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Research AreaArmadale Capital Research Note

Armadale Capital (LSE:ACP)

2nd May, 2020

Market Cap: £10M / 2.2p @ 2nd May 2020

Last Update: 13th Jan 2021

Current Share Price

Key Highlights 

  • Near, mid and long-term investment scope with major catalysts 2021
  • Rapid planned transition from graphite explorer to producer 
  • Low cost, low capex, high grade and high purity graphite project in East Africa
  • CSIRO test-work confirmed Mahenge graphite as suitable for Li-ion batteries
  • Strong macro back-drop for graphite particularly expected from the EV sector
  • Project significantly de-risked following delivery of a robust DFS June 2020
  • Financing and construction start anticipated H1 2021

Challenges as a resources investor, why Graphite?

Anyone who has followed me on twitter will know that I have a big interest in the junior resources space, particularly small cap early stage mining companies.  There are a raft of junior mining companies that sound good on paper, but how do you weed out the companies that actually have a chance of making it from exploration through development and finally to production, where if you embark upon the journey from an early-stage could yield life changing returns?

Well it aint easy! 

And it ain’t easy for a number of reasons.  Is the project any good? Are the people running the company any good? Are they just there to take a wage (plenty are)? Do they have a track record?  What does the market back-drop look like for the particular resource?  Where is the company operating?

If you think you’ve ticked all those boxes you could be onto a winner but what happens if say  a global trade war emerges or even a global pandemic?  

Of course it depends on your investment horizon as clearly events above like we have seen have impacted the junior resources space significantly and it has not been an enjoyable time for any small cap resource investors over the last two years, trust me I know!

This is why you also need to look at a few other things such as corporate overheads and how the company could weather these events.  Last thing you need is to have been patient with your investment to see the company eventually run out of cash due to tight equity markets or fire-sell its assets leaving investors scratching their heads!

One of the biggest challenges I believe junior resource investors face is dilution. Even companies with outstanding assets can do all the hard work de-risking a project only to find that when it comes to closing financing to actually take that leap from developer to producer, shareholders suddenly see a large portion of the upside diluted down to a much smaller percentage.

I’ll explain in a minute why I believe Armadale offers a unique investment opportunity when you consider all of the above.

About Armadale

Armadale is actually an AIM listed investment company not a mining company per-se. Their primary investment focus however is the Mahenge Liandu graphite project in Tanzania, East Africa and the company is committed to bringing the project to production given its extremely compelling economics and returns. 

In addition however the company does hold some quoted investments primarily in producing gold companies and notably a 1.5% royalty agreement on the Mpokoto gold project in the DRC.  Further Information can be found on the company website, but with gold’s recent move and forward potential, these additional investments could well prove lucrative.

I was actually personally invested in Armadale a number of years ago when they were progressing the Mpokoto gold project which offered compelling returns from the market cap at the time.

Unfortunately management in situ at the time failed to deliver and I sold up for a small loss and took ACP off my watch-list.  Once bitten, twice shy and all that…

Luckily for me I spotted Armadale had vended a new graphite asset, something I was getting interested in and so took another look at the company.  RNS were showing the asset to be high grade  –  something that always means lower cost so I started investigating more heavily and eventually took an initial stake at around 1p per share.

Mahenge Graphite Project  – why it stands out

Armadale’s wholly-owned Mahenge Liandu Graphite Project is located in a highly prospective region, with a high-grade JORC compliant indicated and inferred mineral resource estimate of 59.5Mt at 9.8% Total Graphitic Carbon (‘TGC’). This includes 11.5Mt @ 10.5% Measured 32.Mt Indicted at 9.6% and 15.9Mt at 9.8% TGC, making it one of the largest high-grade resources in Tanzania.

The company plan a staged ramp-up to facilitate an initial production of 60,000tpa graphite concentrate for the first four years (Stage 1) before increasing to 120,000tpa (Stage 2)

This stage ramped up means that initial capex remains low and the company can ramp up to stage 2 by expanding the plant funded from initial cash-flow.

Low Capex, Low Capex …

The company delivered their DFS Iteration 2 June 2020 which showed a robust set of economics as follows: 

  • $39.7m Capex
  • NPV10 $430m
  • IRR 91%
  • LOM Net Revenue $1.823bn

The figures above represent a solid set of numbers and improved upon the original scoping study which isn’t often seen in company DFS’s. Personally I have not seen returns like this from a project in my investment career when you consider the ratio between the Capex and NPV < (1:10).  This in itself drives an exceptionally high IRR at 91%.  Mining projects returning around 30-40% IRR would be seen as providing excellent returns.

Low Capex really is key for me though.  At today’s market cap (and I expect this to increase significantly) the company only requires less than 3x cap in Capex  – compare this to some companies seeking over 10x currently!

This goes back to my point on dilution and is important.  Armadale with such a high returning project will have a number of options on the table for financing namely,  debt, equity and project level.

Personally and this is my own opinion, I’d love to see the company bring in a project partner for say 25% of the project in return for the majority of capex with perhaps a modest debt/equity element.  At the 25% interest the partner would be getting a cool return of approx $270m EBITDA over LOM.

Low capex really is a key driver for me here…

You got high purity? you got a premium product…

Graphite pricing is nothing short of complex and is basket based considering the flake fraction sizes and purities.  There is no spot price to track which can make it difficult to keep under review.  The majority of pricing is contract based so you have to follow the market commentary to a certain extent.  

That said premium product commands premium prices and if you refer back to Armadale’s DFS you’ll see they have used the most conservative basket price of $1,179/t in their DFS when compared to other junior graphite mining companies 

Armadale’s recently published test-work had confirmed 97%+ TGC across the majority of flake fraction sizes. 

