Focus Graphite “Ahead Of The Curve” As It Ramps Up To Become A Leader In Graphite Supply

Nov. 22, 2012 12:06 PM ET
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After a very busy year, Focus Graphite (CVE:FMS) (OTCQX:FCSMF) is on its way to meeting its objective of becoming one of "the biggest and best high-end graphite suppliers in the world".

The Canadian graphite mining and exploration company boasts what it says is "the best technology-grade graphite in the world" at its flagship NI 43-101 compliant Lac Knife deposit, located in the Côte Nord region of Quebec.

Focus explains that Lac Knife is unique because of its cost-mitigating, high concentration of large, medium and small flake graphite. Flake graphite - the most actively pursued type of graphite and associated with next-generation technologies - is made up of layers of graphene, which is the mineral's base structural element.

President and CEO Gary Economo says one of the most important milestones achieved by the company this year was its long-awaited preliminary economic assessment (PEA) on the Lac Knife project, showing average concentrate grades of 92% graphitic carbon.

With a mine life of 20 years, the open pit operation is expected to yield 300,000 tonnes per year, with life-of-mine production of 928,000 tonnes of concentrate at 92% graphitic carbon on average, or approximately 46,600 tonnes of concentrate per year.

Pre-tax net present value - at a 10% discount rate - was estimated at $246 million with a 32% pre-tax internal rate of return and a pre-tax payback period of 2.8 years.

Initial capital cost was projected at $154 million, inclusive of $33 million and $24 million in working capital and contingency (25 per cent), respectively.

"Getting the PEA completed was important as we move Lac Knife into production," says Economo.

"The PEA also allowed us to begin to seriously look at off-take agreements, which we'll be working on over the next three to 12 months, and allowed us to begin planning financing."

Economo says the company has decided to go straight to off-take and financing arrangements, eliminating the need for a new feasibility study.

"There have historically been multiple feasibility studies done on the property so we just need to update the numbers," he notes.

"For other precious metals, a feasibility study is required to move forward, but with an industrial metal like graphite, you need customers before you can sell it."

Efforts to update its numbers were met by two "very substantial" drill programs on Lac Knife, and at its Kwyjibo polymetallic property in the Grenville region of northeastern Quebec.

The results will be used to revise and upgrade the company's NI 43-101 compliant Lac Knife resource, published last December, which stands at 4.9 million tonnes at 15.8% graphitic carbon (Cgr) in the indicated category and 3.0 million tonnes at 15.6% Cgr in the inferred category.

Economo says Lac Knife drilling was done along strike and to the south, as the resource is open in all directions, including at depth.

At Kwyjibo, drilling began in August with the aim of confirming grades, thickness and continuity of the rare earth-iron-copper mineralization seen in the area of the Josette horizon.

The Kwyjibo property consists of 118 mining titles and covers 6,278 hectares, located several kilometres north of Manitou Lake and 125 kilometres northeast of Sept-Iles.

The property is also located 25 kilometres east of the Quebec North Shore and Labrador railway line and is accessible by air from Sept-Iles.

The best drilling intersections seen from this area in 2011 included 2.40% total rare earth oxides (TREO) over 48.8 metres, and 3.61% TREO over 33.1 metres.

"We targeted one particular location and we are working on a resource estimate for that property which we expect in six months," Economo says.

"Infill drilling at Lac Knife was done with large drill core in order to have enough material for infill and bulk testing at SGS [testing company] and for our customers, as well as having enough material for Grafoid to use."

Grafoid is a privately-held joint venture, in which Focus owns a 40% stake that develops and acquires patent applications, securesIntellectual property and develops graphene applications.

Economo says that perhaps the most "monumental advancement" at Focus this year is the progress it has made with Grafoid on the graphene front.

Graphene is considered to be one of the strongest substances known to science. It occurs naturally in graphite, is 200 times stronger than steel and is so thin it is transparent. It is also flexible and electrically conductive.

The substance can be used as a transistor, as a component for industrial, aviation and infrastructural use, and can be produced for battery and super-charging capacitor applications.

