NGC (BUY) – Cantor Fitzgerald Research UpdateNorthern Graphite (BUY) – 10% of global flake graphite production shutdown NGC CN C$ 0.68 (TP C$1.70), Market cap: C$34.8m Industrial Minerals magazine reported on 16 December that the Chinese authorities have ordered the suspension of flake graphite production in the Shandong region on environmental grounds. After complaints by residents, primarily about dust contamination, a spot check of 23 graphite operations was made on 30 October around the town of Pingdu and the operations were subsequently ordered to close. Pingdu is China’s oldest flake graphite producing region and its second largest with a capacity of 100kt, or 60kt of flake graphite (1st is Heilongjiang, 280kt capacity, production c.130kt in 2013). Shandong’s production equates to c.10% of the world’s flake supply and 20% of China’s production. The closures are expected to last until June 2014, but the article questions whether this development will actually mark the end of production in this region as in-situ graphite grades are decreasing and mining costs rising. This latest action is part of China’s ongoing efforts to modernise its graphite industry by rationalising the host of small operators, improving environmental performance and focusing on value add down-stream processing. The suspension coincides with the traditional winter shutdown among China’s graphite processors, which should limit the short term pressure on pricing. However, price pressure could build up as consumers return to the market in the Spring if alternative sources of supply aren’t ramped up. The article highlights the 55% rise in large flake prices seen in 2008/9 which occurred after graphite mines in Mongolia, with capacity around 50% of those in Shandong, were closed. Any upward pricing pressure on large flake prices could be very beneficial to NGC as the company looks to finance and construct its Bissett Creek graphite project in Ontario, where 90% of the reserves consist of jumbo or large flake material. September’s revised Feasibility Study based on an average sales price of US$1,800/t (-14% on the July 2012 study price) confirmed the project’s robustness to the current, modest price environment (post tax NPV C$89m, C$1.82/share), while October’s Preliminary Economic Assessment showed the leverage of the project to greater production rates (post tax NPV C$150m, C$3.05/share). If the previous US$2,100/t price assumption was re-applied to these models the NPVs would rise to C$138.1m (C$2.81/share) and C$221.9m (C$4.52/share) respectively. The project has the necessary permitting in place to start construction, a short build programme, is located in a low sovereign risk jurisdiction and has a modest capital requirement at C$101-147m. If graphite prices do rise, we believe NGC would offer an excellent means of exposure to this subsector. We reiterate our BUY recommendation and TP of C$1.30. Asa Bridle | Metals & Mining Research | 020 7894 7536 | abridle@cantor.co.uk Cantor Fitzgerald Europe One Churchill Place, 20th Floor, Canary Wharf, London E14 5RB