Dayton Way Newsletter June 2012 Graphite

Graphite A Recent Market Darling

Dayton Way Financials June Newsletter looks into investment opportunities for a commodity that has attracted a lot of attentionrecentlygraphite.

Chinese Graphite Export Price (US$/t)

1400 1200 1000 800 600 400 200 0

Graphite is a supplyconstrained commodity with a growing marketfoundinnewhightechandhighvalueapplications.But thepricereallytookoffduring2011,whenChina,thatproduces over75%oftheworldsminedgraphite,imposeda20%export duty, a 17% valueadded tax (VAT) and an exportlicencing system,inanattempttocontrolthemarket.

Our newsletter this month includes a review of the demand supply fundamentals for graphite, as well as a summary of our outlookfortheprice.

Source:Bloomberg

Crystalline Flake Graphite

Our Top Picks for the Sector

We have included in this report a quick snapshot of the most advancedAustralianbasedgraphiteexplorersaswellasamore indepthlookatourtwofavouritegraphitecompanies.

Malagasy Minerals (ASX: MGY): a Madagascarbased graphite and vanadium explorer with impressive land holdings prospectiveforhighqualitygraphite.

Archer Exploration (ASX: AXE): an Adelaidebased explorer primarily focused on developing its graphite project in the Eyre PeninsulaofSouthAustralia(SA).

Source:CambridgeHouse

Australian-Based Graphite Companies Summary

ArcherExplorationLtd(ASX:AXE) MonaxMiningLtd(ASX:MOX) MalagasyMineralsLtd(ASX:MGY) SyrahResourcesLtd(ASX:SYR) TalgaGoldLtd(ASX:TLG) LincolnMineralsLtd(ASX:LML) AdelaideProspectingPtyLtd(unlisted) Code AXE MOX MGY SYR TLG LML Price A$0.23 A$0.045 A$0.09 A$2.36 A$0.375 A$0.13 Mkt. Cap A$16.9m A$6.7m A$14.1m A$317.8m A$18.0m A$20.1m Cash1 A$13.50m A$2.93m A$4.3m A$0.5m A$2.71m A$1.78m Debt1 EV2 A$3.4m A$3.8m A$9.8m A$317.3m A$15.3m A$18.3m

1.Seep.4andp.5,2.EnterpriseValueSource:CompanydataandBloomberg

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Dayton Way Newsletter June 2012

Graphiteanoldworldmaterialfindingmodernapplications

Graphiteisanallotropeofcarbon;apureformofcarbonthatexistsinaspecific structure (diamond for example is another allotrope of carbon). Graphite, depending on its type, has various applications. Amorphous (noncrystalline) graphite, the mostcommon type of naturallyoccurring graphite, is largely tied

Figure1:ChineseGraphiteExportPrice (US$/t)
1400 1200 1000 800 600 400 200 0

to industrial consumption for its high melting point, shock resistance and lubricant properties (e.g. in industrial furnaces). Flake graphite, a rare form of naturallyoccurringgraphite,hasitsdemanddrivenbyhightechapplicationsin areassuchaslithiumbatteries,fuelcellsandsolarpanels.

RecentpricegainsdrivenbyChineseexportrestrictions
Chinacurrentlydominatesthemarketformined(naturallyoccurring)graphite;

Source:Bloomberg

Figure2:ChineseExportVolume(Mt)
0.08 0.07 0.06 0.05 0.04 0.03 0.02 0.01 0

thenationaccountsforover75%oftheworldsminedsupply.ButChina,dueto its wish to add value to mined materials domestically, has limited its own exports. China has imposed a 20% export duty, a 17% valueadded tax (VAT) aresult,Chinasexportsofgraphitehavebeenflat(seeFigure2).Chinasexport restrictions, combined with the growing international consumption of flake

andanexportlicensingsysteminanattempttocontrolthegraphitemarket.As

graphite in hightech applications, has resulted in a significant recent price appreciation(seeFigure1).

