MRL Corporation targets graphite production in Sri Lanka by 2015
Recommendation: Speculative Buy
Target Price: $0.09
ASX Code: MRF
Share Price: $0.03
52 Week -
Issued Ordinary Shares: 74.3M
Market Cap: $2.2M
Enterprise Value: $1.0M
Peter Hepburn-Brown, the MD of Medusa Mining ($450M Market Cap.) has been appointed as a director of MRL.
Sri Lankan vein or lump graphite is the highest quality of naturally occurring material in the world. The quality of the graphite produced has a purity level in excess of 90%C with little upgrading or processing required.
MRL is establishing a major tenement position within southern Sri Lanka which is globally renowned for its unique vein style graphitic mineralisation.
This type of graphite has been pre-treated by nature to contain extremely high levels of carbon purity that attract premium pricing.
Current programs are focused along 650 metres of historic mine workings on the Pandeniya to Wallagala strike-line within the Warakapola Project.
MRL’s Sri Lanka project work is not greenfield exploration. All projects areas have extensive historical workings and remnant graphite. This will entail delineating a resource prior to conversion to a mining licence.
MRL’s strategy is to convert at least one license to a Mining Licence within the next 12 months. All project areas are 100% owned.
MRL owns 100% of all its existing licences and the applications which it has made.
MRL are on the ground in Sri Lanka and with a development program in place, which neither of the above companies has at this point in time.
MRL’s projects have low CAPEX and OPEX requirements. Production of 5,000tpa of premium quality vein graphite should generate revenues of approximately of US$10m pa. Capex to achieve this would be
Proactive Investors calculates that MRL should be priced at $0.09 to $0.10 a share just to maintain parity alongside its two ASX listed peers operating within Sri Lanka. Our share price target would increase on release of positive exploration and development data over the next two quarters.
MRL Corporation Ltd re-listed on the ASX on 24 December 2013 after completing a restructure and re-branding of Mongolian Resources Ltd. This included the divestment of Mongolian coal assets, acquisition of Sri Lankan graphite assets. The Company also issued 5.5 million shares at $0.20 per share for $1.1 million, and 5.5 million options exercisable at $0.20 per share.
MRL appointed Peter Hepburn-Brown as a Non-Executive Director. Peter is a mining engineer that currently serves as Managing Director of Medusa Mining Ltd (ASX:MML) and operates the high grade and narrow vein Co-O gold mine in the Philippines. This experience will translate directly to high grade and narrow vein graphite assets that MRL intends to develop in Sri Lanka.
MRL’s FOUR GRAPHITE PROJECTS IN SRI LANKA
MRL Corporation holds a 100% interest over four projects known as Warakapola, Pujapitiya, Palinda Nuwara and Hikkaduwa that include 6,300 hectares of Exclusive Exploration Licences and a further 344 square kilometres under application. The projects cover historical workings within a known graphite province that produced large volumes of vein or lump graphite from the 1890’s to the 1930’s.
HISTORY OF GRAPHITE MINING IN SRI LANKA
Sri Lanka commenced production of graphite in 1820, and is known for production of extremely pure graphite that is generally above 95% carbon. The industry operated at peak levels from 1900 to 1920, reporting exports of 33,411 tonnes in 1916, which equated to 35% of global production at that time.
The boom years produced over 3,000 open pits and mines that mostly included under developed shallow open pits and adits that never met their full production potential.
Technical reports prepared for MRL by independent geological consultants confirm that the project areas were subject to very primitive mining methods that exploited only the weathered rock and topsoil. These “boom and bust” operators appear to have sterilised deeper underground mineralisation that can now be more fully evaluated utilising modern exploration techniques.
Current annual production is approximately 5,000 to 6,000 tonnes of high grade vein graphite from the privately owned mine at Bogala, and the government operated mine complex at Kahatagaha and Kolongaha.
Vein graphite is the rarest form of graphite, and is only found in significant amounts in Sri Lanka. It is highly crystalline and with carbon concentrations of more than 97% as graphite. Simple hand sorting and screening is sufficient to produce high grade ore from these operations. MRL will evaluate the potential for product value addition within any feasibility study.
The Bogala mine hosts graphite within fractures where the particle size within the vein can vary from microcrystalline to coarse and flaky. Graphite can be accompanied by rock particles of hard silicates such as quartz or softer carbonates such as calcite. The carbon content of Run of Mine or ROM falls into a range of 85% to 87% carbon as graphite, and is increased to 99% by visual inspection and physical separation.
TARGETED GEOLOGY AND RESOURCE TARGETS
All graphite occurrences in Sri Lanka are confined to the Precambrian meta-sedimentary belts of the Highland Series and the South West Group, with MRL exploration currently focussed on the Highland series.
Veins that host graphite are known to dip sub-vertical over a strike length of 100 to 350 metres and widths of 10 to 500 millimetres. A single vein is generally made up of a series of 20 to 100 millimetre parallel bands of graphite.
Veins have been developed and exploited to depths that exceed 500 metres. Mining at Kahatagaha is currently at depths that exceed 610 metres and reports only minor water inflow.
