SGA’s graphite project has an inferred JORC Resource of 209Mt at a grade of 28.5% TGC (total graphite content) for 60Mt contained graphite. This makes it the highest grade graphite project on the ASX.
$0.043
Opened: 22-Jul-2022
Shares Held at Open: 4,802,500
What does SGA do?
Sarytogan Graphite (ASX:SGA) holds 100% of a huge graphite project in Kazakhstan, strategically located between Europe and China.
SGA has the highest grade graphite resource of any ASX listed graphite company. It is also the second largest contained graphite resource on the ASX.
What is the macro theme?
Graphite is a critical raw material used in the manufacturing process for lithium-ion batteries - it cannot be substituted in battery anodes.
The battery market is rapidly growing, with graphite demand expected to be five times greater than current levels by 2050.
Consequently graphite is now listed as a “critical mineral” in the US, EU, India, Japan and Australia.
Our Big Bet for SGA
Given SGA's 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+
Why did we invest in SGA?
Highest grade graphite resource on the ASX
SGA’s graphite project has an inferred JORC Resource of 209Mt at a grade of 28.5% TGC (total graphite content) for 60Mt contained graphite. This makes it the highest grade graphite project on the ASX.
Second largest graphite resource on the ASX
The project’s 60Mt of contained graphite resource ranks second only to graphite producer Syrah Resources (capped at $880M).
Low market valuation relative to its graphite peers
Based on its inferred 60Mt contained graphite resource, SGA currently trades with an enterprise value/tonne of contained graphite resource of $0.74/tonne. This compares with graphite major Syrah Resources which trades at $5.19/tonne and graphite developer Renascor which trades at $48.37/tonne. We expect this gap to close as SGA’s market cap rises with upgrades to the classification of its resource and progresses to mine development studies. (Note: the EV/contained graphite (A$/tonne) calculations are based on closing prices as at 21 July 2022).
Project located in Kazakhstan - an established mining jurisdiction between EU and China
Kazakhstan’s mining legislation is based on Western Australia’s mining code. The country is the biggest producer of uranium in the world producing ~45% of global supply in 2021. Companies like Chevron and Exxon Mobil own and operate projects in-country. Kazakhstan’s unique location also presents itself as a future supplier of battery metals to downstream users in Europe and China.
Tight capital structure
There are only 132 million shares currently on issue. 54% of SGA’s shares are escrowed (mostly for two years from the IPO date). This includes the 39% held by founder and Technical Director Dr Waldemar Mueller. There is therefore a limited number of shares available in the event that there is increased demand - we think the SGA capital structure is leveraged to growth.
Extensive Kazakhstan experience and expertise
Technical Director and major shareholder (owning 39%) Dr Waldemar Mueller brings extensive in-country relationships to SGA. This is a big positive for an ASX listed company operating in Kazakhstan. We think Dr Mueller will be able to navigate doing business here, and given his large shareholding, is incentivised to deliver success for SGA shareholders.
What do we expect SGA to deliver?
Objective #1: Complete metallurgical testwork
Milestones
Determine flake size distribution
Metallurgical testwork results
Objective #2: Increase confidence in the resource - upgrade JORC resource from inferred to indicated
Bull case = Total contained graphite >20mt in the “indicated” resource classification.
Base case = Total contained graphite 15-20mt in the “indicated” resource classification.
Bear case = Total contained graphite <15mt in the “indicated” resource classification.
Milestones
Infill and extensional drilling program starts
Drill results
JORC resource update/upgrade commissioned
JORC resource update/upgrade completed
Objective #3: Commence Scoping Study on project economics and feasibility
Objective #4: Progress offtake discussions
Milestones
Commence discussions with potential offtake partners
What could go wrong?
Metallurgical testwork risk
With a massive JORC resource in place, SGA needs to work through the metallurgical testwork to determine whether its graphite can be produced into economically recoverable graphite. SGA is yet to determine the flake size distribution of its JORC resource, which could have implications on product suitability. Testwork could show that the graphite can not be produced economically or that the flake sizes are not suitable for its various use cases.
Exploration risk
SGA’s current JORC resource sits 100% in the “inferred” category — the lowest JORC resource confidence level. Drilling will increase the data available to upgrade the resource from inferred to indicated or measured and then to mineral reserves. As with all exploration, there is always risk that a drilling program fails to deliver the required intercepts for the resource to be upgraded.
Commodity price risk
The outlook for graphite pricing remains positive in the near term, but as with all commodities, the price is volatile. Graphite is an opaque early stage market. New graphite supply may come online and therefore demand may be lower than anticipated. A projected 74% of future graphite demand is forecast to come from EVs, presenting a high technology concentration risk that could impact on graphite pricing.
Funding risk
The funds raised in the IPO are expected to cover two years of operations. Given SGA has no revenue and is still progressing its project towards development, it is likely to be reliant on capital markets for future financing rounds. Once these funds are exhausted SGA may need to raise capital which would dilute existing holders.
Sovereign risk
Kazakhstan’s legal system is less developed than some more established jurisdictions, resulting in higher sovereign risk including in obtaining all required permits and approvals. Kazakhstan borders both Russia and China and so any geopolitical escalations in the region could have spillover effects on Kazakhstan. We also note the civil unrest in Kazakhstan earlier in the year which could reappear at any stage in the future.
What is our investment plan?
Our plan is to hold the majority of our position in SGA for 3 to 5 years in the hope of an acquisition by a major mining company after the project is de-risked (see “our long term bet” above).
Over the next 12 months we will apply our de-risking strategy for early stage companies. We may look to sell 20% of our holding if the company delivers on one or more of the above objectives and the share price materially re-rates.
Summary of our hold periods, See our internal holding policy here.
Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 4,802,500 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.
Begin preliminary economic assessments
