Armadale Capital - Some Investment Reasoning

Updated: Apr 9, 2021

The recent announcement by ACP on 30th March that they had achieved the ESIA approval from NEMC of Tanzania, is certainly a critical step towards achieving their full Mining Right. However, it also proves to the market that this is a viable graphite project that is being taken seriously by the Tanzanian authorities.

In the update, ACP stated the following ;

"An important milestone for Armadale as a company as it is a final essential step prior to being able to be granted the full Mining Licence by the Department of Energy and Minerals."

That point is of interest to me as a shareholder because in the original submittal RNS, dated 8th Sept 2020, the company had this to say ;

"Other components of the Mining Licence process include a Local Content Plan, a Human Resources Plan, a Resettlement Framework and Mine Plans."

With the statement made in the 30th March update, one would have the right to assume that all the items on the above list have been completed. Of those the resettlement framework should be of greatest interest because its trickiest to agree.

If so, then it should now be a matter of time before the Mining Right is granted, which would then move ACP one giant leap up the development ladder and my ongoing comparison with their Tanzanian mine neighbour, ASX listed Blackrock Mining.

A reminder.

Blackrock Mining's (BKT) Mahenge Project (Tanzgraphite), sits immediately next door to Armadale's (Graphite Advancements), both of which can be found on this very useful Tanzanian Mining Portal link.

Currently BKT are running at c. £47m market cap and has to date, achieved the following milestones.

  1. Mining Right

  2. Bulk and Pilot plant test work with Yantai Jinyuan

  3. 2 binding off-take agreements, including one with Yantai Jinyuan, which included price framework agreement. See here.

  4. US $35m in deferred capex from EPC partner CRSG and Yantai Jinyuan. See here.

  5. Further off-take agreement with POSCO, with up to US $20m in pre-payments, which will be used to complete their phase 1 financing package.

  6. Equity investment agreement with POSCO, totaling US $7.5m for a 15% equity stake in the company (both items 5 and 6 are still being finalised).

  7. Completed resettlement action plan.

If BKT are able to secure the finance package, then c. 126m new shares will be issued, representing 27.9% of the total shares in issue. This would immediately increase their valuation to c. £60m.

For that, the company, whilst having made great progress, would have secured 'just' $62.5m in finance, which represents c. 54% of their total capex for phase 1. Meaning they would still need to find around $46m to complete their finance and move to construction. Incidentally, the total $55m in pre-payment/debt deferral (so debt based finance) represents c. 47% of their total capex.

Right now ACP at c. 5.35p a share is worth c. £25m with much of the above list still to complete, be it that their path will not be exactly the same. However, what is common in both is the Mining Right.

Of interest here is the fact that BKTs original deal with Yantai followed a similar path to that ACPs, with Xinhai Mineral EPC (See here) and it was instigated, c. 4 months prior to them having their Mining Right (25th Sept 2018 vs 3rd Feb 2019).

As a comparison, ACP announced the commencement of test work with Xinhai Mineral EPC on 24th November 2020, with full results of that work now pending.

Here's a list of the events that unfolded, post that initial BKT/Yantai deal ;

1. Deal signed including bulk test work 25th Sept 2018

2. Bulk test work completed 1st March 2019

3. Pilot plant first run complete 3rd April 2019

4. Pilot plant main completion 23rd April 2019

5. 2 binding agreements agreed 8th May 2019, with pricing framework, which included Yantai Jinyuan, who undertook the work.

So c. 5 months for the bulk testing, a further 2 months for the pilot plant work and then c. 6 weeks to sign the binding off-takes.

No two projects are ever the same and ACP have gone straight down the EPC contractor route for their works, as opposed to BKT, who signed up a machinery supplier, who in turn committed to securing further finance which came in the form of the eventual EPC contractor CRSG. However, there's some very good points of reference to be had in terms of what needs to be completed and what the potential time frames could end up being.

Right now, as a starter for 10, ACP is very close to achieving their Mining Right and bulk test work milestones.

