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EcoGraf (EGR.ASX) 10 February 2020

EGR owns IP for anode material for lithium ion batteries

See Page 20 for Disclaimer and Disclosures 10 February 2020

Price ■ EGR has developed its own patented process to produce Spherical Purified Graphite (SPG), the key input for the anode of a Lithium ion Battery.

■ EGR’s process is lower cost than current (Chinese) production due to higher recovery to SPG from graphite and removal of HF acid.

■ EGR’s process is environmentally friendlier than current production; it does not use HF acid, which is used in all current production.

■ EGR’s first operation will be in Kwinana; Beer & Co is very positive on the value of EGR’s Intellectual Property.

8.2c

Risked, NPV based Valuation

20c – 46c (including IP)

Commodity

Battery anode material

Snapshot Market Cap $24m

Cash on hand (Dec. 2019) $0.8m

Shares on Issue 294m

52 Week High 15.5c

52 Week Low 5.8c

1 month / 6 month VWAP 7.3c /8.3c

EGR : daily share price v. value traded

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EGR listed on the ASX in October 2010 to explore the Kibaran nickel belt in Tanzania. It re‐focussed on graphite in May 2012, producing a scoping study on the Epanko project in July 2013.

As part of the development concept, EGR began a study to produce Spherical Purified Graphite (SPG). The results of a scoping study were announced in August 2015.

Progress on Epanko slowed after the Government in Tanzania changed in the October 2015 elections. EGR continued to develop its own IP to produce SPG, using simple acids, rather than Hydro‐Fluoric acid.

After 2 years of piloting, including 80 samples with potential customers, EGR announced the results of the DFS in September 2019.

Author : Pieter Bruinstroop [email protected]

EGR’s patented process to produce battery anode material

All battery anode material is produced in China. EGR’s process is :

More environmentally friendly, as it does not use HF acid, which is used by all Chinese producers; and

Lower cost, due to higher recoveries to SPG and the removal of HF acid.

EGR has been operating a pilot plant for more than 2 years now :

More than 80 samples have been sent to various potential purchasers, demonstrating process quality and control;

These samples have varied with the specifications required by differing manufacturers;

EGR’s process has been shown to work on a range of graphites.

Kwinana plant, stage 1, to be producing by in 2021

The DFS determined a project capital cost, for stage 1, of US$ 22.8m to produce 5,000t/yr of SPG, at a cost of about U$ 2,500/t, and sell for about US$ 4,000/t on average, and up to $4,400/t for SPG10.

Further 5,000t/yr trains can be added when required, with each extra train having an extra capital cost of US$ 16.4m.

Strong and growing Demand

Based on analysis by Benchmark Minerals Intelligence, based on announced plans for mega‐factories to produce LiBs, demand for SPG in LiBs is expected to rise from about 290kt in 2020 to over 1.0Mt by 2028.

In addition, demand will move to finer (SPG10 and SPG15) sizes, which is beyond the potential of much existing production capacity.

Beer & Co is very positive on the value of the EGR IP

EGR’s process is lower cost, environmentally superior, able to use a range of graphites and produce high specification product.

EGR’s process now has 2 years history of trialling and testing.

EGR’s Kwinana plant will be first outside of China and can be easily replicated in other countries.

Beer & Co’s base case valuation is 20c / share

Rising to 46c if valuing the potential use of EGR’s IP in further projects.

This report was produced by Beer & Co which is an authorised representative of Melbourne Venture Securities, which holds AFSL No. 224 313. If you do not wish to receive our research, email [email protected] with “unsubscribe”.

Beer & Co research is available ONLY to investors who comply with one of the provisions of s708 of the Corporates Act. If you qualify and wish to receive, free of charge, Beer & Co research, please register at http://beerandco.com.au/all‐research/. Beer &

Co does not provide any advice or recommendation.

EcoGraf (EGR.ASX)


EcoGraf

Figure 1 shows Beer & Co’s base case, risked valuation of EGR.

Figure 1 : Beer & Co.’s valuation of EGR

10‐Feb‐20

AUD m risk : 100% Product per share

SPG / EcoGraf 85 % 123 105 15.3 c 16.5 c

EcoGraf IP 50 % 312 156 22.8 c 24.5 c

Epanko graphite mine 80 % 5 4 0.6 c 0.9 c

Corporate 100 % (27) (27) (4.0c) (4.1c)

franking credits 51 % 35 18 2.6 c 2.8 c

Equity Raisings 100 % 22 22 3.3 c 2.8 c

Cash / debt 100 % 1 1 0.2 c 0.6 c

TOTAL $ 473m $ 280m 41.0 c 44.0 c

293 m F P O shares 1.1 m Options

391 m to be issued 0.0 m exercised

discount rate = 12.0 % 30 June 2019

Source : Beer & Co. estimates

EcoGraf has developed its own process to produce high quality Spherical Purified Graphite (SPG), which is used directly in the manufacture of Lithium ion Batteries.

Beer & Co.’s risked valuation of EGR’s 20kt/yr Kwinana project is more than 2x the current share price.

Beer & Co believes there is significant extra value in EGR’s IP

Figure 1 highlights

Prior to its name change, EGR was recalled as being a graphite project in Tanzania, but Figure 1 shows that Beer & Co.’s valuation of the Epanko project is not significant. There are 4 reasons why the Epanko project is not seen as a highly valued project :

(i) Graphite prices are now lower than 3 years ago, as shown in Figure 2; (ii) EGR’s return has been damaged by the new Government now taking a 16%

free‐carried interest from the time project debt has been re‐paid; (iii) As a result of (i) and (ii), Beer & Co has deferred Epanko’s development

until the time when EGR will not need to raise extra equity to develop it, as EcoGraf generates a much better return for shareholders; and

(iv) EGR does not need graphite from Epanko for its EcoGraf project, and other projects have been recently announced, so that development of Epanko remains an option for EGR if the supply of graphite becomes constrained at some future time;

Even if zero value is given for EGR’s patented technology to produce Spherical Purified Graphite (SPG), Beer & Co.’s risked valuation is much greater than the current share price; and

EGR has now invested in the development of its own technology to produce SPG and this technology has value much greater than a single project.

Figure 2 : Graphite prices now lower Figure 3 : Impact on Epanko value

USD/t fines medium Large Jumbo average

DFS case 823 1,093 1,282 1,864 1,215

Beer & Co 600 950 1,050 1,700 1,011

AUD m BFS case optimised Beer & Co

Project 92 41 20

EGR share 82 34 15

NPV of dividends 36 13 5 Source : Beer & Co. estimates Source : Beer & Co. estimates

Beer & Co believes there is significant extra value in EGR’s IP

Conclusions

EcoGraf’s focus is the delivery of its Kwinana project to produce battery anode material at a lower cost and in a more environmentally friendly manner than existing operations, all of which are based in China.

The first, 20kt/yr project, gives a valuation for EGR that is more than 2x the current share price, while there is significantly greater potential value from EGR’s patented technology than only a single project.

EcoGraf (EGR.ASX)


EcoGraf Kwinana Project

Introduction

The EcoGraf process uses graphitic concentrate, which is the saleable product of the mining and beneficiation process, and transforms the 94% ‐ 96% carbon material into material that is able to be incorporated into the graphite anode of a Lithium ion Battery (LiB), which :

Is rounded in shape, to a sphere;

Purified, to about 99.95%, or higher, carbon.

There is no single standard for Spherical Purified Graphite (SPG), with small variations in :

Purity, and also which impurities that comprise the up to 500ppm that is not carbon;

The degree of “sphericalness” (ie. how round);

The variability across individual grains of SPG; and

The average grain size and the distribution in grain size.

The highest value product is SPG 10, which means a median particle size of 10µ in diameter, as this small size is able to deliver a higher power from the battery than larger grains, such as SPG 25.

Feasibility Studies

In August 2015, EGR announced the results of a scoping study into the production of battery anode material, as a downstream development of its Epanko graphite mining project. This was followed by announcements of :

The results of a successful Feasibility Study, on 27 September 2016;

An optimisation study, on 3 August 2018, showing that EcoGraf process could be successfully applied to a variety of graphitic concentrates, not just Epanko;

The grant of a patent, on 8 December 2018, on the EcoGraf process.