Newapplicationstodrivefuturedemand
The demand for amorphous (noncrystalline) graphite is estimated to grow by

Source:Bloomberg

Figure3:ChineseOutputofGraphite& CarbonProducts
3 2.5 2

5%p.a.onaverage,accordingtotheRareMetalBlog,asithasdoneforthepast ten years on the back of increased industrial output of graphite and carbon products from emerging nations and especially China (see Figure 3). Flake graphite,however,withitsdemanddrivenbyhightechapplications,isexpected toseeamuchhighergrowthrate.Forexample,flakegraphiteisusedasalower (around 10% of the total graphite is mined flake graphite). The demand for lithium ion batteries is expected to grow at around 20% p.a. over the coming years,accordingtoChilesSQM(SociediadQuinicayMinera).

1.5 1 0.5 0

cost substitute for synthetic (manufactured) graphite in lithium ion batteries

Source:Bloomberg

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Dayton Way Newsletter June 2012

Constrainedsupplytomaintainatightmarket

As discussed, China controls a significant proportion of the worlds graphite supply.Toimproveminesafety,toregulateinformalminingandtomaintainits supply for 2012 by an estimated 9%, after a similar drop last year. Outside of

Figure4:AmorphousGraphite

reserves, China has restructured its graphite industry; effectively reducing

China,theabilitytogrowproductionislimited.Adepressedprice,duetocheap graphite from China has, until recently, limited production and exploration outside of China. Furthermore, recent discoveries will take several years to fill this supply gap. As such, we expect the market to remain tight for the foreseeablefuture.

Source:fortunegraphite.com

Figure5:CrystallineFlakeGraphite

Similarstorytorareearths,butwithlowerbarrierstoentry

While both rare earths and graphite have growing hightech applications and Chineserelated supply constraints, developing a rare earths deposit often involves a large capital expenditure requirement and complex metallurgical

processes.Graphite,ontheotherhand,isrelativelysimpletomineandextract fromtheore;themajorityofgraphiteisextractedusingacrushing,grindingand flotationprocess.Inaddition,graphiteelectricallyandthermallyconductivesoit isrelativelyinexpensivetoexploreusingregionalsurveyingmethods.

Source:http://blog.cambridgehouse.com

Figure6:8AllotropesofCarbon

Constrainedsupply+growingdemand=pricegains
We expect the global graphite market, which is currently running a deficit, to

continue to be in deficit for the foreseeable future. Supply from China will remainconstrained,whilenewsupplyoutsideofChinawilltakeseveralyearsto comeonline. Butitisinflakegraphite,thepremiumproductthatcanbeusedasasubstitute forsyntheticgraphiteinapplicationssuchaslithiumionbatteries,wherewesee

the brightest future. If reliable sources of highgrade (reliable quality) flake graphite outside of China can be established, then we may see more of a substitutionofsyntheticgraphiteforflakeinthefuture.Thiswouldpotentially push the price of flake, for this reliable supply, up towards synthetic it is currentlytradingatarounda40%discount.
Source:http://www.thenanoage.com/carbon.htm a.Diamond b.Graphite C.Lonsdaleite D.C60(Buckminsterfullerene) e.C540(Fullerene) f.C70(Fullerene) g.AmorphousCarbon h.Singlewalledcarbonnanotube

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ASX-Listed Graphite Companies

ArcherExploration(ASX:AXE)
Code AXE Price A$0.23 MktCap A$16.88m Cash* A$13.50m Debt* EV A$3.38m
A$ 0.5 0.4 0.3 0.2 0.1 0

AXESharePriceChart
Volume Price

m 15 10 5 0

*cashanddebtprojectedat30June2012

AXE has two graphite projects located in the Eyre Peninsula of South Australia (SA). Drilling at the Sugarloaf deposit has returned 6m to 70m intercepts grading 6.3% to 12.31% of mediumsized flake graphite (averaging 100m in size).AXEhasdefinedanexplorationtargetof4070milliontonnes(Mt)at10 12%carbon(C).DrillingattheCampoonadeposithasreturned48mat12.5%C, including20mat16.5%Cofmediumsizedflakegraphite(averaging180m). Cash* A$2.93m Debt* EV A$3.80m Code MOX Price A$0.045 MktCap A$6.73m

