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Focus Graphite (V.FMS) Investment Case 07/01/2013

|Includes:Focus Graphite, Inc. (FCSMF)

Disclosure - I am a FMS stock holder on a long term, fundamental basis. This instablog contains my own opinions and NPV calculations. I am a qualified Accountant, with 20 years experience, currently working within the European Industrial Chemical Industry.

Focus Metals - Investment Case

Company website:
http://www.focusmetals.ca/

TSX Venture - V.FMS - Mkt Cap $79m CAD, £50m. (also OTCQX & FCSMF Frankfurt)
Price 08/01/2013 - 77c CAD
12 month - high 133c, low 44.5c CAD

Last reported cash position 26/11/2012 $17.6m CAD (NYSE:FRC).

About Focus Graphite:

Focus Graphite Inc. is a Canadian graphite mining and exploration company. They are the owner of Lac Knife, one of the highest grade (16%), large natural flake graphite deposits in the world, located in the Côte Nord region of Quebec. Other mineral exploration projects include the Kwyjibo Rare Earth Elements & Copper Project. Focus hold a 40% stake in Grafoid, a company looking to develop scaleable and affordable Graphene production and Graphene IP, internally and through partnerships. The companies principal aim is to develop one of the lowest cost producers of industrial and technology-grade graphite in the world.

Company Presentation:

http://www.focusgraphite.com/wp-content/uploads/2012/09/FG_PPT_Sept_opt_2012.pdf

Analyst View, fair value $1.44:

http://www.researchfrc.com/research/pdf/fms/FMS%20Update%20-%20Nov%202012.pdf

PEA published 30/10/2012 by Roscoe Postle Associates Inc.

http://www.focusgraphite.com/wp-content/uploads/2012/10/RPA-Focus-Lac-Knife-NI-43-101-Tech-Report-FINAL-Oct-30-2012_opt.pdf

Lac Knife NI43-101 compliant PEA Highlights:

NPV10 $246m

NPV8 $316m

IRR 32%

Capital Investment €154m, including $33m working capital and $24m contingency (25%)

Payback Period 2.8 years

LOM 20 years

LOM production 928,000 tonnes per year at 92% graphitic carbon

Finished production 46,600 tonnes per year

Positive cash flow $880m

Lac Knife PEA Recommendations:

RPA recommends that Focus advance the Project to the next phase of development, by collecting further data, and conducting metallurgical testwork and relevant studies that allow

for licensing process and estimation of Mineral Reserves. Specific recommendations by area are as follows.

GEOLOGY AND MINERAL RESOURCES

• Conduct a comprehensive review of graphitic carbon analytical methodology in order to resolve the issue highlighted during the 2010/11 twin hole drilling campaign. The review should include the use of certified reference material in laboratory roundrobins in order to select the most appropriate analytical method and to select the laboratory for future drilling campaigns.

• Conduct an exploration drilling program to complete the current drilling grid with focus on the mineralized zones currently classified as Inferred.

• Review the existing exploration targets on the property and test selected targets with a limited drilling program.

MINING

• Carry out a geotechnical drill program and initiate geo-mechanical and rock mechanics assessments to confirm appropriate pit wall slopes angle and stability.

• Carry out specific hydrological/hydrogeological studies to refine dewatering needs in the open pit over the LOM.

• Improve the understanding of the mining cost base and carry out a preliminary mining plan and develop a detailed estimate of the mining costs.

PROCESSING AND METALLURGY

• Conduct grindability tests to confirm results obtained in past studies (2002).

• Perform tests on tailings to ensure the effectiveness of separation between acid generating tailings and non-acid generating tailings by flotation and the operating conditions to do so.

• Conduct test program and gather information on polishing grind by ceramic media to evaluate its impact on the process performances.

• Perform a sensitivity analysis to estimate the impact of ore feed grade variability on the concentrate production.

• Conduct a test program to optimize grinding/flotation interactions. Improve the detailed process understanding and develop a detailed estimate of the process capital and operation costs.

• Perform tests of coarse ore upgrading with gravity concentration process to increase graphite concentration before the grinding and flotation process for cost optimization.

• Investigate automation to improve manpower productivity.

