[Music] thank you welcome to CEO insights I'm Marilyn De Guzman with investing News Network I'm speaking with southstar battery metal CEO Richard Pierce who is providing us an update on the company's two near-term production graphite projects hello Richard really nice to see you hi nice to see you again um let's start off our conversation with just an introduction of southstar battery metals and your company's projects sure so we've got two projects one in Brazil Santa Cruz which is basically in
construction and we're uh going into production and phased approach so phase one is five thousand tons phase two is 25 000 tons in Phase 50. phase three is fifty thousand tons of concentrate um so we're basically constructing phase one right now we'll be operational at the end of this year cash flowing basically starting in in January um Industrial Metals are something that the the commercial relationships have to be developed over time so we like stepping into it before we uh really have to to you know spend Oodles
of cash and so you know phase one is about a 10 million dollar capex phase two is about a 37 35 million dollar capex and then phase three is about a 30 million dollar capex so in the next four to five years we'll be spending basically 80 million dollars to to spend that up to 50 000 tons of country per annum uh it's in a great location very close to the coast uh we've got three major ports that are within a day's Drive we're on the energy grid we've got water will be provided by Wells for 1.3
kilometers off Wolfie Lane paid Federal highways so a very favorable Logistics both for internal demand in Brazil as well as external demand for shipping across the the world uh and and that's really uh our our most advanced kind of our Flagship project we have the Bama Star project which is located in the US and Alabama we just completed our Maiden resource estimate we've got 22 million tons uh and resource about 520 000 tons of contained acidic carbon uh the Drillers are basically getting ready
to mobilize in the next week to 10 days we'll be going out to do uh basically a another drilling program to support our our pea uh and then the idea is to get a pea out in q1 of 2024 uh with the Strategic vision of the company which is two mines each producing fifty thousand tons of concentrate and a centrally located value add plant so that will be vertically integrated uh producing a variety of different value-add uh products including coded SBG and if we look at that sort of vision of a hundred thousand tons of
concentrated and you know 60 to 70 000 tons of value-add product that's a pretty exciting uh uh revenue and margins and and net free cash flow so we're looking to get that basically out in q1 of 2024 and in parallel we will be drilling uh another three or four thousand meters in in Brazil at Santa Cruz upsize our resource there and then look to take our PFS advance that basically to an FS study at the end of 24. and then we can make investment decisions on advancing to phase two and or phase three there there is a scenario
where we actually skip phase two go straight to to phase three so again uh we're pretty excited about what we got in front of us lots lots going on uh and really favorable results so far so two two strategic deposits uh with fantastic infrastructure uh very complimentary or deposits and a team that is uh composed largely of you know proven mind Builders and mine operators so we think that's a strong differentiated for us compared to a lot of other stories in the marketplace and will be the first new graphite producer
in the Americas really since 1996. so across graphite project so you're you know you've you're moving into soon into construction oh sorry and production um I guess I I want to get your insights on sort of how you're approaching the sustainability and the ESG aspects of that operation how are you ensuring a lower carbon footprint for that operation yes sir if you look out across the the space um you've got you know certain components like energy so for example at Santa Cruz particularly we're located 99
of all our power on the grid there is still hydroelectric facility so uh from from a power generation standpoint we're we're extremely lucky and blessed on where we're located so all of our energy will come from hydroelectric sources and in addition to that um you know there's very favorable uh short-term medium-term loan facilities available for example uh solar assist programs So within Brazil you can set up uh solar facilities on your site you can plug that energy back into the grid it
can really knock your energy price down particularly as it relates to to peaking power cost and on top of that you can neutralize some of the other components where you really can't uh you know move away from diesel so for example our rolling Fleet it's going to be you know 25 ton trucks um you know basic actuators it's all oxidized work material has surface mineralization so um it really doesn't make sense to use anything but diesel but with the addition of of solar and uh the the drying for our larger
plants will also be done with eucalyptus so we are planning on and that's a green uh resource so again instead of using say natural gas or electric to dry the the the concentrate will be using a renewable energy sources so when we look out across the entire carbon footprint the process of generating concentrate it's not a huge energy demand it's a pretty small footprint we're at surface mineralization the chemicals for the most part are very benign so it turns our overall footprint
