RESOURCEStocks: Three years ago graphite was one of the hot new age minerals that was going to change the world. While there has been a lot of effort put into the sector since 2015, to date success seems to be hard to come by. What is Black Rock doing to change the rate of success?
John de Vries: On a superficial level graphite seems easy. It's quite abundant, simple to treat, and the EV thematic gives you an instant market. The reality is that as we have climbed the graphite learning curve, we have learnt three things matter: product quality, deleterious elements, and in real estate parlance, location, location, location.
The issues of quality/flake size, and deleterious elements are broadly understood. However, in many cases, customer applications are specific to flake chemistry and physical properties such as shape and thickness. Simply put, having something of value is a good start, and that means having more than just graphite, you must have the right graphite for a customer's application.
Doing the work to understand your deposit properties is critical. In many cases we would not be having the offtake conversations we are without the product from the pilot plant. It is relatively easy to secure an MOU. Turning an MOU into a binding offtake agreement takes a lot more work, and is nearly impossible without product to demonstrate your capability.
I think people are starting to come to terms with the location issue, and in our case just how well we are located. In our case, access to grid power, rail transport and a deep water port are fundamental to our success story. In graphite, logistics accounts for around 30% to 40% of your costs, accessing existing logistics infrastructure is solid start to getting a competitive position on the cost curve.
RS: In recent months, you've shipped your first bulk sample, produced a "world first" in ultra high-grade graphite and received positive feedback from potential customers. Starting with the rail shipment, what did that achieve?
JdV: In de-risking the project, it is necessary to run a second pilot plant to validate the DFS design and continue to front end load the product qualification process. This requires a decent sized pilot plant run. In addition to the mechanics of the pilot plant itself, there were a number of reasons why we needed to ship the bulk sample by rail. Firstly, to learn whether rail was a viable solution in Tanzania, and secondly, to teach us what we need to do to export within the legislation and customs regime within the new-look mining code. It put two really big ticks on the box, demonstrating rail is our preferred method, and provisionally having a cost advantage of about US$40/t over road haulage.
In our business, logistics is 30% to 40% of our cost. The rail option reduces us to about 60km of road haulage, we can do customs clearance inland then put the containerised product on a train and that train goes direct to the fourth-largest Indian ocean port in Africa, at Dar es Salaam. Dar es Salaam is the main port for Tanzania, Zambia and the DRC. The advantage of being the container port for East Africa is that we're long on containers. There's a lot of empty containers going back to Asia, and with over 12Mt annually of shipping, we have got a massive advantage there straight away.
Also using rail is an important part of our local content strategy - if we're using rail, we are deeply integrating ourselves into the Tanzanian economy. This is important not only from a cost perspective, but we create jobs and revenue for existing infrastructure, making a real contribution to sustainability.
In terms of marketing our concentrate to customers, generating large quantities of our final high-quality product from the pilot-plant, is essential for potential customers to test and determine if it meets their requirements, hence the need for the large shipment of bulk sample from site. Feedback on the flake product has been extremely positive.
RS: Can you explain the significance of Black Rock's Ultra Purity FPTM Flake Graphite, which you've described as a world-first 99% purity graphite concentrate achieved in a conventional flotation circuit at scale?
JdV: We ran Ultra, with a stunning result. We took a 200kg sample and reprocessed it in a closed circuit. It went from a 97.5% premium concentrate to 99.3% total graphitic carbon and we did that with flotation - nobody else has been able to do that.
Why that's so important is that all we need to do to deliver Ultra is change the retention time in the polishing circuit. We can produce Ultra with the same capital footprint that we need for premium 97.5% graphite concentrate. Alternatively, we simply add in a small amount of additional polishing capacity and we can run Ultra at full production rates with the existing plant.
It's such a simple ore to treat - it's crush, grind, three stages of flotation and a bit of polishing. This translates to a compact plant which is low cost to build and simple to operate and maintain.
RS: Black Rock has sent samples to 22 potential customers and you've reported initial positive feedback - what have been the key takeaways?
JdV: Our view of marketing is not that we're producing stuff and putting it in bags - we're producing a product so we've spent a lot of time understanding what our product can do, segmenting the market and matching our products to those potential customers who need our product for their processes. We are dealing with real customers who have got real needs for real products, and now we can have a conversation about performance and specifications.
The feedback from our pilot plant product placement has been remarkable. We have been asked a number of times "is this stuff real?" - people have accused us of doing some funky refining prior to dispatch of the sample.
It's down to two things - the quality of the resource, and the analogy is the difference between lump iron ore and fines. Geology is a good start and you can't change geology. Fortunately, we have a remarkable block of rock to start with.
And secondly, rather than turn up and say "batteries, batteries, batteries", we've researched and the demand for graphite and the real growth area and shortfall is in expanded graphite, driven by large flake availability. With two-thirds of our product fitting into the large flake grouping, we have the capacity to underwrite the business on current demand, and still capitalise on the EV thematic as it evolves.
For example, between the screen of your smart phone and the electronics is a heat foil made of expanded graphite. 100-inch TVs have an even thicker heat foil, gaskets, heat seals, all those myriad different products have a massive demand for expanded graphite, which is in critical short supply.
What we're doing with our project is we're pushing against an open door, people want the flake because they can't get it, we're fortune to have something different that sells itself.