The project area includes 2,500 hectares of granted exploration concessions and 165 square kilometres that are under application.
Reconnaissance fieldwork within the granted exploration concessions has identified the presence of 20 historic adits, shafts and waste dumps along with geology that is highly prospective for graphite mineralisation. Meetings with local landowners have also produced a historic recounting of mining activity at Pandeniya and Wallagala.
Pandeniya contains two collapsed mining shafts, waste dump, remnant concrete slabs and several concrete plinths that held steam and diesel powered engines used for ore haulage. Local landowners observed that the mine had produced more than 400 tonnes of pure vein graphite from 1949 to 1957, and reached a depth of 10 to 12 metres.
Wallagala is located 400 metres to the northwest of Pandeniya, and contains numerous shafts and decaying infrastructure that may have operated as recently as the 1960’s. Wallagala appears to have been a much larger and longer life mine than Pandeniya.
CURRENT EXPLORATION ACTIVITIES AT WARAKAPOLA
Geological mapping along with a Very Low Frequency or VLF transverse survey was recently completed over priority grid areas. This is being followed by an EM or electromagnetic survey that will cover more than 20 kilometres in lines that run across the same priority targets.
An underground mining crew has been retained to clear access into several historic adits that are located along the Wallagala strike line. They will then secure the adits and clear the way for geologists to complete underground sampling and mapping of graphite vein systems that were exposed by historic mining.
The Company also hopes to locate commercial scale graphite vein systems that will form the first phase of mining operations at Warakapola.
MRL has also deployed a BM8 Beep Mat that is a portable geophysical tool that is dragged across the ground by an operator or light vehicle and is capable of generating a geophysical signal to a depth of 4.5 metres. This new tool will assist with the identification and mapping of near surface graphite veins around the Wallagala strike line.
Pujapitiya is located to the south of the of the Kahatagaha and Kolongaha graphite mining operations, and close to the city of Kandy with a population of approximately 125,000.
Pujapitiya covers areas that contain prolific remnant graphite at surface and numerous abandoned underground shafts and adits. Preliminary site visits have identified several thin graphite veins in roadway and hillside cuttings.
MRL has commenced geological mapping and will deploy the BM8 Beep Mat in the March quarter to locate and map near surface graphite veins on priority areas.
- 344 square kilometres of project areas under application and are expected to be granted as Exclusive Exploration licences in 2014.
- Fast track exploration effort along the Pandeniya and Wallagala strike line is expected to identify multiple drilling targets in the first calendar quarter of 2014.
- Access to underground workings at Wallagala expected to be completed in the first quarter of 2014.
- Mapping of vein style graphite ore systems within Wallagala underground workings has potential to identify economic ore within the first and second calendar quarters of 2014. This will trigger application for mining rights and scoping study to evaluate narrow vein mining utilising local labour, and commencing in the first or second calendar quarter of 2015.
- Electromagnetic Survey will be completed in March of 2014 over priority targets at Wallagala and Pandeniya and will lead to the commencement of drilling in Aril of 2014.
- Drilling results at Wallagala and Pandeniya announced throughout the second and third calendar quarters of 2014.
- Results of early stage geological mapping over priority targets at Palinda Numara and Hikkaduwa announced in first calendar quarter of 2014.
- Additional mapping and geophysical studies commenced over priority targets at Palinda Numara and Hikkaduwa that continue throughout the first and second calendar quarters of 2014.
- Drilling targets identified for further evaluation.
- Subject to a successful scoping study application for conversion to a mining lease at Wallagala in early 2015.
Sri Lanka – economic and political stability now driving growth
In 2009 Sri Lanka emerged from a 26 year long civil war to become one of the world’s fastest growing economies as reconstruction efforts helped the country to recover from a long period of global economic isolation. The Asian Development Bank notes that GDP growth in 2013 was 6.8% and estimates for 2014 are at 7.2%. Unemployment is currently at 4.7%, and per capita GDP is at US$7,900.
Excellent infrastructure and an experienced vein graphite labour market support the Company’s intention of near future production potential.
The economy is dominated by tourism, agricultural exports, apparel manufacture, and textile production.
Sri Lanka is a republic that has open and free elections that operates under a constitution, and a mixture of a presidential and parliamentary system. The Index of Economic Freedom ranks the nation as 81th freest out of 185 nations and 13th out of 41 countries in the Asia-Pacific region.
Mining is governed by Mines and Minerals Act, and licences are granted for exploration and then for industrial mining. Corporate taxes are currently at 28%, with mineral production also subject to payment of royalties.
Underwritten entitlement issue
The company recently decided to proceed with an underwritten entitlement issue.
Under the terms of the issue shareholders will be able to subscribe for 4 new shares for every 5 shares currently held at an issue price of $0.025.
The issue will be fully underwritten by CPS Capital Group Pty Ltd and will raise approximately $1.485 million before costs.
Natural graphite is found in three commercial varieties that include crystalline flake, microcrystalline or amorphous, and crystalline vein or lump. Global production in 2011 consisted of 565,000 tonnes of flake graphite, 450,000 tonnes of amorphous graphite and 4,000 tonnes of vein graphite.
