ENERGIZER RESOURCES INC. //Graphite

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1 ENERGIZER RESOURCES INC. //Graphite S T O R M C R O W INITIATION REPORT Size and Quality Do Matter Aug 17, 2014 Target C$0.35 TSX: EGZ OTC QX: ENZR Energizer is 100% owner of the Molo Graphite Project in southern Madagascar. The Molo project has a high in situ grade, with outcropping graphite hosted in relatively soft rock that suggests very low mining costs. Low overall costs and large resource make Energizer a very attractive development-stage graphite project, likely especially attractive to end- users or traders seeking a long-term supplier of pure natural graphite. Jon Hykawy, PhD President jon@stormcrow.ca Tom Chudnovsky Managing Partner tom@stormcrow.ca Vid Thayalan, S.M.. Partner vid@stormcrow.ca We therefore initiate coverage on Energizer, with a positive recommendation, and a CAD$0.35 target price. New Old Recommendation Positive N/A Target C$0.35 N/A Shares O/S ~267M Shares O/S FD ~338M Recent Price C$0.13 Market Cap C$34.9M Net Cash ~C$3.5M See the end of report for important disclosures

2 Energizer: Size and Quality Do Matter For background on the graphite industry, we refer readers to our recent torturetest price deck and industry initiation study. Graphite is a very old and very common industrial material, used in pencils and lubricants and refractory parts such as crucibles for the metal-making industry. But with advances in technology over the last few decades, graphite use is showing massive growth due to industries such as electronics and electric vehicles, where natural flake graphite is used in batteries and in carbon foil heat spreaders. And if graphene, the single atom-thick sheets of chemically bonded carbon atoms, is able to be made inexpensively, then whole new industries might grow up around this new material, with unknown implications for graphite demand since graphite provides one possible source for the raw materials required to make graphene. Today, much of the graphite used by high-tech end users is synthetic, made from carbonaceous feedstock like petroleum coke in a process that is both highly timeand energy-consuming. Synthetic graphite is currently the only useful raw material for manufacturers of carbon fibers and high-power electrodes, and remains the preferred choice for use in battery anodes. The high-cost, energyintensive process of making synthetic graphite results in a compound with the necessary high purity and customized physical properties, but that depends on both raw starting materials and the processing techniques. Stormcrow s recent graphite industry reported concluded that there are applications that will increase demand for jumbo (+35 mesh, or flakes larger than 500 µm) and large ( mesh, or flakes between 297 μm and 500 μm), but that the rush to produce these highly valued flakes will likely result in a significant oversupply of -150 mesh, or flakes smaller than 170 μm, making survival of new entrants into the graphite market more difficult, unless these entrants are gifted with low-cost production and/or sufficient supply of larger flake material. Energizer enjoys a deposit with a high grade, at Molo. The first pit outlined in the company s April 2013 PEA study had 8.5% in situ grade, roughly 32 million mineralized tonnes of ore, a low strip ratio of only 1.65, and a 27 year mine life. We believe there are a number of end-users and traders that would view Molo as a secure, long-term supply for required raw materials. And we believe that Molo will be improved over time. Our recent visit to site suggested to us that stripping ratio will likely be driven lower as pit locations are optimized, perhaps even to levels approaching 1. We STORMCROW.CA PAGE 2