On 5 September 2019, EGR announced the results of an updated detailed engineering study of a plant sited at Kwinana, carried out as part of the due diligence of the prospective debt financiers. The results of that study included :

A capital of US$ 22.8m for stage 1, to produce 5,000t/yr of SPG, all of which will be SPG 10 and SPG 15;

A further US$ 49.2m to expand this plant by 15,000t/yr, to 20,000t/yr;

Average unit cost of US$ 2,275/t of SPG, at the 20kt/yr volume; and

Producing an annual EBITDA of US$ 35m.

EGR is presently working on the finance for the Kwinana plant and expects to produce first graphite in 11 months after the start of on‐site construction.

The key to securing finance is the execution of (bankable) sales contracts.

EGR believes this is imminent as :

Over 80 samples have been supplied over a period of 2 years, with some potential customers trialling firstly EGR’s generic SPG 15 product and then secondly EGR producing to the required specification of a number of potential customers; and

There is very strong projected growth in demand for LiBs, and particularly for LiBs with higher energy density.

EcoGraf (EGR.ASX)


Beer & Co.’s financial analysis

Figure 4 shows the timing of the project that Beer & Co has assumed for this analysis.

Figure 4 : Beer & Co.’s assumptions on timing of EcoGraf Kwinana project Sep 2019 Dec 2019 Mar 2020 Jun 2020 Sep 2020 Dec 2020 Mar 2021 Jun 2021 Sep 2021 Dec 2021 Mar 2022 Jun 2022 Sep 2022 Dec 2022 Mar 2023 Jun 2023 Sep 2023 Dec 2023 Mar 2024 Jun 2024 Sep 2024 Dec 2024 Mar 2025 Jun 2025 Sep 2025 Dec 2025 Mar 2026 Jun 2026 Sep 2026 Dec 2026

ECO GRAF

Train #1

Samples

Sales agreements

Permitting

Finance

Construction US$ 22.8m 35 % 35 % 30 %

Commissioning 50 % 50 %

Product sales 5,000t/yr 20 % 50 % 80 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %

Train #2

Sales agreements

Finance


Commissioning 80 % 20 %

Product sales 5,000t/yr 35 % 85 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %

Train #3

Sales agreements

Finance


Commissioning 100 %

Product sales 5,000t/yr 65 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %

Train #4

Sales agreements

Finance


Commissioning 100 %

Product sales 5,000t/yr 75 % 100 % 100 % 100 % 100 % Source : Beer & Co. estimates

Figure 4 shows that Beer & Co has modelled the Kwinana project as a progressive start‐up, with

Stage 1 securing sales agreements by June 2020, enabling construction to begin later in 2020 and first product about 12 months later, taking about 12 months to ramp up to full production rate;

Stage 2 securing sales contracts only after stage 1 has been successfully commissioned with (debt) financing secured only after a period of operation at the 100% rate

too many expansion projects get into serious difficulty when the promoters are focussed on the expansion rather than getting operations stable first

Stage 3 and Stage 4 are committed to only when the previous stage has achieved a satisfactory rate of operation.

Figure 5 shows the operating outcomes of Beer & Co.’s projections.

Figure 5 : Outcome of Beer & Co.’s projections 2020‐21 2021‐22 2022‐23 2023‐24 2024‐25 2025‐26 2026‐27 2027‐28 2028‐29 2029‐30 2030‐31 2031‐32 2032‐33 2033‐34 2034‐35

PSG sold 0 t 1,875 t 5,000 t 7,750 t 12,063 t 18,438 t 20,000 t 20,000 t 20,000 t 20,000 t 20,000 t 20,000 t 20,000 t 20,000 t 20,000 t

by‐product fines 0 t 2,116 t 5,436 t 8,438 t 13,137 t 20,072 t 21,744 t 21,744 t 21,744 t 21,744 t 21,744 t 21,744 t 21,744 t 21,744 t 21,744 t

Revenue US$ 0.0m US$ 8.4m US$ 22m US$ 35m US$ 54m US$ 83m US$ 91m US$ 91m US$ 92m US$ 92m US$ 92m US$ 93m US$ 93m US$ 94m US$ 94.0m

Graphite cost US$ 0.0m US$ 3.0m US$ 8m US$ 12m US$ 18m US$ 28m US$ 30m US$ 30m US$ 30m US$ 30m US$ 30m US$ 30m US$ 30m US$ 30m US$ 30.4m

Conversion costs US$ 0.0m US$ 4.8m US$ 9m US$ 13m US$ 19m US$ 28m US$ 30m US$ 30m US$ 30m US$ 30m US$ 30m US$ 30m US$ 30m US$ 30m US$ 30.3m

EBITDA US$ 0.0m US$ 0.6m US$ 5.9m US$ 9.8m US$ 17m US$ 27m US$ 30m US$ 31m US$ 31m US$ 31m US$ 32m US$ 32m US$ 33m US$ 33m US$ 33m

Capital Costs

Train #1 US$ 22.8m

Train #2 US$ 16.4m

Train #3 US$ 11.5m US$ 4.9m

Train #4 US$ 16.4m

Net Operating Cashflow (US$22.8m) US$ 0.6m (US$10m) (US$2m) (US$4m) US$ 27m US$ 30m US$ 31m US$ 31m US$ 31m US$ 32m US$ 32m US$ 33m Source : Beer & Co. estimates

Figure 5 shows the operation increasing its annual EBITDA to US$ 35m. It also shows that cashflow impact of the capital expenditure.

In figure 6, Beer & Co has assumed relatively favourable project finance terms, reflecting the “green” benefits of :

Supplying product for use in Electric Vehicles; and

A production process that is better for the environment than existing processes.

Beer & Co has assumed an interest rate of 6% and a term of 5 years to re‐pay, from the time the project is substantially commissioned.

EcoGraf (EGR.ASX)


Further, Beer & Co has assumed a debt level of 65% for Stage 1 and 100% for each of the subsequent stages, as stage 1 is then in operation, generating cash and offering security for the further debt.

Figure 6 shows the resulting cashflows.

Figure 6 : Beer & Co.’s net cashflow projections

2020‐21 2021‐22 2022‐23 2023‐24 2024‐25 2025‐26 2026‐27 2027‐28 2028‐29 2029‐30 2030‐31 2031‐32 2032‐33

EBITDA US$ 0.0m US$ 0.8m US$ 6.4m US$ 10.7m US$ 18.2m US$ 29.1m US$ 32.3m US$ 32.7m US$ 33.1m US$ 33.5m US$ 33.9m US$ 34.3m US$ 34.7m

Net project finance (US$8.0m) US$ 0.0m (US$9.3m) (US$9.9m) (US$11.8m) (US$9.2m) (US$11.1m) (US$9.0m) (US$7.6m) (US$5.2m) (US$3.3m) (US$0.1m) US$ 0.0m

Net Taxes US$ 0.0m US$ 0.0m (US$0.2m) (US$0.9m) (US$2.1m) (US$3.8m) (US$4.9m) (US$5.1m) (US$5.2m) (US$5.4m) (US$5.5m) (US$5.7m) (US$6.2m)

total (US$8.0m) US$ 0.8m (US$3.0m) (US$0.1m) US$ 4.3m US$ 16.0m US$ 16.3m US$ 18.7m US$ 20.3m US$ 22.9m US$ 25.1m US$ 28.4m US$ 28.5m Source : Beer & Co. estimates

Figure 6 shows that Beer & Co projects that EGR will need to raise US$ 11m in new equity :

US$ 8m (being 35% of US$ 22.8m) for stage 1, plus some extra working capital; and

A further US$ 3m to develop Train 2.

However, by staggering the start‐up, EGR limits the amount of new equity it needs to raise, enhancing value to its shareholders.

Spherical Purified Graphite (SPG)

As shown in Figure 7, there are 8 steps from the mining of graphitic ore to a graphite anode used in a Lithium ion Battery (LiB).

Figure 7 : From graphitic ore to lithium ion battery anode

Source : EcoGraf November 2018 Presentation, Beer & Co

The first 3 steps are executed at the mine site, from the mining of ore grading generally 5% ‐ 15% graphitic carbon and results in the production of a graphitic concentrate, usually grading 94% ‐ 96% graphitic carbon.

