Friday, September 02, 2016

Safety in Numbers for Graphite Producers

The last few articles focused on the challenges faced by graphite producers attempting to gear up for expected growth in demand from battery manufacturers.  It takes high purity graphite to make the best anodes for the lithium ion batteries favored for electric vehicle batteries.  Rather than sending unimproved graphite materials on to processors, North American graphite resource developers intend to capture the value in purified graphite by refining the ore and shaping the graphite themselves.

The race to set up new processing capacity to 'micronize' and 'spheronize' graphite materials to the purity required for batteries has landed some graphite producers in court.  (Read “Graphite Developers in Legal Dust Up” on August 26th.)  Others have found a cooperative approach more appealing.  Northern Graphite Corporation (NGC:  TSX-V or NGPHF:  OTC/QB) is leading a group of graphite resource developers and materials processors in a joint venture to produce spherical graphite materials for lithium ion batteries.  Elcora Advanced Materials Corporation (ERA:  TSX-V) is working on a graphite deposit in Sri Lanka and Nouveau Monde Mining Enterprises, Inc. (NOU:  TSX-V or NMGRF: OTC/QB), the subject to the post “Nouveau Monde Finds an Acorn” on August 9th, is moving forward with its Matawinie project in Qu├ębec Province.  Metals of Africa Ltd. (MTA:  ASX) owns the Montepuez  and Balama Central projects in Mozambique, East Africa.  Northern Graphite itself owns mining leases near Ottawa, Canada that give the company access to 69.8 million metric tons of measured and indicated resources.    
Of course, all four resource developers have knowledge and experience with graphite materials handling and refining.  Northern Graphite has tipped in its own knowledge of spheronization techniques into the joint venture.  However, one of the other two members of the group adds interesting talent to the mix and puts a new twist on graphite market penetration strategies.  
Coulumetrics specializes in ‘toll coating’ or the coverage of substrates with specialized materials.  The company also tests and validates batteries and capacitors and provides materials characterization services to battery manufacturers.  Indeed, Coulumetrics is promoted as a development partner for battery and supercapacitors manufacturers.  Coulumetrics seems to offer an interesting bridge between battery makers and materials producers, acting as a ‘translator’ between the lingo of miners and battery-speak. 
Coulumetrics could also hold the key to the highly coveted ‘value add’ that graphite producers are seeking.  Spherical graphite needs to be ‘coated’ before it can be used in battery anodes.  Thus it is not enough to refine and shape graphite ores into spherical graphite.  The particles must also be coated.  At this processing step the graphite becomes considerably more valuable.  As an expert in toll coating, it would seem Coulumetrics adds an important talent to Northern's joint venture.
The group is jointly acquiring a micronization and spheronization mill that will be located at Coulumetrics battery production and test facilities in Tennessee.  Northern has not released required costs for the planned pilot plant to produce spherical graphite.  Most likely it will be in the hundreds of thousands of dollars.  Whatever the price tag, if the pilot plant proves out, it will be notable as the first spherical graphite production capacity in North America.
Northern Graphite claims that so far it has foot the bills for the joint venture.  This puts some pressure on the company’s balance sheet.  At the end of June 2016, the company reported CDN$1.0 million in cash resources and liabilities totaled CDN$415,492, giving the company the profile of solvency and strength.  Because Northern Graphite pays much of its operating expenses with shares of its common stock, operating losses are somewhat misleading.  Cash usage in the first half of 2016, was CDN$409,680 and free cash flow from operations was CDN$294,499.   Thus at the present rate of spending and investment, the company could go on for another nine to twelve months without having to raise capital.  Put another way, Northern management can take their time to raise additional capital or in the least wait for the right terms.
Investors looking at a position in Northern Graphite should also consider the flip side of this ‘cash frugal’ company.  Using common stock as currency to support operating activities can results in dilution even when there is no new raise of capital.  Total shares outstanding increase 4.7% in the year ending June 2016, over the previous twelve months.  Additionally, leadership has been generous in-house, recently granting replacement options for management stock options that had expired in early 2016.  The grant brought total options outstanding to 4.6 million, representing 9% dilution potential based on the current shares outstanding of 51.5 million shares.  

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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