Chilalo Graphite Project

Chilalo Graphite Project

The Chilalo Graphite Project is located in south-east Tanzania, known for some of the world’s highest-grade and coarse flake graphite deposits.

Chilalo is host to a high-grade Mineral Resource and Ore Reserve with a demonstrated ability to produce a large and jumbo premium graphite flake, possessing outstanding expandability characteristics, making it ideally suited to the rapidly growing expandable graphite market.

Chilalo has a high-grade Mineral Resource, which now stands at 20.1Mt grading 9.9% TGC, comprised of:

  • Indicated Resource of 10.3Mt grading 10.5% TGC for 1.1Mt of contained graphite
  • Inferred Resource of 9.8Mt grading 9.3% TGC for 0.9Mt of contained graphite

The Mining Licence for the development of Chilalo was granted in February 2017.

Strategy

During 2018, a series of tests to optimise the flake size distribution were completed by ALS Metallurgy Perth and managed by BatteryLimits Pty Ltd. The results demonstrate that Chilalo’s flake distribution attracts premium prices, enabling Graphex to generate a potential industry leading margin of $1,277 per tonne.

Markets first strategy

“Without a potential market, there can be no resource; without a good knowledge of the planned market (volume, price and competition), there is no reserve” Border and Butt

Graphite is unlike mainstream commodities in that independent market information is scarce with prices set between the buyer and seller, rather than by reference to an index or exchange.

With this knowledge, the Company has always adopted a ‘markets first’ approach to the development of the Chilalo Project, placing the requirements of customers at the forefront of decisions around product specifications and target markets.

Graphex has identified the expandable graphite market based on its size, premium prices and the suitability of Chilalo graphite for the production of expandable graphite. The Company has prioritised supplying the Chinese expandable graphite market as its primary product sales focus.

Our commitment to this approach has seen a substantial amount of time and effort dedicated to China’s graphite market, which accounts for the vast majority of global graphite supply and consumption.

Managing Director Phil Hoskins has spent over 200 days in China across 30 separate trips, which has resulted in the establishment of a network of high-quality relationships with graphite market participants, including research institutes and a substantial number of end users and traders.

Graphex’s strategy has been to develop multiple customer relationships such that contract values are maximised when the price negotiation takes place. Through this process, the Company has identified 41 potential customers or traders in China and is at varying stages of engagement with these parties, including numerous other customers who have ‘pre-qualified’ Chilalo product and could sign sales agreements prior to conclusion of the construction funding package once the indicative delivery schedule is available.

Fully Funded to Production

On 29 October 2018, Graphex announced that it had entered into agreements with leading U.S. private investment firm Castlelake L.P. (Castlelake) to raise up to US$80 million for the development, construction and ramp-up of the Chilalo Graphite Project.

The funding includes US$5 million from the issue of Interim Loan Notes and subject to the satisfaction of agreed conditions, up to US$40 million in equity and up to US$40 million from the issue of senior secured loan notes (Senior Funding Package). Funding from the Interim Loan Notes is available immediately, with funds being applied to satisfy the conditions of the Senior Funding Package, which, in addition to customary conditions precedent, include:

  • Entry into definitive transaction documents
  • Completion of a bankable feasibility study
  • Additional due diligence through completion of the BFS – extensive due diligence has already been completed by Castlelake
  • Resolution of issues relating to Tanzania’s mining legislation
  • Execution of material contracts

Further details on the funding agreements with Castlelake, including the key terms and conditions of the Interim Loan Notes and Senior Funding Package, are set out in an announcement dated 29 October 2018.

Pre-feasibility study compelling economics

A pre-feasibility study (PFS) completed in September 2018 assessed a two-stage production scenario. Whilst the Company is confident in its ability to sell 108,000 tonnes per annum of Chilalo graphite from the outset, a staged approach minimises upfront capital and is expected to maximise value for shareholders.

Market leading product

Since 2015, extensive metallurgical testwork has been carried out on Chilalo ore. This has included work programs completed by SGS Lakefield (Canada), SGS Perth, Suzhou Sinoma Research Institute for Non-Metallic Minerals in Suzhou China and ALS Metallurgy Perth. During 2018, a series of tests were completed by ALS Metallurgy Perth and managed by BatteryLImits Pty Ltd, to optimise the flake size distribution, the results of which are shown below.

