Mason Graphite Significantly Over-capitalized. National Bank Forecasts $1.20 Price Target.
Experienced mining investors know that a supportive government is critical to the successful growth of resource capital. While there are several global jurisdictions that fit that bill, few measure up to the lengths the Quebec government and private institutions have gone to, financially, to get behind a venture and drive the development of the most promising.
‘Most promising’ would certainly include Mason Graphite ($LLG:CA), a company that is proven to have the highest grades of graphite in the world at its 100% owned Lac Guéret property in Northeastern Quebec. Combined with cheap hydropower in Quebec, Mason is certainly in a position to be one of the absolute lowest cost producers globally.
In his July 16th research report, analyst Rupert Merer, PEng. CFA forecasts a 12 month target for Mason shares of $1.20, more than a 70% return from current levels. And there could be significant upside to this target, notably based on graphite prices, de-risking milestones and project optimization.
Québec is vast. The Province spans 1.7 million km2, of which only 1% is currently mined and mining rights cover less than 6%. With its favorable business climate and immense potential, Québec is a dream location for mineral extraction.
“As a result of significant financial support of the Québec Government, the National Bank and several private money managers, Mason is now in the enviable position of being overcapitalized,” stated Benoit Gascon, CEO. “For shareholders, this means that the Company can realize enhanced execution of our aggressive plans to bring our property to production in 2015, while continuing to significantly lower our capex and cash costs. Exceptional shareholder value will come from several revenue initiatives planned or underway.”
After almost a year of exhaustive due diligence, Ressource-Quebec participated in an $11.5 million bought deal private placement along with several private money managers. As well, a further $4.1 million convertible debenture deal was funded by three renowned Québec-based institutions: Sodémex ($3,000,000), a subsidiary of the Caisse de Dépot et Placement du Québec, the Fonds de Solidarité FTQ ($950,000) and the Fonds regional de Solidarité FTQ Côte-Nord ($200,000). Those same institutions have a history of funding projects at every step of the way, therefore greatly reducing the financial risk for investors.
Rarely will investors experience this level of significant risk mitigation courtesy of direct government investment. Also the company recently announced a cooperative agreement with the Conseil des Innus de Pessamit. To see an agreement with the First Nations always speaks volume to how serious the company is at achieving production.
Mason’s strategic marketing focus will include addressing the significant demand for the high quality graphite required by alternative automakers over the next few years. Why this is important is two-fold; the currently used synthetic graphite is prohibitively expensive and its production throws off large amounts of climate changing CO2. Natural graphite, for the most part, comes from China, which results in supply and, more importantly quality and consistency issues. A North American source of natural graphite combined with much better processing knowledge as a result of Mason’s team can deliver quality and consistency, will be markedly cheaper than synthetic and can be produced with a significant reduction in CO2 emissions. And Mason will produce exactly the type of graphite needed by this potentially massive market as the world transforms to electric cars.
Battery prices are also dropping. In 2014, the battery necessary to power an alternative automobile could cost $75k. Forward to 2014, the price has reduced to $25k for the same power and over the next few years will likely reduce by a further 30% or more. There is 10 to 30 times more graphite in a lithium-ion battery than lithium. Therefore, the demand for graphite will grow substantially, not only in amounts needed, but also for the highest qualities where processing knowledge will be paramount.
Demand for natural flake graphite could well increase by 37% by 2020. That demand would require 6-9 new graphite mines.
Contiguous is the Company’s ongoing plans to continually reduce capex to enhance profitability. An example is Mason’s plan to switch its power needs from diesel fuel to the hydroelectric power grid at Baie-Comeau, a move that could reduce capex and cost of operation significantly. The exceptionally high grade of the deposit could allow such strategy.
Mason’s 2nd Transformation.
Integral to deploying the financing is what the Company refers to as its ‘2nd transformation’. Due to the success of the recent financings, Mason intends to advance the process faster than initially expected.
