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Over the last eight months, IMX Resources (ASX:IXR) has rapidly advanced its Chilalo project in Tanzania from a desktop study to a high-grade project with a strong foundation for success. In particular, the announcements made since our last report in Early March warrant close attention.

These include the announcement of a maiden inferred resource grading 10.7% Total Graphitic Content (TGC), comprising up to 57.4% jumbo or large flake. This is amenable to simple processing to produce a 95.9% concentrate.

The company has subsequently signed a potentially valuable MoU for 25Ktpa with one of China’s largest private trading groups, which IXR has a good relationship with and has traded over US$80m of commodities with in the recent past.

In addition, the company has improved its balance sheet following a capital raising and JV deal, which should see the company with adequate funding for over twelve months (following receipt of funds).

A high-level study with a consultancy group has confirmed the project’s development potential, and a pre-feasibility study has now commenced. The company has also engaged leading graphite market advisory service, Benchmark Mineral Intelligence, to provide a market report as part of this PFS.

Given the significant progress made in recent months, we believe IXR has quickly emerged as one of the few quality juniors in the sector. With a pipeline of news-flow expected to add to recent progress - and as Tesla’s developments drive a return of interest to the graphite thematic - we perceive the closing of a large valuation mismatch here that the market has so far overlooked.

EMERGING WITH A QUALITY GRAPHITE PROJECT

THE PRICE OR VALUE OF PRODUCTS MENTIONED IN THIS REPORT ARE SPECULATIVE AND MAY BE HIGHLY VOLATILE AND THE MARKET FOR THEM MAY BE ADVERSELY AFFECTED BY A LACK OF LIQUIDITY WHICH MAY LIMIT THE ABILITY TO BUY OR SELL THE PRODUCTS. THE INFORMATION CONTAINED WITHIN IS DERIVED FROM SOURCES WHICH WE BELIEVE TO BE RELIABLE, BUT WE MAKE NO REPRESENTATION THAT IT IS COMPLETE OR RELIABLE. PLEASE REFER TO THE DISCLAIMER ON THE LAST PAGE OF THIS DOCUMENT.

COMPANY STATISTICS

Closing price (07/05/15) $0.01

12 month Lo-Hi $0.008 - $0.054

Market Cap (A$m) $8.6m

Issued shares (mil) 827.8m

Options: listed, unlisted 13.5m, 14.2m

Cash (est) $3.5m (inc Figtree $2m)

MAJOR SHAREHOLDERS

Tim Murray 11.4 %

Taifeng Group 8.3 %

Capital Drilling 5.4 %

Cannon Partners Fund 3.0%

SHARE PRICE PERFORMANCE (12MTH)

REPORT OVERVIEW

Company Code ASX:IXR

Author ALEX COWIE

Date of report 08/05/15

Company website CLICK HERE

Previous research CLICK HERE

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Canaccord Genuity (Australia) Limited was the lead manager to the placement at an issue price of $0.01 to raise a total of $1.57million in April 2015.

...RIGHT AS TESLA SHINES THE SPOTLIGHT BACK ON THE SECTOR

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HIGH-GRADE RESOURCE

On the 7th April, IXR announced an inferred resource of 7.4Mt at 10.7%TGC (5% cut-off) at its Chilalo graphite project, following a drilling program of 3,810m (RC) and 544m (diamond). The majority of this resource sits within 100m of the surface.

There is scope for this to grow, with the resource open along strike and down dip, particularly with 90% of the strike identified by VTEM still unexplored.

Given IXR’s intended scale of production of up to 50ktpa, this resource is adequate to provide a reasonable mine life in the first instance. The strategic focus has been on ‘quality not tonnage’.

The grade of 10.7% TGC at IXR’s Chilalo project compares favourably to regional peers (also using a 5% cut-off) such as Kibaran Resources (KNL): 9.8%, Magnis Resources (MNS): 5.2%, and Syrah Resources with 10.2%. It is important to note that Syrah’s high-grade zone is 17.0% TGC, and uses a 13% cut-off.

UP TO 57% JUMBO & LARGE FLAKE

Initial metallurgical results are positive. Basic flotation has yielded concentrate grading 95.9% total carbon, with total graphitic carbon results pending. Flake size distribution is also good. Concentrate weighted to large and jumbo flake is more valuable as the larger flake sizes command a higher market price.

Jumbo and large flake combined comprised 49.1% of the first sample, and 57.4% of the second. Using current graphite pricing (CIF prices for H1 CY15) the flake distribution in these samples would drive basket prices of US$1,050/t and US$1,098/t respectively. IXR sees an added opportunity to improve the proportion of jumbo and large flake in the final concentrate, though further optimisation of the flotation process

The company has tested a number of holes to get an initial understanding of spatial distribution of flake sizes over the resource. This is an important consideration, as flake size can vary significantly across a deposit, impacting final basket price from different areas of a resource.