It also comes back to the ethos of the company - about doing the right things right.
We're doing the DFS right, community engagement right, we did the environmental impact properly. That gives us a lot of confidence as the pieces come together, we take a lot of steps forward and not many backward.
RS: To recap, Mahenge's PFS outlined a 31-year project, with initial capex of US$90.1m and a post-tax IRR of 45.1%. How is the DFS, due out within months, progressing?
Our strategy of focusing on completing high quality technical work, with a focus on market development and customer acceptance, is absolutely the right one. Completing a quality DFS supported by the pilot plant gives a lot of data with which we can optimise the design, reduce capex and opex, and improve operability. Ultimately this translates into a stronger business.
The DFS numbers are starting to come together and while there has been some scope creep such as grid power on day one, and rail haulage, we have managed to offset that through other processes such as Chinese procurement. The bottom line is that we are cautiously optimistic that the DFS will deliver a good outcome relative to the PFS.
Running 90 tonnes of ore through the pilot plant has been an important part of the process. The pilot plant has delivered insights into mill design and opportunities for improvements not available with bench scale testing. Big levers for us have been development of the Ultra concentrate, dry tailings stacking and producing meaningful volumes of concentrate to distribute to potential customers.
Dry stacking of tailings is important to us, given we are in a net rainfall environment. Dry stacking minimises our water consumption and reduces the size of our tailings area, in turn reducing the volume of runoff that needs to be treated prior to discharge.
Dry stacking is the gift that keeps giving - because we're putting in an engineered substance not just mud, we can go quite steep on the tailings walls and that frees up a lot of ground space, allowing us to relocate the mill to a more optimal position in the overall site footprint.
We're now talking to a Chinese EPCM equipment supplier about a lump-sum bid for the mill and we think that's going to add value.
RS: Given the recent regulatory uncertainty in Tanzania, what can you tell investors about Black Rock's experience?
JdV: The most effective political risk management you can do in any environment is surround yourself with friends. Looking at using Tazara (Tanzania-Zambia Railway), Tanzanian power and ports, I'm surrounding myself with friends. In terms of the new regulations, lots of people are learning how to work with the new system and we're all on the same learning curve, and getting better at it with time.
But let me put it in perspective - I've worked in Western Australia's Goldfields and had a project held up for four years because of native title. We're 12 months in to the situation in Tanzania and I think it's beginning to work. Tanzania is one of the few countries in Africa that hasn't had a violent change of government and even though it's reasonably new it's got a history of democracy, bottom line it's not a bad place to be.
On the plus side, one very significant benefit that has eventuated from the legislative reset is the significant improvement in transparency. I think over time, as people become accustomed to seeing how government and business should work in a more consistent environment, the benefits will become more tangible.
RS: What progress is happening on the offtake and financing fronts?
JdV: We're focused on offtake not MOUs, because the history in our sector has shown MOUs have not translated into significant share price rerating. Fundamentally, there is a shortage of flake so people are talking to us about flake offtake.
Where does that leave us with finance? It's one of those circular errors we need to turn into a virtuous circle. You'll get equity finance if people can see an offtake and people will sign for offtake if they think you're going to get built. Our approach to turning the circular error into a virtuous circle, is to secure a deal along the lines of Build, Operate Transfer, with some form of finance package for the mill. That means we get built, then offtake, equity and debt naturally follow.
What the mining code does for us is that instead of phoning the usual suspects in the City of London for finance, we can talk to our friends in the banking sector in Dar Es Salaam and introduce them to our good friends in London, and they effectively front the international finance system for us. I think the expression is "same same but different".
So, our finance strategy is similar to the project strategy. Do the technical work right, de-risk the investment and use that to secure offtake, debt and then equity.
The thing that really stands out for Mahenge is getting the balance right. To be ultimately successful we need to deliver a balance and the sharing of benefits between our equity investors, our host community and the host nation. The way I see this is like a stool and you need three legs for it to be stable, if one leg is too long the stool doesn't work, so you need to get all three in harmony for the project to be stable in the long run.
RS: How do you see the synthetic graphite market changing market dynamics?
JdV: I see two dark clouds sitting out there over synthetic graphite supply and demand fundamentals. Broadly on the macro scale, the availability of synthetic as a co-product of oil refining has to be in question in the long term. Increasing EV penetration by definition, reduces oil consumption and petroleum coke availability. This increases the cost of synthetic relative to natural flake.
And secondly, one of the key things that has held back natural graphite in batteries at the moment is consistency. I think the new generation of large volume mines in Africa will go a long way to improving consistency and availability of homogenous battery feedstock as a reliable alternative to synthetic. Clearly Mahenge has a role to play in this.
RS: Finally, what's on the immediate horizon for Black Rock?
JdV: The next two quarters are pretty big for us. Hopefully we'll get our environmental and social impact assessment approved soon. Securing the environmental licence clearly signals, Tanzania is open for business, and we also know how to do business in Tanzania. On the back of that approval, we'll commence the mining licence application process, supported by release of the DFS in September.
We've already signalled to the ministry very clearly about the pending application, they're expecting us and a lot dialogue is going on in that space. Again, our belief of being in a position to answer all the questions about the technical work is not a bad place to start the application process.
I think we'll be able to get a sense of timing once the application has gone in but if you've lined up finance as part of process it certainly puts a lot of positive tension into the application process.