ENVIRONMENT

• Develop details of the co-disposal concept for tailings and waste rock.

• Continue the environmental program which should be comprehensive and includes baseline work, acid generation accounting, TSF stability, dust emission, and water balance and hydrology.

• Progress permitting activities as well as community and Aboriginal consultations.

• Initiate geotechnical assessments and detail mapping of overburden and soils at open pit and TSF locations to confirm storage capacities as well as dam volume / characteristic requirements.

• Test characteristics of the two tailings streams.

• Initiate consultation/discussions with Hydro-Québec regarding power supply and consumptions

MARKETS

• Review marketing options and develop off-take agreements.

OTHER

• Carry out condemnation drilling in advance of mining in proposed locations for Project components and infrastructure (process plant, service buildings, accommodation camp, tailings and waste rock storage facility, overburden and topsoil piles, ore storage pad, etc.).

• Confirm Project components and infrastructure locations.

• Review the access road route.

• Test and/or confirm the minimum primary concentrate characteristics required for the thermal purification process to 99.99% Cgr.

• Continue to develop in-house purification process or negotiate an agreement for purification on a contract basis.

Process development and mine design is on-going with RPA and Focus has contracted Terrapex to assist with all permitting. The Management team was recently strengthened with Dr. Joseph E. Doninger as Director of Manufacturing and Technology, who served 17 years with Superior Graphite.

http://www.marketwire.com/press-release/focus-graphite-retains-terrapex-environnement-assist-with-federal-provincial-project-tsx-venture-fms-1720789.htm

http://www.marketwire.com/press-release/focus-graphite-inc-appoints-dr-joseph-e-doninger-director-manufacturing-technology-tsx-venture-fms-1707801.htm

http://www.marketwire.com/press-release/focus-metals-contracts-with-rpa-mine-design-engineering-lac-knife-graphite-property-tsx-venture-fms-1511138.htm

Off-take / partnership negotiations are on-going and supported the production levels and revenue prices used in the PEA. This is a critical next step.

Proactive investors interview 26/06/2012. GE, "seven companies that we're working with for off-take agreements and/or long term purchase agreements, will allow us to complete our financing."

PEA Support (RPA) - Pg 19-6

Focus has initiated contacts with several major graphite consuming groups in North America, Europe, and Asia. To date, Focus has identified the following major product opportunities:

Focus Graphite Inc. - Lac Knife Project

Grade Tonnes Product Characteristics

Battery Grade 16,900 >99.95% Cgr, +100 mesh

Medium Grade 11,200 >90% Cgr, -100+200 mesh

Fine Grade 15,500 >80% Cgr, -200 mesh

Total 43,600

The projected product mix is based on expressions of interest received from various potential customers in North America, Europe, and Asia. Potential customers have provided Focus with product quality requirements and projected annual demand. RPA has reviewed these expressions of interest. Multiple product enquiries have been received for the various grades, with total potential demand exceeding the available production limits indicated elsewhere in this report. Focus has provided trial quantities of product to potential customers and has received a positive response from them. RPA is satisfied that there are sufficient indications of demand to support the projected production forecast.

Focus Graphite are also currently undertaking a 5,000 meter drill program to revise and upgrade the company's 4.9 million tons at 15.8% Cgr indicated and 3.0 million tons at 15.6% Cgr inferred NI 43-101 compliant resource estimate published in December 2011. The 2,500 meter exploration drill program will test high priority surface graphite prospects identified from historic information and geophysical EM anomalies in the Southern lateral extension of the deposit. This looks to resolve the RPA twin-hole issue and also has the potential to materially increase the resource.

http://www.marketwire.com/press-release/focus-graphite-commences-its-2012-lac-knife-drilling-program-tsx-venture-fms-1675346.htm

Battery Grade Production

A central tenant of the Focus Graphite PEA, was the inclusion of 16,900tpa sales of battery grade Graphite. In the PEA this production was costed on an outsourced basis. One of the major upsides available over the PEA is for Focus to amend this with their own production costs. Management guidance is such that there would be an expectation of considerable production cost savings from own production vs outsourced 3rd party production of the upgraded product. Focus has entered into an agreement with Hydro-Quebec, to develop its own production plant, utilising HQ's patented technology.

