Valuation I wrote this back on February 16th 2013...the bold parts are new:
My original calculations yielded $55 per share and I was questioned how conservative this was. Here was my reply:
To be honest deputy...I think I am conservative here as I have cut my original numbers back a few times because NPV was coming out just too high. Let's go thru my assumptions again 1 by 1.
Finished pure graphite sell price: $8000 per tonne. At this point, this is looking very conservative!
In the NRs, the company stated that the high end graphite market where we should be able to compete because of our 99.96 purity and vein graphite structure commands $20k per tonne and has been as high as $30k per tonne. This market however is pretty small, only 40k tons per year at the present time but could get much bigger with the graphene market which we seem to be a perfect fit. So IMO, the $8000 per ton is on the fairly conservative side. If we get to 6N, the nuclear market opens up and that one is much bigger than 40k tons per year and sells at $30k per ton!
Cost of processing: $1000 per ton. Hearing that even this is on the high side, $600 more likely!
This figure is based on the cost of NGC in their PEA and statements the company has made that their processing will be cheap as product fairly pure right out of the ground and that their purification method is an off the shelf treatment. I expect we could even beat this figure but staying with this number for now and believe it is conservative.
Ressource size: 20M tonnes at 5% yields 1M tonne of finished product
This is the big assumption!! Although we have hit over 200m of graphite and have hit grades both higher and lower than 5%, this is the biggest variable right now. The 5% grade is realistic but could easily be 4% or sligthly lower but I think if I really wanted to be conservative, 4% here would of been a more realistic figure. The tonnage requires more drilling as well but we have only drilled 1 pipe out of 3. The other 2 pipes could be barren and this one come in at only 10M tonnes or we could be lucky and get 60M tonnes. That is why the next drill program will be so important! I think my numbers here are fair to conservative but certainly the most unknown at this point.
This big assumptions seems obliterated already with only the first 6 holes, wonder how big this will get!!
Production per year: 100k tons for 10 years
Read above
Cashflow of $700M per year at a PE of 10 is $7B
Depends highly on tonnage and grade but realistic numbers if tonnage and grade work out.
Assuming we start mining in 2 years and use an 8% discount rate and $100M investment.
12% would of been a more conservative discount rate here.
The 2 year figure is probably a bit aggressive. It could be 3 or 4 and that would change our NPV. If I use a worse case scenario of 4 years, I get an NPV of $4B or $40 per share if all other variables stand up. The 8% discount rate is pretty standard and the $100M figure came from the NGC PEA and from the Mickey Fulp conference so should be about right.e
I would change the Capex to $200 to be more conservative.
Now another thing to remember is even with an NPV of $55, that does not mean we will trade at this level. We have too many questions marks to answer. As we answer those questions, then NPV gets adjusted and so does our share price. However, I expect us to be trading at 5% ($2.75) to 10% ($5.50) of this NPV in the next 3 months. If drilling shows tonnage and grade in line with my expectation, we probably will move closer to 20% ($11) of this NPV. If the PEA shows the economics of the deposit to be similar to my estimates, then we could see about 30% of that NPV ($15).
Once we get to production, we should be somewhere between 50% and 80% but I think we get bought out before we get to production if tonnage and grade are on target.
Trying to keep it real even though these are big numbers.
Now share price not following my model yet...but I think it is just a matter of time!
G.