This is the Nov. 1st report from Industrial Alliance Securities:

 ANALYST: Kiril Mugerman SECTOR: Mining [email protected] (514) 284 4175


Firstly, Focus Graphite (Focus), a Canadian competitor to NGC, published its Preliminary Economic Assessment (PEA) allowing investors for the first time to directly compare the two graphite projects. Secondly, NGC submitted the Mine Closure Plan to the Ministry of Northern Development and Mines as the final major approval required to commence construction of the mine, subject to financing.


We concentrate on three main topics that demonstrate the differences between the two projects. The complete detailed comparison is presented in Appendix 1.

? Annual production and total revenues – Focus’ PEA is based on the production of 45 ktpy versus 15 ktpy by NGC. With an already tough market to penetrate, Focus will have to sell triple the material, of lower quality, in order to achieve revenues approaching those of NGC (NPV of 246 vs 273 $M).

? Battery Grade – The PEA by Focus presents a model where only 38% of the total production is purified to 99.95% graphitic carbon which accounts for 86% of LOM revenues. This stands out in several aspects. First, Focus does not provide any information in the PEA on detailed studies for Thermal Purification, associated losses, yields or costs. Second, the company bases the cost of thermal purification on a price provided by an existing operator without specifying where this purification will take place. Additional tests by the company and this specific operator might significantly alter the assumptions used and therefore the project NPV. And lastly, Focus assumes the price of $10,000/t for battery grade graphite without indicating if this includes micronization, key for battery grade material. This process brings additional losses reducing production yields and eventually the project NPV. Our model for NGC incorporates these losses (50%) and includes only 28% of total production being converted to battery grade micronized material. This accounts for only 51% of total revenues, while removing the battery grade graphite altogether brings the NPV of Focus to 72 vs 135 $M by NGC.

? Timeline to Production – The work suggested in the PEA demonstrates that Focus requires anywhere between 12 and 36 months in order to complete their Feasibility study followed by a 2 year construction period. On the other hand, with the Mine Closure Plan submitted, NGC is looking at H1 2013 to begin construction at the Bissett Creek deposit, subject to financing.


With the PEA by Focus published, NGC looks better than ever. NGC is trading at 0.6x Focus’ EV with a much more robust project that does not depend solely on the battery grade graphite market. Trading at its 52-week low, NGC should be on the top of the list of every investor looking at graphite. Based on that, we reiterate our 12 month target price of $2.45 and our Speculative Buy recommendation. The valuation is based on a 1.0x multiple of the NAV, derived solely from our base model NPV with no value attributed to potential intellectual property.