Evolution Energy Minerals Limited

ASX:EV1

Last Price:

$0.350

Our Investment Summary

Date of
Initial Coverage

17-Nov-21

Initial
Entry Price

$0.200

Returns from
Initial Entry

75%



Investment Memo: Evolution Energy Minerals (ASX:EV1) - LIVE

Opened: 16-Nov-2021

Shares Held at Open: 3,125,000


What does EV1 do?

EV1 is a sustainable, ESG friendly, advanced stage graphite project in Tanzania.

What is the macro theme?

Graphite is a key component in lithium ion batteries.

Our previous battery materials investments have been very successful.

Up until now we did not have any exposure to graphite and its growing demand. Graphite has many other applications beyond electric vehicles too.

Why did we invest in EV1?

Smaller, advanced graphite project so quick to market while graphite market strong

Fully permitted with JORC resource and DFS (US $87M capex for US323 NPV),

ESG focussed investment

ESG fund invested $8M and is forcing EV1 to be “best in class ESG”, so it can secure ESG capital funding to develop project

Market cap should catch up to peers by progressing down stream value add (good cap table, key shareholders escrowed).

What do we expect EV1 to deliver in 2021?

Objective #1: Final Construction Decision & progress towards Project Funding

The name of the game for EV1 is to reach a final construction decision and secure the ~US$87M required in capital costs to bring the project into production. DFS upgrades and optimisations will form a part of this process, but more importantly, EV1 needs to deliver all of the ESG requirements set out by ARCH (the cornerstone ESG shareholder), so that ARCH can help EV1 secure funding from other ESG funds in its network that only invest in top class, proven ESG opportunities.

Milestones

DFS Optimisation

Front end engineering design (FEED) – Appointment of Engineer

Front end engineering design (FEED) – Progress update

Front end engineering design (FEED) – Final report

ESG – Initial assessment or report

ESG – Sustainability report

ESG – Quarterly progress reporting

ESG – Life cycle assessment report

ESG – Progress towards zero carbon operation

ESG – ESG investment readiness announced

ESG – Independently assessed ESG score

ARCH Provides further project funding

ARCH introduces other ESG funds

Strategic Board appointment

Objective #2: Assess Downstream “Value Add” Opportunities

Assessing further downstream “value add” opportunities and the prospect of commercialisation is important for EV1’s success. Given that each graphite project’s mineralisation has a “unique signature”, it will be important for EV1 to work with potential offtake partners to ensure compatibility with existing technologies as well as the development of new technologies with EV1’s graphite.

Milestones

Market update on downstream value add studies

Market update on downstream value add partnerships

Market update battery specific value add (studies or partnerships)

MoU signed with downstream partner 1

MoU signed with downstream partner 2

Offtake agreement 1

Offtake agreement 2

Objective #3: Increase Resource Size and find more shallow resource

Whilst an increase in the resource size is not necessary for making a final investment decision, the greatest opportunity to improve project economics identified in the DFS was adding more near-surface graphite deposits to substantially reduce mining costs.

We expect EV1 to undertake an expansionary drill program mid-way through next year, with a geophysics program to identify drill targets to commence imminently. We also want exploration to optimise the economics of the DFS by finding more resources at a shallow depth (cheaper to extract).

Milestones

Announce Exploration Program

Drill Targets Identified/Refined

Drill Program commenced

Drill results announced

Resource Update

What could go wrong?

Sovereign Risk

Any Tanzania sovereign risk flare ups will spook investors and dampen share price

Commodity Risk

Graphite prices could fall making the project harder to fund or uneconomical

Funding Risk

Might struggle to secure ~$87M US to develop the project if market softens or they fail on ESG aspects

What is our investment plan?

We are holding a core position (min 50%) long term (4 to 7 years) to hold into first production

The company has a low market cap compared to peers, if EV1 delivers key milestones and the share price re-rates we will (progressively) sell ~20% with the goal to fee carry

if the company rises more than 500% after 12 months holding (CGT tax discount) we will look to take some profit progressive sell down of ~25%


Disclosure: The authors of this memo and owners of Wise-owl, S3 Consortium Pty Ltd, and associated entities, own 3,125,000 EV1 shares at the time of publication. S3 Consortium Pty Ltd has been engaged by EV1 to share our commentary on the progress of our investment in EV1 over time.


