Interview with Gregory Bowes of NGC An interview with Gregory Bowes courtesy of Canaccor Capital. It shows how potential the UBRs' property has.
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AN INTERVIEW WITH GREGORY BOWES CEO and DIRECTOR with NORTHERN GRAPHITE (As of March 27, 2012)
We are here with Greg Bowes of North- ern Graphite which on the markets, is one of the few success stories in that it’s been going up in a junior market that hasn’t been that generous. Greg is kind of pleased because the com- pany has just raised a bunch of money and he’s refreshed after a quick dash down to Myrtle Beach.
David Pescod: So Greg, you mention that there are still a lot of people that don’t understand graphite. Why don’t
you give us some background to this commodity that sud- denly you need for different reasons.
Greg Bowes: Okay Dave. I guess first of all graphite was one of the last commodities to respond to the ‘super cycle’ if you want to look at it that way, basically because there was ex- cess production capacity in China until about 2005. So it kind of flew under everybody’s radar screens and of course it’s always been considered a boring, industrial mineral. Then a couple of things happened to change that situation. One was that the whole commodity super cycle gradually used up that excess production capacity in China, supply started getting tight and prices have tripled since about 2005 and that’s basi- cally just growing industrial demand – the mundane stuff – steel, automotive and traditional uses.
The second thing that has happened is that there have been a number of new applications come out that use a lot of graph- ite. So that has created a lot of excitement in terms of poten- tial future demand. The most obvious one is lithium ion bat- teries. They are growing at 20% or 30% a year and coinciden- tally, it takes 20 to 30 times as much graphite as it does lith- ium to make these batteries, so they should really be called lithium graphite batteries. The world needs a lot more graphite even if we take a very conservative view of the fu- ture success of electric vehicles and hybrid electric vehicles. Fuel cells, vanadium redox batteries and pebble bed nuclear are also big users of graphite and the use of these technolo- gies is increasing.
The third factor that kind of came together is that surprise, surprise – China produces 70% to 80% of the world’s graphite, they are tired of selling us their cheap graphite, they are running out of it actually (mines are getting deeper and higher cost) they want to do a value-added processing there, so a very similar story to rare earths. There is a 20% export duty on graphite now, and a 17% VAT, you have to meet a certain size test to export, so that is creating supply concerns in the rest of the world and basically graphite has gone from a boring, industrial min- eral to a strategic mineral in the space of three or four years. In fact both the European Union and the good old USA have named it a supply critical mineral. The British Geological Survey has ranked it right behind rare earths and well ahead of Lithium in terms of supply criticality.
DP: The important part too is the size of the flakes. I un- derstand that Northern Graphite has the prettiest flake in the crowd?
GB: Thank you very much for the compliment. Yes, the big thing that people/investors have to understand is that the big difference between industrial minerals and base and precious metals is that your gold is the same as my gold; my copper is the same as your copper; everybody gets the same price. In industrial minerals, that is not true. You also have to look at the physical and chemical characteristics of the product that you produce. So you can have 20 different graphite producers that get 20 differ- ent prices because of the quality of their product. In the case of graphite, two things matter. One is flake size (larger is better) and the second is the purity of the con- centrate that you produce. Graphite is basically carbon – we are selling carbon. If you are under 90% carbon in your concentrate, you have got a problem. If you are over 94%, you are going to get a premium price and our Bissett Creek deposit has the highest percentage of large flake and the highest concentrate purity in the industry.
Grade is also not nearly as important with industrial min- erals. What really matters is what you can extract eco- nomically from that grade and sell. That means the metal- lurgy must be right because without metallurgy you don’t have anything. Our metallurgy has been proven through lab work, bulk sampling and pilot plant testing.
DP: For the status of your project now, you actually hope to be in production within a year. That’s pretty aggres- sive.
GB: It is. It is probably going to be a little longer than that, but I think the important take-away here is that this is not an exploration story.
Flake in Rock
Jumbo Size Graphite Flake
Large Flake Graphite Concentrate
We have already done the drilling, we have already done a preliminary economic assessment and we expect to have a bankable feasibility study done and full permitting done by the end of the second quarter this year. Subject to financing we can start construction in the third quarter of this year and it will take about one year to build the mine, so late 2013 we hope to be in production.
DP: I understand as far as how much money you need, you are not talking hundreds of millions, but it is something like $70 million and maybe another $10 million if you added a circuit.
GB: It is a little higher than that. The preliminary economic assessment was $62 million which was done a couple of years ago. We are fairly advanced on the bankable feasibility – I think it’s going to be up closer to $80 million. If we add an upgrader to create a specialty product for the lithium ion battery market, that is going to be an additional smaller capex on top of that. I don’t know whether it’s $10 or $15 million, but something of that order of magnitude, but no where near the capex that you see with the lithium or rare earth companies and there are a couple of reasons for that. This is an open-pit mine with a very low strip ratio so conventional drill, blast, haul. The mill is a standard flotation concentrator – there is nothing funky about the metallurgy. We are located 15 km from the Trans-Canada highway between North Bay and Ottawa, so good access to infrastructure. All of that stuff leads to much more reasonable capital costs.
DP: Right about now, I’m sure Ontario would like to see the jobs?
GB: Absolutely, especially in the upper Ottawa valley as many small towns in the north of Quebec, Ontario, the Mari- times, the Prairies, most of the young people have gone elsewhere because there is nothing for them to do there, so yes there is probably going to be 70 jobs at the start and the affect on the local communities (I think the mining association of Canada usually uses a multiplier affect of two to three times) so it will have a big impact on the local economy.
DP: Now surprise, surprise! There has been a shocking development here with Northern Graphite. You had a couple of analysts following your stock and it’s been shocking that your stock has met all analyst targets!
GB: We had three research reports come out when we were between
.75 and $1.00 a share and most of them had $2.00 targets and we have hit a little over $3.00, but yes we have exceeded all their expectations, so I guess that is a good thing.
DP: So when you are revising targets now, can you work out preliminary expectations for cash flows a year from now?
GB: I can give you a very rough estimate of what it is going to be. The weighted average price for the concentrate that we are going to produce right now is between $2500 and $3000 a ton. Our costs are $1000 a ton to produce, so we are going to generate between $1500 and $2000 per ton assuming prices stay at these levels. We are going to produce 20,000 tons a year of concentrate at the start with the ability to expand in the future based on resources we have already drilled. So, if it is $1500 a ton, that’s $30 million a year in cash flow on a $90 million investment so, you don’t really have to do a discounted cash flow. That generates a pretty good internal rate of return and a pretty good net present value.
DP: We always end these interviews this way...we ask you to give us a stock selection (other than your own) so what would it be?
GB: I will have to declare my conflict up front, but I have been involved with Orezone Gold (ORE); I was senior vice president of Orezone for many years and I really like their latest deposit in Burkina Faso, so that would be my pick on the gold side.
DP: Well since we have you, we might as well ask you where gold will be this Christmas?
GB: I am a gold bug. Gold is still at a pretty reasonable price, but many of the stocks have lost their momentum obvi- ously and haven’t done that well. But I don’t think the problems in Europe have gone away at all and I think they are go- ing to get worse, so I am going to say $1800 to $1900.
DP: Thank you very much Greg!