NextSource Materials (TSX:NEXT,OTCQB:NSRC), formerly Energizer Resources, has been working on an updated feasibility study for its Molo graphite project in Southern Madagascar for the last several months, and it kicked off the month of June by releasing it.
Compared to the company’s previous feasibility study for Molo, it could be a game changer. “We realized that although we issued a very positive feasibility study for our Molo project back in 2015, we needed to address the current market and current prices for flake graphite, which have fallen by almost 50 percent since then,” said Brent Nykoliation, senior vice president, corporate development, at NextSource.
Craig Scherba, president and CEO of NextSource, echoes that sentiment in last week’s release, commenting that all graphite juniors are currently facing a “very difficult reality.” He notes, “depressed graphite prices coupled with high project capital costs [have rendered] every emerging graphite project as non-economical, and therefore non-fundable until market conditions improve.”
Before it released the updated Molo feasibility study, NextSource itself was stalled. The original feasibility study for Molo looked at an operation that would be capable of producing 53,000 tonnes of graphite concentrate per year, and would require CAPEX of US$188 million.
While that CAPEX is reasonable for the planned output, NextSource realized that it would be challenging to fund Molo under the current depressed market conditions. “We identified the challenge early on and embarked on an 18-month value engineering exercise,” said Nykoliation, adding, “we employed some out-of-the-box thinking.”
Ultimately the company decided to adopt a fully modular, two-phased build methodology at Molo. According to Scherba, it will be a “mining industry first,” and was key to attracting project capital under current market conditions.
Last week’s updated feasibility study outlines the economics for Phase 1 of production at Molo, and even a quick glance shows the numbers are considerably different from those shown in the 2015 study. By scaling back initial production from 53,000 tonnes per year to 17,000, CAPEX has been dramatically reduced by over US$169 million; it now stands at just US$18.4 million.
In its release, NextSource highlights that Molo now has “the lowest CAPEX of any new and competing graphite project.” Nykoliation also emphasized that the US$1,014-per-tonne selling price for the company’s SuperFlake™ graphite concentrate, which is based on quotes and projected real estimates from Roskill Consulting Group, is current and realistic. The project’s pre-tax IRR stands at 25.2 percent, and its post-tax IRR is 21.6 percent.
The OPEX reported in the new feasibility study factors in all-in CIF transportation costs to end customer ports, which Nykoliation said is the way that graphite is actually sold. “Based on disclosed market information, no other competing graphite project that has released results of either a preliminary economic assessment or a feasibility study has included an all-in CIF transportation cost as part of their respective OPEX,” he said. Typically they report an “at-the-plant” OPEX cost only, which results in a higher NPV and IRR.
“For Molo to realize a post-tax IRR of over 21% under these current market conditions is considerable and can be attributed to our unique modular build methodology, which provides us with a tremendous first-mover and economic advantage over other companies,” Scherba says in the release.
The company is confident that its scaled approach to developing Molo will position it to rapidly reach Phase 2. “Phase one will be implemented with an incredibly low capital cost, competitive operating costs and with an initial production volume that can be easily absorbed into the current market,” Scherba also notes, adding, “[o]ur end goal is Phase two production, where we can expect even better enhancements to the project economics through economies of scale, which is expected to further decrease operating costs on a per tonne basis.”
Nykoliation was clear that NextSource’s management team will be a key advantage moving forward. He pointed in particular to three key technical people attached to the project. One is the company’s senior vice president of mine operations, Robin Borley, who has extensive operational experience in Madagascar and was the former director of mine operations at South Africa’s largest multidisciplinary engineering group, DRA Global.
As well, the company has Johann de Bruin overseeing all aspects of mine operational readiness. De Bruin recently retired from DRA Global as managing director for the Africas, and has an impressive track record in the industry; he was the qualified person for the updated feasibility study. Lastly, Oliver Peters, who is the head process engineer at highly respected SGS Canada and is recognized worldwide as an expert in graphite processing, will commission the Molo mine.
In terms of what’s next for NextSource, Nykoliation said the challenge will be to get the market to realize what the company has accomplished. “Based on the positive results of our updated feasibility study, we will be initiating an economic analysis to incorporate our unique modular approach for our Phase 2 expansion, which will produce approximately 50,000 tonnes per year of SuperFlake™,” he said.
“Once we get Phase 1 up and running, we anticipate demand will require the need for us to expand quickly.” And with a smirk, Nykoliation added, “that will be a high-class problem.”
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Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: NextSource Materials is a client of the Investing News Network. This article is not paid-for content.