3 saw many areas where high-grade outcrops were present at surface, over wide areas. There was no question in our mind that the resource size would be easily expanded, as Molo currently represents less than 1% of the graphite on more than 300 kilometers of continuous graphite mineralization that is open along strike and at depth. Indeed, in August 2014 the company upgraded the resource at Molo to 23.6 Mt at 6.32% measured, 76.7 Mt at 6.25% indicated and Mt at 6.13% inferred. Even with only the measured and indicated levels of resource, Molo now contains more than enough ore to produce at the company s initially projected levels, for all practical purposes, forever. Molo It Keeps Going and Going and Going Energizer s 100% owned Molo Graphite Project is one of the largest known crystalline flake graphite deposits in the world. The Molo Project hosts a NI compliant indicated and inferred mineral resource of million tonnes, grading 6.34% carbon (C). There are some high grade areas in the samples assayed that were capped at levels of 12% to 15% carbon, all of this 100% flake graphite. The low-grade cutoff used was 2%. Energizer is currently completing a Feasibility Study, with results to be released to the market by late As part of this study, results of the company's recently completed pilot plant operation confirmed that the company can produce highpurity graphite concentrate at a very competitive price. These concentrates have been chemically treated and have reached grades of 99% or better, making them suitable for use in batteries and other high-technology applications. Production is targeted for Q2/Q3 of Energizer s total land package in southern Madagascar encompasses approximately 320 kilometers of continuous graphitic trends, with graphite mineralization immediately at surface. In addition to the Molo Graphite Project, Energizer has also identified through drilling, trenching and geological mapping at least six other zones that could, themselves, be stand-alone graphite deposits. STORMCROW.CA PAGE 3

4 Exhibit 1 -- Project Location Right: Location of Molo Graphite Project in relation to major graphite demand markets. Left: Property location in Madagascar Right: Molo Project is located within the hub of top purchasing markets for flake graphite. Source: Energizer Resources Our recent graphite industry report and our pricing torture test illustrated a different view of the graphite industry than taken by some others. While there are applications that we believe will dramatically increase the demand for jumbo (+48 mesh, or flakes larger than 500 μm) and large (-3548 mesh, or flakes between 297 μm and 500 μm), the rush to satisfy this demand and benefit from attractive larger flake pricing will likely result in the concurrent overproduction of graphite of smaller flake (-150 mesh), making it difficult for any additional new producers beyond the initial entrants to survive the market. The only exception to this rule, of course, would be producers that might be able to produce high purity material, STORMCROW.CA PAGE 4

5 which carries an added price premium, at a low cost. Energizer appears to belong in that camp. We would be remiss if we did not point out that our informal names for the various ranges of flake sizes may differ from those used by the company or by others. They correspond much more closely to the range of sizes used by one of the only sources for graphite pricing, Industrial Minerals. For example, our jumbo size range is +35 mesh, or greater than half a millimeter. Large, for us, is mesh (graphite flakes that pass 35 mesh, but are trapped by 48 mesh). What we term medium graphite is essentially the large of the size range used for batteries, at Fine and very fine are the lower-value portions of the market, at and -200, respectively. However, our pricing models and prices used in valuing companies are based on mesh size, not on informal names, so regardless of how one enumerates or labels the various flake size ranges, we believe that our financial conclusions are valid. In the broadest sense, we have visited Madagascar a number of times in the last few years, and the country as a mining jurisdiction is, thankfully, causing us less and less concern with each visit. The country underwent a coup d état in 2009, and the United States withdrew AGOA (African Growth and Opportunities Act) benefits and support from Madagascar in Recent democratic elections have installed President Rajaonarimampianina (we just wanted to type the name), a Canadian-trained chartered accountant who is pro-western and pro-mining. Following those elections, United States President Obama reinstated Madagascar s AGOA eligibility on June 26, Canada has also recognized the election of the new government, with Canadian Minister of Trade Joe Fast already having met with Madagascar s Strategic Resources Minister. The country is rapidly returning to being a perfectly acceptable business platform, albeit it may be doing so outside of any mainstream recognition of that fact. Leaving aside the metaphorical business climate, actual physical topography at Molo is in Energizer s favour. The Molo deposits lies in a relatively flat, semi-arid environment, with few trees, almost no local population and no problematic flora or fauna with which to contend. All of the relevant portion of the deposit is immediately at surface, here. This implies low stripping requirements, with all indications pointing to it being superior to the levels used in the PEA, and this would translate to lower mining costs. Indeed, it has even translated to lower exploration costs, with the company using small drone technology to explore for graphitic outcrops using GPS-located aerial photography and conformal mapping. STORMCROW.CA PAGE 5