Source:Bloomberg

MonaxMiningLtd(ASX:MOX)

MOXSharePriceChart
A$ 0.1 0.08 0.06 0.04 0.02 0 Volume Price

*Cashanddebtasof31March2012

TheWaddikeeproject,locatedintheEyrePeninsulaofSA,hashadsomehistoric manganese exploration with drill core logs indicating the presence ofgraphite. Samples grading 10.24% to 16.04% C have confirmed the presence of coarse flakegraphiteofupto2mminlength. Cash* A$4.3m Debt* EV A$9.79m Code MGY Price A$0.09 MktCap A$14.09m

m 60 50 40 30 20 10 0

MalagasyMineralsLtd(ASX:MGY)

Source:Bloomberg

MGYSharePriceChart
A$ 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0 Volume Price

*cashanddebtasat31March2012,alsoincludingmarketvalueofEGZshares.

m 20 15 10 5 0

MGY has 25% of a GraphiteVanadium joint venture (JV) with Energizer ResourcesInc(TSX:EGZ)inMadagascar.Drillingreturnedaninterceptof108m grading 8.8% C of mesh jumbo flake graphite for which over 90% purity was achievedthroughcrushingalone.Recentdrillingreturnedaninterceptof434m ofgraphitemineralization.Thedrillcorehasbeensentforassaytestingwiththe resultsexpectedinaroundsixweeks. Cash* A$0.5m Debt* EV A$317.3m Code SYR Price A$2.36 MktCap A$317.8m

SyrahResourcesLtd(ASX:SYR)

Source:Bloomberg

SYRSharePriceChart
A$ 3 2.5 2 1.5 1 0.5 0 Volume Price

*Cashanddebtasof31March2012

SYRs Balama project, located in Mozambique, has returned several drilling intercepts of graphite across a mineralised trend of over 250m at grades over 10%Cofcoarseflakegraphite(averagingat159m).

m 6 5 4 3 2 1 0

Source:Bloomberg

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ASX-listed Graphite Companies

TalgaGoldLtd(ASX:TLG)
Code TLG TLGs recentlyacquired Nunasvaara project, located in Sweden, hosts a JORC Price A$0.375 MktCap A$17.98m Cash* A$2.71m Debt* EV A$15.27m
A$ 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

TLGSharePriceChart
Volume Price

m 5 4 3 2 1 0

*Cashanddebtasof31March2012

compliant Inferred Resource of 3.6Mt at 23% C of amorphous graphite to a maximum depth of 110m (which remains open at depth). The Resource also contains small to medium flake graphite. The Raitajrvi project hosts a JORC compliantInferredResourceof0.5Mtat10.8%Cofcoarseflakegraphite(upto 1.2mm),whichisupgradabletoaconcentratewithover99%C(accordingtoan unoptimisedtest).TLGhasanoverallexplorationtargetof11.638.8Mtat3.4 40.9%C. Cash* A$1.78m Debt* EV A$18.30m

Source:Bloomberg

LMLSharePriceChart
A$ 0.25 0.2 0.15 0.1 0.05 0 Volume Price

m 0.8 0.6 0.4 0.2 0

LincolnMineralsLtd(ASX:LML)
Code LML Price A$0.13 MktCap A$20.08m

*Cashanddebtasof31March2012

LML has three whollyowned projects in the Eyre Peninsula of SA, adjacent to MOX and AXEs projects. The Company has an Inferred Resource of 0.8Mt at 11.47% C, based on trenching at a 50m depth. Beneficiation of 500kg samples hasreturnedgradesofupto16%Cofcoarseflakegraphite(over150m),which canbeupgradedtoa90.5%Cconcentrate. Debt* n.a. EV n.a.

Source:Bloomberg

AdelaideProspectingPtyLtd(unlisted)
Code n.a. Price n.a. MktCap n.a. Cash* n.a.

