Summary
- Flinders is no longer looking to acquire Big North Graphite.
- This is an unexpected development.
- Shares seem to have found support, and remain undervalued given Woxna's potential.
Flinders Resources (OTCPK:FLNXF) just announced that it has terminated its agreement to acquire Big North Graphite (OTCPK:BNCIF) due to legal issues that couldn't be resolved. While this is a little disappointing, it is not a complete surprise given the multiple extensions that Flinders allowed itself in assessing the legal structure of El Tejon.
While the Big North deal had the potential to generate significant value for Flinders shareholders, the market clearly sees this as a bullish development. The stock has been weak ever since the deal was announced, and shares spiked upon today's news. This is likely due to the fact that shareholders will not be diluted and given that now management can focus all of its efforts on producing graphite at its flagship Woxna Project in Sweden.
As I argued in December, the recent sell-off is completely unjustified, considering the value of Woxna. This project is one of the few in the West that is actually producing graphite, and as I gathered in conversations with Big North CEO Blair Way, the company should be at the beginning stages of selling graphite, albeit in small amounts.
Flinders' management is operating using very different assumptions from its peers: it believes that an emphasis on marketing and vertical integration in the graphite space makes sense only once you have a producing mine. The company's peers in Canada and Africa are signing pre-production offtake agreements and devoting energy towards producing value-added products such as spherical graphite and graphene. Flinders didn't start doing any of this until it began producing at its Woxna Project, and it now has a small tentative offtake agreement with a German alternative energy company, Thyssenkrupp (OTCPK:TYEKF). Views as to which strategy is preferable are differ radically in the graphite community.
With that being said, I think Flinders is one of the few graphite companies worth betting on, considering that it has gotten into production with minimal shareholder dilution. While having a second graphite mine would have been nice, I have no reason to believe that the recent announcement will have any serious impact on the company's long-term value, and I think it also opens the door for another acquisition in the near future.
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https://seekingalpha.com/article/2842956-update-flinders-resources-terminates-its-agreement-with-big-north-graphite?isDirectRoadblock=true&uprof=