Typical final product size distribution and grade

The weighted average basket price is based on information obtained from CN Docking Joint Investment & Development Co. Ltd, a subsidiary of China National Building Materials Inc, with whom Graphex has had a long-standing relationship, a reputable Chinese trading house and where possible, Benchmark Minerals Intelligence. The most conservative price estimates have been used in determining the basket price.

The ability to attract premium prices enables Chilalo to generate an industry leading margin of $1,277 per tonne.

Chilalo Ore Reserves and Mineral Resources

Chilalo is host to a high-grade Indicated and Inferred Mineral Resource of 20.1 Mt grading 9.9% Total Graphitic Carbon (TGC) for 1.9Mt of contained graphite within the >5% high-grade TGC zone.

The Mineral Resource Estimate is comprised of:

  • Indicated Resource of 10.3Mt grading 10.5% TGC for 1.1Mt of contained graphite
  • Inferred Resource of 9.8Mt grading 9.3% TGC for 0.9Mt of contained graphite.

The high-grade resource is part of the total Indicated and Inferred Mineral Resource of 67.3 Mt grading 5.4% TGC for 3.7Mt of contained graphite. The total Indicated and Inferred Mineral Resource includes the above high-grade resource and a low-grade Inferred Resource of 47.3 Mt grading 3.5% TGC for 1.68Mt of contained graphite.

The Chilalo Mineral Resource includes an Ore Reserve of 5.3Mt at 10.9% TGC for 576kt of contained graphite, the Company expects to update the Ore Reserve estimate as part of the Definitive Feasibility Study, which is scheduled to be completed in Q4 2019.

Chilalo Mineral Resource and Ore Reseve

Expandable graphite

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.
  • 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.

Since the initial discovery of Chilalo in 2014, Graphex has adopted a clear and differentiated strategy to produce graphite for the expendable graphite market based on flake suitability for the manufacture of flame-retardant building materials and their attractive growth and value characteristics. Testwork has confirmed that Chilalo product is suitable for multiple expandable graphite products including graphite foil, graphite paper, seals, gaskets and flame retardants.

Targeting the expandable graphite market

China is the major producer and consumer of expandable graphite, however is facing critical supply issues. China’s flake graphite reserves are increasingly subject to lower grades, higher costs, diminishing flake size and with the enforcement of environmental measures in China, there are increasing mine closures, further restricting supply. These factors have been behind a trend for higher graphite prices, which has seen prices increase by over 50% since the first quarter of 2017.

Graphex has strategically targeted the expandable graphite market based on its attractive growth and value characteristics. The size of the expandable graphite market, its premium prices and the suitability of Chilalo graphite for the production of expandable graphite has meant that the Company has prioritised supplying the Chinese expandable graphite market as the primary focus.

Traditional markets for graphite, such as refractories, which is the major existing market for graphite, requires medium to large flake material and is a lower growth market. While the battery market is a clear growth market, it uses fine material, has readily available supply (both existing and in the pipeline) and as a result, attracts relatively low prices.

Flame retardant building materials – a demand source that may outstrip batteries

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.

The demand for expandable graphite-based flame-retardant building materials is being driven by a number of factors including:

  • High profile fires that have resulted in substantial loss of life and property – Grenfell Apartment Tower in the United Kingdom, Dubai skyscraper fires, the Port of Tianjin and the Lacrosse apartment building in Australia – with the rapid spread of such fires attributed to the use of flammable external cladding
  • Chinese building regulations which mandate the use of expandable graphite based flame retardant building materials, however these are scarcely enforced due to a lack of flame retardant supply
  • A review of building regulations in a number of major countries
  • Issues associated with obtaining insurance for buildings that do not have expandable graphite based cladding
  • The absence of a competitor product for expandable graphite based flame retardant building materials

In December 2017, at a graphite industry and graphite building materials conference held in Xingshan, Hubei Province, China, Mr Jiang Yang, Group Vice President, China National Building Materials and President, China Building Materials Application Technology Research Institute, stated that “China needs 40Mtpa of FRBMs, which will contain 5% expandable graphite”. This represents an annual requirement of 2 million tonnes of expandable graphite.

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