producing con particularly in Santa Cruz we'll have an extremely small carbon footprint it's not a carbon neutral footprint by the time we get uh all the way up to phase three and I want to ask you so two of these projects are in the graphite space so for investors that are unfamiliar why focus on graphite and what are the market opportunities for that sure um so you know think of graphite basically in two buckets you've got traditional uh industrial applications which are growing you know more or less
at GDP so it's Refractories it's high strengths deals lubricants brake pads there's there's a ton of different stuff that you know pencils there there's a ton of different stuff that you actually use in graphite uh in your everyday and you but you may or may not even know about it and that's more or less you know around uh six hundred seven thousand thousand tons of demand currently and it's growing at GDP obviously when you look at the value add components be it electric vehicles or
you know alkaline batteries or graphene fire retards Etc that's really I think the space that a lot of the growth is coming uh from uh and and that's growing at more or less 20 25 compound and annual growth so and you know currently that's again about half of the demand out there so 2023 will have about 1.3 1.4 million tons of global demand for National flake uh graphite and it's more or less split equally between uh you know traditional industrial applications and the value add component but as we
move into the future and you get you know three four percent growth versus 20 to 25 growth obviously the pressure is going to be applied uh and this is the first year where we actually are predicting a deficit of material uh so there's not enough Supply compared to demand uh you know I've seen projections on everywhere between you know 50 all the way up to 150 000 tons of deficit this year so we'll see kind of how it all plays out but when you look at the mid to long term and let's
say you know two to uh seven to ten years we basically need to bring you know 10 to 15 new Minds online meaning they have to be actually producing by 2025 to meet that demand and that doubles again basically by by 2030. so you know on average uh we've got a supply demand situation which is which is out of balance you've got a very constricted Supply it takes a long time to bring these projects on so on you know it takes whatever 10 to 12 years to actually bring a mind from concept all the way through to production sometimes
a little more a little bit less Santa Cruz for example we started working really on that project in 2010 we're in 2023 and we're bringing her online so I think that's fairly typical of the time frame uh so when we look out across the entire 60 or so projects that are in the public market space um really there's almost not enough economic projects out there to meet this this growing demand so we feel very uh excited about having to near-term producing projects Brazil will be online basically at the end of
this year uh Bama Star we're looking at bringing that online in 2027 and then scaling from there so I think we're we're well located with two amazing assets and strategic jurisdictions coming online right at the at the right time when there's a real imbalance between the supply and demand and that the macro setup is such that almost regardless of what happens in the world um the the macro setup for EVS and a growing demand for Lithium-ion batteries is not going away so regardless of what
happens Maryland the macro setup is such that I don't really see anything that's going to change the Dynamics of it meaning um I don't see any scenario out there where the grid power is power demands for storage systems the EV Power demand for storage systems is going to change anywhere in the near future let's say seven to ten year time frame so if you look at the macro setup and the demand that's coming online you know maybe for a variety of reasons it's not quite as bad as you know that
as they think it's going to be regardless uh you know there's projections out there that say we need 97 new uh graphite lines between now and 2035. even if half of that's true uh there's going to be significant pricing pressure between the supply and demand there's going to be a rising price and there's it's just not possible to bring all of these Minds online in in time so again we'll have two projects that are scaling up um you know have have an executive management team and operational team to
deliver on on these projections and again we're in two strategic jurisdictions so we think we're fantastically located to to be really one of the first movers in the space and the contracts are such that a lot of these these car companies the only thing they're really worried about is guaranteeing um supply for the next 20 30 years so they want to see long uh life mind facilities they want to guarantee that the the material is um you know consistent with what they need in terms of you know chemistry
physical characteristics as well as you know being able to deliver spec material as promised and then also being able to to basically you know execute on on your business plan so um you know we feel like we'll be one of the first movers in this pace the contractor such that it's usually a five-year contract extendable for another five-year period so if we're able to execute on our business plan which I have no reason to doubt that we we won't be able to execute on that very well we'll basically be setting
