Chilalo Graphite Project

Chilalo Graphite Project

The Chilalo Graphite Project is located in south-east Tanzania, within the Mozambique belt, which is well known for hosting some of the world’s highest grade and coarse flake graphite deposits. Chilalo is host to a high-grade, coarse flake graphite deposit, where there is a Probable Ore Reserve (4.7Mt @ 11.0% TGC) and a high-grade Indicated and Inferred Mineral Resource (16.9Mt @ 10.2% TGC).

Signed term sheet for joint venture and offtake transaction

In May 2017, Graphex executed a non-binding term sheet with a Chinese syndicate led by CN Docking Joint Investment and Development Co Ltd, a subsidiary of China National Building Materials Group (‘Term Sheet’). The Term Sheet sets out a number of key terms for an equity joint venture, offtake and prospective financing for the Chilalo Graphite Project.

Key terms include:

  • A syndicate led by CN Docking to make an equity investment of US$18-20M (A$24-27M) for a 50% interest in the Chilalo Project, via a project-level incorporated joint venture, with the level of the final equity investment within the proposed range dependent on the documented governance structure for the joint venture company.
  • The parties are targeting project debt for up to 65% of the pre-production capital costs, with the Chinese investment syndicate primarily responsible for procuring Chinese debt and Graphex for seeking project finance proposals ex-China. If required, both parties have agreed to provide parent company guarantees to assist in securing project finance.
  • Offtake agreement for the purchase of a minimum of 50% of Chilalo product at market prices, with assistance to be provided to the joint venture to procure product sales for the remainder of production.
  • Both Graphex and CN Docking to exercise best endeavours to conclude formal legal documents within three months.
  • Not later than 3 June 2017, the sum of HK$100M (US$13M) – the initial tranche of the equity investment – is to be deposited by the Chinese syndicate into a nominated bank account and designated specifically for investment into the proposed joint venture.

Commencement of preparation of formal legal documentation and finalisation of remaining conditions is under way and is expected to be completed towards the end of August 2017. Finalisation of formal legal documents is anticipated to clear the way for the early development of Chilalo with minimal dilution to Graphex shareholders.

Given the signed Term Sheet and with key regulatory approvals and permits for the development of Chilalo in place, Chilalo is well positioned to have first mover advantage in the supply of high quality flake graphite to the expandable graphite market.

Target market – expandable graphite

The results of testwork and analysis of Chilalo product commissioned by CN Docking, including testing of a +50 mesh (>300 micron) sample of Chilalo graphite, have demonstrated an expandability ratio of 1,500x (times) can be achieved. This compares extremely favourably to ASX listed peers and China-sourced graphite which has expandability ratios averaging 250x.

Published expansion rates from ASX listed graphite companies8D. Published expansion rates from ASX listed graphite companies

Expandable graphite is a compound of graphite that expands or exfoliates when heated. This material is manufactured by treating flake graphite with various reagents (such as acid) that migrate between the layers in the graphite. When the graphite is heated, it rapidly expands to several hundred times its original size (the expansion ratio).

The expansion ratio is the volume of expandable graphite produced per gram of graphite product at a specified temperature. In general, coarser flake graphite typically has higher expansion ratios than smaller flakes. Producing expandable graphite is a relatively inexpensive process. Importantly, excellent rates of expansion can be achieved at low temperatures.

The expansion rate represents the volume growth of the graphite once it is mixed with acid and other reagents and then heated. Higher expandability, and higher expandability at relatively low temperatures, is more valuable to end users on a value-in-use basis. These results are extremely encouraging given the price of flake graphite concentrate that expands at 250x, as shown below (source: Benchmark Mineral Intelligence).

Benchmark Mineral Intelligence Pricing – Flake Graphite Concentrate Assuming 250x Expansion (US$/t)8E. Benchmark Intelligence Pricing

Expandable graphite market

Expandable graphite is one of the fastest growing markets for graphite and has multiple uses,including:

  • With its unique fire and heat resistant characteristics, expandable graphite is being increasingly used in the manufacture of flame retardant and thermally efficient building materials, such as insulation for example, with a rapidly growing market for these products. A video demonstrating the flame retardant characteristics of expandable graphite can be viewed on the Graphex website at: http://www.graphexmining.com.au/graphite-video-gallery/.
  • The production of high-value graphite foils which are used as heat shields in electronic devices such as mobile phones, laptops and TV screens.
  • The production of graphite paper used in the manufacture of heat shield gaskets and other products such as fire and thermal seals for machinery and electronic parts.
  • The radiation resistant properties of expandable graphite also have military applications.