Fig 1: IXR’s favourable project grade and flake distribution, versus market cap (bubble size)

Source: company Presentation

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STRATEGY: START SMALL AND SIMPLE

On the 22nd April, the company announced that the consultancy group, Battery Limits, confirmed Chilalo as a viable proposition. The plan is to pursue a project that would produce up to 50ktpa.

This will require a small, relatively simple plant, with easily sourced conventional parts. This approach would be far easier to finance, quicker to build, and in theory, easier to commission. Operational risk will be lower, and it should be easier to find buyers for these kind of volumes without negatively impacting the market.

We published research based on site visits to East African graphite projects with consultant Geologist, Dr Andrew Tunks, including the Chilalo project, ‘View from the Ground’ (available here). In this, my colleagues highlighted the positive geology, and also that IXR has the benefit of existing infrastructure. IXR has been active in the area for several years and has established camps, water supply, power, accommodation and offices, prep lab and core storage. The location is also positive, with the deep-water port of Mtwara 220km away, the majority of which is via sealed road.

In addition, IXR has strong community engagement, in-country experience, and relations with the government. The company’s Country Manager, Heavenlight Kavishe, has previously held positions with Tanzanian Government agencies.

IXR recently began the permitting process, and announced in April that development of the project has been accepted for registration by the National Environment Management Council. An ESIA (Environmental and Social Impact Assessment) now follows, and a consultant has started work on this. The terms of reference for the ESIA have already been approved.

The addition to the Board of Bruce McFadzean on 30th March brings significant experience to an already very commercially minded and competent Board / Management team. Half of McFadzean’s thirty years in mining includes senior positions with BHP and RIO, and a role as MD of DRC based Mawson West, which brings added African experience to the table.

IMPROVED FUNDING SITUATION

IXR’s cash position has improved following a successful capital raising of A$1.57m in early April 2014, and the receipt of a US$0.3m prepayment (from a $US2m payment) from Fig Tree.

Following the Tanzanian Fair Competition Commission’s decision in late April to approve a JV, Fig Tree is expected to pay the balance of US$1.7m in the first half of May.

Including the funds from the capital raising, and the balance from Fig Tree, IXR’s cash balance will be ~A$3.5m.

IXR then stands to receive a further US$4m from Fig Tree before the end of the September quarter, following successful completion of a 6 diamond hole, 2,200m geotechnical program at the Ntaka Hill Nickel Project (Fig Tree is funding this US$1m program).

CREDIBLE MOU WITH EXISTING TRADING PARTNER

On the 15th April, IXR announced a 25ktpa Memorandum of Understanding for sale of Chilalo graphite concentrate with China-Base Ningbo.

China-Base Ningbo ranks in the top ten of China’s private trading enterprises, with annual turnover last year at $4.5 billion.

Ningbo represent end users interested in high purity, coarse flake graphite for the manufacture of batteries for Electric Vehicles.

Although MoUs are not uncommon, we view this MoU as carrying more weight than most. Principally, this is because this partner has a strong existing relationship with the company, and has traded actively with IXR in the recent past.

IXR reports that across 2013 and 2014, it sold China-Base Ningbo iron ore valued at US$87m when it was operating its Cairn Hill mine. This was a positive business relationship, which IXR has maintained since.

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to 1,400m) will begin in early May, and run through to early June. Management has chosen diamond drilling over RC to facilitate assessment of the variability of the metallurgy (TGC and flake distribution), provide core for geotechnical purposes, as well as enabling resource estimation (into Measured and Indicated categories).

The goal will be to bring enough resource in to the Measured and Indicated categories to provide a mineable inventory, and sufficient tonnes to demonstrate an adequate mine life.

There is no plan at this stage to increase the resource size, however with the resource open in all directions, there is clear scope to do this at an appropriate time.

The company is working on optimisation of the flow sheet to increase the proportion of jumbo and large flake size in the concentrate.

A Pre-Feasibility Study has already commenced. This should take four months, with results due in September. If the company concludes the PFS by September as planned, it will have moved from first drill hole to PFS in just thirteen months, around half the time taken by some of its peers.

RAPID PROGRESS

In the space of just seven months, management has progressed Chilalo from a conceptual desktop study to the current situation where it has defined a high-grade resource, provided excellent metallurgical results, announced a credible and potentially valuable MoU, commissioned a study on the project, turned its balance sheet around, and commenced the permitting process.

The company made efficient use of the period falling within the Wet Season, which runs from December to April.

On the 10th March, IXR announced a project update, which served in part as a strategic outline for the coming months in regards resource estimate, met allurgical work, technical advisory, offtake, and permitting. By the end of April, the company had already delivered on all of these points.

LOOKING AHEAD

We expect strong news-flow to continue in the coming quarters. A 12-14 hole diamond drill program (for up

Source: company presentation

Fig 2: Rapid timeline for progress at Chilalo

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rapidly constructing.

Tesla reports: ‘…the [Powerwall] business unit will be a multi-billion dollar per year one in the near term’.

Benchmark Mineral Intelligence reports that Tesla will have capacity to produce 3.5 million Powerwall units per annum by 2020 when the Gigafactory is at full capacity.