Key Objective 1: Final Construction Decision & progress towards Project Funding

The name of the game for EV1 is to reach a final construction decision and secure the ~US$87M required in capital costs to bring the project into production. DFS upgrades and optimisations will form a part of this process, but more importantly, EV1 needs to deliver all of the ESG requirements set out by ARCH (the cornerstone ESG shareholder), so that ARCH can help EV1 secure funding from other ESG funds in its network that only invest in top class, proven ESG opportunities.

🔄 DFS Optimisation
🔲 Front end engineering design (FEED) – Appointment of Engineer
🔲 Front end engineering design (FEED) – Progress update
🔲 Front end engineering design (FEED) – Final report
✅ ESG – Initial assessment or report
🔄 ESG – Sustainability report
🔄 ESG – Quarterly progress reporting
🔄 ESG – Life cycle assessment report
🔄 ESG – Progress towards zero carbon operation
🔲 ESG – ESG investment readiness announced
✅ ESG – Independently assessed ESG score
🔲 ARCH Provides further project funding
🔲 ARCH introduces other ESG funds
🔲 Strategic Board appointment

Key Objective 2: Assess Downstream “Value Add” Opportunities

Assessing further downstream “value add” opportunities and the prospect of commercialisation is important for EV1’s success. Given that each graphite project’s mineralisation has a “unique signature”, it will be important for EV1 to work with potential offtake partners to ensure compatibility with existing technologies as well as the development of new technologies with EV1’s graphite.

✅ Market update on downstream value add studies
✅ Market update on downstream value add partnerships
🔄Market update battery specific value add (studies or partnerships)
MoU signed with downstream partner 1
🔲 MoU signed with downstream partner 2
Offtake agreement 1
🔲 Offtake agreement 2

Key Objective 3: Increase Resource Size and find more shallow resource

Whilst an increase in the resource size is not necessary for making a final investment decision, the greatest opportunity to improve project economics identified in the DFS was adding more near-surface graphite deposits to substantially reduce mining costs.

We expect EV1 to undertake an expansionary drill program mid-way through next year, with a geophysics program to identify drill targets to commence imminently. We also want exploration to optimise the economics of the DFS by finding more resources at a shallow depth (cheaper to extract).

Announce Exploration Program
Drill Targets Identified/Refined
🔲 Drill Program commenced
🔲 Drill results announced
🔲 Resource Update


Investor Presentation

Tanzanian Gov discussions, improved DFS coming by September

ASX:EV1 May 16, 2022 Announcement


Investment Memo: EV1 2022

Objective: Final Construction Decision & Project Funding

Milestones: FEED - Appoint Engineer: 🔲 → 🔄


EV1 is advancing a Framework Agreement with the Government of Tanzania around their free-carried interest in EV1’s Chilalo project.

This should further aid project financing discussions as there will be more certainty around economic metrics.

EV1 says its DFS optimisation should be complete by September, with an engineer to be engaged this month for Front End Engineering Design. We expect the economics to improve with rising graphite prices and ESG elements to also be included.

We’ve updated the Key Objectives from our EV1 Investment Memo accordingly:


Auramet appointed to advance project financing

ASX:EV1 May 16, 2022 Announcement


Investment Memo: EV1 2022

Objective: Final Construction Decision & Project Funding

Milestone: N/A


EV1 has appointed leading resources financier, Auramet, to help advance project financing.

Mark Tyler of Auramet said he thinks it's “one of the most attractive graphite opportunities globally.” And we agree.

Having Auramet onboard is a significant win for EV1 and should help them make progress towards Key Objective #1 from our EV1 Investment Memo:


Now listed on the Frankfurt Stock Exchange

ASX:EV1 Apr 29, 2022 Announcement


This morning our 2021 Wise-Owl Pick of the Year Evolution Energy Minerals (ASX: EV1) confirmed that it has commenced trading on the Frankfurt Stock Exchange in Germany.

The company is trading under the ticker “FSE: P77” and trading activity can be viewed via the following link: https://www.boerse-frankfurt.de/equity/evol-energy-min-ltd

The significance of this is that investing in EV1 is now much easier for European investors.

In today’s announcement EV1 also mentioned that it is currently working on a commercial verification program to evaluate the production of sustainable battery anode materials.

It also confirmed that it would try and use this technology to build a battery anode manufacturing facility in Europe (which it is pursuing through its European Battery Alliance membership).

