Commencing Production Next Month / Trump Win May Propel Graphite Stocks

Report Highlights

• STS has secured the necessary permits and licenses for a three-phase development plan, and has entered into initial sales agreements with U.S. clients for its graphite concentrate.
• Phase one development was partially funded by a US$10M streaming finance agreement with Sprott Resource Streaming and Royalty Corp., which has also committed an additional US$9-US$18M for phase two.
• At BamaStar, a recent drill program returned significant graphite intercepts, and extended mineralization at depth. Metallurgical tests yielded impressive concentrate grades of up to 99.5% Cg. STS aims to complete a  Preliminary Economic Assessment (PEA) next month,  and initiate a feasibility study in Q4. In late 2023, the U.S Department of Defense  offered to fund 50% of the feasibility study, or US$3.2M.
• Graphite prices are down 20% YoY, amid slower EV sales growth and higher supply. That said, we remain optimistic about long-term prices as the sector is anticipated to face a significant supply deficit towards the end of this decade. Note that graphite and lithium are the only two primary inputs used in all major types of batteries. 
• We believe the U.S. has a pressing need for domestic graphite production, as it imports 100% of its graphite consumption, and has designated graphite as a critical mineral. With China supplying 75% of the global market, the U.S. aims to cut its dependence on Chinese imports, as evidenced by the recent announcement of a 25% tariff on Chinese natural graphite starting in 2026.
• Upcoming catalysts include commercial production at Santa Cruz, a resource update and a PEA on BamaStar. We believe a potential Trump win could escalate trade tensions between the U.S. and China, potentially triggering a rally in graphite stocks.

Price Performance (1-year)

Portfolio Summary

Advancing two graphite projects in the Americas towards production. The U.S. is a leading importer of graphite 

Brazil is the fourth largest graphite producer in the world 

Santa Cruz Graphite Project, Brazil (100% ownership)

STS has completed construction and development activities, and aims to start phase one production next month, targeting 12 Ktpa of natural flake graphite.

Located in one of the most active graphite producing regions in the world, with a track record of over 70 years of production

Excellent infrastructure in place - 1.3 km from a paved highway; power, gas, and water within 5 km; 270 km from a port

A mid-sized/relatively low-grade resource; however, resources are shallow and open-pittable, implying relatively low OPEX

In addition, there is no need for crushing or blasting, and the strip ratio is relatively low

We believe another major advantage is that 63% of resources are large flake; the type used for anode materials in EV batteries

As resources remain open along strike, and at depth, we believe there is potential for resource expansion; note that 95% of the project area remains untested. The 2020 PFS was based on a 12-year mine life

Relatively low initial CAPEX and OPEX. AT-NPV5% of US$81M, and a high AT-IRR of 35%, using US$1,287/t graphite vs the spot price of US$1k/t for large flake graphite (93%-95% Cg)

The company is set to begin phase one production next month.  Additionally, STS is planning a 4,000-5,000 m resource expansion drill program, followed by a feasibility study, in 2025.

BamaStar Graphite Project, Alabama (Option to earn 75%)

Fully permitted. A historic producer, grading 3%-5% Cg (medium grades). Located on the Alabama Graphite Belt

Open-pit resources. Relative to Santa Cruz, BamaStar has higher tonnage, but similar grades. The deposit remains open in multiple directions

Since our previous report, STS has completed an infill/resource expansion drill program (totaling 15 holes/1,900 m), and additional metallurgical tests, in preparation for an upcoming PEA.

All holes intersected material graphite intercepts of up to 3.34% Cg.  Drilling has revealed a deeper mineralized zone beneath the previously identified area; while it is too early to quantify the potential upside, we believe this discovery will positively impact the upcoming resource update and PEA

Metallurgical tests yielded concentrate grades of up to 99.5% Cg, with relatively high recoveries

STS is considering the option of mining oxide and transitional materials before processing fresh ore, with the aim of potentially reducing initial CAPEX and OPEX. Management plans to complete the PEA next month, and initiate a feasibility study in Q4. The U.S. Department of Defense has offered to fund approximately 50% of the feasibility study, or US$3.2M, which is expected to take about 18 months.

Aiming to complete a PEA next month

Upcoming Catalysts

Multiple near-term catalysts

Financials

Strong cash position

Can raise up $0.5M from in-the-money options and warrants

FRC Valuation

STS is trading at $34/t (previously $29/t) vs the sector average of $23/t (previously $30/t) 

Given that STS is a near-term producer, and more advanced than most other juniors on our list, with a higher percentage of large flake graphite, we believe STS should trade at a significant premium

Our revised valuation on Santa Cruz is $1.16/share, down from $1.72/share, due to share dilution since our previous report, partially offset by the higher present value of future cash flows as the project nears production

Using a sum-of-parts valuation, we are arriving at a revised fair value estimate of $1.47/share (previously $2.01/share

We are reiterating our BUY rating, and adjusting our fair value estimate from $2.01 to $1.47/share. Upon commencing production, STS will become the second publicly traded junior flake graphite producer in North America.

Risks

We are continuing to assign a risk rating of 5 (Highly Speculative)

We believe the company is exposed to the following key risks (not exhaustive):

• The value of the company is dependent on flake graphite prices
• Projects might not be advanced to production within management’s expected timeframe
• Development 
• Permitting 
• FOREX