Northern Graphite leading the charge to supply ambitious Tesla Motors

Ottawa-based Northern Graphite Corporation is among just a few junior graphite-mining companies positioned to cash in on the dawning growth of electric vehicle manufacturing in North America, analysts say.

Analysts have pointed to the quality of the graphite in Northern Graphite’s only deposit, the Bissett Creek project near Algonquin Park, Ont., and to the company’s completion of advanced testing and planning as signs it is ahead of many competitors.

Northern Graphite has built up one of the most “advanced” projects among nearly two dozen graphite juniors, most of them strewn across Canada and Australia, said Simon Moors, a minerals analyst at London based-Benchmark Minerals.

The company has also been a “prudent steward” of its finances, said Chris Berry, a minerals analyst at New York-based House Mountain Partners LLC.

Northern Graphite held just more than $14 million in assets, including $2 million in cash and more than $10 million in value in its graphite claim, and just more than $545,000 in liabilities at the end of its third quarter on Sept. 30. The company had accumulated just more than $9.5 million in debt since its 2002 inception at that time.

Northern Graphite’s net loss at the end of the quarter, at just more than $160,000, narrowed from the same time the year prior; its 2013 third-quarter loss also improved from the company’s loss at end of the third-quarter of 2012.

In its financial statements, the company said a gradual completion of testing and analysis on the Bissett Creek deposit meant less labour was required, and it reduced costs related to management, consulting and staff.

The company’s stock was trading at 77 cents on the TSX Venture at closing on Dec. 3, giving Northern Graphite a market capitalization of $37.9 million.

None of the competing graphite juniors in North America have yet begun drawing the mineral out of the ground, though demand is relatively modest at this time, analysts said.

That could change soon, thanks in large part to Tesla Motors, Inc. The manufacturer of hip and pricey electric sports cars announced in February it plans to build a “giga-factory” in Nevada to produce lithium ion batteries, which are made partially of graphite. Tesla aims to produce more batteries in that factory by 2020 than were produced worldwide in 2013, according to a company press release.

To make those batteries, Tesla would likely require more graphite per year for its factory than is currently produced worldwide, wrote Gareth Hatch, a metals analyst at Illinois based-Technology Metals Research, in March. Tesla could save more than $400 US if it uses purified and processed naturally occurring graphite—which Northern Graphite aims to produce—instead of synthetically-produced graphite, wrote Hatch.

Northern Graphite’s standing as one of the most promising graphite juniors in North America makes it well-positioned to supply Tesla with the graphite it will need, said Hatch. Wall Street Daily analyst Tim Maverick also identified Northern Graphite in a March column as among the three leading graphite juniors in the race to fuel Tesla.

There are 16 companies controlling 20 projects worldwide that could potentially yield battery-quality graphite, wrote Hatch. Northern Graphite and Focus Graphite were two of the three companies he identified as best positioned to provide the type of graphite Tesla would require in time for the projected 2017 start-up of the electric car maker’s factory.

While the world’s natural graphite market has traditionally been dominated by Chinese players, many Chinese graphite miners still use toxic chemicals to extract graphite from the earth, said Don Baxter, former president of Northern Graphite and current CEO of Focus Graphite, perhaps Northern Graphite’s biggest competitor.

Most North American and Australian producers, including Northern Graphite and Focus Graphite, use cleaner methods of extraction, said Baxter. Tesla will likely look for a low-polluting supplier, he said, given its branding as an eco-friendly automaker.

The Chinese government has also shuttered a number of high-polluting graphite mines in the past few years, and plans to reduce its graphite exports to ensure enough of the mineral is available for Chinese use, said Moors.

While Tesla is the most ambitious player in the North American electric vehicle market, other automakers could also collectively match Tesla’s goal of producing 500,000 vehicles by 2018, Northern Graphite CEO Gregory Bowes said in an interview.

Unlike Tesla, most electric vehicle manufacturers buy their batteries from a separate battery manufacturer. However, some of the largest battery makers, including South Korean company LG Electronics Inc. and Japan’s Panasonic Corp., are located in Asia and have easier access to graphite produced in China, or rely upon synthetic graphite.

Graphite is not traded on public markets as a commodity, but between private buyers and sellers. With the electric vehicle market still in its infancy, the primary demand for graphite currently comes from steel manufacturers.

Even with the projected growth in electric vehicles, it is likely there will only be enough graphite demand to sustain five to 10 new graphite mines worldwide, Hatch said in an interview.

Baxter’s Focus Graphite is also based in Ottawa, and has high-quality graphite that has been refined to battery quality. Unlike Northern Graphite, it has a deal in place with a graphite user that has committed to buying a portion of its product.

Those deals, known as offtake agreements, are essential for junior mining companies hoping to secure the huge loans needed to build their mine infrastructure, said Baxter.

An offtake agreement is “pretty much a requirement to get financing in this market,” agreed Bowes.

Progress towards such an agreement has been slower than Bowes would like, but there is no great urgency to make a deal while graphite prices are relatively low, he said.

Under a best-case scenario, the company would secure an offtake agreement and financing for the mine by late March 2015, and begin construction that summer, he said.

Northern Graphite’s feasibility study, completed in 2012, demonstrated that graphite extraction and processing at the company’s Bissett Creek project site is economically feasible, and is evidence that the company is ahead of its competitors, said Bowes.

The company has also shown through tests that its graphite can be purified and processed to the quality needed for battery makers, he said.

Few graphite juniors can boast of having passed those milestones, the analysts said.

One of the biggest challenges natural graphite producers will face as the electric vehicle market grows is proving that their raw material can be purified and processed to the point where it can be used reliably for batteries, in place of more expensive but highly refined synthetic graphite, said Moors and Berry.

Northern Graphite opened a battery research and testing facility earlier this month, according to a company press release.

The company has also developed a proprietary process for coating spherical graphite, one of the final stages before it can be used in batteries.