Earlier this year, we flew to Sri Lanka to visit the Sakura mine in which Elcora Resources (ERA.V) owns a 40% equity stake (as it’s a lengthy process to acquire a majority stake in a Sri Lankan project). On top of that, Elcora also receives a 20% mining fee and a 30% processing management fee from the Sakura mine, so its total share of the incoming cash flow will be much higher than the 40% equity interest.
By visiting the mine we got a really good impression of what work still needs to be done and how safe it is to work in Sri Lanka. We also had the chance to meet with Ian Flint. He is Elcora’s Vice President in charge of processing and refining, which probably is the most important aspect for every graphite company out there.
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The Sakura Graphite mine
As we explained in our earlier report on Elcora Resources, the company owns one of the very few high-grade graphite mines in the world. It has actually been in production albeit at an extremely low output rate as the previous owner didn’t take the right steps to de-bottleneck the process flow sheet.
Elcora is planning to bring the Canadian standards to Sri Lanka and we strongly believe that VP Ian Flint is most definitely the right guy to be in charge of Elcora’s expansion and development plans. We had extensive conversations with him about the near-term and longer-term plans of Elcora, and he was able to convince us that this indeed is one of the very few graphite plays in the market that would have a decent chance of succeeding.
The first plant that is aiming to increase the grade of the end product from around 90% to 99.9% is expected to be ready before the end of this semester. The foundations are already under construction (as the rain season has ended now) and all other equipment has already been ordered. This will be the first module of a more extensive Sakura processing plant and should have a processing capacity of 2,500 tonnes of graphite with a purity of at least 99% per year.
There currently is a 250-300 tonne stockpile (see image) of graphite – with an average grade of 80-95% – on the mine site that will be used to commission the new plant. The first module with a capacity of 2,500 tonnes per day will cost less than $1M to build and Elcora has sufficient cash on hand to fund the development of this plant. At 2,500 tonnes per day we expect Elcora to be in a position to break even on its mining and processing operations. But once it proves it is effectively able to produce high-grade graphite, we expect a deal to be signed with a strategic partner that could help fund the expansion to a 10,000 and ultimately a 25,000 tonnes per day operation.
The plans for this year
Elcora’s main focus will be on completing the processing plant on time and preferably within budget. Hereafter it can start to produce its high-grade graphite.
It will be absolutely necessary to increase the run-of-mine production rate to a (much) higher level. This should be doable as there are tens of adits on the property that could be re-opened at a very low cost. We were able to go underground in several of these adits and mining portals, and we are quite sure they could be brought back online at a minimal capital expenditure.
It’s actually pretty easy to mine the graphite at Sakura as the miners can just base their mining decisions on the visual aspect. As can be seen on the pictures above, it’s very easy to distinguish worthless rocks from high-quality graphite.
Elcora has also completed an underground survey and this will obviously come in very handy as it effectively tried to map all graphite seams. This will save Elcora a lot of time when designing its drill program (which is expected in the next few months). This drill program will very likely aim to convert some of the historical graphite resources into an NI43-101 compliant resource estimate.
We have the impression Elcora is having a hard time convincing investors without a NI43 resource, so we do hope this will be seen as a catalyst.
We also expect Elcora to sign a strategic deal with an offtake partner. The Sakura project has what a lot of companies are looking for; it’s at the doorstep of the major markets in Korea and China, a safe jurisdiction and a very high head grade. The combination of these three factors is extremely important.
The political situation in Sri Lanka
When we were in Sri Lanka, the country was getting ready for new presidential elections and the incumbent president was unable to run unopposed as his minister of health decided to run for president as well. The minister had a great track record and was loved by almost the entire population. The vast majority of the Sri Lankans we talked to were quite sure they would vote for him to remove the previous president who had a huge stigma of corruption surrounding him. That effectively happened and the previous minister of health is now the new president of Sri Lanka.
These elections were a real test for the country as in any other developing country a struggle for presidential power was expected, especially as the losing candidate had appointed several family members on key positions. The aftermath of the elections once again emphasized how easy-going the Sri Lankans are and how important peaceful solutions are for the population in general. The president vacated his office and residence just days after he lost the election and the new president has been sworn in without any problem.
This reinforces our opinion that Sri Lanka is a pretty decent place to do business in, and that the main issue for companies operating in the country will be a perception issue.
Why Elcora Resources has a good chance to outperform other graphite companies
Almost every graphite project in the world will be able to produce commercial-graphite, but the main issue will be the production cost. Some of the projects out there have an average grade in the single-digit region, which means they will need to process a lot of tonnes to end up with graphite with an average grade of in excess of 95-98%.
Thus is not the case for Elcora, as the run of mine grade is already in the high-80’s, low-90’s, allowing the company to increase the grade to 99(.9)% very rapidly without the need of 50 tonnes of ore to produce 1 tonne of end-product. This puts Elcora in a very advantageous position and there’s zero doubt the potential off takers will notice the simplicity to upgrade the rough graphite to an end product meeting the strict requirements.
Sri Lankan graphite also has an excellent name as the country has been producing graphite for in excess of 350 years now. In our talks with Dr. Ian Flint we had the impression he was quite confident the Sakura mine would eventually be able to produce the kind of high-quality graphite which is being used in nuclear power plants. This would be a huge bonus for Elcora as at this point all of the nuclear-grade graphite is synthetic.
We would like to point out that for example the German blue-chip company ThyssenKrupp has already signed an offtake agreement with Flinders Resources (FDR.V) which is operating a graphite mine in Sweden. Thyssen remains quite active in the graphite sector and we expect the company to make more strategic offtake agreements in the next 6-12 months. In our opinion, Elcora Resources could be a excellent partner for the Germans.
Conclusion
We haven’t been a fan of graphite or graphite companies in general, but after visiting Elcora’s Sakura graphite mine, we do believe this company has what it takes to become a producer of high-grade graphite.
Elcora is fully funded to complete the construction of the first phase of its processing plant and this should take the capacity up to 2,500 tonnes per year and will allow Elcora to break even. We do believe Elcora will gain access to additional funds once it can either prove to run at its expected capacity as well as producing the desired grade.
At a market capitalization of less than C$5M, the odds are quite favorable to see Elcora having a much higher valuation once it has further de-risked the project. We already own a long position in Elcora but will very likely average down in the near future.
Disclosure: We were engaged by a third party to commission this report. The author holds a long position. Please see our disclaimer for current positions.
