Solid PEA vs Competition. FMS
NPV10 $246m (20 years)
IRR 32.1%
There are some important differences to note in the basic calculations of the Focus PEA and the Northern BFS.
The first thing to consider is that Focus models the PEA on a 20 year mine life for Lac Knife and that NGC uses a 25 year mine life for the Bisset BFS. Therefore, NGC is showing 25% more time in operation when comparing to FMS in its NPV figure. Therefore NGC NPV/IRR figures include 5 years extra margin on top of what Focus has presented. This makes direct comparison more difficult and penalises FMS when the base PEA and BFS NPV numbers are shown side by side without consideration of this. FMS have imo the resources for a 25 year mine life if desired.
The second thing to consider when comparing the projects is the discount rate used. Focus use a 10% rate, Northern use an 8% rate. The additional discounting used by Focus is another reason the PEA and NGC BFS cannot be considered side by side as is. Focus is choosing to present a more conservative analysis than NGC on this basis (more discount for risk and a more appropriate rate for a mining junior). When you compare like for like the stark contrast in the economics becomes apparent. I re-calculated NGC to a 10% discount rate. This drops their pre-tax NPV from $103.5m to $80m (at the NGC $2,300/t revenue point).
Therefore Focus Graphite’s $246m NPV8 is equivalent to NGC at an NPV8 of $80m. The FMS NPV offers a return that is +300% greater than the case presented in the NGC BFS, when the different discount rates are brought into line (for a similar investment amount and timeline to commerciality).
FMS (20 years) NGC (25 years)
NPV (at 10% rate) $246m $80m
NPV (at 8% rate) $316m $103.5m
Considering IRR, Focus sees a 32.1% rate of return that is highly desirable. Again comparisons to NGC need adjustment, as NGC uses a more favourable discount rate of 8%. NGC at $2,300/t and 8% brings IRR in at 18.7%, but if this is adjusted to a 10% discount rate (like for like), this reduces to a sub-16% IRR, even on what I consider a rather high revenue expectations of $2,300/t. Again NGC has more years revenue contributing to this IRR rate, when compared to FMS, so if we reduce the NGC IRR even further for an apples vs apples comparison. The comparative is 32.1% vs 14.6% on an equivalent (NPV rate and same mine life) pre-tax basis (the final 5 years cashflow is as you would expect heavily discounted).
There are then some other important aspects to consider.
Net revenue averages $185m per annum for FMS, for NGC the equivalent is $30m per annum (at $2,100/t), our PEA assumes total revenues more than 6 times per annum.
The production operations of FMS and NGC are now very different. NGC looks to produce standard +94% graphite in its BFS. Focus moves to be a supplier of upgraded material, as this provides 87% of the total revenue stream. It appears (imho) than FMS only sell the remaining Graphite fractions that cannot be upgraded to 99.95%. Income from non 99.95% graded material could almost be considered by-product income for Focus at 13%. For NGC this is the core business, so they are looking to traditional markets, FMS is concentrating higher up the value chain from the outset.
Production cost - Much has been noted on the grade advantages of FMS in terms of low costs compared to potential competitors. The NR gives us a milled cost of $68/t. The equivalent NGC figure is $18/t. We can see that FMS ore is more difficult to process and tailings are more difficult to deal with. NGC as expected also sees material economies of scale having to process so much more ore, per tonne of graphite. These milled figures/t when adjusted for grade provide a cost per finished tonne. For FMS the production cost is $425/t compared to NGC at $968/t (but they may be able to reduce to $918/t). Every finished tonne of base concentrate will cost NGC well over double to produce than that of FMS. The grade advantage is then very clear here. It is also important to note that the FMS production cost as I understand it includes a 25% contingency, so the actual calculated base cost for FMS was more in the region of $340/t, directly in line with the previous management guidance.
Payback is 2.8 years for FMS, compared to NGC at 5 years. But remember NGC is a NPV8, FMS is a NPV10 (FMS more prudent). Recast NGC to a NPV10 and payback there reduces to over 6 years.
Capex is higher than I expected, but as we can see there is a considerable level of contingency included. FMS also includes 3 months opex in its figures, NGC does not. I added the sustaining capex of $25m to the initial capex figure for FMS, as I do not think it is included. Contingency and sustaining from FMS have certainly been pitched at the top end:
| | Capital | Contingency | Opex | Sustaining | Capex Base |
| Focus | 178.5 | 24.2 (25%) | 32.6 | 25.0 (14%) | 96.7 |
| Northern | 110.41 | 9.36 (8.5%) | - | 7.49 (6.8%) | 93.5 |
The base capex requirements (initial capital) after contingencies, opex and sustaining have been stripped out look to be pretty similar for both operations (as capex only covers the base processing, upgrading is on an outsourced basis for FMS for now). So, for a likely ‘similar’ initial capex investment in pure dollar terms, FMS returns an NPV10 with a +300% valuation over NGC.
