Friday, August 12, 2016

Long Drive South for Mason Graphite

Well north in Québec Province is the Lac Guéret resource under development by Mason Graphite, Inc. (LLG:  TSX-V).  The project has a long history, beginning with exploration in the 1950s for iron and then a series of divestitures and acquisitions that finally opened a door in 2012 for Mason to gain control for $15 million .   After lying undeveloped for decades Mason’s leadership team now believes the time is right for Lac Guéret to produce something the world needs today  -  graphite for lithium ion batteries.

A feasibility study first published in September 2015, suggested the deposit could support production of graphite concentrate near 52,000 metric tons per year for at least 25 years.  Aiming for at least 96% purity the processed concentrate could yield as much as 4.7 million metric tons of graphite ore.  An average selling price near CDN$1,905 per metric ton (US$1,465) suggests a total sales value near CDN$8.9 billion if prices remain unchanged. 
No one is expecting that sort of stability in graphite prices.  It is a difficult market to follow, since there is no exchange trading of graphite or any derivatives.  There are several market studies that have tracked historic prices and some offer a few predictions of future prices.  Statista is typical with a forecast of steady selling price increases for all grades of flake graphite, the type most suited for high-value added applications.  By 2020, Statista expects all graphite grades to experience price escalation.  However, the price for the jumbo-sized flake graphite is expected to surge more than the others, reaching US$6,175 per metric ton. This could be in large part due to the anticipated increase in demand coming from battery makers. 
The battery market is expected to need as much as 215,000 metric tons of graphite by 2020, compared to 146,000 metric tons in 2015.  The 47% increase in demand over five years makes batteries by far the fastest growing among the various uses of graphite.  This comparison includes refractories used in steel making to lubricants, pencils and other uses.  Batteries represent 28% of total graphite demand now, but will jump to 32% of demand by 2020.
Mason could make a tidy profit if graphite selling prices unfold as Statista predicts.  Only two-thirds of the purchase price for Lac Guéret has been paid by Mason so far.  However, after the company starts sending graphite ore to market Mason is required pay off the remaining $5 million, but will owe no additional royalties.  Mason owns 100% of the Lac Guéret deposit, which the whole pie goes to shareholders.
The completion of the acquisition leaves production costs and financing costs to cover.  The feasibility study cited an estimated production cost of CDN $376 per metric ton, suggesting Mason could achieve a very compelling profit margin.  However, product cost estimates do not take into consideration the transport costs to reach market.  To get those highly lucrative selling prices, Mason will need to haul its graphite across the 660 kilometers to Montreal (410 miles) or at least 260 kilometers (162 miles) to the nearest population center in Bale-Comeau.
Once Mason begins construction of its mining and processing plants, it will take at least sixteen months to complete.  That means it could be 2019 before the first Mason truck starts the long drive south to resource markets.  By then demand may have increased enough to ensure an enthusiastic welcoming party.
In the meantime, investors will have a chance to make bets on Mason Graphite.  The company’s stock trades on the Toronto Venture Exchange under the symbol LLG.  The stock trades with steady volume and recently set a new 52-week high price.  The recent interest is largely due to the headline news on lithium ion batteries and the need for raw materials to support production. 
Mason compares favorably to other graphite developers, at least in terms of its balance sheet.  At the end of March 2016, the company had CDN$2.1 million in cash on its balance sheet, giving Mason more walking around money than most.  There is a total of CDN$9.5 million in long-term and convertible debt on the balance sheet, of which CDN$3.0 million is due within the next twelve months.  Aside from the need to refinance some of the debt, current cash balance appears adequate to support development work for some quarters to come.  The company has been using about $315,000 in cash per quarter to keep the Mason engineers paid.

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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