Testwork commissioned by CN Docking has confirmed that Chilalo product is suitable for multiple expandable graphite products including graphite foil, graphite paper, seals, gaskets and flame retardants.

Demand for expandable graphite is growing rapidly, particularly given its application in the manufacture of flame retardant building materials. This demand growth is being driven strongly by China, where the Government is encouraging the use of flame retardant materials in the construction of all new buildings. This source of demand for expandable graphite represents a shift from a small, specialized market, to a large volume market. Orders for expandable graphite in China are currently subject to long lead times and prepayments are being made many months in advance of delivery.

For further information on expandable graphite, please go to: http://www.graphexmining.com.au/graphite/

Pre-Feasibility Study Results

The results of a Pre-Feasibility Study (PFS) completed by Perth-based processing and engineering consultancy BatteryLimits Pty Ltd in November 2015 confirmed Chilalo as a market-leading graphite project that on all objective measures compares favourably with other graphite projects. The PFS found that Chilalo is technically sound with high margins, low capital intensity and attractive returns. Key outcomes of the PFS include:

  • Pre-tax NPV10 of US$200 million
  • Average annual EBITDA of US$47 million over 10 year mine life
  • Life of Mine average operating cost of US$490 per tonne FOB – lowest compared to similar scale projects and cost-competitive with Chinese graphite supply
  • Metallurgical testing confirms high quality product in all respects: grade, flake size distribution, purity – delivering an attractive forecast basket price of US$1,217 per tonne
  • Pre-production capital expenditure of US$74 million (including contingencies), pre-tax payback period of 1 year and 7 months,
  • Open pit mining and conventional flotation processing
  • Average annual production of 69,000 tonnes of graphite concentrate

The PFS reveals a strong cash flow and short payback period underpinned by very low capital intensity, a high quality product and highly competitive operating costs. Average annual production is expected to be 69,000 tonnes of graphite concentrate over 10 years.

The key operating and financial metrics are shown in the table below. Operational and financial metrics are based on the November 2015 Mineral Resource and do not take account of an 80% increase in the high-grade Mineral Resource that was announced in February 2017. The increase in the Chilalo Mineral Resource is expected to enable an increase in mine life and / or annual production and therefore result in improved project economics.

Operating and Financial Metrics8A. Operating and Financial Metrics

Ore Reserve and High-grade Mineral Resource

The high-grade Mineral Resource (>5% TGC) stands at 16.9 Mt grading 10.2% TGC for over 1.7 Mt of contained graphite, comprised of:

  • Indicated Resource of 5.2Mt grading 11.9% TGC for 0.6Mt of contained graphite; and
  • Inferred Resource of 11.7Mt grading 9.4% TGC for 1.1Mt of contained graphite.

The high-grade resource is part of the total Mineral Resource at Chilalo, which is 53.5Mt grading 5.6% TGC for 3.0Mt of contained graphite.

An Ore Reserve estimate (based only on the Indicated Resources in the high-grade Mineral Resource estimate) of 4.7 Mt grading 11.0% TGC for 517 kt of contained graphite was announced on 10 May 2016.

Chilalo Project – Chilalo Mineral Resource and Ore Resource1

Completion of additional metallurgical testwork is expected to enable conversion of the majority of the Indicated Resource to the Measured Resource category, without any further drilling.

Metallurgical testwork results

Results of metallurgical testwork on material from Chilalo have confirmed that Chilalo can produce a graphite concentrate that is high quality in terms of flake size distribution and purity. The Company’s metallurgical consultant, BatteryLimits Pty Ltd, believes that additional testwork is expected to deliver further improvements to the flake size distribution.

Chilalo product specifications and weighted average basket price8C. Chilalo product specs and weighted average basket price

It is the significant portion of large and jumbo flake that provides Graphex with exposure to the expandable graphite market, the main markets which are the premium priced graphite foil / sheet markets, gaskets and flame retardants. Expanded graphite can also be manufactured into thermally efficient building products with demand growth, driven by the increase in energy efficient building processes, expected to potentially rival demand growth for spherical graphite in lithium-ion batteries.

Resource upside

With an Exploration Target for the Chilalo Graphite Project of approximately 100–350 Mt grading approximately 3-11% TGC, which is in addition to the existing Chilalo Mineral Resource, there is potential to expand the current high-grade resource.

