Northern Graphite (NGC) is one of the most advanced listed plays in the
rapidly developing graphite sector. Assuming the remainder of the
required financing can be secured to develop the company’s large, high
value project in Ontario, first production should be reached in 4Q 2014.
The company is well financed to complete its project optimisation work in
2013 on the back of last year’s Bankable Feasibility Study which should
generate considerable news flow. Overall NGC is well placed to exploit
any uplift in graphite demand and prices and we initiate with a BUY
recommendation and C$1.70/share target price.
High value asset
NGC’s Bissett Creek project lies just off the Trans-Canada highway some 3 hours’ drive
west of Ottawa. The project boasts a large resource containing some 1.3Mt of graphite
that could be worked via an open pit and established processing methods. Last year’s
Bankable Feasibility Study (BFS) showed the project’s positive credentials based on a
23 year operation producing an average c.16kt of high grade concentrate per year. In
addition to its low operational risk, Bissett Creek’s orebody is dominated by large and
very large (jumbo) graphitic flakes which carry the highest value of all natural graphite
products. We believe that the company’s competent management team can build on
the potential financing recently agreed with Caterpillar to secure the remainder of the
c.C$110m capital required to take the project into production next year.
Graphite demand set to rise
Graphite’s unique set of properties have resulted in its use in a wide range of
applications from steelmaking to battery manufacturing in a 1Mt/year global market.
If new battery technologies, fuel cells and the next generation of nuclear reactors
become established, demand for graphite, and large flake material in particular, is set
to grow rapidly. With the steel market set to grow and China, the world’s largest
graphite producer, restricting exports, price risk lies on the upside in our view.
Share price set to rise
Our valuation of NGC draws on discounted cash flow analysis and peer group resource
metrics. This produces a value range between C$1.32 – C$2.10/share and we take the
range’s average of C$1.70/share as our target price. However, we believe further
upside exists through the current optimisation study, the project’s scalability, rising
graphite prices and production of higher value products.