Friday, August 26, 2016

Graphite Developers in Legal Dust Up

The last two posts touched on the economic case for resource developers to refine graphite materials before going to market  -  “Dissension Discount on Focus Graphite” and “AlabamaGraphite:  Proof in Pudding”.  ‘Micronization’ and ‘spheroidization’ are names applied to secondary processing steps to turn out spherical graphite suitable for use in lithium ion batteries.  Spherical graphite materials command higher selling prices and potentially offer producers higher returns on capital investment.  As noted in the comments on Focus Graphite, the production of spherical graphite is as much art as science, requiring specialized knowledge.  Engineers with the right experience are bound to be in high demand.  Indeed, two graphite developers in Canada even landed in court in a dispute over personnel.

Ontario Graphite Ltd., a privately held graphite resource developer in Ontario, recently won a judgment against Great Lakes Graphite, Inc. (GLK:  TXS.V or GLKIF:  OTC/QB) and two individuals accused of violating non-competition agreements with Ontario Graphite.  In February 2016, a Canadian court ruled in favor of Ontario Graphite and ordered restricting two of its former employees from working for Great Lakes Graphite during remaining non-compete periods specified in their respective employment agreements.    The court also slapped the corporate hand of Great Lakes by ordering its management team to desist from soliciting any more of Ontario’s staff.  Great Lake was also ordered to pay damages to Ontario for using confidential information gained from its former employees.
The stakes are high for both companies.  One of the two employees, Jerry Janik, is a self-described expert in micronization of materials, a critical step in a process Great Lakes Graphite expects to use in its Matheson graphite processing plant.  Ontario Graphite also has plans to upgrade graphite materials from its the Kearney Mine north of Toronto, Ontario.   Janik’s background includes extensive experience with micronization of amorphous silica to “grades as fine as 99%.”  Indeed, Janik is a party to several patents in the materials field, demonstrating a high level of expertise in the types of processes these two companies both need to deploy.  It is wonderful to be needed!
Ontario Graphite
Ontario Graphite’s needs are located at its Kearney property.  The company gained control in 2006, making plans to re-commission the open-pit mine left shuttered since 1994 by previous operator Cal Graphite Corporation.  Measured and indicated resources were estimated at 52 million metric tons.  The company claims it as the largest ‘confirmed’ graphite resource in North America.  The company expects to use the existing mine infrastructure and crushing-grinding plant to process as much as one million metric tons of ore per year, producing an estimated 20,000 metric tons of large flake graphite annually.  A micronization and purification plant still has to be assembled for the second step in Ontario Graphite’s plans to upgrade its output.
Ontario Graphite wants to sell refined graphite directly to end-users in order to capture more of the value in their graphite product.  They will not have far to go to reach the market.  The Kearney Mine is just a few hours travel time from Toronto, ensuring transport costs will be relatively low.  Notably the second former employee in the legal battle with Great Lakes is a sales person widely recognized in resource industry business development.
Great Lakes Graphite
Great Lakes Graphite also has resource development plans and has completed initial drilling tests at its Lochaber property in Québec Province.  The most recent tests seem to confirm earlier exploration work that began over a hundred years ago when earlier developers found significant graphite deposits. 
There is considerable work that must be done to put Lochaber into production.  In the meantime, leadership at Great Lakes Graphite is keeping busy with its micronization facility.   The company has gained access to the Matheson Micronization plant in northern Ontario Province, a plant built for micronization of materials, including graphite.  Great Lakes Graphite wants to be the ‘go to’ processor of both synthetic and natural flake graphite.  The company has made an effort to control energy and water use in order to burnish its ‘green’ reputation.  Recognized micronization expertise is also an important competitive advantage for Great Lakes.  Indeed, the legal battle with Ontario Graphite appears to have made their most recent personnel acquisitions widely known in graphite circles.
In Search of Capital
What is lacking for both companies is adequate capital.  As a private company Ontario Graphite releases no financial information.  Management has been on the road over the past few months, cultivating financial relationships to support capital costs for that micronization plant as well as to support initial operations.  A corporate presentation published in April 2016, makes note of an unspecified financing requirement.  Interestingly, information on potential financial backers as well as customers was cited as part of the proprietary information given to Great Lakes by Ontario’s former employees named in its law suit.  (Apparently, ethical behavior does not go hand with rock crushing knowhow.)  
Great Lakes appears to have had a better reception in the financial community.  The company completed a private placement of common stock in June 2016, providing CDN$1.2 million in gross proceeds (USD$924,000).  Additional capital raising efforts are expected in the coming months. 
For many investors a position in Great Lakes might serve as a good hedge against the failure of companies like Ontario Graphite, with their deep roots in resource exploration and the mine operation culture, to extend their business to materials processing and end-user sales.  Ontario made a valiant effort, setting a winning strategy and hiring the right people.  Perhaps the ‘mining’ culture is not attractive enough to keep some employees from exiting to a business like Great Lakes Graphite, which more or less has the business model of a processor and distributor. 
That said, it is not entirely certain that the phone on Great Lakes will be ringing very often with orders for graphite to process.  Appetites for profit have been growing at resource developers like Ontario Graphite, which might choose to process ore concentrate at home.  Importantly, Great Lakes recently broadened their menu of materials to process to include synthetic graphite, thereby broadening their addressable market and reducing dependence on North American natural graphite producers.  China producers of synthetic graphite might see Great Lakes as a viable ‘back door’ to U.S. buyers looking for ‘green’ and North American produced graphite.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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