6 Exhibit 2 Camera-equipped Drone Used by Energizer Source: Stormcrow Energizer initiated pilot plant testing in January 2013 with SGS Canada, partly in order to generate very large samples of concentrate for evaluation by potential off-take partners. The pilot plant generated several findings that were to our liking. Energizer has publicly revealed that graphite flakes from the Molo deposit can be purified to a high-grade graphite concentrate by simple flotation alone, STORMCROW.CA PAGE 6

7 which should also support low costs. The analysis of flake fractions in early analysis revealed: 43.5% of flake is +80 mesh Average grade of +48 mesh and mesh material is greater than 97% purity, direct from flotation Average grade of all +200 mesh flake is 96.7% C, and 78% of the Molo concentrate is +200 Impurities are largely confined to the lowest value and finest material, -400 mesh, which graded at 93.7% C, with average recovery of 90.3% Previously, the flow sheet developed for Energizer s PEA by another metallurgical firm had suggested that Molo ore must be milled finely to allow for high recoveries, and for silica to be extracted from the concentrate and allow for purification. The more recent pilot plant results from SGS, which also resulted in production of 13 tonnes of concentrates that have been sent to potential customers for evaluation, have shown that large flake sizes can be preserved while generating above average graphite purity. For example, the +48 mesh fraction was assayed to be almost 98% pure, with 96% representing a very favourable concentrate grade. Our thesis is that, given entry into the market by 4-6 new producers with average production of perhaps 30,000 tpa each, profitability will reside in production of larger and purer graphite flake. Energizer s fraction of production is now likely to be more than acceptable, and the combination of high purity and low costs, as we will see below, makes the company very profitable. Exhibit 3 Energizer Flake Fraction Output Using Current Flow Sheet Source: Company reports STORMCROW.CA PAGE 7

8 Molo s Mojo Low Cost Production The metallurgical characteristics of the Molo deposit allow for jumbo flake separation by simple means to produce +100 mesh graphite at an average of better than 97% pure Cg at recovery rates of better than 90%, using simple flotation and no additional chemical purification techniques. The flow sheet used by SGS Canada to generate concentrates for customer analysis has not yet been published, however a recent visit to SGS Lakefield suggests that it is in no way unusual compared to that used historically by other graphite producers. The purity of the concentrate is a function of the Molo deposit itself. Energizer management has made the early decision to engage an EPCM firm, and have made an excellent choice in working with DRA. DRA is Africa s largest EPCM, based in Johannesburg, South Africa, and have successfully constructed over 200 mines throughout Africa. Through their subsidiary, Minopex, DRA currently operates roughly 20 mines for major multinational firms such as Xstrata, Anglo American and Rio Tinto. DRA previously completed Molo s NI PEA, and is currently working on the DFS. A senior DRA director serves on Energizer s Board of Directors, and with DRA s knowledge of the African mining environment is continuing to assist with the very rapid development of Molo. The company is hoping to release their DFS in late 2014, only three years after undertaking work at the site, which represents remarkably rapid progress that would likely not have been possible without the involvement of DRA. The relative ease-of-access to the deposit itself, and the use of simple flotation in initial processing, sets Molo in good stead to become a low-cost producer of graphite. Based on the results from the PEA as well as estimates based on historical results from other miners, the process described above is estimated to have a cost of $523 per tonne FOB port in Madagascar ($418 per tonne production cost, plus $105 per tonne transport), so including both local transportation and environmental costs. Our previously published graphite price deck was intended to be a torture-test for most companies and, intrinsically, pessimistic. For analysis of each possible producer, we will be using a price deck that is pushed back towards historical prices. Specifically, we use a 2-year trailing average of flake graphite prices (from Industrial Minerals) averaged with our torture-test price projections. The resulting base-case deck is below. STORMCROW.CA PAGE 8

