Focus Graphite Inc V.FMS.WT

Dundee: Neutral rating and $0.35 target for Focus Graphite

[shakerman640]

According to Dundee Capital Markets:

https://is.gd/Jtu3nx

Focus Graphite Inc.

(FMS-V: C$0.14), intraday

September 28, 2015

NEUTRAL, Speculative Risk

Dundee target: C$0.35

Might Focus Graphite Be Losing its Focus?

We are downgrading Focus Graphite to Neutral and reduce our 10% DCF target to C$0.35 from C$0.60/sh. We are becoming increasingly concerned about financing, marketing and scheduling risks. While we haven't deferred Lac Knife Mine start-up beyond mid-2017, we delay receipt of financing and increase dilution given the 43% decline in FMS and state of the market. On Friday, FMS announced that it had finalized two off-takes for its Lac Knife project in Quebec with Grafoid Inc., a private graphene application R&D company and related party. This is essentially a re-hash of the June announcement, with notable exception that two "first payments" of C$83,333 for each of the off-takes were received. This finalization comes a month later than expected after the 22-Jun-15 announcement. Terms of the two off-takes are unchanged (see 23-Jun-15 note):

• "Energy" off-take agreement: Grafoid to buy a max of 1,000tpa/10yrs large flake Cg at 98.3% purity at its discretion, with options.

• "Polymer" off-take agreement: Grafoid to buy up to 25,000tpa/10 yrs Cg at 97.3% purity (56.4% of 44,300 tpa), at its discretion, with options.

Risks mounting for timely construction. Lac Knife is one of the best situated, most advanced and highest grade graphite deposits. However, as previously stated, revenue is not guaranteed; and financing is a key concern, and this non-traditional end use as a graphite polymer is a targeted audience and risk lies in off-take partner Grafoid's ability to execute. Grafoid planned to scale up R&D production this summer, but no news was released and discussions with management suggest that requirements might perhaps be only 1,000 t in 2016; and anywhere from 5,000 to 20,000 t in 2017 - assuming all goes perfectly. We worry that Grafoid may not be ready to become the primary customer. About a dozen firms are interested in various Lac Knife graphite products, with at least four specifically qualifying products. This is a far cry from replacing its largest off-take, even with the help of its Chinese off-take. Permit approval timeline is also unknown. The EISA was filed in Dec-14 but FMS response to questions posed by authorities is only due next month. While management is hopeful permits are provided within the next year, timing is uncertain.

Financing remains the key risk. Focus still plans to divest of its Grafoid interest, as announced in June. What seemed to be US$5 to $10MM in available cash is apparently to be included as part of a larger project financing. It appears that Lac Knife financing will be directly linked to a third party's interest in Grafoid. We estimate at ~$0.5MM following two recently received off-take-associated payments. Management suggests $166MM Capex to be covered by equity and debt, perhaps tied to strategic partnerships and vendor financing ($20MM is arranged with CAT Financial). We are experiencing the most challenging junior mining equity market for some time, and lack of firm timeline or independent off-takes could provide further problems in attaining financing in a timely manner.