Focus Graphite (TSXV:FMS) recently tabled a positive Preliminary Economic Assessment (“PEA”) on its wholly-owned Lac Knife Graphite Project in mining friendly Quebec. The PEA was prepared by respected firm Roscoe Postle Associates, in collaboration with Soutex who were responsible for metallurgy and mineral processing.
The report demonstrates that the project has robust economics and that Lac Knife has the potential to become a low cost producer of high value graphite products. Key operational and financial highlights at a glance:
|Production Summary||Lac Knife PEA Data|
|Resource||4.9 million tonnes (indicated) at 15.76% Cgr|
|3 million tonnes (inferred) @ 15.58% Cgr|
|Life of Mine (LOM)||20 years|
|Life of Mine Production||6 million tonnes|
|Milling Rate||820 tonnes per day/365 days per year|
|Mill Head Grade||15.66% graphitic carbon (Cgr)|
|Average Metallurgical Recovery||91.30%|
|LOM production of concentrate||868,000 tonnes concentrate grading 93.5% Cgr|
|338,000 tonnes of high purity 99.95% Cgr product|
|40% of primary concentrate upgraded to 99.99% purity||338,000 tonnes concentrate averaging 99.99% C|
|Mesh size of Carbon||39% of production +100 mesh (battery grade)|
|26% of production is between -100 to +200 mesh (medium grade)|
|35% of production -200 mesh (fine grade)|
|Long Term weighted average Graphite concentrate price||US$4,196/tonne|
|Financial Summary||Lac Knife PEA Data|
|Pre-tax Net Present Value||$246 million (10% discount Rate)|
|Pre-tax Internal Rate of Return||32%|
|Capex Cost||$154 million|
|Payback period||2.8 years|
|Average operating cost over LOM||$435.06/tonne milled*|
|Current Market Capitalization||$70 million|
|Enterprise Value||$45 million|
|Commercial Production Expectation||Second Quarter 2014|
* This consists of operating costs at Lac Knife of $67.61/t milled and $367.45/t milled for thermal purification.
One of the key pieces of data to take from this report is that fact that 46.1% of the Lac Knife deposit is considered large flake (+48 to +100 mesh).
Graphite is not a homogeneous product and is priced based on purity and flake size (crystal size). As can be seen by the price chart below, large flake, high purity graphite is the most valuable.
|Type||Purity||Price $/tonne as of March 2011|
|Small Flake||94% to 97%||$1,200 to $1,800|
|Medium Flake||94% to 97%||$1,600 to $1,900|
|Large Flake||94% to 97%||$1,800 to $2,200|
Flake graphite has the most diverse range of end-uses and therefore commands a premium price. Graphite is not an exchange traded commodity and prices are typically negotiated between producers and end users.
A research report published by Cormark Securities comments that, in addition to producing small and medium flake graphite “Lac knife has the potential to produces high-value battery grade graphite. High purity natural flake graphite is estimated to account for 35% of battery grade graphite use and demand is expected to increase.” The research report suggests the company can potentially sell this product for $10,000/tonne to $30,000 per tonne.
This high quality product (+100 mesh, >95% Cgr for purification to 99.99% Cgr) is used in battery production and technology-grade applications.
In May 2012, the company inked a deal with Hydro-Quebec which will enable FMS to develop a graphite purification facility and a graphite anode production facility for lithium-on batteries. When this facility is completed, FMS anticipates that thermal purification costs will drop significantly compared with the outsourcing costs currently outlined in the PEA ($367.45/t milled).
Focus Graphite intends to provide a high-value niche industrial product and is in the process of establishing various off-take agreements.
Focus Graphite’s Lac Knife project is a high grade and high purity graphite deposit located in northern Quebec with access to excellent infrastructure. The company intends to cash-in on the growing demand for technology-grade graphite by tailoring its product to industrial and technology customers.
The PEA indicates the project could be a low cost producer of graphite. The project is most sensitive to commodity price changes but this should be mitigated by securing favourable off-take agreements for its lower-end product and via the thermal upgrade and sale of its high-end technology-grade product.
Focus Graphite has a current market capitalization of about $62 million. It has an estimated price tag of $154 million to build its mine and a PEA that indicates the project has a Net Present Value of $246 million (using a 10% discount rate). With this positive economic assessment under its belt, the biggest value drivers for Focus Graphite, moving forward, should be the announcement of favourable off-take agreements and a mine finance deal that won’t excessively dilute its shareholders.
Thomas Schuster – Analyst Bio
With a degree in Geological Sciences from the University of Toronto, Thomas started his career in the 1990s as an exploration geologist in the famous Timmins mining camp in Northern Ontario. He then moved to Vancouver and took a position as staff Journalist at the well-known mining publication, The Northern Miner, reporting the merits and shortcomings of Canadian exploration and mining projects worldwide. This built a foundation for his later work as a Mining Analyst for the Toronto-based institutional investment firm, Fraser Mackenzie. Thomas is currently based in Vancouver working as an independent mining analyst.
Disclosure: No positions at time of writing.
Focus Graphite is a client of Dig Media. Dig Media was paid a fee for the creation and dissemination of this commentary.