Focus Metals and Hydro-Quebec's IREQ Sign Graphite Purification Technology Agreement and Anode Production Agreement for Li-Ion Batteries.

http://www.marketwire.com/press-release/focus-metals-hydro-quebecs-ireq-sign-graphite-purification-technology-agreement-anode-tsx-venture-fms-1653417.htm

Varennes, on the South Shore and nearer Montreal, may host a graphite purification plant.

http://graphitestocksblog.agoracom.com/2012/07/17/rare-earth-plant-could-find-home-at-becancour/

Other Properties & Interests:

Kwyjibo, Quebec - Rare earth elements (NYSEMKT:REE) and copper advanced exploration project being developed in partnership with Soquem, the Quebec Government's commercial mining corporation. A further 4,000m drilling program commenced 28/08/2012, with the aim of validating grades, thickness and continuity of the REE-Fe-Cu mineralization in the vicinity of the Josette horizon, where the best drilling intersections were obtained in 2011. The Company intends to incorporate the results of the 2012 exploration program into a National Instrument 43-101 compliant resource estimate at the end of the program.

Lac Tétépisca, Québec - Focus Announces New Graphite Discovery at Lac Tétépisca Québec - 900m Long Graphite Bearing Corridor Hosting 17 Grab Samples Assays of 5.59% to 45.80% Graphitic Carbon. http://www.focusgraphite.com/news/press-releases/2012-2/november152012

Grafoid Inc. - Focus Graphite have 40% equity ownership. http://grafoid.com/

Grafoid Inc invest in, manage, and develop markets for processes that produce economically scalable, pristine graphene for polymer and non-polymer, energy storage and other applications. Their leading investment produces high-energy bilayer and trilayer graphene from a safe, non-destructive extraction process leaving the lowest possible ecological footprint. Grafoid has the potential

You will find an excellent introduction to Grafoid here:

http://grafoid.com/wp-content/uploads/2012/12/international-resource-journal-Grafoid.pdf

Grafoid are in partnership with leading industrial and academic partners, in the commercialisation of Graphene:

Focus Graphite Announces R&D Agreement Between Grafoid Inc. and Hydro-Quebec's IREQ for Next Generation LFP-Graphene Batteries

http://www.marketwire.com/press-release/grafoid-inc-announces-r-d-agreement-with-hydro-quebecs-ireq-next-generation-lfp-graphene-1730181.htm

Grafoid Inc. and CVD Equipment Corporation Sign Joint IP Development Agreement

http://www.marketwire.com/press-release/grafoid-inc-and-cvd-equipment-corporation-sign-joint-ip-development-agreement-1692578.htm

Grafoid Inc. and Rutgers University Sign MOU to Jointly Develop and Commercialize Polymer and Non-Polymer Technology Graphene Applications.

http://www.marketwire.com/press-release/grafoid-inc-rutgers-university-sign-mou-jointly-develop-commercialize-polymer-non-polymer-tsx-venture-fms-1593915.htm

Management

Focus Graphite Board Members:

http://investing.businessweek.com/research/stocks/people/board.asp?ticker=FMS:CN

Insider buying - Jeff York (Chairman) has consistently bought FMS stock. His last buy was 30/12/2012, taking 55,000 share in November. He has bought more than $400k of stock on the open market since August 2010. http://www.canadianinsider.com/node/7?ticker=fms

Gordon Chiu for Grafoid Inc.

http://investing.businessweek.com/research/stocks/people/person.asp?personId=82691719&ticker=MTEK&previousCapId=2783749&previousTitle=FOCUS%20GRAPHITE%20INC

Our recent appointments:

Mr. Benoit Lafrance - Vice-President, Exploration.

http://www.focusgraphite.com/news/press-releases/2013-2/january72013

Dr. Joseph E. Doninger - Director of Manufacturing and Technology.

http://www.focusgraphite.com/news/press-releases/2012-2/october12012

Detailed Lac Knife PEA and Blue Sky Scenarios

Please find below my detailed NPV10 as per recent PEA figures, additional 50m shares issued at $1. Fair Value per share $1.43 diluted, or $2.02 on current share count.