The flowing stage, referred to in Figure 7 as SPG production, involves :

Micronisation of flakes of graphite, which is grinding generally small flakes of graphitic carbon into smaller sizes;

Spheronisation, which is turning the flakes into round balls, as shown in Figure 7; and

Purification, upgrading from 94% graphitic carbon in the feed, up to 99.95%

or in the EcoGraf process, up to 99.98% graphitic carbon.

EcoGraf (EGR.ASX)


Figure 7 shows the change from flakes of graphite into balls (spheres), and Figure 8 shows the final step in the manufacture of the anode for a LiB, which is the coating of the SPG and then its application to copper foil.

Figure 8 : lithium ion battery anode

Source : EcoGraf March 2019 Presentation, Beer & Co

Advantages of the EcoGraf Process

Figure 7 shows 3 steps in the production of PSG, of which the first 2, Micronisation and Spheronisation, use off‐the‐shelf hardware.

EcoGraf’s patent relates to the purification process and the chemicals used.

In Beer & Co’s view, the EcoGraf process presently has 5 clear advantages over present operations producing SPG.

Advantage 1 : NOT in China

At present, all SPG is produced in China. There are presently 2 megafactories producing LiBs in Europe, and Figure 9 shows that there are 3 planned to being production in 2020 and one each in 2021 and 2022, and 6 more in various stages of planning, including 6 expansions.

Figure 9 : LiB megafactories in Europe

Source : EcoGraf February 2020 Presentation, Beer & Co

The German Government has announced €1.0B (ie. $A 1,600m) to develop the systems required to support the manufacture of Electric Vehicles.

The EcoGraf process is suitable for use in Europe, while other processes may have difficulty in getting projects approved for environmental reasons.

There is also a potential geo‐political advantage in not being a Chinese process.

Advantage 2 : Environmentally friendlier than existing processes

Existing operations in China use Hydro‐Fluoric acid (HF) as their purification agent. This is because HF is the only material that is able to remove silica, which is a component of the graphite mined and hence graphitic concentrate produced in China.

EcoGraf (EGR.ASX)


HF is highly corrosive, being used to etch glass and silicon wafers. It is also a powerful contact poison, able to penetrate tissue, so poisoning can occur through exposure of skin or eyes, or when inhaled. However, symptoms of exposure may not be immediately evident and HF interferes with nerve function so that burns may not initially be painful.

Effective disposal of HF is difficult and expensive.

Beer & Co conjectures that, if the EU has a choice, it will ban the sale of Electric Vehicles that use LiBs for which the SPG has been manufactured using HF.

Advantage 3 : Lower Cost

As well as the cost of the chemicals used, the other major determinant of cost is the recovery from graphite feedstock to SPG product.

To produce 20kt/yr of SPG, the EcoGraf process requires about 43,500t of graphitic concentrate grading 95% graphitic carbon. In doing so, the process produces about 21,750t of by‐product fines and achieves a total saleable carbon recovery of 96.8%.

The by‐product fines are sold for about the same price as the feed‐stock is purchased, though costs for double‐handling are incurred.

The EcoGraf process requires less feed‐stock for each unit of SPG produced, which drives its cost advantage, which is shown in Figure 10.

Figure 10 : EcoGraf cost advantage Figure 11 : HF cost dis‐advantage

Source : EcoGraf Sept. 2019 Presentation, Beer & Co Source : EcoGraf Nov. 2019 Presentation, Beer & Co

Further, as shown in Figure 11, the EcoGraf process does not have its margins consumed by rising prices for HF, with 250kg of 55% HF required for 1,000kg SPG.

Advantage 4 : Higher Quality, Chemical Specification.

The standard grade for SPG is 99.95% graphitic carbon. The EcoGraf process produces 99.98% graphitic carbon.

In other words, the material that is not graphitic carbon is

500ppm for standard SPG; and

200ppm, or only 40% of the standard, for EcoGraf SPG.

Figure 12 shows that SPG produced by the EGR process has significantly lower levels of all key impurities than the standard.

Figure 12 : Specifications

standard EcoGraf

Fe 15 ppm 7.1 ppm

Ni 6 ppm 5.0 ppm

Zn 5 ppm < 0.1 ppm

Cr 5 ppm 0.3 ppm

Al 10 ppm 6.3 ppm

Ca 10 ppm 5.9 ppm

Cu 5 ppm 0.3 ppm

S 20 ppm

Si 20 ppm 12 ppm Source : EGR Sept 2019, Beer & Co

Lower levels of impurities become more important as the energy density of LiBs continues to increase.

EcoGraf (EGR.ASX)


Advantage 5 : Higher Quality – Physical Specification

To accommodate increasing energy density, smaller sizes of SPG are required as the smaller the sphere, the less space there is between spheres and so more carbon which is able to hold energy.

Much of the existing production is for SPG 25 and SPG 20; ie. SPG with a ball size of 25µ (ie. 25/1000 of a millimetre) and 20µ.

EcoGraf production has been geared to SPG 15 and SPG 14.5, with some SPG 10. This has significant revenue advantages as shown in Figure 13 which highlights the price premium for smaller product.

Figure 13 : Pricing of SPG 10, SPG 15 and SPG 25

Source : EGR Presentation, March 2019, Benchmark Minerals Intelligence

Figure 14 shows that EcoGraf has a tighter distribution range than that required to meet specification, while having the average size as required for its SPG 15 product.

Figure 14 also shows that the EcoGraf product has a higher density than the minimum standard, which determines the energy able to be stored.

Figure 14 : Specifications

standard EcoGraf

d10 > 9 µ 10 µ

d50 14.5µ ‐ 15.5µ 15 µ

d90 < 25 µ 23 µ

Density > 0.93 g/ml 0.99 g/ml

Moisture > 0.2 % 0.1 %

SSA < 7 m2/g 7.4 m2/g Sources : EGR ASX of 16 August 2019, Presentation November 2019, Beer & Co.

Demand for SPG

While graphite has a wide range of uses, SPG is used only in the production of the anodes for LiBs.

Anodes are produced using a mix of natural and synthetic graphite, though it is expected that, over time, the proportion of natural graphite will increase.

Currently, about 500g of SPG, plus 500g of synthetic graphite is required for 1kWh of LiB capacity. To produce 500g of SPG requires about 1,000g of carbon.

Figure 15 shows projections made by Benchmark Minerals Intelligence over the last 12 months of the growth in demand for LiBs. The data for Figure 15 comes from announcements made by car producers and LiB producers of mega (and giga) factories to be built; in other words, the projections are based on objective evidence

EcoGraf (EGR.ASX)


Figure 15 : Growing demand for LiBs for Electric Vehicles

0

500

1,000

1,500

2,000

2,500

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

Nov. 2018 Feb. 2019 Apr. 2019 Jun. 2019 Aug. 2019

Source : Benchmark Minerals Intelligence, “World Tour”, September 2019, Beer & Co

There are 2 important pieces of information shown in Figure 15 :

BMI has been forced to revise its estimates upwards consistently, each 2 to 3 months, so that the projection for 2028 has increased by more than 50% in this 12 month period, from about 1,310GWh in to about 2,020 GWh

Some intermediate years have had their estimates revised more significantly upwards, showing that the growth is not weighted to some future time, but is in time frames relative to investment decisions today; and

The corresponding demand for SPG is expected to grow from about 145,000t in 2018 to nearly 800,000t by 2025, and over 1,000,000t by 2028.

Also, as illustrated by Figure 9, significant growth is expected outside of China which presently accounts for over half of all global EV production.

Value of EcoGraf technology

Outline

For anything to be valuable, it is necessary that there be demand for that product and also that the vendor is able to attract a price that is not beaten up in competition.

EcoGraf has a patent over its purification process, so it is able to protect its value.

EcoGraf’s process has many advantages, as detailed in the previous section.

There is projected to be very strong demand growth for SPG, as shown above, and also many 20kt/yr plants, as outlined by EGR, will be required each and every year, even if a high proportion of growth is in China.

