Walkabout Resources (ASX: WKT, Share Price: $0.125, Market Cap: $15m) is an emerging graphite play that has implemented measured exploration, project appraisal and growth strategies. It aims to fast-track production at its Lindi jumbo graphite project in Tanzania, whilst also filing applications for Prospecting Licences in Tanzania and Namibia. It has also expanded its commodity exposure into lithium.
Walkabout during mid-January announced positive Scoping Study results for a proposed open-pit mine and graphite processing plant at its 70%-owned Lindi jumbo graphite project. The company has since released the results of a Definitive Feasibility Study (DFS) that reinforce the project’s robust economics.
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Market Significance
Whilst it’s very much early days in terms of Walkabout’s graphite and lithium adventures, the company has so far adopted a very successful and measured approach to project advancement in a relatively short space of time. The company’s flagship Lindi graphite project has recently seen the release of a maiden JORC Resource, along with the release over the past month of robust Scoping Study and Definitive Feasibility Study (DFS) results. Not surprisingly this has led to a resurgence in Walkabout’s share price, although it remains modestly-valued compared with most of its sector peers.
Announcement Detail – Lindi Definitive Feasibility Study
In our coverage of Walkabout Resources during mid-January we reported that it had announced the results of a Scoping Study for a proposed open-pit mine and graphite processing plant at its 70%-owned Lindi jumbo graphite project in southeastern Tanzania.
Encouragingly, the Scoping Study described the project economics as “highly robust”, as a result of the high-grade nature of the project and the expected premium natural flake graphite product.
Importantly too, the full Definitive Feasibility Study (DFS) that was well advanced at the time, has just been released on schedule – reinforcing the project’s robust economics.
Key DFS Outcomes:
- Elective annual production target of 40,000 tonnes graphite in concentrate
- Operating cost per tonne in concentrate estimated at US$292/t in concentrate delivered at mine gate – the second-lowest amongst its peer group and the lowest in Tanzania
- Pre-production capex of US$38.7m – the lowest capital intensity amongst peer group. Ongoing sustaining and deferred capital of US$5.6m. Payback of less than 2 years
- Pre-tax NPV10 of US$323m with Pre-tax IRR of 97% highly robust
- Project Pre-tax NPV10 of US$133m and Pre-tax IRR of 50% at current 10-year low prices
- Pre-Tax IRR of 94%
- Post-Tax IRR of 85.9%
- Operating Margin of 79%
- Mine life in excess of 20 years
- Product basket price of US$1,687/tonne in concentrate using reasonable assumptions for future pricing
- Mill head feed projected at +17% TGC – leading to low working costs and capital requirements
- Project almost completely de-risked – with built in capacity optimisation and expansion opportunities in the resource and the process plant
Technical Significance
The finalisation of the DFS is a milestone event for Walkabout. It simultaneously allows the company to actively pursue funding options for fast-tracked development, whilst also reducing risk and boosting project confidence. The DFS financial modelling has been carried out on a 100% basis because Walkabout will move to acquire the remaining 30% upon project development.
The Study scope was focused 100% within the existing JORC 2012 Measured and Indicated Resources. The Study has found the Lindi Jumbo deposit to technically and financially viable, with no immediate or obvious impediments to mining, even at current 10-year low prices.
The company believes the very high-grade nature of the Mineral Resource provides a significant competitive advantage in capital and operating cost reduction and also in metallurgical performance through the production of a premium graphite product which is able to secure premium sales prices in a highly competitive market.
As a result of the forecast high growth in demand for natural large-flake graphite and the premium nature of the product produced during test work, the company has elected to fast-track the project to production.
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The development philosophy is underpinned by the unique and very high-grade nature of three discrete and visually distinct domains within the Measured and Indicated Resource. Comprehensive mining modelling indicate that these may be extracted with minimum contamination from lower-grade associated domains, such that a high-grade mill-feed in excess of 17.5% TGC can be delivered for the first three years – along with a life-of-mine average mill feed grade above 16% TGC.
