Graphite – Refining the Focus
We seem to be bumping into companies all over the place that have made off with assets of IAMgold and turned them to profitability. The latest I have turned my attention to is Focus Graphite’s (TSXV: FMS | OTCQX: FCSMF) Lac Knife deposit which might be described as yet another “fish that got away” from the clueless IAMgold. The back ground to this asset is that Focus Metals Inc. listed on the TSX Venture exchange in May 2010. Later that year (in October), IAMgold sold 100% of the Lac Knife property to the newly listed entity. The sale was for the bargain price of $250,000 in cash and a whisker over 4,000,000 shares of Focus stock.
The company then changed its name to Focus Graphite in May 2012, to reflect this narrowing down of the focus (excuse the pun).
The Lac Knife high-grade, high-purity crystalline flake graphite deposit located 35 kilometres south of Fermont, Quebec. Lac Knife, grading 14.77% graphitic carbon, is one of the highest-grade flake graphite deposits in the world. The Preliminary Feasibility Study released in June 2014, indicated that Focus could potentially be one of the lowest-cost graphite producers in the world at $441 per tonne of graphite concentrate.
The updated PEA indicated:
- a mine life of 20 years
- capex of $165.55mn (including a $17.1mn contingency)
- low strip ratio of 1.7:1
- potential net revenues of $1.44 billion
- a 30.1% pre-tax internal rate of return (24.1% after-tax IRR)
- a $316.9 million pre-tax NPV ($185.3 million after-tax)
- model uses a weighted average price of US$1,713 per tonne of run-of-mine concentrates
- revenue estimates are based on the production of 44,200 tonnes per year of graphite concentrate
- an average grade of 96.6% Ct. across all flake size categories.
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Add Technology to the Mix
Unlike Rare Earths, where technology is all, the graphite space has the technology mainly coming into the picture with the end-use applications after the concentrate phase. The broader group of which Focus is part (and which is run by Gary Economo) has decided to have its cake and eat it too, with Focus being the upstream and Grafoid and other entities being the downstream.
Focus commissioned a pilot plant to produce graphite concentrate from Lac Knife mineralized material, which started up in April 2013. Pilot flotation plant test results (from SGS Canada) yielded large flake graphite concentrate (+80 mesh) grading 98.3% total carbon. The results also showed that all flake concentrate above 200 mesh could be upgraded to 98% total carbon by flotation, thereby eliminating the need to use third-party purification and reducing the cost per tonne of concentrate to a low of $458.
The company’s interpretation of the test results is that they show that Lac Knife holds the potential in small flake graphite products and valued-added products such as spherical graphite for Li-ion batteries.
The company feels its technology (combined with the nature of its mineralisation) will lower the purification costs to attain battery-grade end product. It cites as evidence for this that the costs of purifying a 95% grade graphite concentrate to a minimum battery grade of 99.95% is approximately $3,000 to $5,000 per tonne, while the cost of purifying Lac Knife’s 98.3% grade to battery grade quality is, it estimates, between $500 and $1,000 per tonne.
Amongst other things it’s acquired, Focus picked up some anode manufacturing technology licenses from IREQ, the research arm of Hydro-Quebec, a world leader in renewable energy development, including battery technologies, and why we are developing our own value-added capabilities to manufacture graphite products for batteries, powder metals and composite materials.
Coalition of the Willing
The tried and true means of financing of either going to a mining financier (e.g. a bank) or the equity route have faded in relevance as the market malaise has dragged on. The larger deals used to attract bank financing (i.e. credit) and that has been particularly battered since 2008 as regulators tried to wind back risk at global lenders and, like truth in war, miners (and property developers) were the first casualties.
The solution these days is to cobble together a Coalition of the Willing, which consists of traders, offtakers, strategic investors and supplier financing. The company has indicated that financing discussions are continuing with a number of investors and institutional funds, in both the public and private sector with an objective to minimize shareholder dilution through a mix of debt and equity financing. The provincial government of Quebec is also seen as offering financing alternatives that are not available in other jurisdictions.