The assessment and definition of a downstream strategy is Objective #2 in our 2022 EV1 Investment Memo, and we think that today’s news opens up the company to further pursue these opportunities inside Europe.

To see all of the key objectives we want to see EV1 achieve in 2022, why we continue to hold EV1 in our portfolio and the key risks to our investment thesis, check out our 2022 EV1 Investment Memo by clicking the image below.


US government recognises graphites importance with US$107M loan

ASX:EV1 Apr 19, 2022


This morning the US government announced a conditional US$107M agreement with ASX listed Graphite miner Syrah Resources. Very rarely do we see the US government step in and make loans directly to listed companies, and very rarely are they companies outside of the US.

The loan comes as the US government recently announced that it would be looking at financing critical minerals projects in a rush to try and secure its supply chains. The funds are expected to be used to build out a processing plant with enough battery anode production capacity to supply ~2.5m electric vehicles (EVs) per annum.

We think that the US government’s involvement in project financing is more recognition of the importance of graphite in the EV supply chain.

This was one of the many reasons we announced Evolution Energy Minerals (ASX: EV1) as our 2021 Wise-Owl Pick of the Year.

EV1’s graphite project is ‘shovel ready’ with a DFS completed in Jan 2020 demonstrating an NPV of US$323M. EV1 is looking to make a Final Investment Decision by the end of this year and will then look to get its project into construction.

EV1 is also committed to achieving best in class ESG credentials, which we think will be the key differentiator for its product when it is being marketed to EV battery makers.

Below is a screenshot from our 2022 EV1 Investment Memo, which details why we invested, what we want to see the company achieve in 2022 and the key risks to our investment thesis.

To check the memo out, click on the image below.


Battery grade graphite just as important as lithium

ASX:EV1 Apr 11, 2022


Lithium is taking centre stage in the electrification thematic, but the markets seem to be missing that in producing electric vehicle (EV) batteries, several other commodities are just as important.

One of those is graphite, which comprises over 50% of the raw materials in every lithium-ion battery (and over 95% of every battery anode).

As is the case for lithium, there is an abundance of graphite deposits all across the world. And again like lithium, despite the abundance of resources there just isn't enough graphite being produced (specifically battery grade graphite) to meet future demand.

The article from the South China Morning Post titled “Shortage of EV battery raw material graphite could delay global drive to go green” details this problem and is definitely worth a read.

With consultants Wood Mackenzie estimating that graphite demand is set to double by 2035, mainly due to the increase in demand by battery producers, there is a real risk that the graphite market becomes structurally short, just like the lithium market is right now.

This is why late last year we announced Evolution Energy Minerals (ASX: EV1) as our 2021 Wise-Owl Pick of the Year.

EV1’s project is shovel ready with a DFS already completed in Jan 2020 showing a low capex requirement of US$87M and an NPV of US$323M. EV1 is looking to make a final investment decision by the end of this year and will then look to get its project into construction.

EV1’s project differentiates itself with 31% of its resource in the extra large/jumbo category giving it the optionality to either sell it at high margins or use it in downstream opportunities in the battery manufacturing space.

On top of all of this EV1 is committed to achieving best in class ESG credentials which we think will be the key differentiator for its product when its product is being marketed to EV battery makers.

Below is a screenshot from our 2022 EV1 Investment Memo, which details why we invested, what we want to see the company achieve in 2022 and the key risks to our investment thesis.

To check the memo out, click on the image below.


Marvel Gold shareholding update

ASX:EV1 Mar 10, 2022


Marvel Gold is exploring whether it can conduct an in-specie distribution of its shareholding in EV1.

Marvel holds 50,000,000 EV1 shares, or ~31% of EV1’s register, that are escrowed until November 2023, meaning Marvel can’t sell until then.

An in-specie distribution is when a company passes on its shareholding in another company to its shareholders. In this case, Marvel would transfer its 50 million EV1 shares to its shareholders pro rata, rather than have the company’s treasury hold onto them.

As mentioned in our launch note, one of the key reasons we liked EV1 is because of its tight capital structure.

With Marvel's shareholding escrowed, ~31% of the shares can’t be sold on-market until 16 November 2023. This means that there will be a limited number of shares to purchase on-market, so if EV1 can deliver progress on its graphite project we could see a sharp share price re-rate.

Whatever happens with the shareholding, ideally we would like to see the escrow remain in place.