9 Exhibit 4: Base-Case Graphite Price Deck Projections Jumbo 3,365 2,135 1,577 1,753 1,832 1,728 1,667 2,188 2,677 3,977 Large 2,514 1,595 1,178 1,238 1,130 1, ,048 1,116 1,225 Medium 2,138 1,514 1,025 1,060 1, Small 1,375 1, Very Fine Source: Stormcrow We do not ascribe any value to any of the other projects owned in whole or part by Energizer. This includes Energizer s Green Giant sedimentary rock-hosted stand-alone vanadium project. We acknowledge that Green Giant has NI reports in place, and has an indicated resource size of 49.5 million tonnes at 0.693% V2O5, along with an inferred resource of 9.7 million tonnes at 0.632% V2O5. However, our valuation of the company is based solely on the Molo graphite project, so investors will essentially be receiving a free option on vanadium by investing in Energizer. Our revenue projections for the company have it selling 75% of annual production in the form of flotation concentrates, and the balance as 99+% purified graphite flake to various specialty markets. We assume our price deck for concentrates, but use a price of roughly $2,500 per tonne (depending on year) for higher purity material. On this basis, a simple DCF model, assuming commencement of production in late 2016 and rising to annual levels of almost 65,000 tonnes thereafter with $162 million in capital expenditure that is paid for by a 60/40 split between 4%, 10 year debt and equity, and using a fairly high 12% discount rate (especially given the risk mitigation owing to using a EPCM contractor such as DRA), values the company as shown below: STORMCROW.CA PAGE 9

10 Exhibit 5 Simple DCF Model Source: Stormcrow Management Ready for Development Peter Harder - Chairman of the Board Mr. Harder has been a director of Energizer since July He is Senior Policy Advisor to the international law firm Dentons Canada LLP, and possesses deep expertise in public policy, as a result of his involvement at the center of government decision-making for over thirty years. Prior to joining Dentons, Mr. Harder was a long-serving Deputy Minister in the Government of Canada. First appointed a Deputy Minister in 1991, he served as the most senior public servant in a number of federal departments, including Industry and Foreign Affairs and International Trade. At present, Mr. Harder also serves on the Boards of Power Financial Corporation, IGM Financial Corporation, Magna International Inc., and Northland Power. In 2008, Mr. Harder was elected the President of the Canada China Business Council (CCBC). Richard Schler CEO, Director Mr. Schler was appointed CEO of the company in September 2013, but has worked with Energizer and served as a director since April Prior to being appointed CEO, Mr. Schler held numerous positions including EVP, CFO and COO. STORMCROW.CA PAGE 10

11 Before joining Energizer, he held various senior management positions with noted corporations in the manufacturing sector. Mr. Schler holds an MBA degree from Western University, and has a background in mechanical engineering. He has over 30 years of financial management, engineering and business operations experience. Craig Scherba President, COO and Director Mr. Scherba was appointed President and COO in September 2012 and has been a director of the company since January Previously, he served as VP Exploration of Energizer from January 2010 to September 2012, and currently serves as VP Exploration of MacDonald Mines Exploration Ltd., Red Pine Exploration Inc. and Honey Badger Exploration Inc. Mr. Scherba was professional geologist with Taiga Consultants, a mining exploration consulting company, from March 2003 to December 2009, and was a managing partner of Taiga from January 2006 to December He has been a professional geologist since 2000, and his expertise includes supervising large Canadian and international exploration projects, and was an integral member of the exploration team that developed Nevsun Resources high grade Au/Cu/Zn Bisha mine in Eritrea. Mr. Scherba served as Energizer s Country and Exploration Manager in Madagascar during its initial exploration stage. Robin Borley - Senior VP, Mine Development Mr. Borley is a graduate mining engineering professional and a certified mine manager with more than 25 years of international mining experience building and operating mining ventures. He has held senior management positions, both internationally and within the South African mining industry. Most recently, he was Mining Director for DRA Mineral Projects, and was instrumental as the COO of Red Island Minerals in developing a Madagascar coal venture. His diverse career has spanned resource project management, evaluation, exploration and mine development. Mr. Borley has completed several mine evaluations including operational and financial evaluations of new and existing operations across a diverse range of resource sectors. He has experience in the management of both underground and surface mining operations, from both the contractor and owner perspective. From 2006 through 2012, Mr. Borley participated in the BEE management buy-out transaction of the Optimum Colliery mining property from BHP, through its independent listing and its ultimate sale to Glencore in December STORMCROW.CA PAGE 11