*Cashanddebtasof31March2012

TheMunglinupdeposithasanonJORCcompliantResourceof1.47Mtat18.2% C. This project is expected to become Western Australias first commercial graphitemine.

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Archer Exploration Ltd (ASX: AXE)

XavierChabeur ResearchAnalyst xchabeur@daytonway.com.au HowardHumphreys SeniorResearchAnalyst hhumphreys@daytonway.com.au

CapitalStructure
ShareCode SharePrice OrdinaryShares Options ITMOptions FullyDilutedMarketCap Less:Cash* Add:Debt EnterpriseValue
*cashanddebtprojectedat30June2012

ASX:AXE A$0.23 67.1m 6.3m 6.3m A$16.9m A$13.5m 0 A$3.4m

Directors&Management
Chairman ManagingDirector NonexecutiveDirector NonexecutiveDirector ExplorationManager GregEnglish GeradAnderson TomPhilips AliceMcCleary WadeBollenhagen

TopShareholders*
GDEExploration(SA)PtyLtd HudsonResourcesLtd RafflesEquitiesLtd GDEExploration(SA)PtyLtd ValentinaNowak TotalTop5 *IRESS(21September2011) 11.2% 9.7% 9.1% 5.3% 3.3% 38.6%

AXESharePriceChart
A$ 0.5 0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 Volume Price

m 16 14 12 10 8 6 4 2 0

Source:Bloomberg

Advancedexplorationstagegraphiteopportunity
Archer Exploration Ltd (ASX: AXE) is an Adelaidebased exploration company thatisprimarilyfocusedonexploringanddevelopingitsgraphiteprojectsthat cover an area of 918 km in the Eyre Peninsula of South Australia. The Eyre Peninsula, which was historically prospective for graphite, with both Monax Mining(ASX:MOX)andLincolnMinerals(ASX:LML)recentlydefiningresources across tenements adjacent to both of AXEs projects. Drilling at both Campoonas and Sugarloafs tenements have intercepted flake graphite mineralisation.

AXEisexpectingtosellitsWestRoxbytenementtoBHPBillitons(ASX:BHP) OlympicDamCorporationfor~A$9million.Thetransaction,whichisexpected tobecompletedbeforetheendofJune,willallowAXEtoaggressivelyexplore itstwographiteprojects,CampoonaandSugarloaf.

The Companys flagship Campoona graphite deposit is located in the Eyre Peninsula.Theproject,whichhasanexplorationtargetof610Mtgrading11 13% C, is currently subject to resource definition drilling. Some of the best assaysresultshighlightthehighgrademineralization:

67mat10.1%Cfrom0m,including25mat13.2% 25mat10.9%Cfrom64m,including14mat15.6% 48mat12.5%Cfrom24m,including20mat16.5%,and 21mat15%Cfrom46m.

Samples sent for metallurgical testing have highlighted the presence of high value flake graphite with 80% of the graphite passing 220 m in size. AXE expects that this type of graphite would be suitable for high grade (+99% C) amorphous powder, which has a current market price of ~US$35,000/t. Additional testing is currently in progress to assess the viability of flake graphiteproduction.

The Sugarloaf deposit, located near Darke Peak in South Australia, hosts an explorationtargetofanexplorationtargetof4070Mtat1012%C.Drillingat Sugarloaf has returned several highgrade intercepts of 670m at a grade of between 6.31% and 12.31% C. The graphite flakes are of medium size, averaging 100m and ranging between 20 and 200m. Metallurgical testing hashighlightedthepotentialproductionofanamorphousconcentrategrading +80%C.