ACP RNS dated 24th November 2020 ;

"The objective of the bulk test work is to provide sufficient data to confirm the results underpinning the definitive feasibility study and confirm the preferred flow sheet prior to completion of the Front-End Engineering Design to develop an EPCM fixed price contract."

Give all off-take/EPC contractors being discussed here are Chinese, there's no reason not to believe that Xinhai Mineral EPC won't also offer some sort of deferred capex deal.

Additionally, ACP at full capex of c. $39.6m, is less than double the full value of the pre-payment facility, BKT agreed with POSCO ($20m) late last year and ACP's project is carrying far better grades (see my previous tweet on this here).

So there's a strong argument to be had that the same sort of pre-payment facility/deferred capex deal could be realised. This gains even greater credence when one considers that belief/interest in the EV market and its supply chain, continue to strengthen even when compared to even just 6 months ago and so deal making really should see greater strength across the board.

That's not to say that ACP can/won't deliver a project finance package without a significant equity package attached but their chances of beating the norm, certainly lies in their favour. All of which should feed into the valuation as the above milestones start to get ticked off.

One other key point to make here is the Tanzanian government's 16% free carry. A bridge that ACP will need to cross at some point. Most importantly, whilst BKT have received a proposal from the Tanzanian government on this the matter is still to be resolved and their valuation, at least in part, should at least be reflecting this outstanding risk.

So as base case like for like, ACP is running at a c. 58% discount to BKT and there's a strong argument to be had that this point in time (immediately prior to POSCO deal close out), marks a low point in BKTs valuation, given they were trading 33% higher shortly after the POSCO investment deal was fully signed back on 11th Feb (see here).

To fully close the gap, ACP will surely still need to complete the above progress list, of which for me, the Mining Right is the most important, not only because of what it opens up (finance) but because it is outside of the company's hands and so more difficult to measure.

In the meantime, working against the BKT example, the bulk testing works can complete and should now be close given it started c. 4 months ago and BKT have already demonstrated that a similar process can be completed in 5 months and ACP were quicker out of the blocks.

From the 24th November RNS once more ;

"Bulk ore samples have been despatched and received by Xinhai Mineral EPC with test work to commence this week."

So long as the bulk sampling follows through against its early signposted results (see RNS dated 10th Feb once more), then ACP is well set up to complete all works from item 1 Mining Right, right through to item 6 debt financing and as far as the Australian market is concerned that sort of progress, warrants a total valuation of at least £60m (point in time only).

I could add to this the higher grades and far lower overall capex demands and so risk, which are strong catalysts in ACP's favour. However, we also need to account for ACPs outstanding warrants, which at my last count (see here) stood at c. 88m, so c. 19% total (potential only) dilution but that would give ACP, c. £2m in additional funds.

Finally, its been a long time since ACP raised any funds. Administrative expenses were running at £176,000 in the six months to June 2020, which is admirable to say the least. Total cash and cash equivalents at that time were £436,000. Nine months have passed since then, so there's an argument to be had that further working capital funds will soon be required. At these elevated valuation levels, such a raise is not a concern for me but the strong possibility still needs to be recognised.

Overall, after some long periods of moving sideways, I really like ACP's prospects as this year starts to develop. News flow looks finally primed to be meaningful. The project has gained important recognition locally, and the EV market is gaining even greater traction.

The last important ingredient is flake graphite pricing, which has finally started to move but has a long way to go, compared to the moves now being witnessed in other EV battery mineral markets. Right now I believe interest and belief in high quality graphite projects is already there, with or without pricing uplifts. So, it acts as a bonus fundamental that can kick in at any time. In the mean time ACP has multiple valuation drivers whilst it and I wait.

Note - This article represents the opinion and research of the author only and the author currently holds a position in one or more of the stocks mentioned. Nothing shared in this article is to be deemed financial advice. Where possible all facts have been checked and references provided, however it is the responsibility of the reader to check all details for themselves before making any financial decisions. Please also refer to the disclaimer policy