Rolls Royce projects.

The Molo was no different. But when graphite prices dropped by almost 40% and, perhaps even more importantly, financing for new projects dried up globally, management quickly realized it had to re-think its approach to building the Molo mine, literally, from the ground up.

Most graphite companies either hunkered down in an ill-conceived attempt to ride out the storm, started to sell (misleadingly) their projects solely on the future demand and perceived prices of battery grade graphite from electric vehicles or else switched commodities altogether.

But not NextSource which took an entirely different view. The NextSource approach was to scrutinize every cost item, right down to the nuts and bolts of the project and determine if there was another, more efficient way of building it that could still make money even in the newer, more difficult pricing environment.

NextSource’s Brent Nykoliation takes up the story....

“Our 2015 bankable feasibility study was very positive, but it had three issues,” he says.

First, there was size. Molo’s original planned output of 53,000 tonnes per year was about 10% of the world market, but to secure legitimate and binding off take deals with reputable buyers for that entire amount would have been a challenge.

Second, there was the US$188mln CAPEX. While it was a realistic cost for a mine of that size and considering that NextSource could secure  between US$80 million and US$90 million in debt financing, the ability to raise the remaining funds from the equity markets was quite simply “a bridge too far”.

And third, there was the fact that the price of graphite has fallen dramatically since NextSource issued their 2015 Feasibilty Study. The graphite price as of then produced a healthy post-tax project IRR of 31%. But at today’s current price, the resulting IRR dropped to just 8%.

What to do?

“We undertook an eighteen month value engineering exercise using three different engineering firms,” explains Nykoliation. The results of this technical collaboration were revolutionary.

“We determined that a full modular mine build methodology was the most cost and time efficient solution. Every part would be built as a containerised module and would connect together like a Lego set.”

Mines using modular components are not new, but never before has an entire mine been designed and built entirely in modular form. With a build time of just 9 months, the Molo mine will rank among the top 3 largest graphite mines in the world, outside of China.

The technical team at NextSource has achieved this game-changing approach by bringing together 36 different vendors from 5 different countries resulting in a total build CAPEX that has been reduced to US$18.4mln number, or US$21.4mln including 3 months of working capital.

Phase 1 will have an initial production of 17,000 tonnes per annum of high-quality SuperFlake® graphite , down from the originally envisaged 53,000 tonnes. Of course the thing about modular projects is that scaling up is simplicity itself, and NextSource has already planned its Phase 2 expansion in 2020 to meet anticipated market demand for its premium SuperFlake® graphite.

The effects have been immediate. Canada’s Dundee Resources took 20% of the company and analysts’ heads have been turned from coast to coast in Canada and elsewhere.

“What we have is something achievable in today’s current economic climate, which has not been kind to junior projects,” says Nykoliation. “To be able to fully fund a graphite mine that is 50% larger in production than the global average for under US$20 million and commission it in nine months’ time is unprecedented. We know we are being watched very closely, by competing graphite projects and major mine and engineering companies. Once we provide proof of concept, we have been told we will have changed mining.”

In comparison with those other graphite companies that were left standing when the bottom dropped out of the market, that’s quite some achievement.

“NextSource is the only graphite project among its peers that is economic using realistic market conditions,” says Nykoliation. “We have used the current graphite price and a planned production that we know we can easily sell into the traditional markets.

"None of the other competing projects with a Feasibility, Pre-Feasibility or Preliminary Economic Assessment Study is economic using the current graphite selling price, which is US$1000 per tonne.” And that’s before all the current electric vehicle hype is taken into account – hype which Nykoliation largely discounts.

“Many graphite juniors have chosen to use selling prices in their economics based on selling solely to the electric vehicle market. Both the prices being used and the volumes they expect to sell tend to be unrealistic” he says.

The amount of natural graphite being used today for electric vehicles is still very small and while this will undoubtedly change in the next few years with the growing penetration of electric vehicles, the stark reality for any graphite project planning to open a mine in the next 2 years is that you will be selling most of your production to the traditional steel market, where the selling price is about US$1,000 per tonne.

And that is a key point, as approximately 85% of annual graphite production is consumed by the traditional steel market.

NextSource is that rare thing, a graphite company that has based its project economics on actual reality and by doing so, has conservatively showed investors that it can make very good margins in doing so now, and likely a whole lot more when the eventual, but still-in-the-future, world of battery power arrives.

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