Former Xstrata boss creates Vision Blue Resources and invests in NextSource Materials

Sir Mick Davis built Xstrata into one of the largest mining companies in the world before it was acquired by Glencore in 2013 and has raised more than US$40 billion from global capital markets over the course of his career.

Now the mining executive is turning his attention to the battery minerals sector and in December 2020 launched Blue Vision Resources to invest in companies with projects that can be brought into production quickly to feed the rising demand for metals used in the batteries of electric vehicles and grid storage.

Blue Vision already has raised US$60 million and recently announced its first deal - a US$29.5 million investment in NextSource Materials (TSX: NEXT; US-OTC: NSRCF) - a Toronto-based junior that is developing its Molo graphite project in Madagascar. The funds will be sufficient to put the large flake graphite deposit into production as early as the second quarter of next year. Sir Davis will also become the company's chairman.

The mining industry veteran noted that NextSource's Molo project "has the potential to become one of the lowest cost producers of high-quality graphite in the world and a tier one multi-generational asset," adding that "the initial stage of the project has been substantially de-risked, and we are confident that production can begin within a year."

The demand outlook for graphite, he said, "is the strongest for all battery minerals with no credible substitution risk and the potential for a six-fold increase in global annual demand."

Vision Blue Resources raised its first US$60 million in five weeks and the company says it has already identified a pipeline of future investments to capitalize on structural changes in battery mineral demand.

"The impact of rapidly growing demand for battery minerals is likely to lead to a surge in demand for specific commodities that will dwarf anything the mining industry has ever seen before, including the commodity impact of China's industrialization in the last 20 years," Sir Davis commented in a news release. "In combination with this surge in demand, a failure to develop new sources of supply highlights the need to ensure that critical mining assets are immediately financed and brought to production."

Sir Mick Davis's frenetic schedule prevented an interview with The Northern Miner, but Brent Nykoliation, NextSource Materials' executive vice president of corporate development, described the investment as a game changer for the company and said since the deal was announced on Feb. 8 he has fielded calls from "about a dozen" companies interested in securing graphite from Molo.

"It's a huge coup for us to get someone of that caliber," Nykoliation said in an interview. "The fact that we are fully financed by Sir Mick Davis has now caused companies to approach us and say, 'Can we buy from you?'"

Sir Mick Davis. Credit: NextSource Material.

The investment not only provides enough money to put the first phase of the project (17,000 tonnes of graphite annually) into production by mid-2022, but will also enable the junior to fast-track two technical studies, Nykoliation said. The first will examine expanding production to more than 100,000 tonnes per year in a second phase of the project, and the second will assess building a facility that will convert the graphite into battery grade anode - also known as spherical graphite, or SPG. This purified graphite is then used for lithium-ion batteries.

"At the end of the day, the original equipment manufacturers (OEMs) prefer to buy graphite in its finished state," Nykoliation explained. "They want the graphite that goes into the battery. The graphite we will be producing in Madagascar is a flake concentrate, but the battery industry needs you to purify it. They want to buy the value-added graphite, because if they just buy your feedstock, then they have to have someone else convert it or do that themselves."

In October 2018, NextSource signed a binding off-take agreement for 20,000 tonnes of graphite a year over ten years, with a Japanese trading company that supplies Japan's largest battery processor and manufacturer of graphite anode material used in lithium ion batteries for EVs. The company, which NextSource declines to name, supplies car companies around the world, including the largest EV maker in the United States. "They supply the majority of anode material to the Japanese OEMs; Subaru, Honda, Toyota and all the material goes into the Evs, and it is also the largest supplier of the most prominent EV maker in the U.S."

An updated feasibility study released in September 2019, outlined a phased development approach with the first phase producing 17,000 tonnes of graphite a year over the first two years and a second phase beginning in year three of 45,000 tonnes per year.The study outlined a mine life of 30 years and initial capex for phase 1 of US$21 million and phase 2 off US$39.1 million. (Capex and working capital combined bring the first phase estimate to about US$25 million.)

But with the investment from Vision Blue Resources and rising demand for graphite, Nykoliation said, the numbers for phase two in that study "are out the window now."

"The market has changed with all those car companies like GM saying they are going EV and forecasts doubling and even quadrupling for what they need for their batteries," he said. "And the fact that Sir Mick Davis is involved. The money from him pays for all of phase 1 and fast-tracking the mine expansion in phase 2."

Nykoliation said that the new studies being fast-tracked for phase two could see production rising from the 45,000 tonnes a year outlined in the 2019 feasibility study to well over 100,000 tonnes.

