SGA Scaling up its High Value Battery Quality Graphite Aspirations

Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 4,354,500 SGA shares and 1,466,250 SGA options, the Company’s staff own 50,000 SGA shares and 12,500 options at the time of publishing this article. The Company has been engaged by SGA to share our commentary on the progress of our Investment in SGA over time.

Time for the bulk samples.

Previously, our 2022 Small Cap Pick of the Year Sarytogan Graphite (ASX:SGA) had achieved 99.87% graphite purity from its giant graphite resource in Kazakhstan.

That is an excellent purity result at this early stage.

And it is an important step towards SGA putting its graphite into batteries and running battery anode performance tests...

All of which is scheduled to happen this year.

So far SGA’s metallurgical testwork has only been done in small benchwork samples of 0.5-1kg that were needed for stage 1 purification.

Now that 99.87% purity has been achieved, it’s time to run the next set of tests that need a bigger graphite sample.

0.5-1kg is not enough volume for the next stages of multiple rounds of purification or for the physical process of spheroidizing - the key steps for use in batteries.

That is why the company has now sent a 240kg bulk sample to Germany for testing, that’s anticipated to be enough to produce four lots of 27kg of graphite concentrate.

This increased volume will allow SGA to aim for a higher purity graphite product for performance testing in actual batteries.

Ultimately, SGA is chasing 99.95% graphite purity to sell into the high value battery anode market.

We note that of all the battery materials, graphite has the largest forecast growth.

Specifically, growth in the battery anode market sees demand for natural graphite set to increase by 650% by 2035, meaning the sheer scale of SGA’s project along with its battery anode product strategy leaves SGA in an opportunistic position.

SGA has the highest grade graphite resource on the ASX and the second largest contained graphite resource - second only to $1.2BN Syrah Resources.

While Syrah is producing graphite right now, SGA’s project is at an earlier in the mining project lifecycle, with some aspects of its plan still unproven and its market cap is at only $51M.

We have been following SGA’s project since April 2021, before the company listed on the ASX.

We Invested in SGA to see it drill out its giant resource, prove the technical/economic feasibility (through metwork and feasibility studies), and to eventually bridge its valuation gap with its ASX peers.

Two of those ASX peers, Talga Resources and Renascor Resources, are also chasing a value-adding fine spherical graphite product strategy and are capped at $565M and $558M - almost ~10x of SGA’s market cap.

A major part of proving the technical feasibility of SGA’s project is the metallurgical testwork.

It achieved a breakthrough 99.87% graphite purity using industry standard processing methods last year. SGA continues to build on that work to achieve the 99.5% required for battery anode markets, today reporting that it is now manufacturing bulk graphite concentrate.

Manufacturing of the bulk sample is taking place at a specialist German lab and is a required step towards making battery anode material in the form of Uncoated Spheroidized Graphite (USpG).

This is a precursor to spheroidization of SGA’s graphite (rolling graphite flakes up into cabbage-like balls) and then putting it into batteries, and then running battery anode performance tests, all of which SGA expects to take place this year.

You can see those cabbage like balls under a microscope here (this is not from SGA’s project):

Source: SGA Announcement

This work is all part of SGA’s value-adding fine spherical graphite product strategy targeting the high value battery anode market.

Uncoated Spheroidized Graphite (USpG) is a crucial battery anode material and SGA intends to supply it to the large EV markets in Europe and China, capitalising on its Kazakhstan location between these two markets that are all connected by rail.

If SGA can crack into the high value battery anode market by producing USpG it would help fill a massive supply shortage, all while commanding prices at multiples of flake graphite products.

Here you can see that USpG is trading around US$3,000/t — a significant value-added premium on flake graphite products that trade between US$600/t and US$1,200/t.

Positive testwork results should lead to higher prices commanded for its product — substantially enhancing the economics of SGA’s planned Pre-Feasibility Study.

SGA has sent a 240kg bulk graphite sample sourced from its graphite project to a specialist German laboratory for USpG optimisation tests. That’s enough graphite for four 60kg batches, each anticipated to produce 27kg of graphite concentrate.

The manufacturer of the bulk graphite concentrate is scheduled for the coming quarter, ahead of spheroidization in Q3, before battery anode performance tests can be run in the fourth quarter of this year.

That means by the end of this year we’ll have a much better idea if SGA’s graphite is appropriate for battery anodes.

Today’s news follows the breakthrough 99.87% graphite purity achieved in metwork last year — a significant step towards achieving the 99.95% required for the battery anode market.

Achieving these purity levels using industry standard methods has substantially increased SGA’s confidence in its product strategy of supplying the high-value battery anode market.

Putting aside the metwork that is running in the background, SGA has a busy 2023 ahead of it with all of the following ongoing:

1. A resource upgrade to ‘indicated’ - While SGA’s resource is already giant, we are looking to see the confidence level of the resource upgraded from inferred into indicated. SGA expects its resource upgrade to come in March 2023.
2. Feasibility studies - This will put some financials behind SGA’s project. SGA is currently tendering out a Pre Feasibility Study (PFS) to potential contractors now. This work should kick off in Q3 and run for ~ 12 months.
3. Offtake discussions - This will be important when it comes time to try and move SGA’s project from definition into the development stage. This type of newsflow usually acts as a major catalyst as it provides industry validation for a project.