NPV10 $246m. No value is attributed to Kwyjibo, Grafoid or other properties.

 

Operating Cashflow & NPV

PEA

       

FMS

 

FMS

FMS

>80/90%

Finished Product

46,135

 

>80/90%

Ore Grade

15.66%

 

>80/90%

Global Recovery

91.30%

 

>80/90%

Ore Processed

294,604

 

>80/90%

Ore Processed per day (365)

807

 

>80/90%

Mill Capacity 2,500tpd

32%

 
       

>80/90%

Concentrate Sold (t)

26,700

 

>80/90%

Concentrate Upgraded (t)

16,900

 
       

>80/90%

Revenue/t ($)

867

 

>80/90%

Revenue ($)

23,148,900

 

>80/90%

Royalty Rate (value t / %)

0%

 

>80/90%

Royality (NGC $20/t, FMS %)

0

 

>80/90%

Net Revenue

23,148,900

 
       

99.5%

Revenue/t ($)

9,572

 

99.5%

Revenue ($)

161,766,800

 

99.5%

Royalty Rate (value t / %)

0%

 

99.5%

Royality (NGC $20/t, FMS %)

0

 

99.5%

Net Revenue

161,766,800

 
       

>80/90%

Operating Costs/t Concentrate ($)

434

 

>80/90%

Operating Costs/t Ore ($)

68

 

>80/90%

Operating Costs ($)

20,022,590

 
       

99.5%

Operating Cost/t Upgrading ($)

5760

 

99.5%

Operating Costs/t Ore ($)

902

 

99.5%

Upgrading Costs ($)

111,945,600

 
       
 

Operating Margin ($)

52,947,510

 
 

Margin (%)

29%

 
       

=

Sustaining Capital (per annum)

1,275,000

 

Yr20

Closure Costs

3,588,000

 
       
       
 

Capex ($)

153,507,000

 
 

Payback (yrs)

2.9

 
 

IRR

31.0%

 
       
     

NPV

 

Cost of Capital (%)

10.00%

246,417,733

 

Market Capitalisation Premium over NPV (%)

 

0%

 

Market Capitalisation ($)

 

246,417,733

 

Shares in Issue (m) (both issue 50m @ $1)

 

172

 

Projected Share Price ($)

 

1.43

       
 

Annual Change in Operating Cashflow (%)

0.00%

 
       
 

0

-39,551,000

-39,551,000

 

1

-113,956,000

-113,956,000

START

2

51,672,510

42,704,554

 

3

51,672,510

38,822,322

 

4

51,672,510

35,293,020

 

5

51,672,510

32,084,563

 

6

51,672,510

29,167,785

 

7

51,672,510

26,516,168

 

8

51,672,510

24,105,607

 

9

51,672,510

21,914,188

 

10

51,672,510

19,921,989

 

11

51,672,510

18,110,900

 

12

51,672,510

16,464,454

 

13

51,672,510

14,967,686

 

14

51,672,510

13,606,987

 

15

51,672,510

12,369,988

 

16

51,672,510

11,245,444

 

17

51,672,510

10,223,131

 

18

51,672,510

9,293,755

 

19

51,672,510

8,448,868

 

20

51,672,510

7,680,789

 

21

51,672,510

6,982,536

       

The PEA above is pretty straight forward and the upside investment case that I will present below, further serves to illustrate the potential here, over an already highly positive, yet prudent PEA. I have referred to this analysis in the past as 'Blue Sky', but really there is not that much blue sky here and for me this may well represent a more accurate future scenario if FMS can achieve what it sets out to, with Lac Knife and Varennes imo.

Amendments from PEA Based NPV10.

- 25% contingency removed from base concentrate production cost and capital estimate.

- Own upgraded production costed at $2,500/t. Mgt guidance, with reference to contract production margins in the UK for industrial chemicals in 2011. Additional $100m capital expenditure for the Varennes plant added.

- Drilling updates allowing a 40 year LOM.

- 2% incremental sales revenue growth pa.

Upside NPV10, additional 50m shares issued at $1. Fair value per share $4.79 diluted, or $6.76 on current share count. NPV10 $824m. IRR 49.7% and payback 1.9 years.

