Canada Carbon Should Become Canada Marble

| About: Canada Carbon, (BRUZF)

Summary

While exploring for graphite, Canada Carbon happened to find a potentially valuable deposit of white marble as well as the graphite they were seeking.

The company has issued a Preliminary Economic Assessment (PEA), which shows an economically viable return for the combined graphite and marble project.

However, much of the economic benefit comes from the marble business, and much of the risk is associated with the graphite.

The company should abandon its graphite ambitions and focus its attention on developing the low cost, high return marble quarry.

Canada Carbon (OTC:BRUZF) recently published a Preliminary Economic Assessment (PEA) for its Miller graphite and marble project in Grenville Township, Quebec.

The company has been exploring the site of a former graphite mine, and has discovered thin veins of high grade graphite, surrounded by disseminated deposits of lower grade material. The characteristics of the deposit indicate that it is a rare form of hydrothermally deposited vein graphite which is found in other places in the world, but is currently only mined in Sri Lanka.

The company has tested this graphite for high purity applications and is proposing a process which includes conventional grinding and flotation, followed by thermal treatment which has been demonstrated to achieve purity levels exceeding 99.99% carbon. Canada Carbon intends to sell this product into a small niche market for very high purity graphite.

Whilst exploring for graphite, the company also discovered a deposit of white marble which, according to the PEA documents, was described by a potential customer as "whiter, less brittle, easier to cut, and polish to a luster not seen in the imported white marble that they currently process". That supplier has committed to purchase 75,000 tonnes of white marble in the first year of production at a price of $184 CDN per tonne.

Economic data from the PEA

In the PEA, Canada Carbon has presented the project as a single combined graphite/marble development with the following economic benefits:

Capcost ($CDN, million)

44.4

IRR

100%

NPV10 ($CDN, millions)

131

Payback

1.9 years

Click to enlarge

However, the primary graphite sources and the source of marble are three separate pits. The marble pit contains some very low grade graphite which would be stockpiled and processed after the graphite pits have been exhausted but the two graphite pits do not contain any usable architectural marble blocks.

It is possible therefore to split this project into its marble and graphite components and evaluate the economics of each one separately, which I have done using the data from the PEA.

Marble Quarry

The marble quarry economic projections are shown in the table below:

Marble

Capcost ($CDN, million)

3.8

IRR

460%

NPV10 ($CDN, millions)

90

Payback

3 months

Click to enlarge

There are risks involved in both components of the project. The PEA is based on inferred resources which, on further drilling, may not turn out be as extensive, or as good a quality as the somewhat limited exploration program has shown. However, it is clear that the marble component of the project provides the bulk of the investment return, and carries much less of the risk.

Most of the equipment for the marble quarry is leased and the quarrying of the marble will be contracted out, so the capital cost is minimal. There is an agreement in place for the sale of 50% of the first year's product at a specified price. Since the product is competing against imported material of supposedly inferior quality, it would seem that there is distinct market place advantage which would drive ongoing sales. However, even if no other sale was made, the contracted sale would pay back the invested capital twice over.

It seems therefore that, providing the inferred resources can be upgraded to measured or indicated resources, the marble component of the project has a very good chance of success. Canada Carbon's market cap is about $27 million or 30% of the value of the marble project and raising the capital for the marble quarry will require only minimal dilution of the existing share base.

Once the marble resource has been verified, I would place a value of 50 to 60 cents per share on Canada carbon, based only on the value of the marble quarry alone.

Graphite Mine and Processing Plant

The graphite component of the project, on the other hand, carries a very degree of risk for a smaller return.

Graphite

Capcost ($CDN, million)

40.7

IRR

31%

NPV10 ($CDN, millions)

41

Payback

3 years

Click to enlarge

Firstly there is process risk. A controlled process in a laboratory cannot always be scaled up to a full scale operation with the same productivity, and producing the same high purity levels in the final product. It is likely that the plant will make some off-spec product would have to be sold at well below the cost of production.

Secondly, there is a high degree of speculation with regard to the proposed end market uses. The two nuclear reactor technologies (prismatic and pebble-bed) that are mentioned in the PEA as potential users are both "next generation" technologies. At present, only experimental prototypes exist and timescales for potential common use stretch out as far as year 2050. There is no guarantee attached to the potential development of those technologies, or to the use of graphite sourced from Canada Carbon. Similarly, graphene, which is also mentioned as a potential product, has not yet found any commercial scale applications, and it may be several years before it is used in sufficient quantities to affect the graphite market.

Thirdly there is a high degree of risk attached to the assumed selling price of $13,000 US/tonne. There are a handful of specialized companies in the world that produce natural graphite at purity levels of 99.99%. Generally, these companies purchase good quality concentrates and use thermal treatment to achieve the required purity - not very different from the processes proposed by Canada Carbon. It is a very small niche market, and it cannot be assumed that an extra 1,500 tonnes per year from a new supplier can enter the market without disrupting the pricing structure. In addition, the PEA has assumed an exchange rate of $1.00CDN to $0.75US. Since most of the operating costs are in $CDN, and revenue in $US, there is also exchange rate risk to consider. A Canadian dollar at par would almost eliminate the net present value of the graphite portion of the project.

Fourthly, there is competitive risk in that other companies may be able to make the same product at a much lower cost. Canada Carbon's cost of producing a flotation concentrate (calculated from data in the PEA) is estimated at $CDN3,581 ($US2,686 per tonne (averaged over the life of the mine). Typically, other mines can produce a graphite flotation concentrate for $US500/tonne or less, and sell for between $US800 and $US2,000 depending on the flake size and purity. Hydrothermally deposited Sri Lankan vein graphite sells for about $US2,000/tonne, so there is no potential for selling into the traditional hydrothermal lump/vein graphite market. Canada Carbon may believe that its own concentrate is better suited to thermal purification and upgrading, but there is no proof that others cannot achieve the same results at lower cost. In fact, Magnis Resources (OTC:URNXF) has made 99.99% graphite, using material from their Nachu project in Tanzania, by thermal processing of a flotation concentrate. Magnis can do this at much lower cost. So how would Canada Carbon be able to compete with Magnis for the high purity applications?

Finally, the timeline shown in the PEA is not realistic. It shows all of the graphite project investment in year two and revenue from a full year of production in year 3. In reality, the graphite portion of the project will take 18 months to build, commission and reach commercial production. At that point sales will have to be ramped up slowly. Graphite is not a base metal where all production can be sold on a metals exchange. It will take time and there will be cost involved in developing customers before reaching full plant capacity. An overoptimistic ramp-up of production overestimates the Net Present Value of the project.

Conclusion

While exploring for graphite, Canada Carbon has fortuitously come across a potentially valuable deposit of white marble, which could be developed with little or no risk into a profitable quarrying operation. Should that development work out as planned, the shares could be worth two or three times their current price.

However, I do not recommend buying the shares because I fear that management will sink the profits from the marble quarry into a very risky and economically marginal graphite development, which could fail to deliver any worthwhile benefits.

The company should abandon its graphite ambitions and focus its attention on developing the low cost, high return marble quarry

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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