Beer & Co.’s valuation

Figure 6 showed the net cashflows Beer & Co expects EcoGraf to generate from its Kwinana operations and Figure 16 shows the annual cashflows expected to be generated.

Figure 16 : Net cashflows generated over time by EcoGraf operations

2020‐21 2021‐22 2022‐23 2023‐24 2024‐25 2025‐26 2026‐27 2027‐28 2028‐29 2029‐30 2030‐31 2031‐32 2032‐33 2033‐34 2034‐35 2035‐36 2036‐37 2037‐38 Terminal

($A 11.4m) $A 1.2m ($A 4.3m) ($A 0.2m) $A 6.1m $A 22.9m $A 23.3m $A 26.7m $A 28.9m $A 32.7m $A 35.8m $A 40.6m $A 40.6m $A 40.9m $A 41.0m $A 40.8m $A 41.0m $A 41.4m $A 345m Source : Beer & Co projections

EcoGraf (EGR.ASX)


Beer & Co have staggered the start‐up of the 5,000t/yr lines after the first line to allow for proper commissioning and achieving stable operations.

In Beer & Co.’s view, there will be demand for EcoGraf’s process due to its environmental and cost advantages, as well as the capability for plants to be built in Europe, which Beer & Co expects will find it difficult to approve widespread use of HF, and other places that are prepared to invest in developing the supply chain for Electric Vehicles.

Annual demand growth ranges from 30kt to 60kt. If China maintains its share, this is still more than 1 EcoGraf plant each year outside of China.

Beer & Co.’s valuation of the EcoGraf is shown in Figure 17.

Figure 17 : Projected cashflows from EcoGraf’s IP

2020‐21 2021‐22 2022‐23 2023‐24 2024‐25 2025‐26 2026‐27 2027‐28 2028‐29 2029‐30 2030‐31 2031‐32 2032‐33 2033‐34 2034‐35 2035‐36 2036‐37 2037‐38 Terminal

Extra #1 ($A 11.4m) $A 1.2m ($A 4.3m) ($A 0.2m) $A 6.1m $A 22.9m $A 23.3m $A 26.7m $A 28.9m $A 32.7m $A 35.8m $A 40.6m $A 40.6m $A 40.9m $A 345m

Extra #2 ($A 11.4m) $A 1.2m ($A 4.3m) ($A 0.2m) $A 6.1m $A 22.9m $A 23.3m $A 26.7m $A 28.9m $A 32.7m $A 35.8m $A 40.6m $A 40.6m $A 345m

Extra #3 ($A 11.4m) $A 1.2m ($A 4.3m) ($A 0.2m) $A 6.1m $A 22.9m $A 23.3m $A 26.7m $A 28.9m $A 32.7m $A 35.8m $A 40.6m $A 345m

Extra #4 ($A 11.4m) $A 1.2m ($A 4.3m) ($A 0.2m) $A 6.1m $A 22.9m $A 23.3m $A 26.7m $A 28.9m $A 32.7m $A 35.8m $A 345m

Extra #5 ($A 11.4m) $A 1.2m ($A 4.3m) ($A 0.2m) $A 6.1m $A 22.9m $A 23.3m $A 26.7m $A 28.9m $A 32.7m $A 345m

TOTAL $A 0.0m $A 0.0m $A 0.0m $A 0.0m ($A 11.4m) ($A 10.2m) ($A 14.5m) ($A 14.7m) ($A 8.6m) $A 25.7m $A 48m $A 79m $A 108m $A 135m $A 147m $A 165m $A 179m $A 191m $A 1,726m

Source : Beer & Co projections

Beer & Co projects that value will be generated from EcoGraf IP only after the Kwinana operations have been fully commissioned, producing good product with stable operations.

The projections are based on plants to be developed by EcoGraf, rather than licencing the IP, which means a slower roll‐out but a greater share of the value retained. By this time, Beer & Co projects that EGR will be generating sufficient operating net cashflow to be able to make these investments.

Beer & Co expects that through the process of optimising the operations, EGR will have been able to tweak the value of the project from :

Higher uptime than assumed in the DFS, which was only 75%, or 6,570 hours of operation a year;

A higher proportion of higher value product, such as SPG 10; and

Other general operational improvements.

Further, in our valuation of the company, Beer & Co heavily risks the resulting valuation.

EcoGraf (EGR.ASX)


Epanko Project

Introduction

EGR listed on the ASX in October 2010 to explore a nickel project in Tanzania. After some anomalous, but sub‐economic, results, EGR pegged the Epanko graphite project, which is shown in Figure 18, as about 400km south‐west of the capital and major port of Dar‐Es Salaam.

The project can be accessed by 411km of bitumen road, which takes about 9 hours, to Ifakara and then 120km of gravel road to Epanko.

EGR announced to the ASX the results of an initial scoping study in July 2013 and an updated scoping study in August 2014.

Figure 18 : Location of Epanko

Source : EGR presentation, February 2018

Work began on the permitting process in May 2015 and in July 2015, EGR announced the results of a Bankable Feasibility Study (BFS) of the development of a project at Epanko to produce 44kt/yr of concentrate grading 95% Total Graphitic Carbon (TGC).

Output was dominated by valuable large and jumbo flake graphite, suited for use in refractory and fire retardant applications. EGR soon had more than 100% of its anticipated production covered by demand from Thyssen Krupp in Germany and Sojitz, the Japanese trading company.

The Mining Lease was granted in July 2015.

Pre‐development activity began in October 2016 and EGR announced the results of an updated BFS, to produce 60kt/yr of saleable concentrate, in June 2017.

Political Risk

Tanzania is a democratic country, though since independence in 1966, elections had not changed Government, until 2017.

In the June 2017 elections, the Government changed. Part of the platform of the then opposition had been to review all mining and oil & gas contracts. A new mining law was passed on July 2017, imposing :

An inspection fee of 1% on the value of all exports;

A levy of 0.3% to be invested in the local community; and

16% free carried Government interest, able to be increased up to 50%, effective as soon as project debt is repaid.

These measures are in addition to the existing royalty of 3%.

After passing the new laws, a new Mining Commission needed to be established, and this was achieved in September 2017, with new draft, regulations issued in January 2018.

EcoGraf (EGR.ASX)


One major issue was the new Government claimed that Acacia Mining, which was the African operations of Barrick Mining (ABX.TSX) that had been spun out into a London listed entity, had not paid appropriate royalties on the copper‐gold concentrate it produced and exported.

The Government held off all other mining contracts until the issues with Acacia Mining, which required its re‐acquisition by Barrick to become a wholly owned subsidiary of ABX. However, this agreement has still to be ratified by Parliament which requires amendment to the laws passed to allow companies to use off‐shore bank accounts.

EGR’s issues were resolved by October 2019 and EGR is now in a position where it can resume development of Epanko, once the new laws have been passed, starting with confirming off‐take, then debt financing.

Resources and Reserves

EGR announced updated Mineral Resource Estimate and Ore Reserve Estimates as part of its 21 June 2017 announcement of its revised DFS.

Figure 19 shows a Resource estimate of 30Mt grading 9.9% graphitic carbon for over 3.0Mt of contained graphite.

Figure 19 : Resources

TGC Graphite

Measured 7.5 Mt 9.8 % 738.9 kt

Indicated 12.8 Mt 10.0 % 1,280.0 kt

Inferred 10.5 Mt 9.9 % 1,030.6 kt

TOTAL 30.7 Mt 9.9 % 3,049.4 kt

Source : EGR 21 June 2017

Figure 20 shows the results of an Electro‐magnetic survey conducted by EGR, as graphite is a very good conductor.

It shows that the drilling that has led to the Resource estimate has been in 2 areas, termed East Pit, which outcrops, and West Pit.

Figure 20 shows that East Pit is the smaller in area and it also shows that there is significant further potential immediately to the south of the West Pit, and along the same trend.

The areas included in the Resource estimates are inside the 2 green outlines shown in Figure 20.

Figure 21 shows the Reserves Estimate.

