Weaknesses:
? We still have a great deal to learn about the Albany deposit including size, grade, and overall costs. No existing NI 43-101 report and no PEA leave us guessing at economics
? Caustic bake is unproven on a large scale. More detail on costs is necessary
? If ZEN is a takeout target, who would the suitor be at such a high valuation with so many unknowns?
? Many of the large end users of graphite such as GrafTech or SGL Carbon have reported lackluster financial results recently bringing into question their appetite for a near-term acquisition
? Despite the large size of the synthetic market, can ZEN prove to end users that they can produce a product suitable for highly specific end uses?
? Which type(s) of graphite will ZEN be competing against? Primary synthetic? Secondary synthetic? Sri Lankan Vein? Natural Flake? Each of these has their own supply and demand dynamic which must be accounted for
Opportunities:
? There is broad consensus that graphite demand is set to increase ahead of supply in coming years
? Academic research into the deposit could yield as-yet-unrealized markets
? ZEN’s share price is head and shoulders above its peers. The company should raise more money NOW regardless of immediate needs
? With the Albany project open at depth, there is room for discovery surprise
MORNING NOTES 9 OF 10 9/2/2013
Threats:
? Sri Lankan expansion
? If ZEN is looking to compete with or replace Sri Lankan graphite, this is an extremely small market (5,000 tpy). Will revenue generated in this segment of the market be enough to support an entire operation?
? Though manufacturing and industrial production data around the world looks to be increasing, a renewed economic downturn could put downward pressure on graphite prices
? Failure to procure an off take or strategic investor could lead to excessive share dilution
? In many ways, ZEN is "priced for perfection". With so much success to date, a bad or mis-interpreted press release could harm the share price
Conclusion - What Should ZEN Do Now To Maximize Shareholder Value?
In many ways, ZEN is in an enviable position. The questions surrounding the company aren’t related to financing or what the company thinks they have in the Albany project. Most of the junior mining companies in the graphite sector today are broke and know little about their deposits.
The real question for ZEN is – what do they do now? At this juncture, it would seem that buying shares in a company with a market cap $160,000,000 greater than all but one of its next competitors is questionable. There is a great deal of information we don’t know about the deposit including size, grade, and economics. We can certainly make educated guesses, but despite the looming catalysts (NI 43-101 report, enhanced metallurgy, PEA in 2014) it seems that there is a great deal of downside risk here.
ZEN is an eventual take out candidate if the company can prove out the deposit and also prove that caustic bake can be executed successfully on a large scale. That said, I view it as unlikely that a potential suitor will emerge anytime soon. ZEN’s current market cap of $216,000,000 would need to be swallowed along with the eventual capital expenditure to build a producing mine at Albany. I assume a cap ex of $175,000,000. Add to this a 20% takeout premium for ZEN shareholders and the total cost is approaching $440,000,000. Recent statements from companies like GrafTech or SGL Carbon lead me to believe that they are retrenching rather than considering acquisitions.
Dilution isn’t What You Think it Is
The junior resource market we are experiencing today just doesn’t support this type of a deal, so ZEN must push forward and continue to surprise to the upside. Along with this, ZEN should raise a significant amount of capital – as much as possible – while the share price is at its current levels.
Raising $50,000,000 at $4 per share would add 12,500,000 shares to the company’s common share structure. With a current fully diluted total of 60,000,000 shares, this would imply dilution of approximately 21%. If ZEN can continue its share price appreciation and return high percentage returns, the 21% dilution seems minimal by comparison and the company is more than fully funded. MORNING NOTES 10 OF 10 9/2/2013 |
