Why is the EV1 share price running?

Disclosure: S3 Consortium Pty Ltd (The Company) and Associated Entities own 3,578,125 EV1 shares at the time of publishing this article. The Company has been engaged by EV1 to share our commentary on the progress of our Investment in EV1 over time.

The share price of Evolution Energy Minerals (ASX:EV1) has been gradually rising over the last few days on no news.

EV1 was our 2021 Wise Owl Pick of the Year. It has an advanced, development ready graphite project in southeast Tanzania that is fast approaching production stage.

So why is the EV1 share price running this week?

After a woeful 2022 for small cap stocks, many stocks were sold down and are trading at or near 12 months lows.

2023 has seen a sudden improvement in market sentiment that has flowed through to small cap stocks, especially in the battery materials sector, which are starting from a relatively low base.

We think it is simply a case of market participants switching off at the back end of 2022, investors wanting to sit in cash over the holiday period, and a protracted holiday mindset all the way through to Australia Day.

With most investors now getting back to their desks, we think the market is starting to show an interest in EV1 because of the near term catalysts for the company.

The market is expecting several key bits of news from EV1 this quarter, here is what may be driving the new interest over the last few days:

1. 🔄 Updated Definitive Feasibility Study (DFS) - EV1 will be looking to improve on its already very strong $323M net present value from its 2020 DFS. EV1 expected the updated DFS in “early 2023” so we suspect that the market’s anticipation is building given January is almost over.
2. 🔄 Framework Agreement - a key milestone that provides regulatory certainty to EV1 from the Tanzanian government.
3. 🔄 Drill results - looking to find shallow high grade graphite to add to its already strong resource estimate. These results should feed the updated DFS.

We’re particularly interested in the updated DFS that will confirm the Chilalo Project as a high-margin project that is well positioned to secure finance for development. In December, EV1 said it expects the updated DFS to be released in early 2023.

With the updated DFS pending, all of the progress the company has made on the downstream part of its business, and considering how advanced EV1’s project is, its market cap — at just $57.7M — remains well below that of its ASX graphite peers.

For context, note EV1’s valuation in comparison to its ASX graphite peers:

• Syrah Resources: ~$1.6BN
• Talga Group: ~$577M
• Magnis Energy Technologies: ~$436M
• EcoGraf: ~$92M

EV1 is progressing its project towards a Final Investment Decision (FID) on its graphite mine at what we think is the perfect time. In our 2023 Investment Outlook we said we are bullish on battery materials, specifically graphite.

While the spotlight for battery materials has so far largely centred on lithium, industry experts are increasingly bullish on graphite.

Graphite is the largest component of lithium-ion batteries, comprising over 50% of every battery and over 95% of a battery’s anode — there are no viable alternatives to graphite in a battery.

To meet the coming wave of demand, Benchmark Mineral Intelligence says the world “needs 97 new graphite mines by 2035” and that shortages could last for 20 years.

Fastmarkets, meanwhile, forecast “notably higher prices” in 2023 and the natural graphite market to remain largely in deficit until 2025.

As we said earlier, also relevant to EV1, is our focus this year on companies that are at development stage.

We think 2023 will be the year for companies with projects that are ‘shovel ready’. This means resource definition and economic studies are complete and they are ready to start building a mine... if they can get financing.

Our view is that companies with a combination of “battery materials” at “development stage” are set to deliver strong performance assuming demand for battery materials continues in the medium to long term.

Basically, companies that are expected to mine their first product in the next year or two as the battery materials boom is in full swing.

EV1 sits firmly into this category with its “shovel ready” project which already has a DFS completed in 2020 and an updated DFS due this quarter.

We also note that despite being so close to development, progress being made on downstream processing, and its DFS due any moment now, EV1 is capped at just $57.7M.

For more on the Mining Company Lifecycle see here.

We first invested in the EV1 IPO at 20c in November 2021, before increasing our holding in the placement at 32c back in August last year.

Since we invested, EV1 has consistently ticked off the milestones in our EV1 Investment Memo.

For that reason we are optimistic, as is the market seemingly in the past week, that the company will deliver a producing graphite mine.

We are currently waiting for drilling results, signing of the framework agreement, and the updated Definitive Feasibility Study (DFS).

Let’s not forget that graphite is a rapidly growing market. Over the past 12 months we’ve seen the big automakers move quickly to secure battery materials supply as global EV sales jumped by more than 50% from January to July of 2022.

On top of this, with a bit of downstream processing, graphite is used in nuclear energy which is currently being embraced amid the ongoing global energy crisis.

Our EV1 Big Bet

“EV1 will achieve first production of the world’s most sustainably produced graphite by early 2024 (including value adding processing) coinciding with the onset of a long-term supply shortage in the graphite market.”

