Date: Saturday, 11 February 2017
WARREN THOMPSON: Joining me on the podcast today is mining analyst, Duncan Hughes, from Somers and Partners in Australia. Good to have you with us, Duncan.
DUNCAN HUGHES: Good to be here, it’s always a nice time of year to be in Cape Town.
WARREN THOMPSON: Yes, it is, we’re having some beautiful weather as we sit out here beside the pool at the Cullinan Hotel. You’re an analyst who covers quite a few companies operating in mining in Africa and we’ve chosen three that we’d like to ask you about today that we think are quite exciting and that are doing some interesting things. Perhaps you could give us, let’s begin with Triton, which is a graphite project in Mozambique, your assessment of these companies.
DUNCAN HUGHES: Graphite is one of those commodities where there is no real shortage of supply compared to demand, so what you need is a high quality product to be meeting demand in graphite. So Triton has that, it has the Ancuabe Project, which is just 60 kilometres from the port in Pemba in Mozambique, sealed road most of the way. It’s got some of the highest purity and flake size distributions in the graphite space and that’s a winner, that’s where the money is when it comes to coarse flake and high purity, which is in demand for the growing lithium ion battery market and for the growing expandable graphite market. Expandable graphite is relatively new on the scene and it’s used in a number of things but the most exciting thing that it’s used for is in building materials. It’s replacing asbestos as a fire retardant, as you know, asbestos is not a pleasant material, well, graphite can be used as a fire retardant, it’s a high quality product that the Chinese are probably going to be implementing in building going forward. So we expect demand to grow there. Ancuabe is a shallow near-surface, good grade product but it’s the flake size that really wins and purity. Purity especially is important for batteries and flake size is especially important to expandable graphite. What we are seeing with the neighbours of Triton, also in Mozambique, a company called Syrah, they’re looking to put out 350 000 tons of much finer flake material, which potentially is going to flood the market for that lower quality material. So to make it in graphite you need the high quality, coarse flake, pure material and that’s what Triton is offering.
WARREN THOMPSON: And where are they, are they producing at the moment?
DUNCAN HUGHES: No, it’s in development, they are right next door to a German operation, AMG GK, which is producing about 10 000 tons of very good flake-size graphite at Ancuabe. But Triton is going through a scoping study to develop that project.
WARREN THOMPSON: Okay, so they are going to need more capital in the future?
DUNCAN HUGHES: They will but not very much, so they’re looking to build a relatively small project to start with and generate cash flow there and thereafter probably expand the project with demand. But it’s sensible, and you see that happening with a lot of graphite developers, to start small because demand at the moment is growing, so start small, we’re talking US$40 million or $50 million to start an operation to put out 40 000 or 50 000 tons per annum, which suits demand for this high quality material. Then as demand grows, which everyone expects it will from the batteries and the expandable graphite space, then Ancuabe will grow. There’s no shortage of potential supply there but it’s a sensible move to start small and grow. That’s the difference between themselves and some of the other graphite producers that are looking to produce a large amount of graphite that, therefore, need a large amount of funding. It’s difficult to source funding when there’s a lot of potential opportunities there and that’s why you need a small low-cost startup with high quality product that should meet the market.
WARREN THOMPSON: What is the mining method with graphite? Is it open-cast mining?
DUNCAN HUGHES: It’s very simple, yes, open-cast mining and then it’s simple processing, it’s a technique that’s used in base metals, it’s basically just flotation. So graphite is a flake, so you grind it down to release the flakes and then you float it and the flakes float on the top, and the other material, the quartz and the silica will sink to the bottom, and you scoop off the flake.
WARREN THOMPSON: Okay, great. The other one that’s quite interesting, and it’s almost like the great diamond hunt, is Lucapa Diamond Company, this is an alluvial diamond project or discovery in Angola, where they found diamonds in the river and they are trying to establish where the source of the diamonds comes from, is that correct?
DUNCAN HUGHES: That’s correct, that’s exactly it. Lucapa itself is exciting to me because of the potential to discover a primary source, a kimberlite source. So by their very nature, alluvial diamonds, some investors have probably not had great experiences with that because they are quite unpredictable. The exception with Lulo, which is Lucapa’s project in joint venture Congolese entities as well, is that they are consistently finding incredibly high quality stones. So their average price per carat is in the order of $2 500/carat, which is the highest in the world for diamonds that I’m aware of. So that obviously has proven quite profitable for them and they found some big stone there, one of which they sold for $16 million, I think it was called the February 4 diamond, I could be wrong but it was named after the day it was found. That’s really worked well for them. But what excites me is not just that they are generating nice cash flow from the alluvial diamonds, all the indications there, given the shape of the diamonds, the size of the diamonds, the indicated minerals that are with them is that the source of these diamonds is very close. They’ve discovered some kimberlite right next door, all the indications are that that is the source and it could be a significantly large primary diamond source. It’s a massive game changer for the company if that comes off.