Electromagnetic (EM) surveys carried out at Chilalo – Versatile Time Domain (VT), Fixed Loop (FL) and Downhole (DH) surveys – have highlighted a number of high-conductance targets, none of which have been tested by drilling or sampling. The high-conductance EM targets correlate very well with high-grade graphite mineralisation at Chilalo. Only 3km of 35km of high conductance targets identified by VTEM have been drilled.

VTEM – 3km drilled of the 35km of high-conductance targets

Of particular interest are four untested, high quality targets on the Chilalo Mining Licence – all within close proximity to the existing Chilalo Mineral Resource – that have been identified by FLEM surveys.

High-conductance targets on Mining Licence

While Graphex is highly confident that further exploration would deliver a significant increase in the Mineral Resource at Chilalo, any decision to carry out such exploration will be driven by the scale of demand for Chilalo graphite.

Previous Drilling at Chilalo

The Indicated and Inferred Mineral Resource estimate at Chilalo was based on three drilling programs:

  • A 3,810m Reverse Circulation (RC) drilling program that was carried out during the December Quarter 2014, where assays returned a number of high-grade, near-surface intersections, including:
    • Hole NRC14-140: 24m @ 11.7% TGC from 28m, including 14m @ 14.9% TGC;
    • Hole NRC14-149: 15m @ 11.9% TGC from 58m, including 10m @ 13.7% TGC;
    • Hole NRC14-150: 18m @ 12.7% TGC from 16m, including 14m @ 14.6% TGC;
    • Hole NRC14-154: 16m @ 11.7% TGC from 18m, including 6m @ 13.5% TGC;
    • Hole NRC14-155: 18m @ 11.8% TGC from 56m, including 8m @ 14.3% TGC; and
    • Hole NRC14-156: 14m @ 13.0% TGC from 0m.
  • A 1,379m diamond drilling program that was completed in the December Quarter 2014, the assay results of which correlated closely with those from twinned RC drilling and included:
    • 24m @ 12.29% TGC from Hole DD067 (twinned from Hole RC140 which returned 24m @ 11.7% TGC);
    • 24m @ 12.50% TGC from Hole DD068 (twinned from Hole RC157 which returned 24m @ 13.1% TGC);
    • 12m @ 10.20% TGC and 10m @ 9.64% TGC from Hole DD069 (twinned from Hole RC151 which returned 20m @ 7.2% TGC); and
    • 16m @ 10.3% TGC and 16m @ 7.4% TGC from Hole DD070 (twinned from Hole RC154 which returned 16m @ 11.7% TGC and 16m @ 5.9%).
  • A 1,461m diamond drilling program that was completed in the June Quarter of 2015, designed to update the initial high-grade Inferred Resource for the Shimba deposit, notable assays included:
    • 29.6m @ 12.07% TGC from 44m down-hole;
    • 26.33m @ 12.69% TGC from 43m down-hole;
    • 23.0m @ 13.88% TGC from 13m down-hole;
    • 24.7m @ 12.47% TGC from 44.3m down-hole; and
    • 27.66m @ 12.07% TGC from 17.1m down-hole.
  • A 1,365m RC drilling program that was completed in September 2016, which included the following notable intersections:
    • 68m @ 6.6% Total Graphitic Carbon (TGC) from 50m in hole NRC16-186, including 18m @ 13.8% TGC from 80m and 5m @ 20.3% TGC from 91m; and
    • 45m @ 8.2% TGC from 10m in hole NRC16-184, including 22m @ 11.9% TGC from 10m

Location of RC and Diamond drilling at Chilalo

Cross section of Chilalo resource

Previous exploration work at Chilalo

The Chilalo Project was identified in August 2014, following a review of data from a rock chip sampling program which returned high-grade graphite results. The program was highly successful with 65 rock chip samples returning grades of between 4.8% and 29.6% carbon, with an average grade of 12.9% carbon. A total of 41 rock chips returned grades of greater than 10% carbon.

A VTEM geophysical survey targeting nickel sulphides that was previously completed over a large area that included the Chilalo Project area and surrounding ground identified numerous anomalies which were considered likely to be associated with graphite mineralisation.

Geological mapping indicated that the graphitic bearing units are up to 500m wide, at surface and extend over several kilometres of strike, open to the north-east and south-west.

Rock chip sample results and mapped graphitic gneiss

The VTEM analysis confirmed the opportunity at Chilalo which is composed of multiple layers of interpreted graphite horizons ranging in thickness from 50m to +200m.

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