Without tapping any demand from domestic commercial markets, or from global markets, Tesla could achieve this quantum of sales with a 3.1% market penetration of the 114 million homes in the US.

Benchmark Mineral Intelligence calculates that each unit would drive demand for 40Kg of flake graphite (to produce the 16Kg of spherical graphite used in the unit). On this basis, the sale of 3.5 million units pa would drive additional demand of 140,000 tpa of flake graphite, compared to the current annual production of ~375,000 tpa.

Fig 3 aims to illustrates the potential impact of just one product line, from just one battery plant. Yet over the last twelve months, construction has started on FIVE other such ‘super-plants’ for mass production of affordable lithium ion batteries. These are all in China, and include plants for Foxconn, LG, Boston Power, BYD and ATL. In addition, Samsung SDI is expanding an existing plant.

It is worth pointing out that while demand is poised to increase, there are also a number of graphite juniors hoping to commence significant production. To provide some indication of how this dynamic may drive the

Driving this rapid progress is a high quality Board and management team, and a continuation of this pace may see IXR catch up with some of its peers.

Given the drill program and PFS will fall during the June quarter, the anticipated quarterly burn for the quarter is A$2.5m. Receipt of the US$4m payment from Fig Tree in the September Q as expected would maintain a comfortable cash balance.

Given the pace of progress, we expect Management to be looking ahead to assess financing options for the DFS and development. We have seen debt financing by Chinese partners proposed for other ASX-listed graphite juniors, so this may be an option for IXR.

There is scope for another MoU, given that the current MoU is for 25ktpa and the production capacity is up to 50ktpa.

China Ningbo would likely be a taker for the other 25ktpa, given its interest to date, mandates to source larger volumes, and pre-existing relationship with the company. However, the company’s stated preference is to have more than one offtake partner. COMMENT ON THE GRAPHITE MARKET

Tesla Motors (NASDAQ:TLSA) helped put the graphite market back in the spotlight on the 1st May, in announcing a new product: The Powerwall. This is a wall-mounted lithium/graphite battery designed for residential use. Tesla intends to produce them on a vast scale from the Nevada-based Gigafactory it is

FIG 3: ESTIMATION OF FLAKE GRAPHITE REQUIRED FOR PRODUCTION OF TESLA POWERWALL

Source: CG, with Tesla & Benchmark data

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SUMMARY

IXR has delivered on its stated strategy over the last few months to emerge with a solid foundation for taking Chilalo forward toward development.

The company has defined a high-grade resource, with excellent metallurgical qualities.

It has signed a high value MoU with a genuine counterparty, determined the project is economically viable and commenced permitting, and improved funding.

With further news-flow anticipated in coming quarters, including drill results, additional MoU’s, PFS outcomes, potential news on project financing, and the US$4m payment from Fig Tree - we anticipate growing interest in the significant value opportunity and a rerating to bring IXR in line with its peers.

Loosely evaluating IXR by comparing its EV to its intended scale of production (Fig 5) offers a rough indication of the mismatch between its valuation and that of its peers.

We anticipate that as we see an increase in market awareness of the progress made by IXR, and its continued emergence as a credible, high-grade project, IXR’s valuation could move closer in line with that its peers.

prices for the various product specifications over time, Benchmark Minerals has kindly provided Canaccord with the following comments specifically for this report:

‘Upward price pressure is likely to begin towards the end of the year [2015] as demand from the battery sector escalates. This will continue into 2016 as supplies tighten and competition between consumers increases for existing output, which is unlikely to be supplemented by significant new quantities entering the market in the medium-term.

Source: Canaccord Genuity, Iress, Company reports

Fig 5: EV/TARGET PRODUCTION METRIC FOR IXR, VERSUS REGIONAL PEERS

FIG 4: BASE CASE FORECAST GRAPHITE PRICES

Source: Benchmark Minerals, Syrah Resources

This squeeze on supply is likely to continue at a slower rate into 2017 as new operations ramp up production, which will be followed by a slight correction in the market in 2018. With a limited supply of XL/jumbo flake products today, this trend is expected to be particularly severe across higher value grades, while for medium-large flake products the recovery is likely to be slower in the short-term but will accelerate as traditional markets compete to secure supplies’

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APPENDIX: IMPORTANT DISCLOSURES

Analyst Certification: Each authoring analyst of Canaccord Genuity (Australia) Limited whose name appears on the front page of this research hereby certifies that (i) the recommendations and opinions expressed in this research accurately reflect the authoring analyst’s personal, independent and objective views about any and all of the designated investments or relevant issuers discussed herein that are within such authoring analyst’s coverage universe and (ii) no part of the authoring analyst’s compensation was, is, or will be, directly or indirectly, related to the specific recommen-dations or views expressed by the authoring analyst in the research. Analysts employed outside the US are not registered as research analysts with FINRA. These analysts may not be associated persons of Canaccord Genuity Inc. and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

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