A number of multinationals are active in graphene research and development, Focus says, including Intel (NASDAQ:INTC) and IBM(NYSE:IBM) in computing, Dow Chemicals (NYSE:DOW) and BASF as suppliers of basic graphene material, and Samsung (KRX:005930) in consumer electronics.

Grafoid holds an economically scalable production process for graphene, from raw, unprocessed graphite ore.

"The low-cost, manufacturing process needed to be proven, so we built a pilot plant that ran for about five months," Economo says.

"We proved it and we are now manufacturing in kilos, while working on characterizing the material for specification to ensure continuity between batches."

At the same time, he says the company has engaged a number of "high profile" corporations to develop applications for its graphene.

"We are looking forward to starting a revenue stream based on the royalties on applications we've enabled with graphene."

Looking ahead, Economo says that over the next three to 12 months, the company will be undertaking a program to build another lab-scale, pilot plant to carry out its own high-purification process for graphite, which it licensed from Hydro Quebec's technology research institute - IREQ, earlier this year.

Economo says the pilot plant will help the company to determine the costing process of the technology, which it plans to include in a revised PEA.

"There are certain costs we feel we can substantially reduce by bringing it in-house," he says.

Over the next year, the company will also be working on its technology process activities, with two separate research and development processes being developed to improve manufacturing and purification.

Off-take agreements are also on the horizon, which Economo says are key to the advancement of Lac Knife.

"We have been in discussions with potential off-take partners for over a year that were waiting for the PEA, as well as bulk material that is currently being processed," he notes.

"That is a big project and a major focus for the company at this point. Once the off-take is done, we can move on to financing."

In the meantime, permitting for the project is in the works, as well as a mine plan and updated resource calculation that will include the results of Focus's summer drilling program.

Economo says that so far, the company is fully financed for all of these ventures.

In addition, after announcing the discovery of a new graphite-bearing corridor on its Lac Tetepisca property last week, Focus says plans for a comprehensive follow-up exploration program in 2013 are underway.

Lac Tetepisca is located southwest of the Manicouagan reservoir, 234 kilometres north-northwest of Baie-Comeau, Quebec.

A total of 26 mineralized grab samples defined the new "Manicouagan-Quest" graphitic corridor, 17 of which host Cgr grades of over 5.59%. The highest grade from the sample was 45.8% Cgr, the company noted at the time.

With all of its graphite properties and technologies, Economo says the demand is there to back the company up. He sees the demand for graphite "increasing substantially" over the next seven to eight years.

"By 2020, we certainly expect to have a major increase in demand - driven by technology applications, though we expect to see a tremendous increase in the lithium storage industry."

Graphite, the mineral form of the element Carbon (C), forms in veins inside metamorphic rocks as a soft black material. It has the highest natural strength and stiffness of any material, along with the lightest weight of all reinforcements. It is also an excellent conductor of electricity and heat, as well as strong lubricant.

It has many applications today, ranging from refractories, brake linings and steel-making uses, to lithium-ion batteries and fuel cells.

And, though the electrification of the transport industry is slower than expected, Economo says there is no doubt that it is coming. The need for graphite in lithium-ion batteries is projected to grow dramatically, with these batteries found in several electronic devices, including the electric vehicle.

Focus is ready to meet the demand, he adds, planning to be among the "biggest and best" high-end graphite suppliers in the world.

"We are certainly way ahead of the curve and our high grade puts us in very strong competition with anybody else in the world."

Indeed, Focus has what it takes to be a contender in the race to be the next big graphite producer. Its Lac Knife property boasts 16% carbon grade of medium and large flake crystalline graphite.

The global supply of the mineral as of 2011 was 1.019 million tonnes, of which 565,000 tonnes was the flake variety.

According to industry sources, over 70 per cent of the world's graphite supply comes from China - the majority of which is of the amorphous variety, used for more traditional applications and for which consumption is falling.

China has also been experiencing declining production and increasing costs, recently imposing a variety of protective measures on graphite exports - including 20 per cent export duties, 17 per cent value added tax, and an export licensing system.

This puts Focus in prime position to benefit from the anticipated graphite demand, as well as the expected decline in supply over the coming years.

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

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