Production levels are held at PEA volumes for LOM. No value is attributed to Kwyjibo, Grafoid or other properties.

 

Operating Cashflow & NPV

UPSIDE PEA

       

FMS

 

FMS

FMS

>80/90%

Finished Product

46,135

 

>80/90%

Ore Grade

15.66%

 

>80/90%

Global Recovery

91.30%

 

>80/90%

Ore Processed

294,604

 

>80/90%

Ore Processed per day (365)

807

 

>80/90%

Mill Capacity 2,500tpd

32%

 
       

>80/90%

Concentrate Sold (t)

26,700

 

>80/90%

Concentrate Upgraded (t)

16,900

 
       

>80/90%

Revenue/t ($)

867

 

>80/90%

Revenue ($)

23,148,900

 

>80/90%

Royalty Rate (value t / %)

0%

 

>80/90%

Royality (NGC $20/t, FMS %)

0

 

>80/90%

Net Revenue

23,148,900

 
       

99.5%

Revenue/t ($)

9,572

 

99.5%

Revenue ($)

161,766,800

 

99.5%

Royalty Rate (value t / %)

0%

 

99.5%

Royality (NGC $20/t, FMS %)

0

 

99.5%

Net Revenue

161,766,800

 
       

>80/90%

Operating Costs/t Concentrate ($)

347.2

 

>80/90%

Operating Costs/t Ore ($)

54

 

>80/90%

Operating Costs ($)

16,018,072

 
       

99.5%

Operating Cost/t Upgrading ($)

2500

 

99.5%

Operating Costs/t Ore ($)

392

 

99.5%

Upgrading Costs ($)

48,587,500

 
       
 

Operating Margin ($)

120,310,128

 
 

Margin (%)

65%

 
       

=

Sustaining Capital (per annum)

1,275,000

 

Yr20

Closure Costs

3,588,000

 
       
       
 

Capex ($)

229,507,000

 
 

Payback (yrs)

1.9

 
 

IRR

49.7%

 
       
     

NPV

 

Cost of Capital (%)

10.00%

824,391,321

 

Market Capitalisation Premium over NPV (%)

 

0%

 

Market Capitalisation ($)

 

824,391,321

 

Shares in Issue (m) (both issue 50m @ $1)

 

172

 

Projected Share Price ($)

 

4.79

       
 

Annual Change in Operating Cashflow (%)

2.00%

 
       
 

0

-39,551,000

-39,551,000

 

1

-189,956,000

-189,956,000

START

2

119,035,128

98,376,139

 

3

121,415,831

91,221,511

 

4

123,844,147

84,587,219

 

5

126,321,030

78,435,421

 

6

128,847,451

72,731,027

 

7

131,424,400

67,441,498

 

8

134,052,888

62,536,661

 

9

136,733,945

57,988,541

 

10

139,468,624

53,771,192

 

11

142,257,997

49,860,560

 

12

145,103,157

46,234,338

 

13

148,005,220

42,871,840

 

14

150,965,324

39,753,888

 

15

153,984,631

36,862,696

 

16

157,064,323

34,181,773

 

17

160,205,610

31,695,826

 

18

163,409,722

29,390,675

 

19

166,677,917

27,253,171

 

20

170,011,475

25,271,122

 

21

173,411,704

23,433,223

 

22

176,879,938

21,728,988

 

23

180,417,537

20,148,698

 

24

184,025,888

18,683,338

 

25

187,706,406

17,324,550

 

26

191,460,534

16,064,583

 

27

195,289,745

14,896,250

 

28

199,195,539

13,812,886

 

29

203,179,450

12,808,312

 

30

207,243,039

11,876,799

 

31

211,387,900

11,013,032

 

32

215,615,658

10,212,084

 

33

219,927,971

9,469,387

 

34

224,326,531

8,780,704

 

35

228,813,061

8,142,107

 

36

233,389,322

7,549,954

 

37

238,057,109

7,000,867

 

38

242,818,251

6,491,713

 

39

247,674,616

6,019,588

 

40

252,628,108

5,581,800

 

41

257,680,671

5,175,851

       

Supplemental Information

Jurisdiction - 1st world Quebec, Canada. South of City of Fermont, fully existing infrastructure and labour. Access to cheap electricity, through Hydro-Quebec. The Quebec Govt is highly supportive of mining activities, this is from their website:

