Taking the Graphite Road Less Travelled
There’s been a fair amount of buzz lately regarding graphite. Last year, there was a flood of new graphite companies and projects as many companies looked to take advantage of the mania surrounding this form of carbon. As with any commodity, some companies will make it and most will not. Unlike gold or silver, graphite’s market is finite and the Companies that will produce need to find a buyer for their product. That is why, I believe, that graphite is a race to the finish line. IMHO, Big North Graphite appears to be heading in the right direction.
Big North Graphite Corp (NRT: TSX.V) is a relative newcomer. The Company completed its RTO in Dec of 2011, and in March of 2012, they starting acquiring graphite exploration projects in Ontario and Quebec, Canada. Soon thereafter, in September of 2012 to be exact, the company announced that it had agreed to acquire 3 small, past producing amorphous graphite mines in Sonora Mexico. Why is this unique or unusual? Big North Graphite is the only TSX.V junior company to pursue amorphous graphite production (to the best of my knowledge). Further, they are pursuing an interesting strategy of buying and processing amorphous graphite. More on all of this a little later…
Big North Looking South
As just suggested, I believe that the graphite market is a race to the finish line. Recently, the dynamics of the graphite market shifted substantially, resulting in a significant increase in graphite pricing. While graphite prices have settled from their 2012 highs, prices are still considerably higher than they were. China, which produced approx 75-80% of the world’s graphite, recently consolidated existing mines AND have adopted a plan of domestic value added processing of graphite therefore keeping more graphite, and jobs, in country.
The result is the recent graphite rush/mania that we saw in early 2012. While the steam may have come out of the market, the fundamentals have not changed. To the best of my knowledge, there are not any TSX.V juniors producing graphite at this time, although several are getting close. There is a finite market for graphite. All graphite produced must have a “home” to go to… a buyer. If not, producers are basically stuck with it. This is why I think Big North Graphite may have a leg up, as it appears that they may be able to supply the market in the near future.
Big North acquired 3 past producing amorphous graphite mines in Sonora Mexico. Two of them are 100% owned and one is a 50/50 JV. These mines shut down due to the graphite price in the late 90’s, early 2000’s. Big North plans on restarting these mines to capture some of the graphite market as soon as possible.
In December of 2012, the Company announced that it had completed Phase 1 of the development work required to re-start the Nuevo San Pedro project, including the “delivery of heavy equipment, repair and construction of haul ways and existing access roads to the mine site, site prep and clearing at the mine site along with enlargement of stockpiling areas to allow for sorting and shipping of mined graphite was completed.” Recently, the company announced that the second phase was completed, which included the stabilization of the second and third levels of the mine, repairs to the existing rail in the mine and the installation of electrical and ventilation systems.
Very quietly, Big North Graphite appears to have put itself in a position to do what no other junior graphite co has been able to do…cross the finish line. In these very turbulent capital markets, where financing is hard to come by, the idea of production and cash flow (however small), puts my mind at ease somewhat. It allows companies to weather the storm and move forward – the ability to plan for the worst while taking advantage of the current potential
Why Amorphous Graphite
If you look at the website of nearly every other junior graphite company, you will see that they are looking for or trying to produce “large flake” graphite. Again, unlike gold or silver, there are many different types of graphite (flake/vein/amorphous) and many different sub-types within those sections. I can understand why most companies are going after large flake graphite…it commands a higher selling price. Amorphous, however, appears to be the Rodney Dangerfield of graphites…it gets no respect. Although it is the lowest priced of the graphite products, amorphous graphite accounts for 55% of the roughly 1.2 million-ton natural graphite market – it is the largest segment of the natural graphite market. Approx 90% of the world’s amorphous graphite is produced in China. To the best of my knowledge, there are currently no active amorphous graphite mines in the US or Canada. It is a large, and growing market, controlled by Chinese production and as such buyers are looking to secure alternative supply chains. Furthermore, unlike flake graphite, Big North has very little by way of competition – there are very few amorphous graphite projects being developed by public companies.
You may have heard of flake graphite’s use in batteries. It is true that this is a potential future driver for flake graphite. Amorphous, however, is largely used in developed industries that are not going away. Amorphous graphite is used in the steel and auto industries, in refractories, lubricants, and water based paints to name a few.
Processing
Last week, NRT announced that the Company had begun assembly on a processing facility meant to crush/grind and screen graphite for shipping to customers. Further, the company has started buying unprocessed amorphous graphite ore from other family owned mines in the area that do not have processing capability. Big North’s plan is to use the purchased graphite to supplement potential production from their projects. The Company plans to process the purchased graphite to and re-sell the purchased graphite at market prices, capturing the difference in prices. IMHO, this is a great idea. As long as Big North has a buyer, they are essentially guaranteed a profit on this purchased graphite, without the risks that come with mining it.
The Risks
As with any mining project, there are risks. First, as per a recent company news release, the company has “not has not established mineral resources and has not completed a valid mining study (as defined by NI 43-101) to support a production decision. Historically, a production decision under these circumstances results in much higher economic or technical risk. Furthermore, without a pre-feasibility or feasibility study and a graphite reserve, there can be no assurance that operations at Nuevo San Pedro will be profitable.” The Company feels that with the low start-up cost associated with this project, and their strategy of buying to process graphite, Big North Graphite can make a go of this project.
Furthermore, the Company needs to sell their graphite. There is no spot market and guaranteed buyers of this commodity. Big North’s management tells me that they are working on this. I think it will be one of the biggest catalysts for this Company and it could very well happen in the near future.
The Bottom Line
As I have always said, mining is a risky business. Big North Graphite, however, is attempting to mitigate the risks by becoming a small amorphous graphite producer/processor and therefore bring in some cash flow to the company. Pending sales contracts, the Company believes that it can be one of the first junior graphite companies to cross the finish line. By taking the graphite road less travelled (amorphous), Big North may end up finishing first, garnering the enviable position of being well seeded to race another day.
Like all juniors, only speculators (gamblers) fully prepared to lose part or all their capital should consider this company.