BRES shares are admittedly highly speculative, but a speculative position could prove lucrative for small-cap position investors.
Blencowe Resources (LON: BRES) shares constitute my fourth and final small-cap graphite stock to consider for 2023. Like many small caps on the UK’s most volatile index, the sub-£10 million graphite explorer has sent long term investors on a rollercoaster ride since its recent IPO.
BRES shares rose to a record 9.13p in mid-February 2021, gradually fell to 3.15p in mid-October 2022, recovered to 6.65p in mid-November 2022, and now stand at 4.74p. This is a penny stock not for the faint-hearted, and for perspective, the stock fell by 10% in a single day’s trading yesterday.
However, my overall positive experience with small-cap exploratory miners means I have a relatively healthy appetite for risk. There are few London-listed graphite stocks, and demand for battery materials will only accelerate as the battle for green revolution raw materials intensifies.
And while there are no guarantees, BRES shares look attractive as one part of my graphite-focused quartet.
Blencowe Resources: investment case for 2023 BRES owns a 100% interest in the Orom-Cross Graphite Project, which it quietly acquired back in April 2020 in the most fearful days of the pandemic. Located in Northern Uganda, the tenements cover some 520,000 hectares, 6km from Orom and 75km Northeast of Kitgum.
Historical exploration demonstrates this is a sizeable graphite project stretching over 19 kilometres long and 2 kilometres wide, with easily accessible graphite, up to 75% of which is premium jumbo-large size.
BRES has conducted two diamond drilling programmes, one of 2,200m and the second of 2,000m to deliver a JORC 2012 code standard indicated resource. It’s also completed a pre-feasibility study on the initial expected 14 years of mine life in July 2022, including operations, processing, logistics, and sales.
Further, the company has commenced its definitive feasibility study, with a target to complete by year-end calendar 2023. Ultimately, Blencowe plans to make a decision whether to mine in H1 2024, provide funding options in H2 2024, and commence first production in 2025. Again, this is not a share for short term traders.
The company released full-year results last Friday with numbers accurate to 30 September 2022. As it remains in the feasibility stage, it derived no income in the year, but ‘continues to monitor the loss before tax to ensure the continued viability of the Group.’
This loss before tax came in at £1,085,474, an increase from the £694,726 of 2021, with the vast majority derived from exploratory activities at Orom-Cross. The company raised £2,628,748 in the financial year and was left with a cash balance of just £346,994.
In late October, the inevitable occurred, raising an additional £750,000 after securing additional investment from three strategic investors. It placed 18.8 million new shares at 4p each, with one warrant for every two shares exercisable at 8p for three years from admission. For balance, this is a share price headwind to watch for when the project nears production.
Jangada Mines invested £610,000, increasing its holding from 2% to 9.5%, and RAB Capital and JUB Capital invested pro rata to their existing 10% and 8.2% shareholdings.
Resource details
The JORC 2012 Mineral Resource currently stands at 24.5Mt of graphite at a 6.0% in situ average grade. This result came from exploration on circa 1-2% of the estimated overall Orom-Cross deposit, illustrating just how much graphite there is at site.
Metallurgical work shows that the Orom-Cross large flake graphite is upgradable to a 96-97% purity concentrate when combining a composite mix of the projects two deposits (Northern Syncline and Camp Lode). This should allow BRES to create and sell the 99.95% spherical purified graphite used in lithium-ion batteries.
Positively, the pre-feasibility study showed that the mine should deliver low operating costs of (US$499/t FOB port), high weighted average selling price (US$1,307/t) and from these very healthy margins which delivered an NPV8 of US$482M and an IRR8 of 49%.
However, the capex expenditure required to build an initial plant and infrastructure stands at $62 million. Blencowe is now working through the possible funding options as part of the definitive feasibility study, with further updates to come through 2023. But overall, it plans to establish itself as the owner of a world-class, high quality graphite asset.
Recent developments
Blencowe originally envisaged building a small pilot plant on site which could start-up small scale operations to provide product for pre-screening, to help become pre-qualified for sales contracts including the funding needed to scale up.
However, it’s pivoted strategy to copy other explorers which have found success in sending bulk samples to be processed in existing pilot plants in China, with binding contracts forthcoming on the results. For context, China represents 95% of the end market for graphite sales, so this is no bad plan.
On 16 January, BRES announced it had sent 20kg of concentrate by air to experts at the Wuhan University of Technology to begin immediate preliminary testing ahead of the soon to be sent 100kg bulk samples. An additional 5kg was sent to US-based firm American Energy Technologies for further testing, and to confirm it can be upgraded to a battery-grade product.
Executive Chairman Cameron Pearce notes that ‘there is only testing as required from the OEMs themselves to verify all data and if successful thereafter we can move to offtake agreements. We are confident that our Orom-Cross concentrate will be verified.’ It seems likely that BRES will require capex funding as part of any offtake agreement, so a JV with one of the Chinese majors may be agreed in due course.
Interestingly, First Equity believes that the company is severely undervalued, will attract further institutional investors seeking exposure to the battery-grade graphite market, and has put a 64p price target on the stock.
As a caveat, the company has already warned it is two years from production, and a lot can go wrong between now and then. But a speculative position in this London-listed graphite company could prove lucrative for those prepared to ride the share price rollercoaster.
This article has been prepared for information purposes only by Charles Archer. It does not constitute advice, and no party accepts any liability for either accuracy or for investing decisions made using the information provided.
Further, it is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.
Sounds a good assessment and worth a long hold.