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 EV1 Investment memo. Success will require a significant amount of luck. There is no guarantee that our Big Bet will ever come true.

To monitor EV1’s progress since we first Invested and track how the company is performing relative to our “Big Bet”, we maintain the following EV1 “Progress Tracker”.

See our EV1 Progress Tracker here:

What’s next for EV1?

Updated Definitive Feasibility Study (DFS) + Final Investment Decision (FID) 🔄

EV1’s initial 2020 DFS shows an NPV of US$323M with a 3.4 year post-tax payback period, based on total capital expenditures of ~US$87M to get the mine into development.

EV1 is currently updating its DFS and expects the report to be ready in “early 2023”.

Initially the report was targeted for the end of 2022 but EV1 made changes to its project design so as to remove a tailings storage facility.

This is an improvement in the way any mining waste is handled - reducing costs associated with earthworks and sustaining capital expenditure while also improving the ESG credentials of EV1’s project.

We covered the changes to EV1’s project design in a Quick Take which you can view here:

DFS due in early 2023 - EV1 pursuing improved project economics

We hope the updates to the project design, along with improvements in the graphite price, lead to an overall improvement in the Net Present Value (NPV) figure in the updated DFS, or at the very least, help counter the higher expenses caused by inflation.

The importance of completing this work is really to secure financing partners who will want to see updated estimates for capital costs and future profits, and would be less likely to finance a project based on possibly outdated 2020 estimates.

Framework Agreement with the Tanzanian government 🔄

We think a Framework Agreement with the government would be a big catalyst for EV1 as it would provide a clear regulatory pathway to production - the ultimate goal for EV1.

We have seen other ASX listed companies like Strandline Resources, OreCorp, and Black Rock Mining sign these agreements.

Once the agreement is signed, we expect EV1’s project to be viewed as being more suitable for investment by institutional capital who would be wanting to see such regulatory risks to the project addressed.

We have seen this happen with ASX listed Strandline which signed its framework agreement on 14 December 2021.

This saw Strandline’s share price rise from ~25c per share (pre-framework agreement) to all time highs of ~51.5c, after which the company completed a $50M capital raise.

The past performance is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.

We hope similar market attention comes EV1’s way once the company signs off on its own framework agreement.

In December, EV1 said negotiations had concluded with the government of Tanzania and it is awaiting instructions regarding the protocols and timing for execution of the agreement.

Drilling results 🔄

Back in October EV1 kicked off a 7,500m of exploration drilling at its advanced, development ready project.

The plan for the program was to start with ~3,000m of shallow RC drilling targeting the highest priority drill targets AFTER which the most promising intercepts would be followed up with additional drilling.

This drilling program is a little bit different to that of other explorers in our Portfolio given that EV1 is trying to improve what is already a fundamentally strong project.

EV1 doesn't need any more drilling or new discoveries before it can move into production, but some more high-grade near-surface graphite discoveries would certainly be welcome.

A new high-grade near-surface discovery could improve project economics and give EV1 the option to add new resources to the back end of its project (by increasing the mine life) and/or to the front end (mining the highest grade and most profitable first).

EV1’s drilling would focus on high priority EM targets ~15 times the size of the single EM conductor that contains EV1’s 20Mt JORC resource that grades 9.9% Total Graphitic Carbon (TGC).

For some context, EV1’s existing JORC resource sits on an EM conductor that’s approximately 2km long, whereas there are around 8km of exploration targets that display higher conductivity.

Any results that EV1 delivers at or above the 9.9% TGC grade of its existing JORC resource will be positive news for us.

If EV1 unlocks new higher grade, shallower graphite resources this could be included into the mine plan used in the DFS to improve the overall net present value (NPV) of EV1’s project.

If drilling doesn't find anything material, nothing will change with respect to why we continue to hold EV1 in our Portfolio.

Feasibility study on a downstream plant (bonus) 🔄

Feasibility studies on a downstream processing plant in an EV friendly jurisdiction.

In recent announcements, EV1 has specifically mentioned that it would look to commence a Scoping Study followed by a DFS on a downstream graphite processing plant.

What could go wrong

Our 2022 EV1 Investment Memo

Below is our 2022 Investment Memo for EV1 where you can find a short, high level summary of our reasons for Investing.

The ultimate purpose of the memo is to track the progress of our Portfolio companies using our Investment Memo as a benchmark throughout 2022.

In our EV1 Investment Memo you’ll find:

• Key objectives for EV1 in 2022
• Why do we continue to hold EV1
• What the key risks to our Investment thesis are
• Our Investment plan