Union Securities Research: Northern Graphite Corp. (TSXv: NGC)


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Union Securities Research: Northern Graphite Corp. (TSXv: NGC)

  1. 1. Northern Graphite Corp. (NGC-TSX.V) $3.24Northern Graphite produces spherical graphitePhilip Ker, B.Sc.Geol, MBA 416-775-5130 pker@union-securities.com 3-Apr-12Stock Rating: Speculative Buy (Previous: Hold)Target Price: $4.15 (Previous: $2.40) Projected Return 28.1% Shares Outstanding, Basic (M) 45.4 Shares Outstanding, FD (M) 52.1 Market Capitalization C$147.1 52 Week High/Low C$3.38/C$0.71 Fiscal Year End Dec. 31 Net Asset Value/Share (C$) $5.16 Northern Graphite Corporation (NGC) is an Ottawa-based Canadian company that recently closed a $4 million initial public offering at a price of $0.50 per share and began trading on the TSX Venture Exchange under the symbol "NGC". Its principal asset is the Bissett Creek graphite project located 100km east of North Bay, Ontario, and close to major roads and rail and other infrastructure. The Company has 2011E 2012E 2013E 2014E completed an NI 43-101 preliminary assessment report on Revenue ($ mm) $0.0 $0.0 $28.9 $57.7 the project and has initiated a bankable feasibility study and Graphite Production (K tonnes) 0.0 0.0 0.0 19.0 commenced the environmental and mine permitting process. NGC anticipates that it will be in a position to begin Adj EPS ($0.11) ($0.10) $0.05 $0.31 construction of the mine early in 2012, subject to positive CFPS ($0.07) ($0.10) $0.06 $0.35 results from the feasibility study and the availability of financing. (www.northerngraphite.com)Source: Company reports, Union Securities estimates, www.bigcharts.comEventNorthern Graphite confirms Bissett Creek graphite capable of being purified into spherical graphiteImpactPositive: Increasing stock rating and target priceDetailsSpherical graphite sells at a substantial premium: The recent news announced by the Company has signaledthat spherical graphite can be produced from Bissett Creek graphite ore. Prior to this achievement, our analysisfocused solely on the production and sale of flake graphite concentrate. After discussions with management, we nowbelieve this value added product will be produced at Bissett Creek as an additional revenue stream. Spherical graphiteis a purified, potato shaped type of graphite that is formed from flake graphite and contains approximately 99%Carbon. This more pure form of graphite is used within Lithium Ion batteries and based on current flake concentrateand battery grade material prices on the market, along with positive confirmation of recent tests on ore from BissettCreek, Northern Graphite is poised to sell a battery grade product at a substantial premium to concentrate as currentcontracts for battery grade spherical graphite sell at approximately $7200USD/t.Additionally, the Company aims at using its medium flake (-80) sized graphite for use as feed to the purity plant andthus enables the Company to capitalize on a higher profit margin by using the lower valued flakes in its purificationPlease see important disclosures at the back of this report. Philip Ker| 416-775-5130 | pker@union-securities.com EQUITY RESEARCH MINING REPORT
  2. 2. process. We believe over time, an optimal blend of flake feed will be achieved in order to maximize efficiency andrevenues of the operation. A summary of the current market prices for flake concentrate can be seen in Exhibit 1.Exhibit 1. Flake Graphite Price Chart April 2012 Pricing Flake Size Carbon % Mesh Range ($US/t) Large 94-97 +80 2500-3000 Medium 94-97 +100-80 2200-2500 Medium 85-87 +100-80 1500-1900 Powder 80-85 N/A 600-800 Medium 90 +100-80 1500-2000Source: www.indmin.comPurity plant now needed to maximize potential: With confirmation of production of spherical graphite fromBissett Creek flake graphite, the project now needs a purification plant in addition to its floatation recovery cycle. Withlimited investigation or engineering design on a plant done thus far, we estimate an additional Capex requirement of$15M. Furthermore, despite high open market prices for spherical graphite, its production does come at a substantialcost. We assume that due to the intensity of thermal and chemical requirements needed in the process that a $1200/toperating cost is justified and would be in addition to the mining and recovery costs of the flake concentrate. Despitethe additional costs, there is a substantial