In addition to the above in Jan 2021, Armadale confirmed that CSIRO test-work on Mahenge graphite confirmed that it could be used in Li-ion batteries as follows:

“To have positive confirmation from Australia’s Commonwealth Scientific and Industrial Research Organisation that Armadale’s natural flake graphite from our Mahenge graphite project is suitable for use in lithium-ion batteries is very welcome news indeed; we are delighted to positively progress this testing collaboration with CSIRO’s world-class specialist battery team to confirm the Mahenge natural flake graphite as a premium quality product with the exceptionally high purity and characteristics necessary for the lithium-ion battery market.

This really is good news on the pricing front and should fill investors with more confidence around the numbers especially when you consider that Blackrock (a Mahenge neighbour) have partnered with POSCO a Korean battery material maker and have established a binding off-take framework with off-take partners as per below:

Armadale’s key target market will be, but not limited to the EV battery sector given that graphite is used in the anode of all lithium-ion battery combinations.  EV batteries require 99.9% graphite purity which means the higher the starting purity the less cost it is to up-scale to the battery purity.  This is sadly why some existing graphite producers targeting the battery sector have failed to achieve premium pricing, their puritues are just too low, enter East Africa!

Given India and China are dramatically reducing their synthetic graphite production due to environmental constraints and set to become net importers of graphite they’ll be looking towards East Africa to source high purity graphite, commentators agree with this.

This sets things up nicely for Armadale in fact previous test work confirmed 99.99% TGC on Armadales concentrate using conventional treatment

I like the sound of this so far, who’s managing my investment then…?

So the company re-jigged the board at the time of vending in the graphite project at which Time Matt Bull became Technical Director.  The board also consists of other Directors with legal, environmental and local African expertise.  

The company runs a lean corporate model and have kept costs extremely respectable for an AIM listed company.   The company has remained focused on getting the job done, being frugal with cash  and most importantly limiting dilution.

In fact Armadale are one of the only AIM companies I know who have successfully executed  three ‘at market’ or ‘premium’ fund-raises one after the other and at progressively higher prices and keeping dilution to a minimum.  Warrants have featured in many of these raises but at  premiums meaning further significant cash to the company.

This is exactly what I want to see as a shareholder and it’s no coincidence this has happened since Matt, a significant shareholder,  joined the company.  As evidenced by the latest RNS clearly the company has a HNWI following prepared to stump up cash.

Matt Bull himself has in excess of an 8% shareholding and notably has recently joined the board.

I’ve had the pleasure of speaking to Matt on a number of occasions since I’ve invested and he’s always been more than happy to assist with me developing a greater understanding of the project. In fact, any reasonable investment I make, I make sure I have spoken with the company.

Matt has an impressive resume having worked for Rio Tinto and having had more than one junior resource Director role.  Most notably, after Matt joined the board of VOLT resources the company achieved an uplift from $1m to $180m AUD

From my perspective I’m very comfortable with a significant share-holder with a proven track record who is aligned with shareholders looking after my investment.

Ok, like it a bit more, graphite though…?

As touched upon already, graphite has a number of end applications from battery anodes to foils, expendables and graphene. Graphene, believe it or not is now even featuring as a reusable face-mask material!

Armadale’s offering will be a straight-forward graphite concentrate that can be exported to end consumers who can do with it what they choose but significant as I’ve mentioned is high purity medium/large flakes will lend themselves well to the EV battery sector, Armadales target market.

Perhaps surprisingly when you think of EV battery metals you are immediately drawn to the likes of nickel and copper and rightly so.  They will both see huge demand from the impending EV revolution but. I’ve seen more than one chart now showing that  graphite could see the largest demand up-lift.

The winners will be those projects with low cost, high grade, high purity projects with the right flake-size distribution.  Armadale stacks up very well!


So before I highlight all the fluffy bits and why those invested  could be sitting on significant returns we need to be aware that small cap companies in general carry high risk and that macro-events can dramatically change the land-scape for any investment so don’t be throwing the kitchen sink in, manage your risk !

Now back to business…

So hopefully in this brief research note I’ve helped you understand a bit more about the Armadale proposition.

I personally see a bright future for graphite  but I do think it’s going to be a case of being very selective and by that I mean find the companies that have quality projects and the end product consumers will want. I believe potential financiers and partners will be too!

It’s good news that China has extended their subsidies for the EV sector for another two years and I think this market could see huge growth which bodes well for graphite.

Back to Armadale…

If you look back over the last couple of years of RNS you will see that Armadale really has been delivering and is very much focused on the Mahenge Liandu graphite project. Impressive delivery whilst keeping costs down and limiting dilution.

The company is now reaching what I’d expect to be a significant re-rating stage. Now the DFS has been delivered, the company should be able to press on with post DFS work-streams to bring the project to construction (hopefully this year) and we can expect, going by guidance to see binding off-takes, completion of the pre-construction engineering, securing the mining license and most importantly closing project financing which have all been sign-posted for 2021.

At £20m market cap (an uplift from the original £10m cap when I first wrote this note) I believe the company is a compelling investment given the company has published a robust DFS that exhibits excellent economics and returns and further de-risks the project.  

Market conditions and raising finance are going to be challenging for any junior mining company, there is no doubt about that, which is why a low capex by comparison to returns could see Armadale high up the pecking order when looking at debt and/or project level partners

Coupled with a very active roadmap for 2021 and beyond, I personally see this as an excellent near, short or long-term investment for whatever suits your individual investment horizon.

Food for thought…


12th June 2020Update following Optimised DFS
12 Jan 2021Update following Mahenge Test Work Results


Research materials prepared based upon my own analysis and research. Accuracy cannot be guaranteed and research notes should not be taken as investment advice. Please always do your own research.


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