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.