Union Securities - $3.95 Target Northern Graphite Corp. (NGC-TSX.V) $1.83
Bissett Creek proves its feasibility, next step financing
Philip Ker, P.Geo, MBA 416-775-5130 pker@union-securities.com 10-Jul-12
Stock Rating: Speculative Buy Target Price: $3.95 (Previous: $4.15)
Northern Graphite Corporation (NGC) is an Ottawa-based Canadian company that recently closed a $4 million initial public offering at a price of
.50 per share and began trading on the TSX Venture Exchange under the symbol "NGC". Its principal asset is the Bissett Creek graphite project located 100km east of North Bay, Ontario, and close to major roads and rail and other infrastructure. The Company has completed an NI 43-101 preliminary assessment report on the project and has recently completed a bankable feasibility study and commenced the environmental and mine permitting process. NGC anticipates that it will be in a position to begin construction of the mine late in 2012, subject to the availability of financing. (www.northerngraphite.com)
Source: Company reports, Union Securities estimates
Event
Northern Graphite provides a positive Feasibility Study (FS) on its large flake Bissett Creek project
Impact
Positive: Ro bust economics are outlined with conservative parameters and plenty of upside
Details
Bissett Creek demonstrates its economics: The long awaited completion of the project’s Feasibility Study (FS) confirmed our thesis that Bissett Creek will be a large flake graphite producer with competitive operating costs. The operating costs announced in the FS were actually lower than anticipated and should continue to decrease as several operational efficiencies are met. Within the study, several key results are highlighted below:
? Probable Reserves: 18.98Mt
? Grade: 1.89%
? Mine life: 23yrs
? Annual Production (first 5 yrs): 18,600t
? Cash Operating Costs (LOM): $968/t
? Capital Costs: ($102.9M incl. $9.4M contingency)
Worthy to note is that Northern Graphite is investigating its potential to sell a battery grade product (high purity graphite) at a substantial premium to concentrate. Presently, there is an engineering study being completed in order to assess its viability and should be available later this year. The economics of this was NOT included in the FS and positions Northern Graphite well going forward as current contracts for battery grade spherical graphite sell at approximately $7200USD/t. Our valuation INCLUDES the anticipated sale of high purity graphite and a summary of our NAV for Northern Graphite can be seen in Exhibit 1.
2012E2013E2014E2015ERevenue ($ mm)
.0
.0$56.6$55.5Graphite Production (Mt)0.0000.0000.0190.018EPS (basic)(
.10)(
.10)
.35
.38CFPS(
.10)(
.10)
.53
.52P/E--5.254.87P/CF--3.433.50Projected Return118.6%Shares Outstanding, Basic (M)46.1Shares Outstanding, FD (M)52.1Market CapitalizationC$84.352 Week High/LowC$3.42/
.71Fiscal Year EndDec. 31Net Asset Value/Share ($)C$4.96
Additionally, we believe the FS was completed and focused on the conservative side and leaves plenty of room for improvements to a variety of factors such as; Capital costs, operating costs, mine life, grade, recovery and easy expansion to floatation cells within the plant’s recovery process. Our estimates for Bissett Creek consider future looking improvements to such parameters and variances to the study and are outlined below:
? Inclusion of 17Mt of Inferred material into Probable Reserves
? Expansion of processing rates to 4,600tpd beginning in year 5 of mine life
? Mine life of 24.5 years
? Life of mine cash costs of $785/t concentrate
? Grades of 1.95% Cg, including dilution and low grade stockpile
? Recovery of 95% (greater than FS but less than locked cycle tests)
? Premium market price for initial graphite concentrate production of $3,000/t, scaled to our long term forecast of $2,200/t
Exhibit 1. NAV Estimate
Source: Union Securities estimates
The path to production: Over the coming few months, Management aims to complete the project’s Mine Closure Plan which will assess the environmental issues with respect to the mine’s tailings and reclamation initiatives. Upon conclusion of today’s conference call with Management, we foresee the Company targeting a 50/50 debt to equity scenario to finance the project over the next 12-16 months. We believe Management is in advanced discussions to secure an off-take suitor in exchange for debt or equity in the project. Before an agreement can be confirmed, several deliverables (including the FS) need to be achieved in order to continue negotiations. Additionally, the Company is currently delivering a half tonne sample to a potential suitor, whom require this for testing of the graphite material in its end use products and we anticipate a firm agreement to be made before the end of 2012. Although the Capital Costs were slightly higher than anticipated, we feel that the $9.4M in contingency is generous and Management is currently assessing other options to reduce the overall requirements and are confident they will succeed on several aspects of this process.
Recommendation
Due to the quality of the Bissett Creek project and its abundance of rare, high purity jumbo flake graphite, we continue to believe Northern Graphite will evolve as the leading graphite producer within the safe, mining friendly jurisdiction of Ontario. With one more milestone now achieved, Northern Graphite becomes one step closer to becoming a bonafide producer. Our previous target of $4.15 incorporated a forecasted equity raise at $3/sh. Due to current market conditions, we now believe a more dilutive equity raise will be likely and thus impacts the number of shares outstanding and reduces our target price to $3.95. We continue to value the Company on 0.8x our NAV(5%) and maintain our Speculative Buy rating.