profit margin to take advantage of and we believe that once engineeringstudies are complete, the Company will have an operating purification plant at the Bissett Creek project in 2015.New assumptions in conjunction with production, processing and corporate forecast: • Required Capex of $95M to include the $15M needed for the purification plant • Purification plant coming on-line in 2015, at 20% of production feed rate • Feed rate to slowly increase to 50% of production as battery grade demand increases • Selling price of battery grade of $7200/t with operating costs of $1200/t • Yields of 50% during purification process from medium flake concentrate • Anticipating a $15M financing at ~$3/sh for 2012 Capex requirements • Utilizing a 10% discount rate in our DCF and current target price based on 0.8x NAVA summary of our NAV for Northern Graphite can be seen in Exhibit 2.Please see important disclosures at the back of this report. Philip Ker| 416-775-5130 | pker@union-securities.com EQUITY RESEARCH MINING REPORT
  3. 3. Exhibit 2. NAV Estimate Discount Value Assets (CDN$ mm) Interest Rate ($mm) $/Share Bissett Creek 100% 10% 268.6 4.70 Corporate Working Capital 9.1 0.06 Exercise of Warrants & Options 1.9 0.03 Proceeds from Equity Financing 15.0 0.26 Other Total Corporate Net Asset Value 294.6 5.16 Shares Fully Diluted (million) 57.13Source: Union Securities estimatesWith a lack of engineering studies done at this point, we can only speculate the operating costs going forward.Additionally, the demand for battery grade material cannot accurately be predicted at this time and we forecast amodest and flat contract selling price of $7200USD/t for Bissett Creek spherical graphite. These assumed selling pricesand operating costs are most sensitive to the Company’s NAV, and a sensitivity table can be seen in Exhibit 3.Exhibit 3. NAV Sensitivity Operating Costs ($/t) NAVPS -15% -10% -5% 0% 5% 10% 15% $1,020 $1,080 $1,140 $1,200 $1,260 $1,320 $1,380 -15% $6,120 4.51 4.46 4.41 4.36 4.31 4.26 4.21Graphite Price -10% $6,480 4.77 4.72 4.68 4.63 4.58 4.53 4.48 Spherical -5% $6,840 5.04 4.99 4.94 4.89 4.84 4.79 4.74 ($/t) 0% $7,200 5.30 5.25 5.20 5.16 5.11 5.06 5.01 5% $7,560 5.57 5.52 5.47 5.42 5.37 5.32 5.27 10% $7,920 5.83 5.78 5.73 5.69 5.64 5.59 5.54 15% $8,280 6.10 6.05 6.00 5.95 5.90 5.85 5.80Source: Union Securities estimatesRecommendationWith several upcoming catalysts, along with the quality of the Bissett Creek project, we continue to believe NorthernGraphite will evolve as a large flake concentrate and spherical graphite producer within the safe, mining friendlyjurisdiction of Ontario. Milestones such as project permitting, Capex financing and off-take agreements should bereached over the coming quarters and present a clear picture for the Company as it moves towards production. Dueto our re-valuation of the stock to include the value added component of producing spherical graphite, we are re-rating the stock to a Speculative Buy and are increasing our target to $4.15 from $2.40 based on 0.8x NAVPS.Risk to outlook: Our 12 month outlook forecasts development of the Bissett Creek project and assumes some equitydilution in order to fund the capital expenditures needed. Any deterrence or delay in the project’s development wouldnegatively impact our outlook. Additionally, since the Company’s future revenues are driven by the sale of graphite,and since Bissett Creek is the Company’s lone operation, a decline in graphite prices or demand, would impact thefinancial viability of the project and could alter Management’s decision to continue advancing the project.Please see important disclosures at the back of this report. Philip Ker| 416-775-5130 | pker@union-securities.com EQUITY RESEARCH MINING REPORT
  4. 4. Union Securities Research DisclosuresAt the date of the release of this report, Philip Ker does not own shares of Northern Graphite Corp.At the date of the release of this report, Union Securities Ltd. (“USL”) does not hold any shares or options of Northern Graphite Corp.Within the past 12 months, USL has acted as agent for an offering of the Northern Graphite Corp.Within the past 12 months, the Analyst has not visited the Bissett Creek Project site.Research Rating System:Strong Buy – Analyst’s top sector picks, with expected return of 25% or more over the next 6 to 12 months.Buy – Expected return of 10% to 25% over the next 6 to 12 months.Speculative Buy – Expected