All of this forms the basis for our Big Bet for SGA which is as follows:

Our SGA “Big Bet”

“Given this graphite project’s strategic location in between China and Europe, we hope that if SGA proves out the size and economic extractability of the resource, it will generate interest from major mining companies, leading to a takeover of SGA for $1 billion+.”

NOTE: our “Big Bet” is what we HOPE the ultimate success scenario looks like for this particular Investment over the long term (3+ years). There is a lot of work to be done, many risks involved - just some of which we list in our SGA Investment Memo. Success will require a significant amount of luck. There is no guarantee that our Big Bet will ever come true.

For a quick summary of SGA’s progress over time see our SGA Progress Tracker:

Graphite Outlook

Of all the battery materials, graphite has the largest forecast growth.

This makes sense, since graphite is always required in an EV battery, regardless of what the cathode chemistry is.

For some context, graphite makes up ~50% of the raw materials in every lithium-ion battery and over 95% of every battery anode.

Much of graphite’s demand growth will come from the transition away from synthetic graphite, which has high CO2 emissions, compared to natural graphite.

Benchmark Minerals says that to meet upcoming demand, 97 new graphite mines are needed by 2035, but that is based on a small average mine size.

Given the size of the resource at SGA’s project, the development of a mine here could account for a number of those needed graphite mines required to meet the forecast graphite demand.

(Source)

Making Uncoated Spheroidized Graphite (USpG)

The test work on graphite from SGA’s project to date has been undertaken on a benchwork scale, beginning with sample masses of 0.5-1kg.

At this scale, there is insufficient graphite concentrate for multiple rounds of purification or for the physical process of spheroidizing the graphite. One round of spheroidization optimisation requires approximately 5kg of graphite concentrate.

SGA has delivered 240kg of its graphite to the German lab, where FIA will homogenise the graphite and split it into four equal portions of 60kg.

This has been identified as the most economical scale to manufacture the required graphite concentrate.

Approximately 27kg of graphite concentrate is expected from each batch. Initially one batch will be run, which will be more than sufficient for further chemical purification and physical spheroidization. Three subsequent batches may be called to meet ongoing growth in sample demands.

We like that SGA is getting ahead of the sample demand, and it's ready for more work to be done.

The bulk flotation program will run through Q2, 2023 to then feed into the spheroidization program in Q3, 2023 ahead of battery performance tests in Q4 2023.

What’s Next?

As Managing Director Sean Gregory revealed in a recent presentation at the RIU Explorers Conference, SGA has a busy work program ahead of it.

Updated JORC resource 🔄

With SGA’s maiden drilling program now complete, up next is an upgrade to the project’s JORC resource classification.

SGA is working to upgrade the existing JORC resource from Inferred category to the Indicated category, and move its project into the feasibility study stage.

SGA have confirmed that the resource upgrade is on track for next month.

Our expectations for the upgraded JORC resource are as follows:

1. Bull case = Total contained graphite >20mt in the “indicated” resource classification.
2. Base case = Total contained graphite 15-20mt in the “indicated” resource classification.
3. Bear case = Total contained graphite <15mt in the “indicated” resource classification.

This is key objective #2 of our SGA Investment Memo.

Ongoing metwork 🔄

SGA continues to work with its processing partners to achieve the required Uncoated Spherical Graphite (USpG) specifications of 99.95% TGC purity in spherical graphite balls of 5-20 micron in size.

Achieving these specifications will be key to accessing the battery anode market with a high priced spherical graphite product.

However, there is no guarantee that SGA will be able to achieve these required specifications and/or it may not be able to scale the processing solution to a size/scale that is required for its project.

This is a key development that we are watching for.

Permitting and access 🔄

The on-ground SGA team in Kazakhstan, including six geologists, is busy securing land access and approvals. It is also undertaking some exploration work, leveraging swathes of historical data left by past exploration in Kazakhstan by Russians.

What could go wrong?

While SGA has made breakthroughs on the network front, the company still has a lot of work to do before its project is ready to be put into development.

As a result there are still risks that the company needs to address, some of which we list in our SGA Investment Memo.

To see the risks in detail check out the Memo here, or click on the image below:

Our 2022 SGA Investment Memo

Below is our Investment Memo for SGA, where you can find a short, high level summary of our reasons for Investing.

The ultimate purpose of the memo is to record our current thinking as a benchmark to assess the company's performance against our expectations for the following 12 months.

In our SGA Investment Memo, you’ll find:

• Key objectives went want to see SGA achieve
• Why we are Invested in SGA
• What the key risks to our Investment Thesis are
• Our Investment plan

Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 4,354,500 SGA shares and 1,466,250 SGA options, the Company’s staff own 50,000 SGA shares and 12,500 options at the time of publishing this article. The Company has been engaged by SGA to share our commentary on the progress of our Investment in SGA over time.