Mugerman: Graphite Investors Should Look for Large Flakeshttps://www.theaureport.com/pub/na/15868?utm_source=delivra&utm_medium=email&utm_campaign=FINAL+TMR+3-4-14 TMR: In your evaluation of advanced-stage graphite projects, what criteria distinguish the best projects? KM: We look at flake distribution and purity levels. The former is somewhat of a proxy for the latter. Larger flakes will tend to have higher purities. With both larger flakes and higher purities, companies can command higher prices. That's the first criterion and a very important one. Second, we look at the annual production the company is targeting. Many companies have issued studies suggesting they can produce 50K or 80K tons per year. But considering that the market for flake graphite is anywhere between 400K and 500K tons per year, that is a lot of product being added to the market from just one mine. TMR: So you prefer smaller projects? KM: We prefer a project that can give us 20% internal rate of return (IRR) at 20K tons per year instead of a project that will produce 80K tons per year, because being in industrial minerals means you must sell those 80K tons to a multitude of customers. As I mentioned earlier, unlike precious metals mines, you cannot ship all of it to one refinery that will buy it from you. The marketing risk becomes very high for projects that must sell a very large amount of product in order to reach high rates of return. TMR: Is flake graphite typically mined in open pits? KM: All current graphite projects in development will be targeting open-pit operations. TMR: So, putting infrastructure questions aside, is there much variance in mining costs among the advanced projects you've examined? KM: There are two factors to consider. First, strip ratio. Favorable geology will allow some projects to have low strip ratios, whereas projects dealing with much steeper geological structures will have high strip ratios. Second, grade. For instance, a project like Northern Graphite Corporation's (NGC:TSX.V; NGPHF:OTCQX) Bissett Creek in Ontario, will have to process many more tons to produce that graphite. Their costs will definitely be higher than a project that has, let's say, 15–20% graphite. TMR: So why do you name Northern Graphite as one of your favorite graphite companies? KM: From the beginning, Northern Graphite has remained the most advanced project among the Canadian juniors that we've been following. The company did have some permitting issues over the last couple of years, but that has been taken care of. All the graphite produced at Bissett Creek will be 95%+ purity, so Northern Graphite will definitely target the premium markets. And it will produce only 18K–20K tons per year, so Northern Graphite only needs to sell a relatively small amount of graphite to reach its revenue targets. TMR: What are Bissett Creek's financials? KM: According to the company's October 2013 preliminary economic assessment, the after-tax net present value (NPV) will be $150 million ($150M), with an after-tax IRR of 22%. The waste-to-ore ratio is 0.24, and mill recovery is 94.7%. Initial capex is $101.6M. TMR: How does Northern Graphite intend to pay for Bissett Creek? KM: That's a hard question. In my opinion, a graphite company at Northern Graphite's stage needs to attract an offtake partner. The market will appreciate seeing end-users, such as an industrial minerals company, participate in the development of this project. In addition, Northern Graphite has been working to produce battery-quality graphite in-house, from its concentrate. This could allow Northern Graphite to attract a higher valuation for its material and help it secure a development partner. TMR: What's your rating for Northern Graphite? KM: We rate it a Speculative Buy with a target price of $1.50.