The company’s first offtake agreement was announced in December 2013 for up to 40,000 tonnes per year of graphite concentrate and value-added products from future production at Lac Knife. This was signed with a Chinese industrial conglomerate comprised of heavy industry, manufacturing and technology companies located in Dalian City, Liaoning Province, China. A key point to note are that while the annual offtake is substantially all of the expected capacity of the mine and concentrator, it should also be noted that the use of the words of “up to” means it could be much less, leaving space for a “funding offtaker” to potentially insert themselves into the equation.
A Hefty New Friend?
It has long been mooted that suppliers would have to eventually come to the party in financing projects or they faced seeing their supply of future business dry up as the financing drought choked off the flow of new projects. The reduced flow would in turn herald the end of the golden years when suppliers pretty much were able to charge what they liked, playing a major role in the sector’s capex inflation.
So in a sign that reality is starting to bite Focus kicked of the New Year (our Year of Action) with an announcement that Caterpillar Financial Services had expressed its formal interest in providing Focus with a financing solution for Lac Knife’s development. The release indicated that the potential participation of Caterpillar would amount to around 12% of the total project financing requirements and reduce operating costs as Focus changed gear to owner-mining instead of contractor-mining as outlined in the Feasibility Study.
Snatching Northern’s Competitive Advantage
The moment I first encountered the graphite space was in the form of a curious meeting in New York many years ago (November 2009) when the then unlisted Northern Graphite did the rounds. I had agreed to take the meeting with an unlisted company as I was intrigued by this material that I had never encountered before. My curiosity was piqued and eventually the stock hit the markets and was for a while the only game in town.
Part of the success of Northern post-listing was due to its uniqueness, and part to its team. Prominent on that team was Don Baxter, who has since gone on to head up Focus Graphite, being its President and COO at the current time. He had previously served as President of Northern Graphite between February 2011 and July 2013, where he was responsible for all technical aspects relating to the Bissett Creek graphite project, including the bankable feasibility study, metallurgical test work and environmental and mine permitting. Focus’s gain was clearly a major loss for Northern Graphite.
Past experience in graphite mining is a rarity as we have pointed out in the past with regard to Alabama Graphite (that has some of the Timcal team on board). Focus has almost managed to grab a chunk of this rare skillset as Baxter was previously the Mine Superintendent at the Kearney Graphite mine when it operated in the 1990s. He served as a Director of Mining at Ontario Graphite Ltd., has worked for Inco and Noranda Minerals, as well as on numerous consulting projects for base and precious metals. Ultimately when it comes to actual production, it will be having experienced veterans on board, rather than generalists that will matter. It’s also worth noting that he holds a degree in Mining Engineering from Queen’s University.
Also Worth Remembering
Those who recall our Scandium piece of several months ago may also remember that, indirectly, Focus has exposure to that interesting metal via Grafoid (in which Focus Graphite has a substantial stake). It is primarily a graphene investment and application development company.
Back in October Grafoid announced it was acquiring a ALCERECO Inc. which is involved in advanced composite materials, alloys and coatings focused on the development, testing and production of advanced materials. Grafoid purchased ALCERECO in exchange for 250,000 common shares of Grafoid for CAD$1.25mn.
Based in Kingston, Ontario, ALCERECO has a global customer base in aerospace, automotive, electronics, sporting goods, infrastructural and mining sectors. It is involved in the development of aluminum-scandium alloys, specialty ceramics, rare earths and advanced composite materials. Its facility includes a five-ton foundry, casting, rolling, a wide range of development laboratories, and analytical equipment for the development of prototype production.
That which we have said recently with regards to Rare Earths also goes for Graphite. We regard 2014 as having been the Year of Metallurgy and 2015 will be the Year of Action. Like Rare Earths there is only space for 4-5 companies to make it over the finish line and those that do not are destined for the glue factory. Darwinian principles reign in mining as they do in the rest of the natural world.
The market does not need fifteen graphite juniors.. it needs a maximum of four producers. With Flinders Resources having made it across the line and Elcora seemingly positioned to also get a mine reactivated, that leaves two other potential spots on the winners’ podium.
With its technology essentially in the bag and a vertically integrated relationship with Grafoid, all Focus needs now is the financing leg of the trifecta to be a runner in the final straight. The deal with Caterpillar shows that it is prepared to be creative in hunting down the elusive dollars required to kick start Lac Knife.
Christopher Ecclestone is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten & Company in New York in 2003 ... <Read more about Christopher Ecclestone>