ourselves up for a decade of success as we move through this this energy transition our Revolution that's going on and there's nothing really on the macro scale uh that's going to derail that anytime in the next five to ten years sounds like you're really in in the right place at the right time so I wonder um are you also exploring sort of off take agreements with end users like is that something you're looking into or interested in looking into absolutely and that's kind of a piece of
the puzzle so again I think when you look out across the graphite space the majority of the of the projects only stand up if they can deliver coded SBG to to battery companies we're profitable producing concentrated five thousand tons I'm more profitable producing con at 50 000 tons and in the meantime you know a lot of these contracts require you to provide samples at scale so you know send me a couple kilos send me a couple tons you know send me a container and they'll basically slowly test your material
at scale until they actually get to the to the point where they're like yeah your stuff is good we'd like to set up a long-term contract for you and it's a series of gates that you kind of have to walk your material through and it's the same with all of you Ford is the same as Tesla is the same as GM is the same as as the Volkswagen so they all have a little different special sauce and a you know a size gradation and things that they're looking for but in the you know for the most part the qualification
period it's the same and it you know can take anywhere between 18 months to three years depending on on the company and what they're looking for so and when we lay out our uh you know when we lay out our commercial plan we'll be selling and we're happy to sell concentrate uh at uh you know 94 to 96 percent they've got 40 percent even to margins associated with that and it gets better with time as as we scale this thing up we'll be taking a portion of our con and upgrading that so that we
can start the different qualification periods for example Lithium-ion batteries require you know 10 to 12 months to get qualified we are well advanced in some of those conversations and have material in different stages of testing for that so every year 12 billion uh but uh alkaline batteries get produced globally it's a pretty nice Market if you can get your material in there and get it qualified and start getting it in in whatever your favorite battery company is so again I think as we looked at our commercial
plan we're very realistic about uh you know power profitable from day one we scale our operations we we set up these off Tech agreements where we can develop long-term uh commercial relationships with clients and these clients will help us with their balance sheet and you know firm off take agreements help us Finance future faces of of development so that's the way we're looking at it when you look out across the capital stack um you know lots of projects are really struggling to finance their projects
we'll be in cash flow I'll have a balance sheet I'll have a bunch of clients I'll have pricing I can sit down with the bank anywhere in the world and there's lots of development banks that we already have uh long-term relationships with here in Brazil as well as as in the US and globally as well as the traditional project Finance Banks I can sit down with them walk through our balance sheet walk through our clients and we think we can get very reasonable costs of capital associated
with with debt we obviously have a fantastic partner in Sprott and and they are ready to help us Finance phase two and always willing to consider future Investments as well so when we look at our Capital stack we've got you know fantastic opportunities for for for debt as we move into phase two and phase three we've got Sprott sitting alongside of us ready to write checks uh and and really as we advance the project through to phase three I think we'll have lots of opportunity for additional off-take
agreements with some prepayments uh and then top it off with Equity so I think in the grand scheme of things I'm not asking for 1.3 billion dollars or whatever the price tag happens to be really what we say in Brazil is you know I need 80 to 90 million dollars in capital in the next four to five years we can finance that no problem we'll be profitable as we work our way through this and once we get the scale and we start looking at Alabama uh both on the con side as well as the value add value
add site I'll have material that's basically set up and ready to go and I just need to build a plant and we're good to go so I think you know there's there's some significant advantages to the way that we're developing the projects in phases and more companies don't do this what what we're proposing to do is because they're not economic at just selling con so again we're we have very favorable economics um our Capital intensity extremely low will be first quartile of Opex uh so
we're profitable throughout the the ups and downs of commodity cycle so again I think we've got some significant advantages compared to the vast majority of other projects out there and again we'll be the first new producer really in next year so um I think it's a smart way to allocate capital I think it's a realistically a realistic way to finance these projects which everybody's space knows it I mean projects are just stacked up because they can't get them financed and on top
of that we've got the opportunity with Alabama to get DOD Department of Defense through the DPA the defense production act as well as doe loans associated with that project so the dod DPA funding is basically a dollar for dollar Grant meaning at every dollar we spend they spend a dollar beside us and we never have to pay that back uh and then the doe is very low cost uh loans associated with it so that would fit in really with uh you know the idea of a development Banker or similar where you know it's
