PDAC 2016: Juniors trial different business models to tempt investors

By Kasia Patel
Published: Friday, 11 March 2016

With investors more risk averse than ever, particularly with regards to the extraction industry, junior companies are turning to shortcuts in technology and planning in order to make it to the finish line.

This year’s Prospectors and Developers Association of Canada (PDAC) Convention in Toronto, Canada, was better attended than in 2015 and the general mood was more optimistic, despite the lack of investor confidence in higher risk investments.

 PDAC 2016_KP IM
Sentiment at PDAC was more positive in 2016 than it was a year ago, although investors continue to be shy of investing in the crowded junior mining industry against a backdrop of low mineral prices (source: IM). 

Simply ticking off the necessary components of an early stage mining business –acquiring valuable assets, using funds to advance exploration and delivering positive feasibility studies, have left many companies stuck and strapped for cash, unable to proceed further.

"Today the market doesn’t want to see a preliminary economic assessment (PEA), that’s not what’s important now," Kiril Mugerman, CEO of TSX-V-listed rare earths development company GeoMega Resources Inc., told IM.

The company is bypassing – at least temporarily – what it calls "the mountain" of building a rare earths mine, opting to develop its separation technology first, meeting customer specifications and working to streamline its flow sheet.

Proof of concept is reassuring for mining investors, but arguably the most compelling way of getting financiers to put their hands in their pockets is evidence of downstream demand growth. Applications for minerals that failed to deliver on promises of being the next big thing have spooked many potential backers of new projects.

Graphene, the two dimensional carbon layer that can be derived from natural graphite, has been a rather painful example of this. The palpable excitement surrounding the material four years ago has since died down, as developers have so far failed to make the anticipated commercial breakthrough.

One PDAC attendee told IM that they "wouldn’t touch graphene with a barge pole". Others criticised some graphite companies for pushing graphene just to obtain project funding.

"They build this picture of a project that’s tens of thousands of tonnes per year, just to make the economics work and all of a sudden they realise they can’t raise the money, which is why, all of a sudden, they start talking about graphene," one delegate said.

Many companies however insist that graphene is good iron to have in the fire of a graphite project, as long as there are other business propositions to run alongside it. 

Although the chances of turning it into a significant revenue spinner may be slim, several of those with the capacity to produce graphene from natural graphite do not want to be left behind, if and when the material does take off commercially.

TSX-V-listed Flinders Resources Ltd, which owns the currently mothballed Woxna graphite mine and plant in Sweden, is focusing on two initiatives.The first is working with a Chinese technology partner to design a graphite production process for Woxna. The second is its Swedish graphene project, a government funded programme to research and commercialise the production of graphene using Woxna material.

The company’s CEO, Blair Way, is realistic about the impact of graphene on the market, saying that even if the material is successfully commercialised, it is unlikely to have a large impact on the natural graphite market.

For the company’s high purity graphite project, Flinders recently received positive results from test work on product from Woxna, which means that, after Easter the company will be in a position to approach end users with samples.

A number of companies have expressed an interest in receiving graphite from sources outside of China, but Flinders has so far struggled to place its material in the market and low prices forced the company to put its mining operation on hold. 

However, Way believes that the company's work with a strategic Chinese technology partner with a well-established design, build and operate capacity in high purity graphite production will give it an advantage going forward.

"China has the experience and are doing it well. Why wouldn’t we get technology from China? We’re working with an engineering company and as long as performance is high, we will keep using them," Way said.

Kevin Watson, of processing company, KPM, which has developed a way of producing the battery material, spherical graphite, told IM that many juniors are underestimating the complexity of upgrading graphite for the battery market.

The company works with juniors and existing producers to streamline production, improving production processes and cutting costs and is now looking to provide a package technology to the mining industry, focusing on graphite.

"A lot of juniors have a long hard process to carry out requiring them to develop large production capacity and projects and they need a lot of funding," he said.

Alternative funding

DNI Metals Inc., another Canada-based exploration company, is tackling the graphite market in a different way. DNI is buying graphite from Brazil and processing it, before selling it to end users in small quantities to build up a customer base for its own graphite project in Madagascar.

Importing graphite from Brazil allows DNI to build relationships with customers and other market heavyweights, which according to its CEO, Dan Weir, is an important part of making it in the business.

"It’s not about producing large quantities, it’s the sales and it’s the marketing that counts. Also being able to supply a lot of different specs and products to a lot of different people," he told IM.

Weir said that the company chose Madagascar as the location to develop a graphite project, owing to its geology and the availability of good quality large flake graphite, which Weir says is not widely available in Brazil.

"The big reason why Madagascar can compete with China is because the geology of the graphite means it requires less processing. We're not starting with hard rock and so it doesn't need to be crushed and ground, meaning that the capex is going to be a fraction of the cost of other projects," he said.

DNI plans to start output at 12,000 tpa, which Weir says will enable the company to be extremely competitive in the current graphite market owing to its lower capex and opex costs as the ore can go straight into the flotation process following excavation.

"We are not as concerned with the graphite prices going up because, at these prices, with these operating costs, we can still be profitable," Weir said.

The next step for the project, which is already fully permitted, is a drilling programme which is to begin in May. DNI's intention is that, by this time next year, it will have the funds to build a processing plant in Canada.

With only part of the graphite needed to be upgraded to battery grade, DNI decided it was more economical to build a facility in North America for processing to higher grade graphite. The facility will also enable DNI to conduct all of its own testing.

Funding the project has, however, not been entirely straightforward and in January the company announced plans to acquire 100% of the shares of CR Capital Corp. and 100% of the shares of a privately owned Canadian company operating in mineral exploration.

The completion of the acquisitions provided DNI with copper and zinc properties in Canada, and, more importantly, $2.2m in cash and working capital.

Batteries still driving demand

As demand for batteries continues to grow around the world, so will demand for lithium, but according to Stormcrow Capital Ltd president Jon Hykawy, other applications will also drive consumption.

Speaking at PDAC, he outlined that rechargeable battery demand is pegged at 29% but other markets also remain important, such as the manufacture of ceramics, fritz, glazes, greases, thermal glass and metallurgical powder.

"All of these markets are growing – or shrinking in the case of aluminium – at various rates. But the battery side of this equation is growing at the largest rate," he said.

Hykawy estimated that total battery demand increased 11% between 2014 and 2015, with a dramatic rise expected for battery materials such as graphite, lithium and cobalt out to 2025. 

Current demand for lithium remains in the region of 200,000 tpa with global nameplate capacity estimated at around 231,000 tonnes.

"Why then is the price going crazy? There are some issues with the supply in China which is why some Chinese companies were recently trying to find buyers at prices as high as $30,000/tonne but that is exclusive to China. We do however see prices going higher even in the West," Hykawy outlined, pointing to recent price increases by US-based FMC Corp.

Out to 2025, Hykawy expects demand in excess of 400,000 tpa and supply of around 425,000 tpa, with new projects coming online.

Hykawy cautioned that the 25,000 tonne overlap is not a large margin of error, however. "Some of these [new lithium] projects aren’t completely financed and there should be some concern about supply but not all lithium goes into batteries. Some of it is lower value and used for things like greases and there is some elasticity in market segments," he said.

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