Company Overview: Battery Minerals Ltd, formerly Metals of Africa Ltd, is an Australia-based company engaged in the mineral exploration and assessment of mineral projects. It is focused on developing its graphite projects at Montepuez Central and Balama Central, and the Kroussou lead-zinc project. It operates in mineral exploration within East Africa segment. It has completed drilling program at the Montepuez project. It also focuses on undertaking on-ground exploration program at the Kroussou lead-zinc project, including discovery of outcropping. It produces Graphene Oxide and Graphene from raw graphite at its Montepuez project. The Montepuez central project consists of various prospects, such as Buffalo, Lion and Elephant. The Balama Central project is located within Xixano Complex. It has discovered additional outcropping zinc and lead prospects, over a distance of approximately 50 kilometers. Its subsidiaries include Rio Mazowe Limited, Express Resources Pty Ltd and Index Resources Pty Ltd.


BAT Details

Significant Developments in FY 2018: Battery Minerals Limited (ASX: BAT) happens to be a diversified mining development and minerals exploration company which is dedicated to exploring and developing mineral deposits in Mozambique. As on March 29, 2019, BAT had a market capitalisation of $36.75 million. The company had earlier posted its financial report for the year ended December 2018 and, during the same period, the company witnessed significant developments that place the company in a strong position to tap key growth prospects. In January 2018, the company signed three binding offtake agreements with Guangxing Electronic Materials (or GEM), Keshou and Black Dragon for 10,000tpa each and it also wrapped up the fund-raising amounting to A$20 million. Moreover, in the quarter ended June 2018, BAT wrapped up fund raising amounting to $20.7 million. However, in the year ended December 2018, the company witnessed loss after tax amounting to $7,243,165 while, in the same period of 2017, it was $5,822,651. The company’s net assets witnessed the rise to $44,644,650 as at December 31, 2018 from $17,846,393 as at December 31, 2017 on the back of capitalised exploration and evaluation and mine development expenditure incurred. The working capital of BAT witnessed a marginal reduction to $6,638,314 as at December 31, 2018 from $6,806,911 as at December 31, 2017, mainly because of share placements in January and May 2018 and effective cost control.

In a nutshell, we anticipate that the liquidity position coupled with the positive outlook for the graphite demand is expected to act as a tailwind for Battery Minerals. Also, the recent changes in the Board can help the company in streamlining the operations. As a result, we are affirmative on the company and expect that BAT can tap growth opportunities moving forward while certain risks related to the sector and the small-cap stock do prevail.


FY18 Financial Performance / Financial Position (Source: Company Reports)

Liquidity Position - Current Ratio Higher Than Industry Median: Battery Minerals has witnessed significant improvement in its key margins in FY 2018 on the YoY basis which further builds confidence in its expected future performance. The YoY improvement in net margins indicates that the company has been able to convert its top line into the bottom line. Also, the company is having decent liquidity position as its current ratio stood at 7.50x in FY 2018 which is higher than the industry median of 1.51x indicating that BAT is relatively well-positioned to meet its short-term obligations. Also, the company’s decent liquidity standing also gives it headroom for further growth prospects.

BAT Announces Key Board Changes: Battery Minerals has recently made an announcement about important board changes which are focused towards providing additional skills and resources to finalise project financing with respect to the Montepuez graphite project in Mozambique, progress and complete project development as well as commence production at Montepuez. Recently, the group announced that Mr. David Flanagan will be transitioned from MD to the role of Executive Chairman and will continue to lead the project funding strategy. In turn, Mr. Jeremy Sinclair has been appointed as the Managing Director of BAT, effective from 8 April 2019.

Jeff Dowling would be moving to Lead Independent Director from Chairman and Brett Smith and Gilbert George would be stepping down from the company’s board at the AGM in the month of May 2019. Also, the company stated that Mr. Flanagan’s salary would be reduced by approximately 57%. This, and departures of Mr. Smith and Mr. George would imply that BAT’s total board remuneration would not be increased because of appointments.