Figure 20 : Epanko mineralisation

Source : EGR Presentation June 2017

Figure 21 : Epanko Ore Reserves Estimate

Oxide 4.2 Mt 8.48 % 356 kt 3.0 Mt 7.54 % 227 kt 7.2 Mt 8.09 % 583 kt

Tranistional 0.5 Mt 7.99 % 43 kt 0.6 Mt 8.96 % 55 kt 1.1 Mt 8.51 % 97 kt

Fresh 1.0 Mt 8.36 % 84 kt 2.3 Mt 8.95 % 206 kt 3.3 Mt 8.77 % 291 kt

TOTAL 5.7 Mt 8.41 % 483 kt 5.9 Mt 8.23 % 488 kt 11.7 Mt 8.32 % 971 kt

Proven Probable Total

Source : EGR’s ASX announcement, 21 June 2017; Beer & Co

Of the 30Mt in total Resources, or 20.3Mt in Measured + Indicated Resources, nearly 12Mt was included in Reserves. Given a planned mining rate of 720kt/yr, this is sufficient for more than 16 years, giving plenty of time to prove up more from the areas indicated by the EM survey.

EcoGraf (EGR.ASX)


Product and Metallurgy

The DFS estimated a recovery of 94% of graphite in ore to graphite in saleable concentrate.

Figure 22 shows the expected output by size and by carbon content. It shows that :

Production is dominated by large and jumbo sized flake, in contrast to projects such as Syrah which is dominated by fines; and

The average carbon grade is high, at over 97%, with higher grades from fresh material.

Figure 22 : Product

Size Mass Carbon

Super Jumbo > 500 µ 2.1 % 97.5 %

Junbo > 300 µ 18.3 % 97.7 %

Large > 180 µ 31.2 % 97.5 %

Medium large > 150 µ 13.1 % 97.4 %

Medum small > 106 µ 14.9 % 97.0 %

Small > 75 µ 8.0 % 96.6 %

very small < 75 µ 12.5 % 94.2 % Source : EGR 21 June 2017; Beer & Co

Operating and Capital Costs

The DFS proposed mining and processing 720kt/yr of ore to produce, on average 60kt/yr of concentrate.

The expected pre‐production capital cost was estimated to be US$ 88.9m.

The C1 FOB cost was estimated to be US$ 500/t of concentrate, and the All In Cost, including royalties and sustaining capital, was estimated to be US$ 572/t.

Operating Outcomes

Figure 23 shows Beer & Co.’s projected operating outcomes for Epanko, based on the data from EGR’s June 2017 DFS.

Figure 23 : Beer & Co.’s projections of Epanko’s operating outcomes

2020‐21 2021‐22 2022‐23 2023‐24 2024‐25 2025‐26 2026‐27 2027‐28 2028‐29 2029‐30 2030‐31 2031‐32 2032‐33 2033‐34 2034‐35 2035‐36 2036‐37 2037‐38 2038‐39

Ore Mined 0 kt 0 kt 450 kt 720 kt 720 kt 720 kt 720 kt 720 kt 720 kt 720 kt 720 kt 720 kt 720 kt 720 kt 720 kt 720 kt 720 kt 720 kt 333 kt

Waste moved 0 kt 0 kt 180 kt 288 kt 288 kt 288 kt 288 kt 288 kt 288 kt 288 kt 288 kt 288 kt 288 kt 288 kt 288 kt 288 kt 288 kt 288 kt 133 kt

0.4 : 1 0.4 : 1 0.4 : 1 0.4 : 1 0.4 : 1 0.4 : 1 0.4 : 1 0.4 : 1 0.4 : 1 0.4 : 1 0.4 : 1 0.4 : 1 0.4 : 1 0.4 : 1 0.4 : 1 0.4 : 1 0.4 : 1 0.4 : 1 0.4 : 1

av. head grade 8.48 % 8.48 % 8.48 % 8.48 % 8.13 % 7.54 % 7.54 % 7.98 % 8.95 % 8.95 % 8.57 % 8.19 % 8.19 % 8.19 % 8.19 % 8.19 % 8.19 % 8.19 % 8.19 %

Ore processed 0 kt 0 kt 270 kt 720 kt 720 kt 720 kt 720 kt 720 kt 720 kt 720 kt 720 kt 720 kt 720 kt 720 kt 720 kt 720 kt 720 kt 720 kt 513 kt

head grade 8.48 % 8.48 % 8.48 % 8.48 % 8.35 % 7.55 % 7.54 % 7.62 % 8.96 % 8.95 % 8.76 % 8.19 % 8.19 % 8.19 % 8.19 % 8.19 % 8.19 % 8.19 % 8.19 %

Recovery 65 % 65 % 69 % 87 % 94 % 94 % 94 % 94 % 94 % 94 % 94 % 94 % 94 % 94 % 94 % 94 % 94 % 94 % 94 %

graphite recovered 0 kt 0 kt 16 kt 53 kt 57 kt 51 kt 51 kt 52 kt 61 kt 61 kt 59 kt 55 kt 55 kt 55 kt 55 kt 55 kt 55 kt 55 kt 39 kt

concentrate grade 91 % 91 % 91 % 93 % 95 % 95 % 95 % 95 % 95 % 95 % 95 % 95 % 95 % 95 % 95 % 95 % 95 % 95 % 95 %

Concentrate produced 0 kt 0 kt 17 kt 57 kt 60 kt 54 kt 54 kt 54 kt 64 kt 64 kt 62 kt 58 kt 58 kt 58 kt 58 kt 58 kt 58 kt 58 kt 42 kt

Reserves, year end 5,868 kt 5,868 kt 5,418 kt 4,698 kt 3,978 kt 3,258 kt 2,538 kt 1,818 kt 1,098 kt 378 kt 0 kt 0 kt 0 kt 0 kt 0 kt 0 kt 0 kt 0 kt 0 kt

Resources 5,714 kt 5,714 kt 5,714 kt 5,714 kt 5,714 kt 5,714 kt 5,714 kt 5,714 kt 5,714 kt 5,714 kt 5,373 kt 4,653 kt 3,933 kt 3,213 kt 2,493 kt 1,773 kt 1,053 kt 333 kt 0 kt


The timing in Figure 23 is based on what Beer & Co expects would happen if Epanko was EGR’s primary project and all approvals are in place so that financing can be finalised and on‐site construction begin in September 2020, leading to first product in September 2022.

Note that Beer & Co allows some conversion of about 30% of the Resources not included in Reserves into the mining inventory, even though the extent of the potential mineralisation shown in Figure 20 suggests much more.

Figure 24 shows Beer & Co.’s projected production volumes of the differing flake sizes. It shows that Beer & Co projects that it will take some time for EGR to produce its projected proportion of the Jumbo sized flakes, as Figure 24 shows the proportion of Jumbo size flakes increasing over the first 3 years.

EcoGraf (EGR.ASX)


Figure 24 : detail of Beer & Co.’s projected production from Epanko, by flake size 2020‐21 2021‐22 2022‐23 2023‐24 2024‐25 2025‐26 2026‐27 2027‐28 2028‐29 2029‐30 2030‐31 2031‐32 2032‐33 2033‐34 2034‐35 2035‐36 2036‐37 2037‐38 2038‐39

Jumbo 0 kt 0 kt 3 kt 10 kt 12 kt 11 kt 11 kt 11 kt 13 kt 13 kt 13 kt 12 kt 12 kt 12 kt 12 kt 12 kt 12 kt 12 kt 8 kt

Large 0 kt 0 kt 5 kt 16 kt 19 kt 17 kt 17 kt 17 kt 20 kt 20 kt 19 kt 18 kt 18 kt 18 kt 18 kt 18 kt 18 kt 18 kt 13 kt

Medium 0 kt 0 kt 2 kt 7 kt 8 kt 7 kt 7 kt 7 kt 8 kt 8 kt 8 kt 8 kt 8 kt 8 kt 8 kt 8 kt 8 kt 8 kt 5 kt

Small 0 kt 0 kt 8 kt 23 kt 21 kt 19 kt 19 kt 19 kt 23 kt 23 kt 22 kt 21 kt 21 kt 21 kt 21 kt 21 kt 21 kt 21 kt 15 kt Source : Beer & Co. estimates

Figure 25 shows the results of Beer & Co.’s estimated operating costs for Epanko on a year by year basis. Note that Beer & Co.’s estimated AISC of $570/t is a slight discount to the DFS estimate of $572/t and the difference is due to Beer & Co.’s lower assumed prices and hence slightly lower royalty payments.