China is the major producer of graphite with a 73% market share, and Sri Lanka is at the other end of the scale with a 0.4% market share.
Graphite is an excellent conductor of heat and electricity, has a high melting point of 3,650°C and is typically resistant to chemical degradation, thermal shock and shrinkage. It has been declared a strategic material by both the USA and European Union due to its scarcity and unique properties that is driving demand within the high technology and green energy sectors.
Applications include industrial dry lubricant, medical implants, heat shield for re-entry vehicles from space, solid rocket engines, high temperature reactors, brake shoes, electric motor brushes, fire seals, lithium ion batteries, fuel cells, nuclear power plants and portable electronic devices as a heat sink.
Global production of graphite is currently at 1.1 million tonnes per annum with 52% of consumption absorbed by the steel industry. This is utilised as a liner for ladles, crucibles, component in brick lined furnaces, and as an agent to increase the strength in steel, and assist with the melting of scrap steel.
A typical electric vehicle consumes 25 to 50 kilograms of graphite in its battery pack. Battery production for electronic appliances and electric vehicles represents the biggest growth market for high quality graphite with lithium ion batteries consuming ten times as much graphite as lithium.
Annual growth in the lithium ion battery market is forecast at 30% to 40% and 20% in the electric vehicle market.
Graphite is a major component of carbon fibre that is a lightweight reinforced plastic material. Around 50% of current production is absorbed by aerospace applications and the balance goes into vehicles, tools and sporting goods.
China’s recent halt of graphite production around Pingdu, Shandong will force buyers to seek new and long-time supply sources of graphite, and provides new developers such as MRL opportunities to secure long term supply contracts once a resource base is established.
Industrial Minerals forecasts that global demand for graphite will grow by an additional 1 million tonnes per annum by 2020. This will require 25 new mines that produce 40,000 tonnes of graphite per annum.
Graphite pricing currently falls into a range of US$1,400 to US$1,500 per tonne for plus 80 mesh 94-97% carbon, and is conservatively forecast to reach US$ 1,600 to US$1,800 per tonne in 2016. A more aggressive forecast puts the price at US$3,600 per tonne at the end of 2016.
Vein graphite can range in purity from 94% to 99% carbon and may attract a higher price due to higher thermal and electrical conductivity.
Peer group analysis and valuation
Australian graphite explorers operating in Sri Lanka include Bora Bora (ASX: BBR) which is capitalised at $6 million. Bora Bora holds a 75% interest in its Sri Lanka permits and has recently conducted an aerial VTem survey of Sri Lankan assets and interpretation of results.
The other is Viculus Limited (ASX:VCL) which reached an agreement to acquire five exploration licences in Sri Lanka’s Western Province that are prospective for graphite mineralisation. The company has signed a Heads of Agreement to acquire Euro Petroleum, which holds the contractual rights to acquire 70% of Lanka Graphite.
MRL is currently capitalised at $2.2 million, holds a 100% interest in its Sri Lankan assets, and has undertaken local EM surveying and has already commenced on site project development with field teams. At this stage of operations both companies should carry similar valuations. This is equivalent to $0.08 per share at a market capitalisation of $6 million.
On a range of metrics MRL is compelling:
Safety training and the implementation of a management safety system are well advanced. All safety and operations are being completed to the standard which would be expected in Australia.
Basically, MRL is on the ground and operating in Sri Lanka, which neither of the above companies are at this point in time.
Risk v Reward
- Production of 5,000tpa of premium quality vein graphite should generate revenues of approximately of US$10m pa. Capex to achieve this would be
- Most other potential producers have capex requirements of $34m and up to $133m. This level is to produce 20,000-50,000 tpa of graphite from grades ranging between 7% to 12% Carbon as graphite.
Another valid peer comparison is with Canada Carbon (TSXV: CCB) which we believe to be the only project developer of a graphitic vein carbon resource. The resource is known as the Miller Graphite Project and is located in Quebec, Canada. Miller is operated as a hydrothermal lump vein graphite mine that shipped 25 railcars of graphite in 1900.
Carbon Canada has located the historic open pit, completed surface sampling, electromagnetic surveying, and identified a number of anomalies. Several recent drill holes have been completed that confirm the near surface presence of economic grades of mineralisation.
The Company is the 100% owner of Miller and is currently capitalised at C$13.6 million. This is indicative of the valuation that applies to an early stage developer of a vein type graphite deposit.
This provides another peer comparison valuation guidepost for MRL. MRL will reach the same developmental point within the next two quarters and should reflect a similar or higher valuation. That is equivalent to $0.16 per share (on an undiluted basis). Our valuation and target price reflect a discount to this price.
Proactive Investors calculates that MRL should be priced at $0.09 to $0.10 to maintain parity with its two ASX listed peers operating within Sri Lanka and based on its advanced project capacity to move to early production than its peers which could see it begin production in 2015 – based on low CAPEX.
The significant catalysts ahead for MRL provide value accretive milestones to step up the value of the Company.
Our share price target would increase on release of positive exploration and development data over the next two quarters.
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