Company Overview -  Magnis Resources Limited is an Australia-based graphite producer company. The Company is engaged in the business of exploring for, developing, and mining natural flake graphite for use in various industries, including batteries for storing electrical energy. Its segments include Australia and East Africa. The Company is focused on the graphite or battery powered industries. The Company is involved in prospecting, exploration and pre-development for graphite on its Nachu Project. Its Nachu Project is located near Ruangwa, in Southern Tanzania and approximately 220 kilometers to the Tanzanian port of Mtwara. Its other projects/tenement names include Ruangwa, Rutamba North, Lihehe East, SML Nachu, Issuna, Mkuju 1, Ilongo North and Manyoni East. Its graphite end uses include battery anodes, expandable graphite, composites, refractory and foundry, steel markets, gaskets, seals, brake linings and lubricants.

 

MNS Details
September Quarter of 2016 highlights: Magnis Resources Ltd (ASX: MNS) has recently announced their September quarter of 2016 highlights and reported that they are progressing with the development of the Nachu Graphite Project in southern Tanzania in a timely manner. MNS is targeting the commencement of pre-construction site works for the project by mid of fourth quarter of CY16 before the onset of the Tanzanian wet season in January. The group’s cash position reached A$6.1 million as of September 30, 2016.
 
Nachu project’s regulatory permits are done: Nachu, the core project of the group and one of the world’s most advanced and shovel-ready graphite projects, is poised for development with an annual production of about 240kt graphite concentrate for an initial 15 year LOM. The superior flake size and purity of Nachu graphite deposit is the group’s competitive advantage as the thickness and ordered crystal structure of Nachu natural graphite flake supports the production of spherical graphite through sustainable processing and flexibility to meet customer specifications. In addition, Nachu graphite underpins MNS’ strategy to become a major producer of high value graphite products to address Lithium-ion battery market. Moreover, the Nachu project has finalized all the regulatory and environmental permits, while finished a Bankable Feasibility Study (BFS), a power supply agreement and has clearly defined concentrate export route. The Ministry of Energy has granted the Special Mining License (SML) to Nachu and Minerals of Tanzania, as well as Mineral Development Agreement (MDA) has been finalized for Nachu. Moreover, MNS is continuing the Nachu landowner compensation process, which includes the resettlement of over 55 basic dwellings in the Nachu project area. MNS has continued with the community consultation and education programs for the project development that includes the land valuation process and verification of asset valuations. The construction of an eco-village resettlement housing development is going to start shortly and then the clearing activities for site access and a construction camp would start. A number of water bores have been already identified and successfully drilled to assess and confirm the quantity, suitability and sustainability of the water bores to offer construction water via development phase of the Nachu project.

 

Target Development Timeline (Source: Company Reports)
 
FEED study has started:MNS has initiated Front End Engineering and Design (FEED) with Ausenco. The first phase of the FEED program is vendor testing to finalize the equipment selection. After the equipment was selected and confirmed, the optimization work on the processing plant footprint at Nachu would be undertaken. Overall, the FEED study is expected to finish by the end of the first quarter of 2017 after the targeted timeline of beginning full scale construction at Nachu post the conclusion of the wet season in April 2017.
 
Lithium-ion Battery (LIB) commercial anode development programs:MNS commercial anode development programs for the Lithium-ion Battery has done additional downstream technical expertise, industry leading battery test facilities to allow for full cells and battery fabrication development utilizing Nachu anode material. Moreover, MNS has produced uncoated spherical graphite utilizing the commercially available milling equipment in Europe for performing the spheronisation step with high purity Nachu flake concentrate. There was no chemical or thermal purification used in the production of the spherical graphite. Moreover, the yields in the region of 75% are consistently achieved when starting with >99% TGC Nachu graphite concentrate, which is significantly higher than current spherical graphite production. Additionally, MNS intends to capitalise on the significant divergence in graphite end markets by focusing solely on growing and high value product markets. MNS is avoiding exposure to traditional graphite markets with clear future oversupply risk in fine grain and lower purity products. In fact, there is a huge price difference between high and low value product concentrates, while this difference is expected to grow given the growing market demand for higher end products.
 


Price differentials for purity, for group and their competitors (Source: Company Reports)
 
Agreement with Charge CCCV (C4V) as a core advisor for battery anode development: MNS and C4V entered into a formal collaboration for the development of natural graphite anode material to continue. The agreement would lead to the development of both spherical graphite anode material and silicon/graphite anode material that has the potential to produce a significant step change in battery mileage.
 
Flexible Supply Chain Strategy: MNS has built a flexible supply chain to meet the customer’s specifications which starts and finishes with the quality of the in-situ graphite at Nachu. The co-location potential of downstream facilities for efficiency has mainly cut the cost and rapid scale up potential to meet end user demand. In addition, MNS has established the higher quality and consistent non-Chinese supply source. Moreover, MNS might supply both coated and uncoated spherical graphite subject to customer requirements.
 


Growing investment potential in battery supply chain (Source: Company Reports)
 
Long term target market for the group: Recently, Germany reported that they might set an official deadline to ban gas-powered cars in their country. This move is as a part of their strategy to reduce their carbon dioxide output by 80% to 95% by 2050. Even India is pursuing a scheme to be electric by 2030. Dutch government as well as Norwegian government are also considering to ban gas-powered car sales and start electric vehicle sales by 2025. Other than countries efforts, car makers like Volkswagen are aiming a long-term strategy of a structural shift towards electric vehicles. They aim 20-25% of group sales in 2025, which represents annual sales of 2 to 3 million of “e-cars” as compared to the Volkswagen global total sales of 9.93 million in 2015.  Accordingly, there might be a fleet requirement of ~150Gwh by 2025 to support this Volkswagen strategy which is equal to ~165ktpa anode material or ~165ktpa spherical graphite. This is where the group’s Nachu Graphite Project fits in as the test work indicated spherical graphite yields of ~75%. The group reported that their Nachu concentrate product purity and coarse flake distribution would generate solid margins given the demand from higher value end markets.
 


Nachu project’s competitive position against peers (Source: Company Reports)
 
Stock Performance:The shares of MNS fell over 32.02% in the last four weeks (as of November 01, 2016) due to some market volatility and impact from resignation of the group’s directors, Colin Cobb Johnston and Len Eldridge. On the other hand, the group has recently announced for the joining of two Non-Executive Directors, Marc Vogts and Peter Sarantzouklis to assist the group in next stage of development. We believe the stock has the potential to recover given the group’s proven track record of the management. The group’s stock made a debut in the S&P/ASX 300 Index in September 2016. MNS core Nachu project has a post-tax net present value of US$1.69 billion and a project of IRR of 98%. Nachu project has a 12.5x mine life to payback ratio. Based on the BFS Results, the project has a strong operating margin estimate of US$1,791/t while the basket price is estimated to be US$2,350/t for high value products with exceptional purity and flake size. Meanwhile, the group’s Nachu project timeline for the first production in 2018 would coincide with the beginning of battery “mega-factory” ramp ups. MNS has finalized all the requisite environmental and mining permits and the Ministry of Energy and Minerals of Tanzania even got a Special Mining License (SML) to Nachu. MNS stock generated returns of over 59.2% (as of November 01, 2016) during this year to date and we believe this positive momentum could continue in the coming months despite short term volatilities. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $0.62
 

MNS Daily Chart (Source: Thomson Reuters)
 

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