Figure 25 : Beer & Co.’s estimated costs, by year USD terms 2020‐21 2021‐22 2022‐23 2023‐24 2024‐25 2025‐26 2026‐27 2027‐28 2028‐29 2029‐30 2030‐31 2031‐32 2032‐33 2033‐34 2034‐35 2035‐36 2036‐37 2037‐38 2038‐39

C1, FOB Costs $ 0m $ 0m $ 13m $ 27m $ 28m $ 28m $ 28m $ 28m $ 30m $ 30m $ 30m $ 30m $ 30m $ 30m $ 30m $ 30m $ 30m $ 30m $ 20m

$ 505/t $ 0/t $ 0/t $ 755/t $ 481/t $ 468/t $ 513/t $ 520/t $ 522/t $ 464/t $ 468/t $ 479/t $ 509/t $ 513/t $ 517/t $ 518/t $ 519/t $ 520/t $ 520/t $ 488/t

AISC $ 0m $ 0m $ 14m $ 33m $ 32m $ 31m $ 32m $ 32m $ 34m $ 34m $ 34m $ 34m $ 34m $ 34m $ 34m $ 34m $ 34m $ 33m $ 21m

$ 570/t $ 0/t $ 0/t $ 828/t $ 591/t $ 533/t $ 581/t $ 588/t $ 590/t $ 527/t $ 530/t $ 542/t $ 575/t $ 578/t $ 582/t $ 584/t $ 584/t $ 585/t $ 559/t $ 517/t Source : Beer & Co. estimates

Financial Outcomes, Epanko project

EGR produced its DFS in June 2017. Since then, graphite prices have fallen, as shown in Figure 26, through the second quarter and into the third quarter of 2019, responding to the announcement by the Government of China that it was reducing the subsidies paid for New Energy Vehicles.

Figure 26 : Graphite price index

Source : Benchmark Minerals Intelligence, 15 September 2019

Figure 27 shows the decline in prices received by Syrah Resources (SYR.ASX), the major ASX listed graphite producer, showing lower prices in Q3, and lower demand since.

Figure 27 : Received prices

Mar 2019 Jun 2019 Sep 2019 Dec 2019

price US$ 468/t US$ 457/t US$ 391/t US$ 458/t

volume sold 48 kt 53 kt 45 kt 17 kt Source : SYR quarterlies, Beer & Co

Figure 28 shows the prices assumed for various flake sizes in EGR’s June 2017 DFS and compares them with the lower prices assumed in Beer & Co.’s base case financial analysis of the Epanko project.

We will also show the impact of these lower prices on the project returns in our sensitivity analyses.

Figure 28 : Graphite prices

DFS Beer & Co

AUD‐USD 0.700 0.700

Jumbo Flake $ 1,864/t $ 1,700/t

Large Flake $ 1,282/t $ 1,050/t

Medium Flake $ 1,093/t $ 950/t

Fines $ 823/t $ 600/t Source : EGR 21 June 2017, Beer & Co

EcoGraf (EGR.ASX)


Note that the received prices in Figure 27 are significantly lower than the projected prices in Figure 28. Contributing factors include :

The received prices are dominated by lower value fines, which account for nearly 90% of the volume (compared with 70% projected in feasibility studies);

The prices received reflect discounts offered to trial volumes rather than on‐going contract prices.

Figure 29, which shows data to September 2018, from which time Figure 26 indicates graphite prices were relatively flat for a further 6 months or so, indicates :

Industry prices were around $600/t for SYR’s product, compared with about $450/t received by SYR; and

Prices for large flake are a significant premium.

Figure 29 : chart of graphite prices

Source : Benchmark Minerals Intelligence

The prices assumed by Beer & Co are consistent with those shown in Figure 29, which means that Beer & Co projects a recovery in graphite prices before Epanko begins production.

Figure 30 shows projected financial outcomes for the Epanko project, with

Revenue based on the production shown in Figure 24 and the price shown in Figure 28; and

Costs as shown in Figure 25.

Figure 30 : Beer & Co.’s projected financial outcomes for Epanko USDm, 100% basis 2020‐21 2021‐22 2022‐23 2023‐24 2024‐25 2025‐26 2026‐27 2027‐28 2028‐29 2029‐30 2030‐31 2031‐32 2032‐33 2033‐34 2034‐35 2035‐36 2036‐37 2037‐38 2038‐39

Graphitic concentrate 0 kt 0 kt 17 kt 57 kt 60 kt 54 kt 54 kt 54 kt 64 kt 64 kt 62 kt 58 kt 58 kt 58 kt 58 kt 58 kt 58 kt 58 kt 42 kt

Revenue 0 0 16 55 60 54 54 55 64 64 63 59 59 59 59 59 59 59 42

Cash costs 0 0 13 27 28 28 28 28 30 30 30 30 30 30 30 30 30 30 20

Royalties 0 0 1 2 3 2 2 2 3 3 3 3 3 3 3 3 3 3 2

Interest 1 4 5 5 4 3 2 0 0 0 0 0 0 0 0 0 0 0 0

Dep'cn & Amort'sn 0 0 5 22 22 22 22 19 0 0 0 0 0 0 0 0 0 0 0

P B T (1) (4) (8) (1) 4 (0) 1 5 32 32 30 27 26 26 26 26 26 26 20

Taxes (0) (1) (2) (0) 1 (0) 0 1 10 10 9 8 8 8 8 8 8 8 6

N P A T (0) (3) (6) (1) 3 (0) 0 3 22 22 21 19 19 18 18 18 18 18 14

Project Capital 49 40

Western Pit 3

Other Sus Cap Ex 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 1 0

Project Cashflow, pre‐finance (49) (39) 4 21 26 22 22 21 20 20 19 17 16 16 16 16 16 18 14

Project Cashflow, after finance (29) 1 4 3 8 4 4 10 20 20 19 17 16 16 16 16 16 18 14 Source : Beer & Co. estimates

The bottom line in Figure 28 assumes that US$ 60m in debt is able to be sourced, with term of 4 years from the time the project is generating sustainable cashflows (it takes about 10 quarters from first debt draw‐down to first re‐payment), at an interest rate of 7.5%.

EcoGraf (EGR.ASX)


Also the tax liability shown is assumed to be the tax paid.

The NPV of the cashflows shown in the bottom line, using a discount rate of 12%, is US$ 35m (the NPV of the project cashflow, before finance, but after tax, is US$ 29m).

Financial Outcomes, for EGR

Figure 31 is very similar to Figure 30, except :

It is in AUD terms, though as Beer & Co has assumed that the AUD‐USD rate remains stable at 0.700 over the period, this has little impact; and

It shows EGR’s share falling from 100% to 84% when the debt is re‐paid.

Figure 31 : Beer & Co.’s projected financial outcomes for Epanko, EGR’s share AUDm 2020‐21 2021‐22 2022‐23 2023‐24 2024‐25 2025‐26 2026‐27 2027‐28 2028‐29 2029‐30 2030‐31 2031‐32 2032‐33 2033‐34 2034‐35 2035‐36 2036‐37 2037‐38 2038‐39

EGR share 100 % 100 % 100 % 100 % 100 % 100 % 100 % 96 % 84 % 84 % 84 % 84 % 84 % 84 % 84 % 84 % 84 % 84 % 84 %

Graphitic concentrate 0 kt 0 kt 17 kt 57 kt 60 kt 54 kt 54 kt 52 kt 54 kt 54 kt 52 kt 49 kt 49 kt 49 kt 49 kt 49 kt 49 kt 49 kt 35 kt

Revenue 0 0 23 79 86 78 77 75 77 77 76 71 71 71 71 71 71 71 50

Cash costs 0 0 19 39 40 39 40 39 36 36 36 36 36 36 36 36 36 36 24

Royalties 0 0 1 3 4 3 3 3 3 3 3 3 3 3 3 3 3 3 2

Interest 1 6 7 7 5 4 2 1 0 0 0 0 0 0 0 0 0 0 0

Dep'cn & Amort'sn 0 0 8 31 31 31 31 26 0 0 0 0 0 0 0 0 0 0 0

P B T (1) (6) (12) (2) 6 (0) 1 6 38 38 36 32 32 31 31 31 31 31 24

Taxes (0) (2) (3) (0) 2 (0) 0 2 12 11 11 10 10 9 9 9 9 9 7

N P A T (1) (4) (8) (1) 4 (0) 1 4 27 27 26 22 22 22 22 22 22 22 17

Pre‐development Capital 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Project Capital (70) (57) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Western Pit 0 0 0 (4) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Other Sus Cap Ex 0 0 (1) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (3) (1) 0

Project Cashflow, pre‐finance (70) (56) 6 30 38 32 31 28 24 24 23 20 20 20 19 19 19 21 17

Project Cashflow, after finance (41) 2 6 5 12 6 5 13 24 24 23 20 20 20 19 19 19 21 17

to EGR (41) 0 0 0 0 0 0 3 24 24 23 20 20 20 19 19 19 21 17 Source : Beer & Co. estimates

Regulations in Tanzania require that the project be executed through a local company, so the only access to cashflows is through after‐tax dividends paid by the local company. This means that EGR receives no cash, other than for services to the local company, until the debt is re‐paid.

