INITIATING COVERAGE
RATING: SPECULATIVE BUY 12 MONTH TARGET: C$3.00
A Step Away From Building Canada’s Next Graphite Mine
>>> Ideal location. Deposit located only 250 km from Ottawa and less than 20km from a main highway with natural gas lines and power lines easily accessible.
>>> Simple mining. Shallow, flat lying and homogeneous deposit easily scalable through lateral expansion at very low strip ratios.
>>> Quick development. Construction expected to begin in H2/12 and take one year to complete.
>>> Large flake graphite. Extremely favorable distribution rarely attainable at high grade mines (80% in +32 / +50 / +80 mesh size).
>>> High recovery. Above 95% recovered through simple floatation technique.
>>> High purity graphite. 75% of production results in graphite with carbon levels above 94%.
>>> Successful spherical graphite production. Company has been able to attain up to 70% yield. Spherical graphite is a strong growth market required for both current and future markets.
>>> Our base case DCF model considers a mining operation of 2,500 tpd with 30% of production upgraded to spherical flake graphite. We assume a 45 year life of mine with CAPEX of $90M and additional $15M for the spherical graphite production plant. Our life of mine concentrate cash cost is estimated at 1,073 $/t and spherical graphite cash cost is estimated at 2,650 $/t. We use a blended concentrate price of 2,318 $/t and 6,000 $/t of spherical graphite.
>>> The base case DCF model results in an after-tax NPV of $141.7M and 21.5% IRR with a payback period of 3 years.
INVESTMENT THESIS
Northern Graphite is a mineral exploration company developing the Bissett Creek graphite deposit that has the potential to become one of the largest graphite mines in the world. With metallurgical testing completed and a bankable feasibility study expected in Q2/12, the company is well position to begin construction in 2012. This solidifies the company’s first-mover advantage as it becomes a major global supplier of high quality large flake graphite. We initiate coverage of Northern Graphite with a Speculative Buy recommendation and a 12 month target of C$3.00 target price. The price is based on a 1.0x multiple of a 2.98 NAV (rounded up). Our target is derived solely from the IAS Base model NPV with no value attributed to potential intellectual property from graphene or spherical graphite research.
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