return over 10%, companies without significant revenues.Hold – Expected return of 0% to 10% over the next 6 to 12 months.Reduce – Expected return of -10% or more over the next 6 to 12 months.Distribution of Ratings Rating Number of Companies % of Research Coverage Strong Buy 2 11% Buy 8 42% Speculative Buy 9 47% Hold ReduceResearch Analyst CertificationThe views expressed in this report accurately reflect the personal views of the analyst covering the subject company and its securities. No part of the analyst’scompensation was, is or will be directly or indirectly related to the specific recommendations expressed in this research report.Analyst CompensationAnalysts are compensated through a combined base salary and bonus payout system. The bonus payout is determined by revenues generated directly or indirectly fromvarious divisions of USL including investment banking, based on the following factors: quality and quantity of reports generated, relative performance of recommendationsversus benchmark index, knowledge of industry and feedback from clients and in-house brokers. Analysts are not directly compensated for specific investment bankingtransactions.DisseminationUSL sends its research reports to interested institutional and retail clients via e-mail upon release. Simultaneously, research reports are posted to USL’s public web siteand intranet where they are available to clients and to USL’s sales staff. Research reports may also be printed and mailed to clients upon request.The opinions, estimates, projections contained herein are those of USL as of the date hereof and are subject to change without notice. USL makes every effort to ensurethat the contents herein have been compiled or derived from sources believed to be reliable and contain information and opinions, which are accurate and complete.However, USL makes no representation or warranty, express or implied in respect hereof, takes no responsibility for any errors or omissions which may be contained hereinand accepts no liability whatsoever for any loss arising from any use or reliance on this research report or its contents. Information may be available to USL which is notreflected herein. This research report is not to be construed as, an offer to sell or solicitation for an offer to buy, any securities. USL, its affiliates, and/or their respectiveofficers, directors or employees may from time to time acquire, hold or sell securities mentioned herein as principal or agent. USL is a member of the Toronto Stock, theTSX Venture Exchange, the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.UK DisclosureThis Communication is only made to or directed at investment professionals whose ordinary business activities involve carrying on investments in junior Canadian equitiesand who have professional experience in such investments. The investments and investment services to which this Communication relates are only available to suchInvestment Professionals. This Communication is not made to anyone who does not have professional experience in investing in junior Canadian equities. Any person whodoes not have professional experience in investing in junior Canadian equities must not rely upon this Communication.Investments in exploration and early stage natural resource companies should be regarded as speculative and only made by persons who can afford the total loss of suchan investment.This communication is exempt from section 21 of the Financial Services and Markets Act 2000 and has not been approved by an Authorized Person under Section 21 of TheFinancial Services and Markets Act 2000.Union Securities (International) Ltd. is authorized and regulated by the Financial Services Authority of the UK.Conflicts of interest disclosure – Individuals at Union Securities (International) Ltd. may hold investments in the company and /or have affected transactions in thecompany concerned. London, UK Contact: David Sadler Tel: +44-(0)20 3170 6198This report is not intended for nor should it be distributed to any persons residing in the USA.©This report may not be reproduced in whole or in part, or further distributed or published or referred to in any manner whatsoever, nor may the information, opinion orconclusions contained herein be referred to without in each case the prior written consent of Union Securities Ltd. and Member IIROC Philip Ker| 416-775-5130 | pker@union-securities.com EQUITY RESEARCH MINING REPORT