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Shareholders have been waiting for Zenyatta Ventures to release a PEA for its Ontario-based Albany hydrothermal graphite project since last year. On Monday, the company finally delivered, but unfortunately the long-awaited report seems to have disappointed.
Shareholders have been waiting for Zenyatta Ventures (TSXV:ZEN) to release a preliminary economic assessment (PEA) for its Ontario-based Albany hydrothermal graphite project since last year, and on Monday the company finally delivered.
Unfortunately, the long-awaited report seems to have disappointed — Zenyatta’s share price ended the day down 13.91 percent, at $1.98, on the back of the news. Here’s a look at the numbers reported in the PEA and why they may have left investors feeling inclined to ditch the stock.
By the numbers
The Albany PEA was prepared by independent engineering firm RPA, and it proposes an open-pit mine with a 22-year life. Mine production is pegged at 3,000 tonnes per day for annual production of 30,000 tonnes of high-purity (>99.88 percent) graphitic carbon.
Those numbers are based on less than 50 percent of Albany’s indicated and inferred mineral resources, and the company emphasizes that “[u]nderground mining of Inferred Resources below the sill are not included in this study.” In total, Albany holds an indicated resource of 25.1 million tonnes grading 3.89 percent graphitic carbon for a total of 977,000 tonnes of graphitic carbon; its inferred resource sits at 20.1 million tonnes grading 2.2 percent graphitic carbon for a total of 441,000 tonnes of graphitic carbon.
The PEA uses a purified graphite price of $7,500 per tonne and estimates an operating cost of $2,046 per tonne, leaving a margin of $5,454 per tonne. Based on those stats, life-of-mine gross revenue is estimated at $4.8 billion, while after-tax average annual cash flow is set at $110 million. All in all, Albany is estimated to have a base-case, after-tax NPV of $438 million at a 10-percent discount and an after-tax IRR of 24 percent.
In terms of costs, the report places total initial capital costs at $411.47 million. That breaks down into mining, processing and infrastructure costs of $262.91 million; engineering, procurement and construction management costs of $68.73 million; and a 24-percent contingency.
It’s perhaps initial capital costs that sent some investors running. After all, funding is a challenge in the resource sector as a whole right now, and in the graphite space it comes with its own issues. One of those is offtake agreements — though traditionally they allow companies to gain funds through the sale of future production, many graphite companies having been setting them up with the understanding that they’ll receive money only once they’re in production. Given that environment, it may be tough for Zenyatta to raise the money it needs.
Offtake agreements also guarantee companies a market for some or all of their product. That’s another important consideration in the graphite industry given that the metal is not sold on the open market. Though Zenyatta lays out graphite demand projections for various market segments in Monday’s PEA, as yet there’s no guarantee that it will be able to tap them — and as InvestorIntel’s Peter Clausi points out, even if it can, some of those markets “have the potential for huge swings … [h]ow the pricing actually turns out will have a massive impact on the economics of the mine.”
The upshot
Those are just a couple of considerations to keep in mind when thinking about Zenyatta’s PEA, and while they’re worth thinking about, it’s also important to note that the PEA has given Zenyatta the confidence to proceed with a prefeasibility study at Albany. Speaking positively about the report, CEO Aubrey Eveleigh said in Monday’s release, “[t]he Company is exceptionally pleased with the strong PEA results presented by RPA and will now proceed to a pre-feasibility stage where further project definition and optimization is expected.” He added, “Zenyatta’s early stage study has resulted in extremely encouraging economics that will support discussions with potential strategic partners and financiers. ”
Furthermore, while Zenyatta’s share price took a substantial hit on Monday, it’s still up 32 percent year-to-date. It’s also up an impressive 88.57 percent from $1.05, where it plunged in December following a disappointing metallurgical process update.
Investors will no doubt be watching to see if Zenyatta recovers from its latest fall as effectively. No word yet on when it will begin work on the prefeasibility study.
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.
Related reading:
Are Large Shareholders a Burden for Junior Miners?
Investors Dump Zenyatta as Metallurgical Process Update Disappoints
Zenyatta’s Albany Graphite Could be Used in Lithium-ion Batteries
Zenyatta Ventures Up Over 20 Percent on Purification Process News
