Epstein Interviews Don Baxter of Focus Graphite
The following exclusive interview of Don Baxter, President & COO of Focus Graphite (TSXV: FMS | OTCQX: FCSMF), was conducted on August 18-20 by phone and email. Focus Graphite is a leading contender to be one of the first graphite producers into action. According to Mr. Baxter, Focus could be up and running in 2016. A takeaway from this comprehensive interview is that Mr. Baxter believes that global demand for graphite could be stronger than currently forecast. I happen to agree. With China’s exports in decline and demand for select graphite applications that could surprise to the upside, graphite prices are likely to move higher. Please continue reading for more information on Focus Graphite and on the graphite sector.
Can you please tell us a little bit about Focus Graphite?
Founded in 2010, Quebec based Focus Graphite has an advanced, high purity natural flake graphite project called Lac Knife with a completed Feasibility Study and we are now moving forward to the EPCM level. That alone differentiates us from most peers. Our aim is to reset the standard for high quality graphite, becoming the frontrunner for the clean technology economy through an innovative mine-to-market strategy. Focus also has an off-take agreement for 50% and up to 100% of our production and other interested parties with agreements pending. We believe that Lac Knife’s operating cost per tonne of concentrate will be in the lowest quartile at $441/tonne. Focus is one of only two companies who have successfully produced and tested, “battery ready” graphite. Therefore, I strongly feel that Focus has the most advanced project in North America.
Focus Graphite describes itself as having a vertically integrated, mine-to-market business model, please explain
Focus has the ability to retain virtually all of its run-of-mine concentrate for higher margin, higher value products. We have recently demonstrated that we can produce high purity spherical graphite with yields significantly higher than Chinese producers.
Can you tell us a little bit about your background and the technical team at Focus Graphite?
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Since the question is on our technical team, I will only mention a few people, but I can assure you there are several more experts at our disposal. Focus has a true depth of technical expertise, not only in graphite mining and processing, but also in value added, secondary processing. As mentioned, we are one of only two companies who have successfully produced and tested “battery ready” graphite for use in Lithium-ion batteries. Focus can do this very cost effectively using an environmentally sustainable process. The economics of the project are strong, based on, “run-of-mine” concentrate. The tremendous upside potential from valued added graphite products, including “battery ready” graphite, are not yet included in these economics.
As for me, I am a P. Eng., hold a degree in Mining Engineering from Queen’s University and am a Registered Professional Engineer and the company’s Qualified Person under NI 43-101. I served as President of Northern Graphite Corporation between Feb. 2, 2011 and July 8, 2013, responsible for all technical aspects relating to their flagship Bissett Creek project, including the Bankable Feasibility Study, metallurgical test work and environmental permitting. I also served as Mine Superintendent at the Kearney Graphite mine when it operated in the 1990s. And served as a Director of Mining at Ontario Graphite Ltd.
Dr. Doninger is the developer and co-developer of a number of U.S., European and Canadian patents related to carbon processing methodologies and processing equipment. As a chemical engineer, Dr. Doninger is the author and co-author of some two dozen technical papers and studies related to graphite composite anodes; carbon-based materials for electrochemical energy storage systems; advanced graphite for Lithium-ion batteries, among others. As a consulting engineer, Dr. Doninger served as President of Dontech Global, Inc. During his 17-year career with Superior Graphite Co., he held the posts of Senior Vice-President, Technology, Vice-President, Engineering and Product Commercialization, Vice- President, Manufacturing, and Vice-President, Technology.
George Hawley, Technical Adviser, specializing in the development and marketing of value-added products based on industrial minerals. Former R&D and Quality Assurance Chemist for Morgan Crucible Company, and has acted as consultant for Quinto and Northen Graphite Carbon.
When does the company expect to reach initial commercial production?
We are one of the most advanced development projects in North America, due to the favorable mining environment in Quebec, we believe we will reach production in 2016. Of course that is subject to project financing and obtaining required permits. However, we have the distinct advantage of already having an off-take partner for 50% or more of our annual production. Most peers need to find initial demand for their products, we don’t. We are continuing discussions with other potential customers and associated off-take agreements.
Can you give readers the highlights of your Feasibility Study?
Sure. Let me remind readers that the Feasibility stage is significantly more advanced than a Preliminary Economic Assessment. Our study brings us to the stage now to start detailed engineering in preparation for construction. Just the headlines, 44,300 tonnes of concentrate per year, average selling price of $1,713/tonne, operating costs per tonne of concentrate $441/tonne. The key economic metrics are an initial capital cost of $166 million, Net Present Value (NPV8%) of $383 million and pre-tax IRR of 30.1%. To reiterate, at a greater level of accuracy than most of our peers, these metrics are highly competitive, especially the $441/tonne of concentrate operating costs.
Please describe Focus Graphite’s off-take agreement, the first of its kind at the time
Our first off-take agreement for up to 40,000 tonnes per year of graphite concentrate and value-added products from future production at Lac Knife, was signed with an industrial conglomerate comprised of heavy industry, manufacturing and technology companies located Dalian City, Liaoning Province, China.