12 Peter Liabotis Senior VP, CFO and Corporate Secretary Mr. Liabotis was appointed CFO of Energizer in September, Previously, he was the company s VP Finance. Mr. Liabotis also currently serves as VP Finance of MacDonald Mines Exploration Ltd., Red Pine Exploration Inc. and Honey Badger Exploration Inc. From August 2008 to September 2009, Mr. Liabotis worked for EFG Wealth Management (Canada), assisting with accounting matters and Canadian mutual fund launches. From July 1998 through July 2008, he was Senior VP and CFO of Olympia Capital (Bermuda) Ltd. Prior to July 1998, Mr. Liabotis worked with both PriceWaterhouseCoopers in Bermuda and KPMG in Canada. Mr. Liabotis is a current member of the Board of Directors of Honey Badger Exploration. He is a Chartered Accountant and has received a B.Comm. (Honours) degree from the University of Windsor and a B.A. from Western University. Brent Nykoliation Senior VP, Corporate Development Mr. Nykoliation was appointed Senior Vice President Corporate Development in September Previously he was the Company s Director of Corporate Development, a position he held since joining the Company in November Mr. Nykoliation holds a B.Comm. (Honours) degree from Queen's University, and has a career that has spanned 15 years in various senior management roles in marketing and corporate development with notable industry leading companies such as Nestle, Home Depot and Whirlpool. Quentin Yarie - Senior VP, Exploration and Director Mr. Yarie s principal occupation is as a professional geophysicist (P.Geo). He is President & CEO of Red Pine Exploration Inc., Senior Vice-President of Exploration for Honey Badger Exploration Inc. and Senior Vice-President of Exploration for MacDonald Mines Exploration Ltd. since January 1, Mr. Yarie was the business development officer of Geotech Limited, an Ontario corporation from October 2007 to January From September 2004 through October 2007, he was a senior representative of sales and business development for Aeroquest Limited. Roland Fok Seung - Chartered Accountant and Madagascar Country Manager STORMCROW.CA PAGE 12

13 Mr. Fok Seung is a Chartered Accountant of the Institute of England and Wales and the Association of Chartered Certified Accountants. Employed as Energizer s Madagascar Country Manager for the past five years, Mr. Fok Seung is based full time in Madagascar and will continue to act in this capacity with a focus on financials and business activity. Conclusions Future Producer of Pure Flake Graphite One of the arguments we hear against Energizer is that the Molo project is challenged by its infrastructure. No company wishes to spend capital on the construction of roads and the like, and in a perfect world every mining project would have at least a two-lane paved highway outside the front gate. However, Energizer has incorporated its infrastructure penalties into its PEA, and will also do so in its DFS. The company also has to absorb costs, albeit likely lower than those required by most other graphite projects due to Molo s higher concentrate purity, to purify its concentrates and access the higher-value market for purified graphite. In spite of this or perhaps because of Molo s relative advantages, the project remains not only a viable producer of pure, natural flake graphite, but arguably is one of the strongest potential entrants. Our financial model suggests that the company should be valued at US$0.40 per share, excluding any value that one might ascribe to any of the company s projects other than Molo. On this basis, we are initiating coverage with a positive recommendation and a $0.35 target price. However, perhaps more important than the pure financial analysis is that Molo and the surrounding graphite discoveries can produce at a stable, low cost for decades. This ability to secure supply at a known cost for an extended period of time is precisely what makes any critical materials project attractive to strategic investors. More than many others, Molo can provide these attributes to the right partners. We believe that this is the reason Molo, and Energizer, will just keep going and going and going. STORMCROW.CA PAGE 13