In that July 2014 research report from National Bank, the initiative is described as:
Today, flake graphite prices are typically between $800 and $1800/MT. Mason, as with many of its peers, has its eye on the potential for the spherical graphite market, where graphite is used for the anodes of lithium ion batteries. Material sold into this market competes with uncoated synthetic graphite, at prices quoted at $3,400/MT or more coming from China. If the material is coated, the price is higher – perhaps as much as $10,000/MT.
The cost of this process and the potential for profits is not known at this time, although Mason could conduct a feasibility analysis on this opportunity in the coming quarters. Typically, the yield for the production of spherical graphite is 30-40%.
The Property Metrics/Graphene/Management
The market for this type of product is much smaller, although this could change with the growth in electric cars, but the margins are much higher, so this 2nd transformation could potentially double the NPV of the Company. To expedite this processing capacity would also strategically position Mason to serve this new demand.
The projected direct cost to develop the overall operation is estimated at about $90M, with a before tax NPV from the PEA (Preliminary Economic Assessment) estimated at $363.7 mln (8% discount rate), but again those number should improve as the company studies the impact of a different logistic of operation.
The January 2014 NI 43-101 evidenced a 50 mln MT deposit with percentage graphite at 15.6% Cg. With the original 22 years of production at 27.4% and a total mine life of over 100 years of flake graphite, the resource will be a global competitor. Mason will complete its feasibility study by Q4 2014 with plans to commence production in late 2015, early 2016.
Further to the success of Mason to date, is the rapidly advancing graphene development thorough its 40% ownership of NanoXplore.
” We are very impressed with the low cost graphene production technology developed by NanoXplore,” stated Simon Marcotte, VP Corporate Development. “With progress greatly ahead of schedule, we are confident that NanoXplore will be the first company of its kind to have meaningful graphene revenues. It will also be a perfect product addition to the spectrum of products that our team will distribute. Tomorrow’s most likely buyers of graphene are today’s buyers of graphite.”
High quality graphene has a lot of potential but remains very expensive. NanoXplore has a proprietary technology to produce graphene at very low cost with a process that is easily scalable.
Bringing all of this together is Mason’s peerless management team, overseen by CEO Benoit Gascon. For almost a decade, Gascon was the CEO of the largest graphite supplier in the world, Timcal Canada, where he and the team that is now at Mason had dealings with virtually every global client. Management learned early on that a personal relationship with each client was critical, as was flexible pricing; a result of Gascon’s initiatives at Timcal to deal directly with customers.
As the graphite market is greatly fragmented, offtakes have proven useless. Benoit Gascon had close relationships to 700 customers globally, and was producing more than 70 different types of products. As demand from the buyers constantly evolves, contracts are typically for one year with option to renew.
The management team, along with the Board of Directors, has a great depth of experience in the resource sector; another fact that should engender investor confidence. The Chairman, Tayfun Eldem, is the former COO of the Iron Ore Company of Canada, North America’s largest iron ore operation.
The Bottom Line
There are a myriad of moving parts to Mason. All of which appear to be laser focused on developing growing and significant shareholder value. That old chestnut may seem hackneyed, but if you have read this far, you’d likely agree with this article’s initial premise; that this is a stock to watch and likely own.
Here are the salient investment drivers:
- China supplies 70% of global graphite; supply and quality are growingly inconsistent and many operations are being shut down
- Alternative automobile market later in the decade will significantly raise demand for high quality graphite
- Few, if any mines opening globally in the next few years with the size, quality of Lac Guéret
- Production to commence just as worldwide demand enters a major growth phase
- Very long mine life. Most likely more than 100 years
- Significant government financial support resulting in overcapitalization
- Focus on cost cutting, both capex and cash costs
- Best in class graphene partnership for increased revenue stream and enhanced supply opportunity
- Management that is second to none in the graphite/resource space
- Several potential revenue streams including production of rare, high margin enhanced spherical graphite
While Mason has been relatively quiet with news of late, that is expected to change as drilling results are released, the updated feasibility study gets underway and many other corporate developments are realized.
As mentioned, demand for natural flake graphite as a result of battery production growth could well increase by 37% by 2020. That demand alone would require 6-9 new graphite mines.
The time for quality exposure to graphite is now and Mason and its shareholders will be there every step of the way.
Bob Beaty for The Bottom Line Report
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