The deposit contains 100.4 million measured and indicated tonnes grading 6.3% carbon (graphite) for 6.3 million tonnes of graphite and inferred resources of 40.9 million tonnes grading 5.8% carbon for 2.4 million tonnes of graphite. The resource estimate used a cut-off grade of 2%.

President and CEO Craig Scherba walking across surficial graphite on the Molo Property in Madagascar. Credit: NextSource Materials.

The plant for phase one will be modular - consisting of 35 units that are built and put together offshore, tested, then dismantled and shipped to Madagascar's Fort Duphin port in Taolagnaro. NextSource forecasts it will take nine months to build the open-pit mining operation and get the plant up and running.

Nykoliation cites statistics from the World Bank that forecast demand for graphite is expected to rise 494% from 2018 production levels by 2050.

"Up until now the largest consumer of graphite was the steel industry," he said, "but that's changing because lithium batteries take a lot of graphite. Roughly 300 pounds of graphite is required for an electric car with a 100 kilowatt battery; it's 2.2 kilograms of graphite for every one kilowatt hour in a battery. These are big numbers."

Nykoliation said Sir Mick Davis' team first approached NextSource in September 2020, created the fund in December, and completed the due diligence on the Molo project in January.

"He views graphite as one of the most critical battery materials required for this secular change happening in the industry," he said, "and the reason he chose us is because we have a very low-cost to build the mine, we have a very high quality off-taker (and another one in negotiations), and a very premium product."

"He's not in this to be a passive investor, he wants to grow it and steer it with expertise. He wants us to grow into a global battery material producer. He didn't invest in us to have a 17,000 tonne a year mine. He wants us to be a fully integrated battery anode producer, and control the whole supply chain."

The US$29.5 million financing package consists of a US$6.1 million equity private placement scheduled to close at the end of February; a US$12.4 million equity private placement to close following shareholder approval; and US$11 million in royalty financing.

In the first tranche, NextSource will issue 120 million common shares at 6.5 ? per share, giving Vision Blue Resources a 16.7% ownership stake. In the second tranche, NextSource will issue 232.1 million units at 7 ? per unit with each unit consisting of one common share and one common share purchase warrant. Each the warrant will entitle Vision Blue to buy an additional common share of the company for 10 ? per share for a two-year period. Once the second tranche is completed, Vision Blue Resources will own about 37% of NextSource's common shares outstanding, or about 49.4% on a partially diluted basis.

NextSource discovered Molo in 2010 but at first didn't realize the deposit was valuable, dismissing it as "pencil graphite." It wasn't until a geology student working on his doctorate at the University of Toronto visited Molo and told the company's president and CEO, Craig Scherba, that the company had a unique project on its hands.

"He came over and said, 'Holy Cow, do you know what you're on? This stuff is very valuable, this isn't pencil graphite, this is a premium quality graphite.' So I started calling off-takers. We have got 300 line km of graphite at surface."

"Graphite is found everywhere in the world but high-quality graphite is not," Nykoliation added. "This is one of the highest quality discoveries in the world."

The graphite at Molo will also be relatively inexpensive to mine, given that it lies between 1 cm and 5 cm below grass cover - giving a strip ratio of just 1:0.5.

With operating costs outlined in the2019 feasibility study of about US$567 per tonne of flake graphite, Molo is competitive with graphite mines in China, he adds, where operating costs can range from US$400 per tonne up to US$900 per tonne.

In addition to the Molo project, NextSource owns the Green Giant vanadium project, about 15 km away. Green Giant contains indicated resources of 49.5 million tonnes grading 0.69% vanadium pentoxide for 756.3 million pounds of vanadium pentoxide and another 9.7 million inferred tonnes grading 0.63% vanadium pentoxide for 134.5 million pounds. The resource estimate used a o.5% cut-off grade.

Nykoliation said he believes that with the increasing focus on Environmental, Social and Governance (ESG); the importance of sustainability; and concerns over U.S.-China trade tensions, more and more companies want to diversify their supply away from China, which he estimates currently produces about 66% of the world's graphite.

"Madagascar is famous for graphite, it's been exporting it for nearly 100 years, but this is by far the biggest discovery in the country," he said. "Molo is in a very friendly mining jurisdiction, the project is 200 km away from the rain forest in an area with a low population and fauna and we have a world-class port built by the World Bank - Fort Dauphin at Taolagnaro."

"We'll be in production in the first half of 2022," he said. "It's been a long time coming and we're super excited."

Drill core showcasing the graphite from the Molo project in Madagascar. Credit: NextSource Materials.