"In 2009, for the third consecutive year, Québec earned international recognition for the excellence of its mining sector, when Vancouver's Fraser Institute ranked the province first in the world for its favourable mining environment, based mainly on its mining policies and mineral potential. The mining industry, accounts for 15,000 direct and 20,000 indirect jobs in all administrative regions of Québec, With 27 mines in operation in July 2010". Focus are 35km South of Fermont, the town was actually created to house workers/families of Cartier's (Now Mittal) iron ore mine at Mont Wright. Mont Wright is an open pit operation, producing 18m tonnes of iron ore per annum. We would be a miniscule operation in comparison and on the doorstep, very low impact.

There is considerable historical information related to the Lac Knife deposit and the quality of the Graphite that can be produced from it:
Bonneau & Raby - Mazarin Report (1990):
http://www.focusmetals.ca/english/wp-content/uploads/2011/06/FMS_Article_Lac-Knife-Graphite-Deposit_April-9-2011.pdf

Graftech (1991):
http://www.thefreelibrary.com/Graftech+Inc.+Announces+Completion+of+Phase+One+Test+of+Canadian...-a071313816

BGS (1993):
Further support from the 1993 CJ Mitchell report from the British Geological Survey:
Appendix 6 states a post screening grade of 17.3% and a 50% recovery factor supporting the reported 1:1 mining yeild (graphite to waste ratio).
http://www.bgs.ac.uk/research/international/dfid-kar/WG92030_col.pdf

The Government of Quebec showcases Lac Knife on their mines website:
http://www.mrnf.gouv.qc.ca/mines/industrie/mineraux/mineraux-potentiel-graphite.jsp

Various articles/links of Interest:

Graphite demand is rising and supply is potentially doubtful

http://www.im-mining.com/2012/01/11/find-more-graphite-demand-is-rising-and-supply-is-potentially-doubtful/

EU Foresees Shortages of 14 Critical Minerals

http://www.resourceinvestor.com/2010/06/17/eu-foresees-shortages-of-14-critical-minerals

Graphite and Rare Earth Metals for the 21st Century: Jack Lifton

http://www.theaureport.com/pub/na/12484

Graphite: A Diamond in the Rough for Investors?

http://www.resourceinvestor.com/2011/01/03/graphite-a-diamond-in-the-rough-for-investors

Only a Few Graphite Companies Will Win: Mickey Fulp

http://www.resourceinvestor.com/2012/05/24/only-a-few-graphite-companies-will-win-mickey-fulp

Industial Minerals - Commercialising Graphene

http://www.sgtk.ch/rkuendig/dokumente/HS12_recomended_reading_Commercialising_graphen.pdf

A visit to Lac Knife

http://onemansfinancial.blogspot.de/2011/08/walk-around-lac-knife-deposit-owned-by.html

RPA - Mine Design

http://www.rpacan.com/history.html

Terrapex - Permitting

http://www.terrapex.com/about.asp

Photos

http://www.focusgraphite.com/photos/lac-knife-updated-drilling-july-2012.html

http://www.focusgraphite.com/photos/lac-knife-graphite-property-2012.html

http://www.focusgraphite.com/photos/lac-knife.html

2012 London Graphite Conference Presentations - Grafoid, FMS & Chris Berry (set).

http://www.files.com/set/50ec19314cd9f

(Unsure how long these will be hosted for).

Critical Next Steps:

Lac Knife drill results 2012.

Own plant upgraded production costing RPA.

Off-takes / partnerships, Focus Graphite & Grafoid.

Focus has much to offer, but not without risk, we are a junior miner with all the financing and execution risk that comes with it, we still need to make the potential a reality, so the usual caveat of DYOR applies strongly here. That said, I have never seen a junior with such ambition and drive, they listed in May 2010 and have seen capital appreciation of around x7 since then. The news flow has been pretty phenomenal so far with the high potential of even more pivotal news to come. I hold the opinion that Mr Economo is one of the hardest working CEOs around

IMO, DYOR & GLTA.

Disclosure: I am long OTCQX:FCSMF.

Stocks: FCSMF