very low cost loans over longer periods nice grace period low interest rates Etc so I think when we look at the two projects they're very complementary we'll have a variety of mechanisms to finance these realistically in the next five to seven years and again if we look at that vision of a hundred thousand tons of con and sixty to seven thousand tons of of value-add you know that's all you know all part numbers are you know kind of 1.2 to 1.5 billion dollar market cap company with six 650 million dollar uh annual revenue
and and good margins associated with it so it's pretty exciting numbers when we think that we can bring that on in five to seven years exactly at a time when you know Supply and man is out of balance and there's nothing really that's going to change that that scenario in the next you know five to ten years and the the Alabama sounds very really a strategic opportunity right now so what's the do you have some timeline on I know you've um you've mentioned sort of the the the
uh the status of the project work now but are you able to provide some timeline on when you think you can start um production or that comes into production oh yeah 2027 so again what we're what we're planning on doing is again it'll be a phased approach into production so we'll have on the con side and the mind side we'll have two phases you know phase one which is 25 000 tons and we set that up to 50 000 tons of con probably the majority of all the production from Alabama will be geared
towards the the value add it's a mirror image really of what we have in terms of green size distribution in Brazil uh so in in Brazil it's principally you know medium to large flight deposit so we've got 65 percent thereabouts uh that is 80 mesh and above we've got a you know let's say a third of the deposit is fines for the value add component principally it's the fines that they want so again the two projects are kind of mirrors of each other it's very likely that the vast majority of
everything we produce in Alabama will go into the value add um I'm I'm happy to sell con from Brazil and we look forward to doing that so when we look at the sequence it's you know the first award that we can actually ship to the value ahead plant comes from Brazil we phase that into production we we keep the streams of con separate so the Alabama is always kept separate from uh the the Santa Cruz so that we can have full traceability on on clients you know they want to be able to trace where
that material is coming from in case for whatever reason there is a problem so we'll keep the seats streams separate we're building everything in a modular fashion so that for the most part the plant in Brazil for Khan is the same exact plant as the plant in Alabama then obviously the the value add component will step up in three phases as well so again as the market demands new material and as we kind of get new new orders from clients we have the ability to to grow this into you know 60 to 70 000 tons of
value add over the next you know five to seven years so again the plan is in Brazil will be you know phase one will be two years we bring it online basically at the end of this year two years operating at at phase two and then life of mine at phase three so basically in in five years we're at full build out here or at least up to 50 000 tons in in Alabama we're looking at again two phases on the mine phase one will be online basically in 27 plus the value add component which will have three phases to it again first
phase comes online at 27. we honestly think that we will be likely to be the first new graphite producer in in North America as well so again I think when you look at our Capital stack and our Capital cost our our Opex I think we'll have some very favorable uh terms and conditions that we can Finance without too much trouble and and and bring it online quickly in the U.S today there's only two um graphite projects in the continental US and only three in the entire U.S that actually have a defined resource or more
information there so again if if we get our pea out here in the next um you know couple months get the Australian program wrapped up uh and I I'm pretty excited about the prospects associated with that there's not a lot of other projects out there and for a variety of reasons again I think because for example we're on private property and we're on private mining claims I don't have to do anything with the forest service the Bureau of Land Management we can get this permitted
based on our initial consultations all at the state level I don't have to involve the Army Corps of Engineers as long as I stay out of navigable waterways and the wetlands and that's our plan so again I think with the the favorable infrastructure our ability to permit Alabama basically at at the state level it's really an exciting opportunity to get something online quick and that's exactly what the DPA is set up for I mean the Fizz production Act is trying to get critical medals
online as quickly as possible so that they can be less dependent on you know an imbalanced supply chain and you know southstar is set up to really help make that happen all right well exciting time to head for the company for sure thanks for um uh sharing the updates on her exciting projects uh with us today thank you Marlin present pleasure to see you again have a great rest of your week yeah you too and thanks for joining us uh join us again next time for another engaging conversation on CEO insights
[Music] thank you
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