The resulting cashflows are shown in the bolded line.

The NPV of the cashflows shown in the bottom line is now $A 16m, or US$ 11m, which is less than half the NPV in Figure 30.

Revised Timing

The returns expected for the Epanko project from the June 2017 DFS have been revised :

For lower graphite prices; and

Revised fiscal arrangements, which prevent EGFR from receiving any income from the project until after all debt has been re‐paid and then receiving only 84% of the net, after‐tax, cashflows.

As a result, the NPV to EGR is not attractive when compared with the risk, particularly given the amount of equity that will need to be raised to finance the project.

In contrast, EGR’s EcoGraf Kwinana project has a higher return for a lower investment, so is favoured.

In Beer & Co.’s view, Epanko is a useful option for EGR to guard against any shortages of graphite feed, even though Epanko produces large and jumbo flake while feed for SPG is 100µ, and smaller.

The 4th , and final, train of the EcoGraf Kwinana project is commissioned in December 2025. Beer & Co assumes that only after this is done and Kwinana is generating good net cashflow, is the development of Epanko committed to.

EcoGraf (EGR.ASX)


This means deferring the start of construction until early 2027, otherwise a dilutive equity raising is required.

Further, EGR is only able to receive dividends and none are able to be paid before the debt is extinguished, so there is a long lag between investment and any return.

Figure 32 shows the deterioration in the value of Epanko to EGR due to

Lower graphite prices (DFS case to optimised);

The 16% free carry to the Tanzanian Government, from the time debt is re‐paid;

The delay in the project start‐up due to an over‐supplied graphite market and

lower returns relative to other projects; and

The delay in cash returns to EGR until after all debt is repaid (NPV of dividends).

Figure 32 : Impact on Epanko value to EGR

AUD m DFS case optimised base case

Project 92 37 18

EGR share 82 31 14

NPV of dividends 36 12 5 Source : Beer & Co estimates

The values in Figure 32 are about $A 3m lower than those around Figures 30 and 31 as Figure 32 captures $3m spent in 2019‐20.

Conclusions

EGR’s focus project was the Epanko graphite project in Tanzania, for which EGR has announced the results of :

An initial scoping study in July 2013;

An updated scoping study in August 2014;

a Definitive Feasibility Study (DFS) in July 2015;

an updated DFS, to 60kt/yr, in June 2017.

The Mining Lease was granted in July 2015 and pre‐development activity began in October 2016.

Activity has been delayed since a new Government was elected in July 2017. While EGR’s project has been confirmed, EGR is not able to open an overseas bank account for Epanko as yet as enabling legislation has not been passed.

The value for EGR’s share of Epanko has been shredded by :

Lower graphite prices;

The 16% free carry to the Tanzanian Government;

EGR’s inability to receive any cash from Epanko before all debt is re‐paid, from which time the Tanzania Government takes 16%.

EGR is now focussed in its EcoGraf project in Kwinana, to produce anode material for lithium ion batteries, or Spherical Purified Graphite (SPG).

This higher returning project means that shareholder value is maximised by directing all equity to EcoGraf Kwinana and subsequent project that can use the Intellectual Property, for which patents have been applied, to produce SPG.

Beer & Co has staggered the start‐up of EcoGraf projects to allow time for commissioning and stabilising operations, as there is no existing operation from which EGR can copy. This has the benefit of not requiring any equity beyond that required for current working capital plus the first train of the first project.

EcoGraf (EGR.ASX)


Figure 33 : Beer & Co.’s valuation of EGR

31‐Jan‐20

AUD m risk : 100% Product per share

SPG / EcoGraf 85 % 123 105 16.0 c 17.1 c

EcoGraf IP 50 % 312 156 23.7 c 25.4 c

Epanko graphite mine 80 % 5 4 0.7 c 0.9 c

Corporate 100 % (27) (27) (4.1c) (4.2c)

franking credits 51 % 35 18 2.7 c 2.9 c

Equity Raisings 100 % 22 22 3.4 c 3.0 c

Cash / debt 100 % 1 1 0.2 c 0.6 c

TOTAL $ 473m $ 280m 42.6 c 45.6 c

293 m F P O shares 1.1 m Options

364 m to be issued 0.0 m exercised



Figure 33 shows that Beer & Co.’s risked valuation of EGR for its EcoGraf Kwinana project is more than 2x the current share price.

It also shows that Beer & Co estimates a risked valuation for EGR’s IP to produce SPG is greater than our risked valuation for EGR’s Kwinana project.

Without giving any value to EGR’s IP, Beer & Co estimates a risked valuation for EGR of about 20c/share.

Beer & Co believes that as EcoGraf is a lower cost process and more environmentally friendly than all other processes, which are based in China, EGR’s IP has significant further vale, as shown in Figure 33.

EcoGraf (EGR.ASX)


Beer& Co Research EcoGraf (EGR.ASX)

Year ended June 2018‐19 2019‐20 2020‐21 2021‐22 2022‐23 2023‐24 2024‐25 2025‐26 Price assumptions

Section 1 - P&L Year ended June 2018‐19 2019‐20 2020‐21 2021‐22 2022‐23 2023‐24 2024‐25 2025‐26

Sales revenue $A m 0 0 0 12 32 50 78 119 AUD‐USD 0.715 0.700 0.700 0.700 0.700 0.700 0.700 0.700

Interest revenue $A m 0 0 0 0 0 0 0 0 SPG 10 USD /t 4,350 4,400 4,400 4,400 4,400 4,400 4,400 4,400

Other revenue $A m 0 0 0 0 0 0 0 0 SPG 15 USD /t 3,550 3,600 3,600 3,600 3,600 3,600 3,600 3,600

Total Revenue $A m 0 0 0 12 32 50 78 119 fines sold USD /t 750 600 600 600 600 600 600 600

Large Flake USD /t 1,000 1,050 1,050 1,050 1,050 1,050 1,050 1,050

Cost of Goods Sold $A m 0 0 0 (11) (23) (36) (54) (80)

Royalties $A m 0 0 0 0 0 0 0 0 Production / Sales 2020‐21 2021‐22 2022‐23 2023‐24 2024‐25 2025‐26 2026‐27 2027‐28

Corporate Costs $A m (3) (2) (2) (3) (3) (3) (3) (3) SPG 10 0 t 469 t 1,313 t 2,228 t 3,770 t 6,223 t 7,250 t 7,750 t

Exploration Expense $A m (1) 0 0 0 0 0 0 0 SPG 15 1,875 t 4,531 t 6,438 t 9,834 t 14,668 t 13,777 t 12,750 t 12,250 t

Other Operating Expenses $A m (0) 0 0 0 0 0 0 0 by‐product fines 2,116 t 5,436 t 8,438 t 13,137 t 20,072 t 21,744 t 21,744 t 21,744 t

