Nouveau Monde Provides A Whole New World Of Opportunities
Summary
- Nouveau Monde is a developmental graphite miner in Quebec.
- The company recently completed a proactive reverse split.
- Next up is a listing on the NYSE that will create excellent new opportunities for traders.
- As the demand for graphite increases, the company is poised to fill a crucial role in the global supply chain.
Nouveau Monde (OTC: NMGRD) is a Quebec-based developmental mining and chemical company promoting renewable energy solutions. In particular, the company looks to build out the largest graphite mining operation in the Western world, and they would play a unique role in the graphite supply chain.
Recently, Seeking Alpha contributor Gold Panda weighed in on Nouveau Monde’s prospects from a bearish perspective. The author provided some excellent financial insight regarding the potential value of the company, while also missing key elements that make the stock much more attractive than presented in the article.
This article clarifies some of those critical issues, including their partnership with Pallinghurst, understanding the differences between synthetic and natural graphite, and recognizing the changing market that places the company in a promising position. I also share some ways to take advantage of their impending move to the NYSE.
Company Overview
Nouveau Monde is currently developing two properties in order to become the largest producer of graphite in North America. Those properties are Matawinie, a mine in Saint-Michel-des-Saints, near Montreal, and a conversion facility that can further purify graphite material, housed in nearby Becancour.
The Matawinie mine has been fully permitted and contains total reserves of over 120 megatons. The company expects the mine to produce over 100,000 tons of high-purity graphite flake per year.
Based on projected graphite demand and costs, Nouveau Monde anticipates 2025 earnings of US$270 million, a number that makes the company an interesting investment at current levels. As of April 9, Nouveau Monde has a market cap of under USD$500 million, along with a recently updated share count of 37 million.
Investors who bought into Nouveau Monde in 2020 have already reaped substantial rewards. The share price, which spent most of the last summer in a narrow range near $1.50, experienced a move above $20 (on an adjusted basis) in early February.
Since then, it has traded in a tightening wedge, with 11.80 holding up as support for the time being.
Published on TradingView on 4-10-21 by the author
Revisiting the Royalty Deal
One of the concerns raised in the previous article was a recent royalty deal with Pallinghurst where Nouveau Monde offered a 3% net smelter royalty in exchange for approximately C$4.3 million. However, that information alone wildly mischaracterizes the actual transaction. In addition, note the following highlights from the press release:
In total, the company raised C$20 million from the deal
Pallinghurst accepted a C$15 million convertible bond as part of the transaction
Pallinghurst currently owns 20% of Nouveau Monde’s stock, making them a tight-knit partner
The deal allows Nouveau Monde to repurchase 1% of the royalty each year for just C$1.3 million, plus interest
The deal includes cancellation of C$4 million in promissory notes
If Pallinghurst executes all of the convertible bonds they hold, they will eventually own 49% of the company, reinforcing how important the success of Nouveau Monde is to them
Altogether, this deal ends up being quite favorable to Nouveau Monde and places few restrictions on future growth, while also aiding the balance sheet.
Synthetic vs. Natural Graphite
You might know that graphite can be made synthetically and that it has some advantages over natural graphite. But you might be surprised to learn that synthetic graphite and natural graphite are two distinct products with their own markets.
As explained by Steven Riddle of Asbury Carbons, the two types “are used in their own applications and do not compete. They have no relationship except they’re both called graphite.”
Synthetic graphite = Manmade; purer carbon content; used for specific industries such as solar; significantly more expensive
Natural graphite = Mined; less pure in carbon content; used in many industrial applications; less expensive
Synthetic graphite is made from petroleum coke that is mixed with coal-tar pitch and super-heated to over 2500˚C. The graphite product is high in purity and conductivity.
On the other hand, natural graphite is a by-product of millions of years of compression and heat in the Earth's crust. To date, natural graphite has not been able to match all of the characteristics of synthetic.
However, with the help of chemical processes - which Nouveau Monde will be engaging in - natural flake material can come closer to the properties of synthetic graphite. And if the lower cost structure can be maintained, there will be substantial benefits on a large scale.
One industry where demand is expected to surge is electric vehicles (EVs), and Nouveau Monde has hinted at ongoing discussions with several automakers. The higher expense of synthetic graphite makes it less appealing for use in EVs, and that's a reason why more natural graphite will be in demand in coming years. Estimates are for 5-7% annual total market demand growth through at least 2027. Enter Nouveau Monde, which anticipates that its jumbo flake mines will be fully online by 2023.
Why Graphite is Well-Positioned
While industrial demand for graphite has been significant for many decades, the ability of new mining operations to emerge has been limited. This may be changing.
Historically, graphite has primarily been produced in China. While the country will undoubtedly remain a major part of the global industry, the COVID pandemic has forced countries to rethink their approach to supply chains for everything from medical supplies to mineral reserves.
Being located in Canada and maintaining all of their production and refining processes in-house gives Nouveau Monde a notable advantage. They also plan to be a carbon-neutral company and would offer customers a supply chain benefit of not having their material processed in China, where nearly 100% of flake material is currently processed.
On another note, when the author of the bearish article on Nouveau Monde mentions that the Balama graphite mine was unsuccessful, he fails to include some important information:
- Balama is located in Mozambique
- Balama was closed due in part to COVID concerns
- Balama is restarting production this year
In short, there are plenty of reasons to be bullish on graphite, and Syrah - the company that runs the Balama mine - seems to agree.
