Ottawa-based Focus Graphite Inc. is starting its transition from exploration to development and mine building.
The company has been exploring properties, primarily in Quebec, since it concentrated its efforts on graphite in 2010.
Its main property, Lac Knife, which is located in the Côte Nord region of Quebec, was estimated at a pre-tax net value of approximately $380 million following a feasibility study released in June 2014. Focus Graphite projects a mine built there would have a 25-year life, according to its official report on the feasibility study.
Focus Graphite is enthusiastic about the potential of the property despite the company’s market cap only being about $43 million as of Dec. 3, says president and chief operating officer Don Baxter.
“We are definitely the most advanced graphite players out there as far as we are concerned,” Baxter says. “We are the only team that has actual graphite experience so that differentiates us from any other company out there.”
Since Focus Graphite is an exploratory mining company that is still in its development stage, it does not have any revenues. It has been operating at an average net loss of $7 million over the last three years and has not had any long-term debt since September 2012.
The value of graphite has surged over the last few years because of its application in lithium-ion batteries. These batteries can be used in a wide range of products from small devices such as cellphones to large machines such as electric cars.
Focus Graphite is looking to capitalize on that market by selling its graphite to these producers. The company has already conducted tests on its graphite to ensure its durability with potential clients.
“We have produced and successfully tested the battery ready graphite,” Baxter says. “It’s a pretty significant milestone, that we have shown we can make this product and it works extremely well.”
Focus Graphite is currently exploring options as to how to finance its Lac Knife mine, which is expected to be operational in 2016.
“We will do a mix of debt and equity,” Baxter says, adding the company is also looking into vendor and royalty financing. He also points out that since its property is located in Quebec, Focus Graphite will get financing from the Quebec government.
“The Quebec government has several Quebec sponsored funds with a mandate to be involved in the financing of projects such as ours,” Baxter says. “That is where we have the advantage over properties not located in Quebec.”
Sid Rajeev, an analyst at Vancouver-based Fundamental Research Corp., agrees, saying that Quebec companies have an advantage because of existing infrastructure in the province.
“For mining companies, the most important aspect is the location,” says Rajeev. “You could have the best gold, copper or graphite deposit but if it’s the jungle or if it’s in a bad terrain, it may not be profitable at all.”
Despite Focus Graphite’s upside in location, Rajeev says it is difficult to properly evaluate a junior mining company before it begins actual production.
“It’s all an educated guess based on what the company has done,” he says. “Each analyst will have a different opinion, especially because no one really knows how many tons of graphite is under the ground, so everyone comes up with their own estimate.”
Rajeev says one positive for a company like Focus Graphite is the presence of large flake graphite. This type of graphite is in high demand because it is best suited for new technologies, especially lithium-ion batteries.
“The first question somebody has to ask when looking for a graphite company is whether they do flake or non-flake,” he says. “If it is non-flake, people are not interested, but if somebody says they have large flake graphite in a good location, that is definitely interesting.”
Still, Focus Graphite has not attracted investors recently. The company’s stock was trading at 39.5 cents per share on the TSX-Ventures as of Dec. 4 and its 52-week high is only 69 cents. That compares to 2011, when the stock was at $1.78.
Rajeev says that fluctuation in the stock of a junior mining company like Focus Graphite is common because everyone is trying to gauge what the company is worth.
“There is a lot of speculation involved,” he says. “Stock goes up and down very fast as gamblers and speculators come in.”
One research firm that has a higher valuation of Focus Graphite is Stormcrow Capital Ltd. Tom Chudnovsky, managing partner at the Toronto-based firm, says his company values Focus Graphite at $1.25 a share.
“In the case of Focus Graphite, they are a fairly advanced company,” he says. “They are pre-production but they are advanced in the process towards doing their full round of construction financing.”
Chudnovsky says Stormcrow is optimistic about Lac Knife’s potential and the value of graphite in the economy in the years to come.
“Everybody wants to have high purity, high quality large flake graphite,” he says. “We believe that is going to create substantial demand over the next five or 10 years, so a company like Focus should be reasonably well-positioned to address those demands in the market.”
One of the ways Focus Graphite can address those demands is the 2013 off-take agreement with a Chinese conglomerate. The deal allows Focus Graphite to sell up to 40,000 tonnes of graphite concentrate per year from its Lac Knife project.
Having this deal in place, before production, was essential for Focus Graphite because graphite is not a traded commodity and bankers and investors want to see the company selling its product, Baxter says.
“To have a secured sale for 50 per cent of our production, as we do, makes a huge difference when we go out and talk to financial people,” he says. “We are showing that we can in fact sell it, and that is something we can base financing on.”
In the past, Focus Graphite has received financing for its projects from Cormark Securities Inc. The two companies secured three deals between 2011 and 2013, worth $15 million, $10 million and $3 million, respectively.
Focus Graphite’s one off-take agreement will help with financing, but it does not mean that the company is not exploring others, Baxter says.
“We are talking with other battery manufactures in Asia and in Europe and there is a particular one in North America that we are hoping to work with as well,” he says.
One of those agreements could be with Tesla Motors Inc. The company is planning to open a new factory and needs high-value graphite for its vehicles.
Focus Graphite’s three other properties are still in the exploration stage. The company is excited about one of those properties, Lac Tetepisca, says Baxter. Focus announced the discovery of significant graphite at the site in Oct. 2014.
“It is something we are looking at from an exploration and development standpoint,” says Baxter. “It shows some interesting characteristics similar to Lac Knife and we are hoping to further develop it.”
Until production begins at these sites, Focus Graphite may remain undervalued, though Baxter does not see this as a problem moving forward.
“We are looking at some pretty substantial news flow in the near term and as that news comes out people will realize how advanced we are.”