Commenced Production in Brazil, Advancing U.S. Graphite Strategy

• Since our previous report in August 2024, STS has commenced commercial production at its Santa Cruz graphite project (Brazil), and completed  a Preliminary Economic Assessment (PEA) on the BamaStar graphite project (a historic producer) in Alabama.
• STS aims to establish a vertically integrated battery-graphite plant in the U.S., sourcing 100,000 tpy of flake graphite from its projects in Brazil and Alabama. The plant will produce 61,800 tpy of high-value products, such as battery anode materials, enough to support graphite requirements for 1M electric vehicles per year.

• At Santa Cruz, STS has commenced phase one production with an annual capacity of 12 Kt of flake graphite concentrates. The project is fully permitted for 50 Kt per year. We estimate that phase one production of 12 Kt/year could generate US$12M in revenue. The company is anticipated to begin reporting revenue this quarter.
• The PEA on BamaStar returned robust economics, with an AT-NPV8% of US$1.6B, and a high AT-IRR of 27%, using current graphite prices.  Management plans to complete a Feasibility Study (FS) by 2026, and move the project to production by 2027.
• Graphite prices are down 6% YoY, amid slower EV sales growth and higher supply. 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. 
• Key upcoming catalysts include the potential for production ramp-up, and Q1 financials, which will report revenue for the first time.

Price Performance (1-year)

Portfolio Summary

Two graphite projects in the Americas. Santa Cruz is the first new graphite producer in the Americas in over 25 years. The U.S. is a leading importer of graphite 

Brazil is the fourth largest graphite producer in the world. STS aims to establish a vertically integrated battery-graphite plant in the U.S., sourcing 100,000 tpy of flake graphite from its mines in Brazil and Alabama, to produce 61,800 tpy of high-value products, such as battery anode materials

Santa Cruz Graphite Project, Brazil (100% ownership)

STS commenced phase one production in Q4-2024, 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. Located just 1.3 km from a paved highway, and 270 km from a port, with power, gas, and water within 5 km

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

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

A 2020 PFS, based on a 12-year mine life, returned an AT-NPV5% of US$81M, using US$1,287/t graphite vs the spot price of US$1k/t for large flake graphite (93%-95% Cg

We estimate that phase one production of 12 Kt/year could generate US$12M in revenue. We expect the company to start reporting revenue this quarter

We will provide our full-year revenue and earnings forecasts once the Q1 financials are published

STS is planning a 4,000-5,000 m resource expansion drill program, followed by a feasibility study in late 2025.

Located on the Alabama Graphite Belt. This project includes a past producing graphite mine, grading 3%-5% Cg (medium grades). Management aims to commence production in 2027

The PEA was based on a vertically integrated battery-graphite plant in the U.S., producing 61,800 tpy of high-value products over a 19-year project life. This plant will source 50,000 tpy of concentrates from BamaStar, and 25,000 tpy from Santa Cruz, as feedstock. The project will encompass:

• A graphite mine
• A concentrate processing facility in Coosa County, Alabama
• A value-added plant in Mobile, Alabama, strategically located near a port

Resources increased 108% to 1.08 Mt, while the average grade decreased 14%. We believe the impact of higher tonnage more than offsets the decline in grades

Assuming an EV consumes 75 kg of graphite, STS’ plant should support 1M EVs per year

The PEA returned an AT-NPV8% of US$1.6B, and a high AT-IRR of 27%. Product prices used in the study range from US$800/t for fine flake, to US$10,500/t for anode materials, consistent with current price

Management plans to complete a feasibility study by late 2026. The U.S. Department of Defense has agreed to fund US$3.2M towards the study, which is estimated to cost US$9-US$14M over 18 months.

Upcoming Catalysts

Multiple near-term catalysts

Financials

Source: FRC / Company

FRC Valuation

Our DCF valuation on BamaStar (introduced in this report) is $0.74/share

For conservatism, we have not factored in potential upside from value-added products, and have modeled the mine to produce and sell only concentrates, similar to Santa Cruz

We are not making any material changes to our valuation on Santa Cruz

Following the inclusion of our DCF valuation on BamaStar, our fair value estimate for STS has risen from $1.47 to $1.91/share

We are reiterating our BUY rating, and adjusting our fair value estimate from $1.47 to $1.91/share. STS has made significant progress, commencing production at Santa Cruz, and delivering a robust PEA for BamaStar. The company is well-positioned to capitalize on the growing demand for battery-grade graphite, particularly in the U.S.

Risks

We are maintaining our 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 
• Project financing
• FOREX