Industrial Alliance Analyst Report On NGC RATING: SPECULATIVE BUY
12 MONTH TARGET: C$3.00
EVENT
NGC announced the completion of its bankable feasibility study (BFS) for the Bissett
Creek graphite deposit.
HIGHLIGHTS
NGC set the standard once again in the graphite industry by releasing the first BFS and
outlining their road to production. Overall, the BFS presents a very conservative model
in terms of grade and tonnage (Probable Reserves 18.97Mt @ 1.89% Cg) leaving place
for NGC to improve on several aspects of the mine from now until late 2013 / early
2014 when it is expected to enter production.
Based on an average price of 2,300$/t, the BFS presents an NPV of 103.5M$ (pre-tax)
with an IRR of 18.7% which are both below expectations. Looking at the details
available in the news release and those provided by the management, the following are
the major parameters that explain the decreased project valuation.
? Grade of the reserves was based on a partially weathered bulk sample that
returned lower head grades than both the pilot plant and the locked cycle tests.
However, we expect the performance of the mill to easily exceed the levels
used in the BFS.
? A large portion of the resources is still in the inferred category and therefore
could not be used in the reserves calculation. The inferred material located
within the pit shell was subsequently treated as waste instead of ore while
material outside the pit was not used at all, thus contributing to the reduced
mine life (23 years).
? The BFS did not include any value added upgrades. NGC is presently working
on a bench scale test (with Hazen Research) for spherical graphite which will
be followed by a pilot plant and engineering work to determine exact costs.
We believe that an improvement to several of these parameters will have a significant
upside effect on the Bissett Creek deposit.
The BFS also outlined an elevated CAPEX (102.9M$) which contributed to a lower
LOM OPEX (968 $/t). The company is still exploring several avenues to decrease the
CAPEX and OPEX.
The project NPV is hard to compare directly to the PEA or the IAS models as all
previous models were based on a larger resource instead of only the Indicated resources
used in the BFS. Beyond the resource size, the main cause of the reduced NPV remains
the decreased grade of the reserves. A quick comparison of the BFS, PEA and IAS
Bear model is presented in Appendix 1. A more complete review and comparison of
the BFS will be compiled once the full document is released on SEDAR.
RECOMMENDATION
With a conservative BFS study that indirectly shows excellent growth potential while
setting NGC another step ahead of the competition, we reiterate our Speculative Buy
recommendation and our 12 month target price of $3.00 based on a 1.0x multiple of
the NAV. This target is derived solely from the IAS base model NPV with no value
attributed to potential intellectual property.
July 11th, 2012
Northern Graphite Corp.
(TSX.V: NGC C$1.75)