Total Operating Expenses $A m (4) (2) (2) (14) (26) (39) (57) (83) Epanko

Graphitic Conc. 0 kt 0 kt 0 kt 0 kt 0 kt 0 kt 0 kt 0 kt

EBITDA $A m (3) (2) (2) (2) 5 11 21 36

Dep'cn & Amort'sn $A m (0) 0 0 (1) (3) (5) (7) (10) Epanko Reserves

EBIT $A m (3) (2) (2) (3) 2 7 15 26

Interest Expense $A m 0 0 (0) (1) (2) (2) (3) (3) Oxide 4.2 Mt 8.48 % 356 kt 3.0 Mt 7.54 % 227 kt 7.2 Mt 8.09 % 583 kt

Other $A m 0 0 0 0 0 0 0 0 Tranistional 0.5 Mt 7.99 % 43 kt 0.6 Mt 8.96 % 55 kt 1.1 Mt 8.51 % 97 kt

Pre‐Tax Profit $A m (3) (2) (2) (4) 1 4 12 23 Fresh 1.0 Mt 8.36 % 84 kt 2.3 Mt 8.95 % 206 kt 3.3 Mt 8.77 % 291 kt

Tax Expense $A m 0 0 0 0 (1) (2) (4) (8) TOTAL 5.7 Mt 8.41 % 483 kt 5.9 Mt 8.23 % 488 kt 11.7 Mt 8.32 % 971 kt

NPAT $A m (3) (2) (2) (4) (0) 2 7 15

Epanko Resources (including Reserves)

Section 2 - Key Data TGC Contained

Ordinary shares ‐ year end m 292.6 402.9 555.1 555.1 684.9 684.9 684.9 684.9 Measured 7.5 Mt 9.8 % 739 kt

Fully diluted shares on issue m 292.6 402.9 555.1 555.1 684.9 684.9 684.9 684.9 Indicated 12.8 Mt 10.0 % 1,280 kt

Weighted # shares m 284.2 348.1 555.1 555.1 684.9 684.9 684.9 684.9 Inferred 10.5 Mt 9.9 % 1,031 kt

Earnings per Share (0.6c) (0.4c) (0.7c) (0.1c) 0.3 c 1.0 c 2.2 c 2.7 c TOTAL 30.7 Mt 9.9 % 3,049 kt

Dividends Per Share 0.0 c 0.0 c 0.0 c 0.0 c 0.0 c 0.0 c 0.0 c 0.0 c

Beer & Co risked valuation

Section 3 - Balance Sheet 10‐Feb‐20

Cash $A m 1 5 3 1 4 1 5 22 AUD m risk : 100% Product per share

Receivables $A m 0 0 0 3 3 6 10 13 SPG / EcoGraf 85 % 123 105 15.3 c 16.5 c

Other $A m 0 0 0 1 1 3 4 5 EcoGraf IP 50 % 312 156 22.8 c 24.5 c

CURRENT ASSETS $A m 2 5 3 5 9 10 19 40 Epanko graphite 80 % 5 4 0.6 c 0.9 c

Corporate 100 % (27) (27) (4.0c) (4.1c)

Receivables $A m 0 0 0 0 0 0 0 0 franking credits 51 % 35 18 2.6 c 2.8 c

P , P & E $A m 0 0 33 31 52 63 87 78 Equity Raisings 100 % 22 22 3.3 c 2.8 c

Mining Properties / Exploration $A m 17 29 29 29 29 29 29 29 Cash / debt 100 % 1 1 0.2 c 0.6 c

Other $A m 0 0 0 0 0 0 0 0 TOTAL $ 473m $ 280m 41.0 c 44.0 c 19.5 c

NON‐CURRENT ASSETS $A m 17 29 61 60 80 92 116 106 Shares on issue 938.6m F P O shares 77.3m Options

TOTAL ASSETS $A m 19 34 64 65 89 102 135 146 671.1m to be issued 57.0m exercised

Payables $A m 1 0 0 1 2 3 5 7 Financial Ratios

Debt $A m 0 0 0 2 4 7 9 13 Year ended June 2019‐20 2020‐21 2021‐22 2022‐23 2023‐24 2024‐25

Other $A m 0 0 0 0 0 0 0 0 Revenue $A m 0 0 12 32 50 78

CURRENT LIABILITIES $A m 1 0 0 4 6 10 14 20 EBITDA $A m (2) (2) (2) 5 11 21

EBIT $A m (2) (2) (3) 2 7 15

Long Term Debt $A m 0 0 21 20 32 34 48 36 NPAT (reported) $A m (2) (2) (4) (0) 2 7

Other $A m 0 0 0 0 0 0 0 0 Adjusted EPS (cps) (0.4c) (0.7c) (0.1c) 0.3 c 1.0 c 2.2 c

Provisions $A m 0 0 0 0 0 0 0 0 EPS Growth (%) (72%) 90 % 555 % 228 % 114 %

NON‐CURRENT LIABILITIES $A m 0 0 21 20 32 34 48 36 DPS (c) 0.0 c 0.0 c 0.0 c 0.0 c 0.0 c 0.0 c

TOTAL LIABILTIES $A m 1 0 21 24 37 44 62 56 Dividend Yield (%) 0 % 0 % 0 % 0 % 0 % 0 %

NET ASSETS $A m 18 34 43 41 52 58 73 91 PE adj. (x) x (20.0) (11.7) (116.9) 25.7 7.8 0.0

EV / EBITDA (x) x (14.0) (33.1) (36.3) 15.9 8.6 0.0

Accumulated Profit (Loss) $A m (29) (31) (33) (37) (38) (35) (28) (13) EV / EBIT (x) x (14.0) (33.1) (21.9) 39.2 14.6 0.0

Reserves $A m 3 13 13 14 15 19 27 29 Gearing (%) 0 % 33 % 35 % 40 % 40 % 42 %

Contributed Equity $A m 45 52 63 63 74 74 74 74 Return on Assets (6%) (3%) (5%) 3 % 6 % 11 %

Total Equity $A m 18 34 43 41 52 58 73 91 Return on Equity (6%) (5%) (10%) (1%) 4 % 10 %

EBITDA Margin (%) n/a n/a n/a (15%) 17 % 22 %

Section 4 - Cashflow Interest Cover (x) x n/a n/a (3.9) (2.3) 1.3 3.0

Net Cashflow from operations $A m (3) (2) (2) (2) 5 11 21 36

Net Interest Paid $A m (0) (0) 0 1 2 2 3 3 Shareholders

Taxes Paid $A m 0 0 0 0 (0) (1) (3) (5) Board and Management

Change in Working Capital $A m 0 (0) 0 (1) (0) (2) (2) (2) Andrew Spinks MD 14.772m 5.0 %

OPERATING CASHFLOW $A m (3) (2) (2) (2) 7 10 20 32 Grant Pierce 4.250m 1.5 %

Robert Pett Chair 3.250m 1.1 %

Exploration + Feasibility $A m 0 (3) 0 0 0 0 0 0 John Conidi NED 3.250m 1.1 %

Maintenace Capex $A m 0 0 0 0 0 0 0 0 Howard Rae CFO 3.000m 1.0 %

Expansion Capex $A m 0 0 (33) 0 (23) (16) (30) 0 Christoph Frey NED 2.000m 0.7 %

PPE Acquisitions (Total Capex) $A m 0 (3) (33) 0 (23) (16) (30) 0 30.5m 10.4 %

PPE Divestments $A m 0 0 0 0 0 0 0 0 Others

INVESTING CASHFLOW $A m 0 (3) (33) 0 (23) (16) (30) 0 Citicoorp Noms 35.254m 12.0 %

JP Morgan Noms 32.846m 11.2 %

Change in Equity $A m 1 8 11 0 11 0 0 0 Peter & Lynette Meier 9.182m 3.1 %

Dividends Paid $A m 0 0 0 0 0 0 0 0 Value On Growth Investm 6.622m 2.3 %

Change in Debt $A m 0 0 21 1 13 5 16 (8) G R Engineering 5.738m 2.0 %

FINANCING CASHFLOW $A m 1 8 32 1 24 5 16 (8)

Free Cashflow $A m (3) (5) (34) (2) (17) (6) (11) 32

Net Cashflow $A m (2) 2 (2) (0) 7 (1) 6 24

February 2020


Proven Probable Total

EcoGraf (EGR.ASX)


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