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Malagasy Minerals Ltd (ASX: MGY)

XavierChabeur ResearchAnalyst xchabeur@daytonway.com.au HowardHumphreys SeniorResearchAnalyst hhumphreys@daytonway.com.au

CapitalStructure ShareCode ASX:MGY SharePrice A$0.09 OrdinaryShares 156.6m Options 9.0m ITMOptions FullyDilutedMarketCap A$14.1m Less:Cash* A$4.3m Add:Debt EnterpriseValue A$9.8m *cashanddebtasat31March2012,alsoincludingmarket valueofEGZshares. Directors&Management Chairman MaxCozijn NonExecutiveDirector GuyLeClezio NonExecutiveDirector DrPeterWoods ExplorationManager FergusJockel TopShareholders* WorldTitaniumResourcesLtd 6.4% NEFCONomineesPL 5.2% DiplomatHoldingsPL 4.8% MidasConsultancyLtd 3.2% GoertzSuperfundA/C 2.9% TotalTop5 22.5% *IRESS(20September2011) MGYSharePriceChart m A$ Volume Price 0.10 60 0.09 50 0.08 0.07 40 0.06 0.05 30 0.04 20 0.03 0.02 10 0.01 0.00 0 Source:Bloomberg

Madagascarbasedexplorerwithsignificantgraphiteexposure
Malagasy Minerals (ASX: MGY) has a joint venture (JV) agreement with Energizer Resources (TSX: EGZ) to jointly explorer an area covering ~40% of MGYslandholdingsinSouthernMadagascarthatisprospectiveforvanadium andgraphite.UndertheJV,MGYretainsa25%ofownershipandafreecarried interestuptoaBankableFeasibilityStudy(BFS)inexchangeforUS$2.25Min cashand7.5MEGZshares.MGYalsoretains100%rightstoallbase&precious metals.

ExplorationconductedbyEGZhasidentifieda320kmofprospectivestrikefor graphite and vanadium within JV and EGZs leases. Exploration done to date haveanestimatedexplorationtargetof50100mtatagraderangeof6to10% Carbon(C).Thefirstroundofdrillingshowedbestassaysresultof:

108mat8.8%Cfromsurface, 13.5mat14.63%Cfrom9.5m, 54mat7.27%Cfrom50m,and 88mat7.92%Cfrom37m.

Preliminarymetallurgicaltestingcamebackwithexcellentresultsshowingthe presence of highvalue jumbo flake graphite at an average purity of 93% C; jumbo flake graphite with purity of 99% C is priced at around US$4,500 6,500/t. Testing has also shown that the graphite can be easily liberated throughsimplecrushing.

In May, EGZ announced that it was commencing a 7,500m resource drilling campaign, which is expected to be completed during July. On 5 June, EGZ announced a drilling core returning a verylarge, 434m graphite intersection. Thecoreisbeenassayedandresultareexpectedtobereleasedinsixweeks.

MGYisalsoconductinggraphiteexplorationoverits100%ownedtenements adjacenttotheJVarea.Surveyinghasidentified~110kmofprospectivestrike. MGYplanstocommencedrilling,alongwithadditionalmappingandsurveying toidentifymoredrillingtargets.

EGZ has also defined a NI 43101compliant Inferred Resource of 59.2Mt at 0.683% vanadium. The vanadium mineralised trend is expected to continue 30kmintotheJVarea.

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Dayton Way Newsletter June 2012

ABOUT DAYTON WAY

Dayton Way Financial Pty Ltd ('Dayton Way') is an Australianbased financial servicescompanythatspecialisesinemergingresourceandenergycompanies. WewerefoundedinAugust2009,withtheaimofprovidingamuchneededlink betweeninvestorsandglobalresourceinvestmentopportunities. Thereturnsontheseinvestmentscanbegreat,butmoreoftenthannot,sois therisk.ThroughourExecutiveDirector,DavidSutton,wehaveover30yearsof mininginvestmentexperience.Wehelpselectthebestopportunitiestomitigate risk,whilemaximisingreturns.

Corporate
DavidSutton ManagingDirector dsutton@daytonway.com.au AnthonyHargreaves Director&CorporateAdvisor ahargreaves@daytonway.com.au

Trading
TonyAdams SeniorClientAdvisor tadams@daytonway.com.au NickKelso ClientAdvisor nkelso@daytonway.com.au StanfordHor ClientAdvisor shor@daytonway.com.au TonyLewis ClientAdvisor tlewis@daytonway.com.au TomCoates ClientAdvisor tcoates@daytonway.com.au JohnGaunt ClientAdvisor jgaunt@daytonway.com.au

CORPORATE FINANCE
DaytonWaymanages resource sectorcapital raisings andhas accessto capital raisings and placements managed by other brokers. Our clients have access to discountcapitalraisingsoncompaniescarefullyselectedbyDaytonWay.