WARREN THOMPSON: Absolutely, so what are they doing now, are they drilling that kimberlite?
DUNCAN HUGHES: Yes, they’ve got three rigs one site now and they are drilling that kimberlite source. It’s a big source and obviously with diamonds and drilling you don’t always hit the diamonds in the first hole that you drill but the idea of that is to define the diamonds and the indicator minerals that are in that rock to find the primary kimberlite. So these things take a bit of time with drilling but all signs are that they should be successful.
WARREN THOMPSON: Outside of finding the primary kimberlite, is there a business model for the alluvial diamonds on their own?
DUNCAN HUGHES: Yes, they are making money on the alluvial diamonds, good money, and they are getting it out of the country, which sometimes might be some people’s concerns for Angola. But they are due to pay another distribution now and they paid a distribution last year as well, which comes out and obviously helps Lucapa. Then that money that they’ve got, some of it is being invested into the exploration but they’ve also just acquired another asset Lesotho. The attraction with Lesotho, there’s another company that operates there called Gem Diamonds, so they have a mine there and they are producing some of the highest value stones from a primary source in the world. So the key here is high value stones. This project that Lucapa have just acquired is effectively adjacent to the Gem Diamonds operation and previously Lucara actually had it, not Lucapa, it’s a work in progress but it shows a lot of potential for, again, those high value stones. I think that’s what Lucapa is all about, is producing high value stones.
WARREN THOMPSON: The last company that we wanted to talk about is Danakali, which is a potash project in Eritrea, give us the scoop on what’s going on there.
DUNCAN HUGHES: I love this project, as a technical guy this is the best, as far as I’m concerned, the best undeveloped SOP, sodium, sulphate and potash, project in the world. SOP generally sells for twice the value of MOP, muriate of potash, it’s used in agriculture but it’s used for sulphur-poor soil, so there’s real demand for it and this is a quality source.
What’s great quality about it, it’s in solid form, it’s not in a brine, so you don’t have to go through what can be quite a challenging and expensive processing of taking it out of a salt lake and processing it into product. It’s in solid form, it’s simple mining and it’s open pit. A lot of the potash mines of the world involve solution mining from 400, 500, 600 sometimes 800 metres down, that by its very nature is an uncertain process, compared to just going out and mining practically from surface. So that’s really going for it.
The other thing going for it is it’s close to port, it’s got pretty good infrastructure, there’s a road that goes to the port of Massawa. Massaw is the port that the world class Bisha deposit, which is a base metals and gold project, owned by Canadian-listed Nevsun, is already shipping copper from. There’s capacity at the port for the guys to ship potash. The challenge for Danakali is the global perception of Eritrea. Eritrea is viewed by many as a difficult place to operate. It’s not, I have been there but what is a challenge as well is that the government has taken 50% of the project. Now, there are pros and cons to that, the cons are you are only going to be profitable and make a lot of money with a world class project, Danakali have that in Colluli, Nevsun have that in Bisha. Smaller projects won’t work when the government takes so much.
The positive is that the government really wants this to succeed and that’s been demonstrated by the fact that Danakali have just received a mining licence and have all the support that they need from the government. Landing in Eritrea, and I’ve been to a lot of African countries, it feels like one of the safest, easiest places to do business in Africa. Unfortunately ,it’s got bad press because of UK sanctions imposed due to alleged support of Somalian insurgents. I don’t know whether that is the case or not but certainly the UN feels it is. There’s a case for lifting those sanctions soon but whilst they are in place it makes it hard for traditional investments.
So Danakali is a relatively small capital project, given the size of it, they need $300 million to start an enormous project, there’s billions and billions of tons of the stuff, so it will go for 200 years. But to get that funding traditional sources might be difficult, so my view is they will achieve off-take and with that offt-ake will come some form of funding to make that happen. When it happens it’s going to be the lowest cost, highest quality product that I’m aware of in this space. It’s very exciting.
WARREN THOMPSON: So it’s a really world class deposit.
DUNCAN HUGHES: Yes, a really world class deposit in a perceived challenging jurisdiction.
WARREN THOMPSON: Great, Duncan, we’re going to have to leave it there. That was Duncan Hughes, mining analyst at Somers and Partners.
To listen to the radio interview on SAfm on the support planned for junior miners, from the 2017 Mining Indaba, click here.