No Guarantees of Success
While the company remains focused on reaching full operationality by 2023, there are obstacles along the way. The most obvious of those is the need for additional financing.
At the end of March, the company had just C$35 million (USD$28 million) in cash. According to Nouveau Monde's investor presentation, they need to spend close to USD$800 million in initial capital expenditures to make both of their properties fully operational. That money is expected to come from a combination of sources, including the Canadian government, bank loans, and share dilution.
There will also be more competition coming, as companies such as Westwater focus resources on developing graphite. Will the industry demand keep pace with increased graphite production? Running a profitable business focused on the production of graphite will require a healthy market for the material, one where prices are supported at a level well above production costs.
Another uncertainty is the future market price of graphite. One of the unique aspects of graphite is that it does not have a spot market like other materials such as gold, silver, copper, and nickel. Forward guidance relies on estimates of future value, which is of course unpredictable. This is an issue for all miners, as spot markets can swing dramatically. However, having experience in those industries helps companies prepare for market downturns, whereas Nouveau Monde will be trying to establish itself.
Upcoming Uplisting
A major goal of the company has been to have their shares trading on the New York Stock Exchange. They have taken some important steps in that direction, executing a 1:10 reverse split on March 31 and beginning the application process to be newly listed on the NYSE.
Investors are often frightened by reverse splits, which tend to carry a negative connotation. The truth is that not all splits are equal.
When a company underperforms for a significant period of time and needs to undergo a reverse split to maintain a share price above $1 in order to stay listed on a major exchange, this is an unhealthy development. But when a company makes the reverse split in a proactive manner to reduce the outstanding shares and prepare for an uplisting, this is a significant positive for investors. The latter is clearly the case for Nouveau Monde.
This process should occur in early May, roughly six weeks from when their application was filed on March 31. Once that takes place, the door is open to new institutional investment, and also for some new tricks for retail investors.
Preparing to Use Covered Calls
Once Nouveau Monde uplists to the NYSE, there should be an options market arriving shortly after. I recommend keeping an eye on the strikes that are made available when that happens, as it should open some excellent opportunities for options traders.
With the company's share price showing a lot of volatility, we can guess there might be strikes set at intervals of 2.50, perhaps starting at 2.50 and going up. That would create potential call options at 12.50, 15, 17.50, and 20. Beyond that, the strikes could shift to $5 increments (ex: 25, 30, 35). we will have to wait and see, but we can prepare a strategy now.
If you happened to catch my previous article on Nokia, you may have noticed my affinity for covered calls. Writing calls offers several advantages:
- Instant cash
- Reduced downside risk, as the premium you earn effectively reduces your cost on the stock
- Potential to keep all of your shares if the call expires worthless
- Potential to sell your shares at a nice profit if the calls are exercised
It's always possible to get burned by covered calls if the underlying stock price rockets upward. In that case, your proceeds are capped at the call price plus the premium you sold them for.
Even then, however, you can make a substantial profit. Realistically speaking, most out-of-the-money calls will expire worthless, allowing you to keep the shares and the premium. For that reason, it makes sense to sell calls at a price above your purchase price and the current share price whenever possible.
If the share price of Nouveau Monde stays under $15 upon uplisting, my first move will be to buy shares and simultaneously sell calls with an expiration roughly one or two months out. If you can scoop up a $2-3 premium for a strike near $20 and an expiration no more than two months out, I believe it's a good value. Anything more than that is a bonus.
With a company like Nokia, where the share price is about as active as a dead fish, I advocate a covered call strategy because of the lack of volatility. In most cases, as long as you set your strike price at the appropriate point, you just keep the shares and the premium and repeat the process.
In this situation, you can use the volatility that you see in a company like Nouveau Monde to your advantage. Higher volatility stocks have higher premiums for their call strikes. The chances of losing your shares are greater, but again, as long as you've set your strike where you're happy to sell the shares, there's really no risk involved.
The downside is the scenario where the share price skyrockets, somebody else calls your shares away at the agreed price, and you still make a good profit, albeit lower than it would have been without selling the calls. Keep in mind that is still a good win.
Another possibility is that the share price tanks. We know that Nouveau Monde is likely to do a share dilution to raise capital at some point in the near future. Depending on the size and the offering price, it could have a significant downward effect. But that is something that would have happened whether you sold calls or not, and if you were actively writing calls, then you've limited your downside by keeping that premium.
Conclusion
Nouveau Monde is an active company in an industry set to experience soaring demand in the coming decade. There will be important management moves to watch in the next 18 months as they prepare to be a fully functioning miner. Raising cash, developing a carbon-neutral operation, and managing their competition are all important milestones.
In the short term, their move to the NYSE will also bring new institutional money and open options markets that create new avenues for traders. And in the long-term, I see a company that is well-positioned to take advantage of changing approaches to supply chain issues and surging demand for EVs.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in NMGRD over 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (13)
1. Not in Africa, S. America, China (supply chain risks)
2. ESG, or demonstrated/documented green mining process
3. Quality of resource
4. Financing
NMG ticks boxes for me. Not smart on LMR or WWR. Will look into it.Any commodity that goes into deficit sees great price leverage. If the forecasts are right, then pricing should be better than currently expected.Weakness in my thesis: if another metal is more in deficit than anode graphite, then graphite pricing will be merely ok to very good.Like Talga and Novonix for similar reasons.
