Having a mineral deposit of any sort is the beginning of the process of building a mine. If your deposit is the right grade, if there is infrastructure and a suitable workforce, if you can design a flow sheet which makes economic sense, you might have a mine.
Perhaps the most important question is what the mine is going to cost to put into production, its CAPEX. Because to build a mine a company has to come up with all the money required for its CAPEX before its actual mining operations can begin.
For NextSource Materials (T.NEXT) Senior Vice President of Corporate Development, Brent Nykoliation, the past 18 months have been spent solving a CAPEX problem.
In February 2015 the company, then named Energizer Resources, put out a feasibility study for its Molo Madagascar graphite project. This study, while positive, pegged a realistic CAPEX for the project at $188 million for a mine that would produce 53,000 tonnes per year of SuperFlake™ graphite concentrate.
“The average price per tonne of flake graphite at that time was about $1700 a tonne,” said Nykoliation. “But since that time, the price has fallen by about 40 percent to about $1000 a tonne.”
Price was one issue, and selling 53,000 tonnes a year out-of-the gate, while achievable, would be a challenge. Despite all the talk of Tesla and Li-ion batteries, NextSource realized the fact that graphite demand for electric vehicles is still very small and that approximately 60 percent of demand still comes from the traditional steel and refractory market. More importantly, the reported operating costs of NextSource’s Molo project were competitive with the Chinese graphite projects, which produce over 60 percent of the global supply of flake graphite.
For NextSource, the large CAPEX and demand still tied to the lower-priced, traditional steel market necessitated a re-evaluation.
“We did an 18-month comprehensive value engineering exercise and looked at every cost item,” said Nykoliation.
It was quite an exercise. In an updated Feasibility Study NextSource reduced its planned initial output to 17,000 tonnes a year for 30 years. But the headline is that it reduced the CAPEX for the mine to $18.4 million. With these numbers NextSource could afford to be very realistic about the graphite concentrate price working on the basis of $1000 a tonne.
The secret was using an entirely modular methodology to build the mine and in two stages, “We decided on a 100% modular build design, which has not been done in mining” said Nykoliation. “We brought together three engineering groups and a well-established modular technology and design supplier who has built fully modular factories with a Fortune 50 consumer packaged goods company.”
The mine consists of approximately 40 modules, that will be built and assembled offshore, then factory tested and approved by the engineers, then dismantled, put in containers and delivered to site. The team that built it, assembled it and dismantled it will be the same team that reassembles it on site.
The 100% modular design produces tremendous cost savings up front and operationally. “It it will take just 9 months from the point we have financing to put the mine into operation. The actual on site time it takes to re-connect the modules, is seven days,” said Nykoliation. “It’s like a lego set – you simply connect the pieces together.”
“The whole design has been built to European standards. Dry stack tailings will be used which significantly reduces the CAPEX associated with a conventional tailings facility. The Molo mine has also been optimized for space; the whole modular plant will cover an area just 30 meters by 60 meters in size,” said Nykoliation. “And to build the plant we’ll need no more than 50 people on site.”
Phase 1 is a plant capable of producing 17,000 tonne a year, with Phase 2 being the expansion to over 50,000 tonnes per year. Starting with Phase 1 allows us to enter the market quickly and sell an amount that one buyer can absorb entirely without stressing the market,” said Nykoliation. Phase 1 is proof of concept; build it and they will come”.
Also key is NextSource’s landed cost of $688 for a tonne of graphite in the European port of Rotterdam, which includes a production cost of $433 a tonne. “Those are true all-in costs.” said Nykoliation.
In the June 1, 2017 press release outlining the updated feasibility, NextSource CEO Craig Sherba stated, “These results are a significant achievement given the very difficult reality that every junior graphite project is currently facing; depressed graphite prices coupled with high project capital costs that render almost every immerging graphite project as non-economical, and therefore non-fundable until market conditions improve. For Molo to realize a post-tax IRR of over 21% under these current market conditions is considerable and can be attributed to our unique modular build methodology, which provides us with a tremendous first-mover and economic advantage over other companies. Our end goal is Phase two production, where we can expect even better enhancements to the project economics through economies of scale, which is expected to further decrease operating costs on a per tonne basis.”
“The key is to be up and running,” said Nykoliation, “We are ready to hit the start button as soon as we secure the funds. Phase 1 is not our goal, Phase 2 is and we will be able to quickly expand production to 50,000 tonnes as market demand requires.”
Industry analysts are well aware that if the 100% modular concept works it will change mining. NextSource is keeping its engineering and vendor list close to its chest, as Nykoliation has already had inquiries from competing projects. “We have first mover advantage,” said Nykoliation, “Our modular mine is a huge barrier to entry for less cost efficient graphite projects.”
At time of writing NextSource Materials was trading at $0.09 with 461 million shares outstanding for a market cap of $41 million.
(Reprinted from The Financial Post)