Paydirt’s Battery Minerals Conference: Recently, in Paydirt’s Battery Minerals Conference March 2019 presentation, BAT had stated that its product range is an “everyman product” in terms of flake size distribution and carbon content, which addresses precise requirements of high growth electric vehicle (or EV) battery and energy storage sectors. Moreover, it has specifications that are attractive to the customers in traditional established sectors of the natural graphite market. As shown below in the chart, from 2018-2035, the battery demand has been expected to witness a CAGR of 22%. With respect to Montepuez project, the company stated that the construction has been started and 100-persons’ village has been constructed and commissioned. Also, the completion of site roads and plant site earthworks has been indicated. The tailings storage facility has also been constructed. From the regulatory front, the mining licence and all environmental approvals have been granted. The company also stated that there are no impediments with regards to export and product sales.
 

Graphite Demand (Source: Company Reports)

Information on Offtake Agreements: In Paydirt’s Battery Minerals Conference March 2019 presentation, BAT had also given a brief about Balama project. With respect to product market, the company added that forecasts for pricing have been verified by the independent market analysts and the exports are expected not to occur earlier than Q1 2021. The company provided information about the offtake agreements. An offtake agreement has been signed with Qingdao Guangxing Electronic Materials Co. Ltd, Qingdao Black Dragon Graphite Co. Ltd and Qingdao Keshuo New Materials Technology Co. Ltd for the term of 3 years and for 10ktpa. The offtake agreements have also been signed with Urbix Resources.  In our view, the off take agreement with these companies will help to ramp-up overall growth of the company in years to come.


Offtake with Key Graphite Processors in China & USA (Source: Company Reports)

A Look at December Quarter: Battery Minerals had witnessed strong progress with respect to its Montepuez and Balama Central Graphite Projects in Mozambique during the quarter ended December 2018. All the construction milestones at Montepuez got wrapped up on budget and on time and there was excellent safety performance on site. The company’s top management had stated that updated reserve as well as resource figures, along with financial studies, implies that Montepuez would be generating outstanding returns. They reflected favourable views and stated that there is a robust outlook with respect to graphite demand and prices due to the lithium battery boom.

In the quarter ended December 2018, the company had made an announcement about the significant improvement in the Montepuez Graphite Project’s economics. The total estimated pre-production establishment capital cost outstanding is US$39.5 million, which includes contingency, and average operating cost for the first 10 years is US$361/t (FOB Pemba). The company had stated that the project funding process is ramping up and independent technical reports on project and graphite market have been completed and is made available to potential project financiers. At the end of December 2018, the company had $7.2 million of cash on hand.


Montepuez Graphite Project’s Capital Expenditure (Source: Company Reports)

What to Expect from BAT Moving Forward: Battery Minerals would be focusing towards strategic plan to develop and bring Montepuez Graphite Project as well as Balama Graphite Project into the commercial production. It involves raising funding in the form of debt and equity to wrap up the development and achieve production of flake graphite concentrate. Battery Minerals has been building the operational and administrative capability, systems and processes and it is working to become the successful production company with respect to graphite market.

The company’s long-term strategic objective revolves around developing the projects, grow production to 200,000 tonnes of graphite concentrate per annum and to make sure that all the activities are carried out in a transparent and responsible way. In a presentation, the company had mentioned about the recommendations which have been made by Credit Suisse in which Credit Suisse stated that 1 in 4 cars would be powered by batteries and that the electric cars would be most cost savvy option. The presentation also stated that the gas consumption is expected to be down 30% by 2040 and would stand at 280 billion gallons per year and would be replaced by the electricity generated from the renewable sources.

Stock Recommendation: The company seems to be poised for respectable growth in the forthcoming years supported by balance sheet position, rise in natural graphite demand in the market, secured offtake agreements and mining license agreement for Montepuez Project in FY18. From the stock performance front, the stock of Battery Minerals has delivered 13.79% return in the past 6 months while, in the time frame of the previous three months, it posted a 43.48% return. However, over the past one year, the company has delivered the return of -58.23%. Thus, it can be said that the company’s stock is quite volatile. From the valuations perspective, the company seems to be slightly undervalued as its P/B ratio stood at 0.8x as compared to the industry median (Basic Materials) of 1.4x which provides a decent opportunity to make an investment entry. Hence, we recommend a “Speculative Buy” rating on the stock at the current market price of A$0.031 per share (down 6.061% on 29 March 2019).


BAT Daily Chart (Source: Thomson Reuters)

 
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