We can then attempt to value both companies now side by side, on a NPV8 basis (as this figure is clearly presented by both companies), with no further calculations. For both operations (similar base capex) if we assume $50m equity raised at current price (Focus should though have a major advantage at the finance stage, as it has a considerably larger ROI for the same capital), but this still gives a good indication, if we assume both companies do move to production:
| | FMS | NGC* |
| NPV8 ($m) | 316 | 104 |
| Current Float (shares) | 122 | 52 |
| FMS Dilution ($50m at 72c) | 69 | |
| NGC Dilution ($50m at 84c) | | 60 |
| Shares post financing | 191 | 112 |
| Share Price | 1.65 | 0.93 |
| Current price | 0.72 | 0.84 |
| Upside | 129% | 10% |
25 years for NGC vs only 20 years operation for FMS / $2,300/t revenue for NGC*
Considerable further upside is also available to the FMS PEA it seems.
The NPV does not attempt to value Grafoid, Kwyjibo and other developments (Varennes, Brazil, Labrador etc..), these need to be added to the SP valuation.
Plant utilisation. On a 2,500tpd mill, FMS are running at 35% capacity under the PEA, NGC run between 83-90% on their BFS. FMS can therefore expand operations at will as demand increases. NGC would need to install additional production capacity (at additional capital cost) if they wanted to increase over their average 15-17,000tpa base production.
The FMS PEA clearly states:
“Potential customers have provided Focus with product quality requirements and projected annual demand. RPA has reviewed these expressions of interest and is satisfied that there are sufficient indications of demand to support the projected PEA production forecast”. “It is noted that the processing for the Battery Grade product, which accounts for some 86% of LOM revenue, is based on an expression of interest by a producer and is by no means a certainty, however, RPA considers the assumption to be reasonable for a PEA”.
Therefore production/sales levels and prices have been derived directly from our customer negotiations. This to me indicates this aspect of the project is probably progressing well. NGC was forced to apply the IM published prices in their BFS, with a ‘jumbo premium’, as they had no customer demand or prices to apply to their BFS unfortunately. IM prices are just industry averages over a specific time period. RPA are using actual demand and prices as evidenced by Focus’s discussions with their potential partners, with reference to the specific customer requirements being fulfilled. We know the industry runs on such commercial agreements, so I would suggest revenue figures derived from these sources, are vastly superior to just taking IM average industry rates, with a blanket premium applied. Compare this to the NGC BFS, their production levels are not based in any way on commercial discussions. The BFS production levels at Bisset are wholly derived (contrived imo) from the max NGC can get out of a 2,500tpd mill, to limit capital investment to an acceptable value to produce an 'acceptable' NPV/IRR. That approach for me is terminally flawed.
The PEA is on the basis of outsourced 99.95% production. We have yet to see the results achievable for FMS if we move to the Varennes/IREQ plant. The upgrading 3rd party will certainly be adding a margin to its production costs (25-50%?) to give our internal $367/t unit cost for thermal processing. One of the aims of the Varennes plant will be to reduce this cost and to produce further up the value chain again 99.99%, spherical and anodes, as per the IREQ licensing agreement of May 2012. There is a lot work on-going here that we will hopefully see in the next few months, that will build upon this initial assessment.
In conclusion. The PEA illustrates a very strong economic model. High grade, low cost production. NPV10 at $246m is 3 times the return of our nearest competitor and may be considerably more if you believe NGC are being too optimistic modelling revenue at $2,300/t. Also to consider are the large contingencies (operating costs and capex) inherent in the FMS PEA. Considerable upside potential exists from reducing these contingencies and from the Varennes plant/IREQ relationship, not explored in the PEA. IMO off-takes negotiations are on-going and to the point that demand and prices are known with enough confidence to be included in the PEA by RPA.
Focus are firmly in the driving seat now, $246m is an excellent NPV. Consider our favourable jurisdiction, access to US markets and that this can be up and running in a year (as opposed to the $1b NPV Iron Ore mine, coming on-line in 7-10 years) and I think this is a truly exceptional prospect.
My view, DYOR. as for the short term price (under pressure), who knows how this market works atm, BUT the project is a really genuine prospect now imo.