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Summary

  • Recently Announced Expansion-Case PEA.
  • Relative Undervaluation to Focus Graphite.
  • Construction Should Commence by Q2 2015.

Northern Graphite Company

Featured In: January 2012

Partnership Average Cost per Share: $0.97

Current Market Price (July 15, 2014): $0.75

Northern Graphite Company (OTCQX:NGPHF) (V.NGC) continues to be a Partnership holding. Northern Graphite remains an advanced development company with no production - the next step for the company is to receive mine financing and begin construction. The past six months have been disappointingly quiet -there have been no off-take agreements, no financing arrangements, and no joint venture partnerships to speak of. NGC still remains the world's most advanced graphite development project (no other company has completed their Feasibility Study AND has received full mine permitting), but the company needs to begin construction soon to maintain their first mover advantage.

In late June, NGC did announce an updated PEA presenting an expansion case with twice the capacity as the original mine plan. When evaluating the economics of development projects, I look at three different measurements, and the updated PEA passes with flying colors. The first views the project's NPV in relation to the project's initial capital expenditures and the current enterprise value (NPV > Startup Capital + EV). According to the June study, NGC has an NPV of $265M, EV of $32M, and requires an initial investment of $135M. The second looks at the payback of initial CapEx once the project reaches production (a payback of 3 years or less is ideal; NGC's payback is expected to be 2.5 years with the expansion case). The third looks at the project's Internal Rate of Return (an IRR of >25% is ideal; NGC's Bisssett Creek IRR is 31.7%). The project seems to have a high likelihood of reaching production based on a holistic reading of the three measurements.

Northern Graphite also presents relative value when viewed against its closest competitor, Quebec-based Focus Graphite (OTCQX:FCSMF). As of July 15th, Focus Graphite's Lac Knife project had a 40% higher IPV than Bissett Creek. Interestingly, Focus Graphite released a Feasibility Study within days of NGC's updated expansion case PEA. After looking through the numbers, the two projects seems very similar - with the main difference being a 20% higher CapEx and a 20% higher NPV for Focus. The IRR and payback periods are similar, though NGC edges out Focus in both departments.

It is true that Focus Graphite was able to ink an off-take agreement with an unnamed Chinese industrial conglomerate in December 2013. This is something that NGC has yet to accomplish. However, the details are still murky and a graphite price has yet to be determined in the 7 months since the agreement. The off-take is an advantage that Focus has over NGC, but the agreement itself is not worth the IPV premium. Given the projects' similar economics, NGC offers relative value when compared to its closest graphite peer.

The Partnership has been patient with our NGC investment (which has been a holding since inception in Sept 2011). However, it is important for the company to capitalize on their first mover status and advance Bissett Creek into construction within the upcoming 2-3 quarters. My expectations are that the company will obtain project financing by the end of 2014 and begin construction, at the very latest, in Q1 2015. If the company is able to meet these deadlines, then commercial production will begin in Q1 2016. With more details expected from Tesla in the upcoming months regarding "the gigafactory", I am hopeful that NGC can leverage the Tesla-mania and secure the financing necessary to take Bissett Creek to production. However, if the company is not able to commence construction within my timeline, then the Partnership will liquidate NGC in Q2 2015.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: Northern Graphite Company (H2 2014 Update)