How will you fund $166 million in upfront cap-ex?
We are currently developing our project financing structure with interested institutions and are working on various options. We expect to complete the project financing in 2014 that will include straight debt, project level debt, equity, equipment financing, forward sales or supply chain financing to our off-take partner(s) or others. This includes possible investments by both strategic and financial partners. In addition there are numerous instances of the province of Quebec participating in project financing of mining projects. Many Canadian projects will require more than $100 million of upfront capital, we think we are well positioned to achieve are required funding.
Can you give us a snapshot of Focus Graphite’s capital structure? Will you need to raise capital anytime soon?
Our capital structure is quite simple. We have zero debt. We have 107 million outstanding shares and 10 million options and warrants for a fully-diluted share count of 117 million. Based on today’s share price, our market cap at the current price of 62 cents is 66.4 million.
Lac Knife has one of the highest known in situ grades at 15% Cg, and is near surface, are those the main reasons for the project’s very low estimated operating costs?
Yes, a near-surface deposit is of paramount importance to a successful low cost mining project, the 15% Cg doesn’t hurt either. Consider this– all else equal, a project with 5% Cg would need to mine, move and handle 3 times as much ore as our 15% Cg project. So, yes grade and depth are key attributes to our anticipated lowest quartile operating cost. Equally important to grade and depth is the fact that we have a proven economic mix of large, medium and fine flake that can be produced at very high carbon grade and that we are close to Hydro Quebec’s electrical power lines to get electricity at C$0.04-C$0.05 per kWh. This is not only low cost power by Canadian standards, it’s low cost on a global scale.
Located in northern Quebec, do you anticipate any infrastructure challenges?
Nothing out of the ordinary, we are surrounded by giant iron ore projects with ready access to rail, power, skilled labor and a port for export to the U.S., Europe and even Asia if warranted. We are 400 kilometers by rail to the port. Lac Knife will be a year-round operation. Some have asked about rail capacity, we’re only shipping 44,300 tonnes of finished product vs. iron ore giants shipping millions of tonnes. Access to infrastructure is strong in Quebec, another reason why it’s a top mining jurisdiction in the world.
How about on the permitting front, is there still a lot to do there?
It’s important to understand that work on Lac Knife has been going on for years. The most important permitting that still needs to be done is an Environmental Impact Assessment. We expect to submit that application in the fourth quarter of this year.
Roughly 80% of your resource is upgradable to 98%. What does that initial upgrade entail?
Yes, Focus has a tremendous competitive advantage in this regard. Being able to upgrade to a concentrate containing 98% Cg by simple floatation (or polishing) is hugely important and another key factor in our anticipated $441/tonne cost. In addition, once at 98% Cg, the cost of continuous purification for upgrading to the 99.95%+ grade needed for lithium-ion batteries, is far less than peers that need to upgrade from 91-92% or 94%-96%.
Are there end uses for graphite that could really take off?
Graphite is a key material in the clean energy technology economy, which is being driven by increasing demand for products such as batteries for electric vehicles, energy storage, photovoltaics and consumer electronics from smartphones to laptops. I believe that energy storage for the burgeoning global renewables markets could surprise to the upside. It should be noted that growth in EVs and Hybrid vehicles could be even greater than pundits realize. Tesla is far from the only maker of EV and hybrids; there’s the Chevy Volt, Nissan Leaf, 2 Toyota models and BMW has the i3 and i8 models. Our business model is designed to reflect not only what’s going on in the burgeoning clean tech economy, but to be one step ahead.
How do you feel about annual production of 44,300 tonnes per year? Do you wish it were greater? If so, can you expand production?
Our current NI 43-101 Measured & Indicated compliant resource is 1.4 million in situ tonnes of graphite. That alone is enough for a 25 year mine. If we included our entire resource we could potentially have a 42 year mine life. Over time, if warranted, we will delineate more graphite and grow beyond 44,300 tonnes/year if the market demands it. We also have several exploration properties in Quebec that we are evaluating. Since the U.S. & EU governments named graphite a, “critical mineral” for industrial and national security reasons, attention on this mineral is high.
If the world needs 25 new 40k tonne graphite mines by 2020, where will all that supply come from?
I honestly don’t know. China dominates the graphite market accounting for something like 76% of supply, but China’s production for export is in decline. China has implemented a Value Added Tax and issued export licenses to only larger mining complexes. As I referred to earlier, between EV and Hybrid vehicles, demand could surprise to the upside. And, demand for wide-scale energy storage for renewables, mosts notably wind and solar, could be a wildcard as well. Therefore, I’m frequently quoted as saying that graphite prices will move higher in coming years. We have a slide on that in our corporate presentation.
Would you like to leave readers with some parting thoughts?
As an investment, Focus Graphite remains dramatically undervalued.
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