When it comes to junior mining companies, trying to pick a winner can be a real gamble. There’s a whole host of variables at play: quality of the product, jurisdiction of the project, and capability of management, to name a few. Plus there’s the fact most of the projects are years away from production, and the companies have never brought in revenue.
Enter Focus Graphite.
The Ottawa-based graphite exploration and development company has 100 per cent ownership of the Lac Knife project in the Côte Nord region of Quebec. It says testing over the last several years has proved the site contains some of the highest-grade graphite in the world – 16 per cent carbon grade flake crystalline graphite. The company believes the project is their golden ticket to success, and to proving junior mining critics wrong.
“We’re extremely confident in our ability to continue to move this project forward. We believe that we have one of the best deposits in the world. We believe we’ll be able to get into production,” says the company’s CEO, Gary Economo.
Closer to production
Focus’s recent announcement that a feasibility study on their flagship Lac Knife site is in the works, is a sign, say analysts, that they may just beat the odds and bring their product to market.
A feasibility study is a crucial step in bringing a project to production. Unlike earlier preliminary economic assessments that have a margin of error, a feasibility study becomes the gospel; they are extremely precise.
What makes Lac Knife different
Graphite, the company’s namesake, has a growing number of applications, including industrial uses for brake linings, lubricants and lithium-ion batteries. It is also expected to play a big role in the future of electric cars, green energies and the electronics market.
Analysts say the race to bring technology-grade graphite to market will go to those who manage to find a low-cost way of producing it.
Economo says the numerous steps in the expensive graphite purification process are what normally hurt mining companies. The great thing about Lac Knife says Economo, is that the product is starting at a higher purity level, so the costs associated with purification are drastically reduced.
“The higher the grade you can get, the better,” says Economo. “That’s why Lac Knife is such a special deposit.”
While investors should always take a “portfolio approach” with junior mining companies, Focus Graphite does have an edge. That’s according to Jon Hykawy, head of global research with investment analyst firm Byron Capital Markets in Toronto.
“Focus has a couple of things going for it. Very high grade by comparison – grade cures a lot of ills,” says Hykawy. “If you’re mining less stuff…then you’re probably doing something good because your mining costs are minimized.”
Hykawy says that from the initial reports he has seen, the project looks “reasonably good.” But he adds, “It’s still relatively early days.”
A dose of cautious optimism
Hykawy also displays that cautious optimism when asked whether Focus Graphite’s stock price will rebound to where it was in 2011.
The stock rose as high as $1.78 in 2011 and $1.33 in 2012. Its current 52-week high stands at $0.80 on Jan. 7, 2013; its 52-week low is $0.32 on Nov. 7, 2013.
“Can I guarantee that Focus will get back to where it was? Of course not… but I think there’s reasonable basis to conclude that this is a reasonable project,” says Hykawy. “This is not a company that has slapped graphite at the end of its name because they want to take advantage of a boom in the space.”
A tricky game to play
The graphite industry experienced a surge several years ago that saw a string of new graphite mining companies enter the market to capitalize on investor excitement. Most projects will never make it to market. They will fizzle out as the excitement from the initial boom fades.
Deciphering which companies are legitimate can be tricky. Investors should look for ones that are in the “advanced stages” of their project, and that have released a preliminary economic assessment, says Sid Rajeev. Rajeev is head of research at Fundamental Research Corp. in Vancouver, a firm that provides analysis to investors.
Lac Knife potential
Focus released a preliminary economic assessment in October 2012. At the time, the net present value of Lac Knife was estimated at $246 million.
“Exploration advanced-stage mining projects are highly speculative,” says Rajeev. “So investors should get in by knowing that.”
Rajeev goes on to say he thinks Focus Graphite’s Lac Knife project looks “promising” based on what he has seen from studies about their high-grade graphite.
But he adds junior mining companies tend to say they are “highly enthusiastic” about their projects to drum up support because most of them don’t have revenue.
Focus Graphite has never taken in revenue, but it raises funds for drilling and exploration at Lac Knife through bought deals. In April 2011 it raised $15 million through a deal with Cormark Securities. It closed a similar $10 million deal with Cormark in March 2012, and again in January 2013 for $3 million.
More recently, Focus posted a net loss in its third quarter, which ended June 30, of $3.5 million. That’s up from a $1.4 million net loss in the same quarter in 2012.
The losses are mainly attributed to $1.4 million in stock-based compensation. The company granted 2.9 million stock options this quarter as an incentive to preferred shareholders. The company incurred only $142, 649 in stock-based compensation expenses at the same time last year. Other notable expenses were an increase in management and consulting fees to $563,941, versus $286,686 the same time the year before. Their financial report’s accompanying analysis explained the costs are due to an increase in the number of consultants working on the company’s Lac Knife project.
The next crucial step is the bankable feasibility study on Lac Knife, which will be completed during summer 2014. Its completion will signify a major milestone for the company in bringing the site to production.
While the junior mining industry is certainly not without its challenges, looking ahead CEO Economo is confident, yet humble.
“Time will tell,” says Economo “…if we are successful in creating the great company that we think Focus Graphite could turn into over the next couple of years.”