Northern Graphite (OTCQX:NGPHF) just announced results from its test production that indicate that the company's large flake graphite will yield 50% spherical graphite. The fact that the company will be able to produce so much spherical graphite is important for two reasons. First, spherical graphite has substantially higher value than other forms of graphite. Graphite companies are typically reporting that the average value of their graphite will be around $1,500/tonne. Spherical graphite is worth twice that, and if it is coated it can be worth $10,000/tonne or more. Second, spherical graphite is the graphite that is used for products such as lithium ion batteries, soaring demand for which is expected to drive graphite prices higher in the long run.
If you recall I suggested a couple weeks ago that Northern Graphite shares had run too far after having appreciated around 50% in a very short period of time on no news. I made it very clear that I wasn't bearish, and that I didn't think it was a good idea for investors to go short. But the revaluation was pricing in a relatively optimistic scenario that assumed that the company would receive financing for its Bissett Creek Project in a timely manner and that graphite prices would hold up relatively well in the near term. In the same article I suggested that the stock was worth owning on a pullback, and while we have seen the shares pull back slightly, I had been hoping for more.
Now, however, I think that the company's graphite - which the company priced at $1,800/tonne and which I priced at $1,620/tonne for the sake of being conservative - is potentially worth even more, although we have to take into consideration additional processing costs. With this in mind we see a couple of positive developments. The first is that the project is less risky from the perspective of a financier, which means that there is a higher probability that Northern Graphite will get financing for its Bissett Creek Project. The second is that the stock has some upside from here if we assume the "optimistic" scenario that I felt that the market was pricing in a couple of weeks ago.
Investors should keep in mind that there are still risks, especially since the Bissett Creek Project is not yet financed, and I would not be putting new money to work here at $1.05/share. However, on a modest pullback to, say, $0.90/share, I think we will have seen enough of a correction to warrant taking a position.
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