As such, the potential high-grade feed favourably impacts capital and operating margins, as well as mitigating potential market risks that may arise within the international graphite market.
Walkabout believes a second pillar of design needs to be the production of a premium product, which could be in short supply even in a highly-contested supply environment. The company has managed to achieve this with repeated test-work that has returned highly favourable ratios of the high-value, larger graphite flakes especially those in the Jumbo (+300μm) and Super Jumbo (+500μm) categories.
This should allow the company to negotiate higher-than-average prices even during periods of softer pricing due to potential oversupply of general natural flake graphite product smaller than 300μm.
The third pillar of the design philosophy is to not target too large an operation, increasing capital and operational risk during the early stages. It would be much more prudent to increase production from a stable economic base than attempt too large an entry into the market which may be oversupplied with smaller flake natural “vanilla” graphite.
Next Steps
Walkabout currently owns 70% of the project, with an option to acquire the remaining 30% balance for a once-off payment of US$1 million for each of the four licences. The Lindi jumbo mine project is located within just one of the licences, PL9992/2014 and the company intends utilising project capital to purchase the outstanding 30% of this licence. The stature of the other licences will not be affected.
The project has been divided into nine Work Breakdown Structure (WBS) elements on a functional basis and the company has prepared fully-scoped enquiry documents for each of these areas and submitted them to appropriate service providers in each area located in Tanzania, South Africa and Australia. The combined detailed responses of these service providers input cost, schedule, manning and methodology data as direct input for the DFS.
Immediately upon assessing these responses, the company enters into further discussions with the preferred suppliers in regard to the nature, size and timing of potential contracts. The company’s preferred contracting model is Fully Outsourced-Build-Own-Operate where possible.
This management system will allow initial project planning and logistics to eventuate under an accelerated timescale. Simultaneously with the direct study and construction initiatives the company is engaging in product and project marketing in various locations and with various existing industry participants around the world, with these discussions remaining ongoing.
In terms of Resource upgrade potential, the Mineral Resource encompasses less than 1% of the tenement package area of 325 sq km – meaning there is sizeable potential for further upgrades. Previous work across the tenement package has returned several surface samples with graphite assays in excess of 10% TGC and up to 23% TGC. These areas will be further explored, in conjunction with the VTEM data to source further high grade, large flake deposits within the tenement package.
Funding Options
The company believes that reasonable grounds exist to assume that funding for the project will be will be available. The company is currently in discussions with several parties regarding funding options for the project, although the details of these discussions cannot be disclosed at this time for commercial reasons. No material or binding Agreements for funding or product off-take have been signed at this time.
Walkabout believes that the highly-robust economics, relative efficient capital intensity, premium products produced, and project size and approach will all facilitate successful fund raising for the project. However, successful funding remains a key risk associated with all proposed project developments.
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Summary
We initiated coverage of Walkabout Resources during April 2016 around $0.007. The stock has since undergone a 1-for-4 rights issue priced at $0.004 and 23-for-1 share consolidation.
he Lindi graphite project is an exciting proposition, as the multiple and discrete domains of the JORC Resource has the proven flexibility and robustness to support a potential mining operation. Optionality is added by the potential for mining of substantially higher-grade zones during periods of economic downturn, as opposed to being locked into a grade of around 5%.
The board’s development strategy envisages a focused, modest, low-risk approach to exploration and potential mine development. This is intended to prevent large expenditure incurred on resource size at the expense of product quality. The international graphite market is limited in nature and there is an ongoing surplus of graphite exploration. This would imply that quality is much more important than quantity.
Walkabout’s market value is modest and it is progressing funding discussions with respect to the purchase of the remaining 30% balance of the Lindi project, as well as funding for project development. The company presented this week at the 121 resources conference in Cape Town and I understand the story has been very well received.