STOCK AND OPTION TRADING

Dayton Way is authorised to deal in a variety of securities, including stocks, optionsandCFDs.AsaclientofDaytonWay,youwillhavedirectphoneaccess tooneofourbrokerstotradeanyofthesesecurities.

INVESTMENT RESEARCH

DaytonWayconducts,andhasaccessto,extensiveresearchtoidentifythebest opportunities in the resource sector. Our clients get preferential access to our latestresearch,beforeitiswidelyreleasedtothemarket.

Research
HowardHumphreys SeniorResearchAnalyst hhumphreys@daytonway.com.au XavierChabeur ResearchAnalyst xchabeur@daytonway.com.au

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Authors of this Report

Dayton Way Financial

The analyst(s) principally responsible for the production of this researchdocumentare:

XavierChabeur ResearchAnalyst xchabeur@daytonway.com.au

HowardHumphreys SeniorResearchAnalyst hhumphreys@daytonway.com.au

Analyst Certification: Any views expressed in this research report by Dayton Way Financial Pty Ltd accurately reflect the personal views of the analyst(s) about the subject securities or issuersandnopartofthecompensationoftheanalyst(s)was,is, orwillbedirectlyorindirectlyrelatedtotheinclusionofspecific recommendations or views in this research. The analyst principallyresponsibleforthepreparationofthisresearchreport receives compensation based on overall revenues of Seismic Researchandhastakenreasonablecaretoachieveandmaintain independenceandobjectivityinmakinganyrecommendations.

DaytonWayFinancialPtyLtdisanAustralianFinancialServices Licenceholder(AFSLicencenumber:338943).

Sydney Office: Ph:+61292763100 Level5,1719BridgeStreet SydneyCBD NSW2000

Hong Kong Office: Suite3406Level34, LippoCentreTowerTwo, 89Queensway, New Zealand Office: Ph:+6421333970 Level15,HPTower 171FeatherstoneStreet Wellington6001

Media Contact: TonyAdams tadams@daytonway.com.au Ph:+61292763102

ThisdocumentisintendedsolelyfortheinformationoftheparticularpersontowhomitwasprovidedbyDaytonWayFinancialPtyLtd(DaytonWay)andshouldnotbe relied upon by any other person. If you are not the intended recipient you must not use or disclose the information in this document in any way. In preparing this document,DaytonWaydidnottakeintoaccounttheinvestmentobjectives,financialsituationandparticularneedsofthereader.Beforemakinganinvestmentdecision onthebasisofthisresearch,thereaderneedstoconsider,withorwithouttheassistanceofafinancialadviser,whethertheadviceisappropriateinlightoftheirparticular investmentneeds,objectivesandfinancialcircumstances. Althoughwebelievethattheinformationthisdocumentcontainsisaccurateandreliable,DaytonWayhasnotindependentlyverifiedtheinformationcontainedinthis document,whichisderivedfrompubliclyavailablesources,directorsandproposeddirectorsandmanagement.DaytonWayassumesnoresponsibilityforupdatingany informationcontainedinthisdocumentorforcorrectinganyerrororomissionwhichmaybecomeapparentafterthedocumenthasbeenissued.DaytonWaydoesnot give any warranty as to the reliability of any information contained in this report and does not accept any liability for any loss caused by representations, errors or omissionsonthepartofDaytonWayorbyanyofitsrespectivedirectors,employeesorassociates. DaytonWay,itsdirectors,employeesandassociatesmayhavearelevantinterestinthecompaniesmentionedinthisresearchreport.Thispositionmaychangeatany time.DaytonWaymayearnreferralfeesinrespectofinvestorsthatDaytonWayreferstocompanieslookingtoraisecapital.

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