Dr. Jon Hikaway / Stormcrow Capital - Focus Coverage Conclusion – Stay Focused on Focus
Stormcrow has long argued that the best position for any commodity resource company to find itself is in the position of being the lowest cost producer. This has been China’s approach to dominating commodity markets, and while some of China’s ability to become that low-cost producer has depended on willingness to forego environmental and safety concerns, the strategy has largely worked. However, creating significant advantages in product quality, while maintaining low costs is likely the correct method to outmaneuver China’s approach to market dominance.
Given the unique properties of Lac Knife graphite, and the off-take agreement already in place at Focus, we believe the company stands in good stead against competitors in the graphite market. In a worst-case scenario, assuming a very conservative average concentrate price of $800 per tonne for graphite and no VAP sales whatsoever, the company can generate strong cash flows. Assuming that 1/3 of annual production becomes VAPs makes the resulting financial picture extremely strong.
We like the fact that Focus, with its high in situ grade and strong flake distribution, has arguably the highest value of contained graphite per tonne of ore among junior developers. We also like the fact that the relatively low cost of producing concentrate, and a very low cost for producing VAPs, allows the potential of a strong financial return for investors. We are initiating coverage on Focus Minerals with a positive recommendation and a target price of C$1.25.