Alabama Graphite Corp. Com ABGPF

on the importance of binding off-take agreements

[DoctorFouad]

Hi all, 
there is an interesting article on seeking alpha by ben kramer analysing the chances of success of Mason graphite (one of the biggest projects) in this market. I made this comment on the article, for those interested : 

"At 48,000 tonnes of production at C$1,220/tonne the company will have revenue of C$58.6 million/year."

 

There is one other risk (the most important IMO) that should be included in the risks of investing in mason Graphite or any other Graphite ambitious big project graphite company : 

"finding buyers to most or all of its annual graphite production"

 

For example, even if Mason graphite gets financing, builds its mine and achieve production of 48.000 tonnes of graphite per year, there is no assurance that they could annually sell all their graphite (so the future revenues are maximal theoritical figures only, which makes analysing the future profitability of the project very challenging), for many reasons :

 

1- the flake graphite market is very small (500.000 tonnes per year), 50.000 is already a 10% increase in this market, it wont be easy to sell this supply unless demand do increase by 10%;

 

2- there is no central exchange market for graphite unlike gold of oil for example. So if a company wants to sell its graphite it should contact directly potential end users and buyers by itself (adding to the marketing cost and expertise needed), which makes selling the graphite even harder even if demand is there.

 

3- there are different specifications and needs for end users, it is hard to produce graphite that satisfies all needs, so the graphite produced should be very end user specific.

 

4- even if demand is there, and the company find and contact potential buyers for specific demands, there is still no guarantee that it could find buyers for all the types of graphite that it produces (small/medium/large, different purity levels, different cristal morphology, plus many possible combinations of these characteristics and very specific needs for end users).

 

in other words it is basically a marketing nightmare to sell each year all production, especially a high level production like 50.000 tonnes per year. I would say almost impossible unless you have binding off-take agreements for all your produced graphite.

 

This brings me to the conclusion that small capex, small opex, (like refurbishing older mines), very end user small oriented projects, have better chance succeeding in this difficult market than those mega projects of 20.000+ tonnes per year production.

 

I am even speculating that the reason why those big projects have difficulties to be financed is because they dont have binding off-take agreements. it could be that investment banks like dundee, are well aware of the risk I mentioned in this comment (finding buyers to sell all production each year), and thats why they are not willing to finance a 100 million$+ graphite projects unless they are sure that at least most of the production will find sellers.

this is the link to the original article :
https://seekingalpha.com/article/2774665-mason-graphite-recent-weakness-and-the-compelling-location-trade-off-study-make-this-stock-extremely-compelling?isDirectRoadblock=true&uprof=