Volt Resources Limited
(ASX:VRC)
This summary of views is based on the PortfolioDirect rating criteria described in the detailed PortfolioDirect rating report for Volt Resources Limited dated 10 February 2017. No investment decisions should be taken based on the views presented below. Financial advisers and professional money managers may request a copy of the full Volt Resources rating report from here.
Recent Events
Volt Resources reported that testing of concentrate from its Namangale graphite project showed it was a suitable source for flame retardant foam, among a wide range of other applications, facilitating a large scale development of the asset (19 January 2017).
A pre-feasibility study outlined a route to production commencing in 2018 (15 December 2016).
The company claimed to have the largest graphite resource in Tanzania after reporting a significant increase in mineral resources at the Namangale graphite project (ASX 12 October 2016).
The company announced non-binding off-take agreements covering 100,000tpa of product with three Chinese end-user groups (ASX 16 June 2016).
Development Stage
PortfolioDirect has classified Volt Resources as a late stage Phase I company having demonstrated the existence of a resource with commercial potential.
Evaluation Summary
Asset Quality
The ‘GLOSS’ rating criteria provide the framework against which the quality of company activities are assessed.
The quality assessment for Volt Resources points to a rating slightly above the middle of the feasible range of outcomes.
The grade of the deposits under the control of Volt Resources is consistent with other graphite deposits in the region but toward the lower end of the range of grades found globally among those companies aspiring to develop graphite mining opportunities presently.
The company is in a region with widespread occurrences of graphite mineralisation. The proposed project is near existing infrastructure which permits a lower capital commitment and speedier completion than for other projects less favourably positioned.
The geometry of the mineralisation enables open pit mining although exploitation of the resource will be spread over multiple locations with varying qualities adding to the complexity of mine planning and optimisation of value outcomes.
The grain size distribution and the metallurgical properties of the mineralisation appear consistent with regional properties. The company is still undertaking metallurgical testing and facilitating the testing by prospective customers of the final product. The company has commissioned production of concentrate samples to advance consideration of the mine product and has received favourable laboratory reviews to confirm the applicability of the mine product for a range of applications requiring graphite. No potential buyers have confirmed the suitability of the product for their needs.
The company’s prospects are located in rocks with the geological characteristics conducive to the formation of large commercial scale deposits. The size of the deposit puts it toward the upper end of the range of feasible mine lives providing greater confidence of an adequate return on capital and a stronger value proposition which comes through being able to produce through multiple economic cycles, if necessary.
Investment Risk Assessment
The risk assessment suggests that Ironbark Zinc is toward the low end of the risk range for a company at its stage of development.
Funding risk remains high although anticipated capital needs are relatively modest by industry standards. The company does not have any joint venture partners or other associations on which it might rely for access to capital markets. Funding will almost certainly depend on being able to show that off-take arrangements are in place leaving the company with a ‘chicken and egg’ problem to the extent potential customers may not wish to make firm commitments without a guarantee that the project has the necessary funding.
Market expectation risk has been high but is falling. Returns over most of the cycle were well within the lowest quartile of those available to investors in the sector but, since the beginning of 2015, the company experienced a dramatic re-pricing much of which has been reversed since the middle of 2016, with a fall of 67% in the share price, even as returns in the sector have stabilised. A period of share price stability may be needed to reassure investors about the downside market risk.
The company’s assets are located in a generally favourable regulatory domain with established mining and exploration industries. The tenements in Tanzania were granted relatively recently. There is no reason to believe the government will fail to approve the mine but the company has guided investors to expect a positive result before the end of September 2017. The risk of regulatory delay is elevated until the company receives a mining permit.
Particularly for the higher value graphite products, the hurdles to market are time consuming and tilted in favour of buyers. A graphite mine developer would always have a higher risk profile than developers of gold or copper mines, for example. Volt Resources is relatively well positioned insofar as it has memoranda of understanding covering most of its output but the agreements remain non-binding and the company must still identify and lock in buyers for the balance of the anticipated output. Firmer agreements would, in any case, be contingent on receiving timely government and funding approvals.
The opportunity cost risk is moderate for a company at this stage of development as investors will have clarity about progress within six months due to the company having publicly targeted the end of September 2017 for a government permit. The opportunity cost risk probably rises thereafter as the company faces several critical steps along a two year development path possibly extending to three years before successful production can be confirmed.
Scope for Future Rating Reappraisal
The PortfolioDirect rating is based on information available publicly at the time of writing. Scope for a higher PortfolioDirect rating will depend, in the nearer term, on the company receiving a timely development approval from the government . Progress toward funding and off-take commitments will also improve the rating. While these are matters on which the company is focused, it remains premature to assume success in an investment environment in which timing will be crucial to the investment returns.
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