14 Keywords Industry Graphite, Critical Materials, Critical Metals, Mining, Industrial Minerals Relevant Companies ENERGIZER RESOURCES TSXV:EGZ SYRAH RESOURCES ASX:SYR NORTHERN GRAPHITE TSXV:NGC ZENYATTA RESOURCES TSXV:ZEN FOCUS GRAPHITE TSXV:FMS FLINDERS RESOURCES TSXV:FDR GRAPHITE ONE TSXV:GPH STANDARD GRAPHITE TSXV:SGH ONTARIO GRAPHITE Private MASON GRAPHITE TSXV:LLG VALENCE INDUSTRIES ASX:VXL ST. JEAN CARBON TSXV:SJL LOMIKO METALS TSXV:LMR SOVEREIGN METALS ASX:SVM EAGLE GRAPHITE PRIVATE LAMBOO RESOURCES ASX:LMB Why do we use keywords? We feel people who could stand to benefit from the contents of this report, are not solely ones who already follow the specific company or sector discussed herein. As such, we hope to provide this free service to as wide an audience as possible and keywords help to this end. Important Disclosures Stormcrow Capital Ltd. ( Stormcrow ) is a financial and technical/scientific consulting firm that provides its clients with some or all of the following services: (i) an assessment of the client s industry, business plans and operations, market positioning, economic situation and prospects; (ii) certain technical and scientific commentary, analysis and advice that is within the expertise of Stormcrow s staff; (iii) advice regarding optimization strategies for the client s business and capital structure; and (iv) opinions regarding the future expected value of the client s equity securities so as to allow the client to then make capital market, capital budgeting and capital structure plans. Stormcrow does not provide securities trading services, equity sales or distribution services, securities underwriting services, or investment banking services. Stormcrow does publish research reports for general and regular circulation. With the consent of Stormcrow s client, the client and/or its industry sector may be the subject of an investment or financial research report, newsletter, bulletin or other publication by Stormcrow where such publication is made publicly available at or elsewhere or is otherwise distributed by Stormcrow. Any such publication is limited to generic, non-tailored advice or opinions and should not be construed as investment advice that is suitable for the reader or recipient. Stormcrow does not offer personalized or tailored investment advice to anyone and its research reports should not be relied upon in making any investment decisions. Rather, investors should speak with their personal financial advisor(s). ENERGIZER RESOURCES INC. ( Energizer, the Company ) is a client of Stormcrow, and as such, Stormcrow has agreed to provide the Company with a variety of consulting services. The fixed rate fee that the Company pays to Stormcrow is not contingent on the content or conclusions of any of Stormcrow s research reports and is not contingent on the price, or price movement, of any securities. None of Stormcrow s officers, directors, or significant shareholders own, directly or indirectly, shares in the Company. It is a policy of Stormcrow and its employees to refrain from trading in a manner that is contrary to, or inconsistent with, Stormcrow s most recent published recommendations or ratings, except in circumstances of unanticipated extreme financial hardship. Stormcrow intends to provide regular market updates on the affairs of the Company (at Stormcrow s discretion) and make these updates publicly available at Readers who wish to receive notice when such updates become available, should to info@stormcrow.ca with the subject heading Get Update Notifications. All information used in the publication of this report has been compiled from publicly available sources that Stormcrow believes to be reliable. Stormcrow does not guarantee the accuracy or completeness of the information found in this report and Stormcrow may not have undertaken any independent investigation to confirm or verify such information. Opinions contained in this report represent the true opinion of Stormcrow and the author(s) at the time of publication. The securities described in this research report may not be eligible for sale in all jurisdictions or to certain categories of investors. This report and the content herein should not be construed by anyone as a

15 solicitation to effect, or attempt to effect, any transaction in a security. This document was prepared and was made available for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned herein. The securities referred to herein should be considered speculative in nature and should be considered to involve a high amount of financial risk where investors may lose all of their investment. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. No representation is being made that any investment or security will or is likely to achieve the return or performance estimated herein. There can be sharp differences between expected performance results and the actual results. Dissemination of Research Since Stormcrow does not rely on earning commission fees from institutional agency trading services, or investment banking revenues, this research report is widely available to the public via its website: Investment Rating Criteria We do not provide an investment rating, beyond indicating whether the target price exceeds current trading ranges by a reasonable range, indicated as Positive, or whether the target price is either below or roughly equivalent to the current trading range, indicated as Negative. Each investor has an individual target return in mind, we leave it to the individual investor to determine how our target and the current price fit in their portfolio. STORMCROW.CA PAGE 1