Big North Graphite [NRT.V] [BNCIF] is a speculative small-cap graphite company that’s unique as it’s one of just a very few companies actually selling graphite in North America. Since mid-2013, Big North has sold a cumulative 1,163 tonnes of amorphous graphite from graphite projects in Sonora, Mexico. Earlier this year the company acquired the El Tejon flake graphite mine an mill in Oaxaca, Mexico. El Tejon is a past producing mine that closed in 2002 due to weak graphite prices. On August 14th the company reported very important news relating to the El Tejon Flake project. The key parts of the press release are as follows,

“An estimate of the initial investment cost required to bring Line 1 to operational status is approximately US$2.25 million which also includes infrastructure requirements, equipment and clean-up of the process plant. A total estimated investment cost of approximately US$5 million will be required to bring the process plant to full operational capability.”

“Following the visual assessment made of the process plant and its facilities during the site visit, the following general recommendations can be made. The initial objective should be the restoration of Line 1 to production status at the nominal rate of 250 t/d within a nominal period of (say) 6 months of receiving the decision for the project to proceed. The additional objective is for Line 2 to be operational within say 18 months of the project go-ahead thereby increasing the plant feed rate to 500 t/d capacity.”

I reached out to Director, Cesar Guajardo for a quote and this was his response, [Note: Please see management bios below]

“The Tetra Tech report confirms the Company’s belief that the El Tejon mill will require minimal capital and time to refurbish. The mill has always been well taken care of – both when I ran it up to 2002, and since we closed solely due to depressed graphite prices. We, as Big North Graphite, are looking forward to working with the people of San Francisco Telix again in the near future.”

Capital Requirement Tiny Compared to Peers

In my opinion, US$2.25-US$5.0 million of capital to reach 500 t/d capacity at the El Tejon flake mine and mill is a very low hurdle to clear. Further, the indicated time frames of 6 and 18 months are simply tremendous. We all know that 6 months could become 9-12 months and 18 months could become 24 months, but still, great news all around. This property is the only flake graphite mine to have produced in Mexico. The mine and mill were built in 1980 by the Government of Mexico. In 1989, a second processing line was installed to increase the capacity to approximately 4,400 tonnes per year of finished graphite. The mine was operated by the Government until 1988 and then run privately until 2002.

The question is, what’s the next bit of news to follow? Well, at some point, (timing unknown) the company will announce an off-take agreement(s) for its amorphous and/or flake graphite. That would be pretty good news. Even better would be a financing package of roughly US$2.25 million to get the first 250 t/d into production. I don’t know if either of these events are a month away or several months away, but I’m hoping both are within 6 months. Long-term investors in Big North, some of them perhaps disappointed with the lack of news flow, should be heartened by today’s news. It should be the start of the rubber hitting the road with regard to further updates and execution in getting the flake graphite mine up and running.Please let me reiterate that Big North’s flake project in southern Mexico will not be capital intensive. Many aspiring graphite players are facing the daunting task of raising upwards of a hundred million dollars and are scrambling to cut corners to bring capital costs down. Further, In my opinion, one should not assume that the next capital raise for Big North will be 100% equity. It could include one or more parts equity, debt, equipment financing and forward sales (perhaps through off-take agreements).

This could mitigate the need for significant equity dilution. Positive cash flow from the sale of flake graphite from the first line will help offset the capital costs of refurbishing the second line at El Tejon.As a past producing mine, a lot of infrastructure is already in place and the operating flow sheet is well established. The risk of restarting El Tejon is far less than the dozens of green field projects around the world, many of which are in inhospitable countries. Therefore, Big North could easily become the next small, but profitable producer of flake graphite in North America. Best of all, the company could achieve 2,500 tpy of finished product within 6-9 months and reach a run-rate of 5,000 tpy 18 months thereafter.

Back of the Envelope Valuation Exercise…

Large flake is currently selling for close to US$1,300/tonne, medium flake approximately $1,000/tonne and small flake at about $650/tonne. Based on an approximate mix of 75% medium flake, 20% large and 5% small, that’s a weighted average price of about US$1,050/tonne. Assuming an all-in cost of US$550/tonne (about US$100/tonne more than it cost to make 12 years ago) a 5,000 tonne run-rate in 2016 from two lines would yield profits of 5,000 x US $500/tonne margin = US$2.5 million. From 2017 on I expect that the company would be able to expand above 5,000 tonnes by adding an additional line, which could possibly be partially self-funded. Over-time, I believe that 10,000 tonnes of finished product per year is a reasonable expectation for profits of US$5.0 million. [Note that’s on currently depressed graphite pricing.] If graphite prices were to rise just 25%, the margin would go from US$500 to US$625 and cash flow to US$625 x 10,000 tonnes = US$6.25 million. Assuming of course that, there are customers for the graphite.

How much is US$5.0 million a year worth? Ascribing a 6x multiple to that high-margin earnings stream would value the company at about US$30 million. Big North has almost 80 million shares outstanding and a bunch of warrants and options that are almost entirely out of the money. The company has minimal debt. If the Big North were to issue 30 million new shares and exercise some of the close-to-in-the money options/warrants, the share count would be about 120 million and the per share valuation US$ 30 million x 1.1 FX rate = C$33 million divided by 120 million shares = C$0.27 per share. However, to be prudent, one needs to discount that pro-forma share price back 3 years at 12% so that the company would be valued on, “next year’s earnings.” That brings the stock price target to C$0.20 per share. At current depressed graphite prices, Big North could be worth C$0.20, about 3x the current price. [Note: This gives no valuation consideration to the company’s amorphous graphite operations of which I have too little information to value].

A Lot Can Go Wrong, But Overall Risk Appears Low Compared to Peer Green Field Projects

Make no mistake, I fully recognize that a lot can go wrong on the way to a $30 million valuation. And, I fully recognize that the $30 million figure is based on somewhat unproven inputs. However, I’m comforted by the fact that my assumptions are not that aggressive AND that Big North’s operations and growth should be relatively simple compared to green field projects in high-risk countries, locations without infrastructure or severe climates where year-round production is impossible. I’m heartened by the fact that I’m only forced to forecast 2-3 years, not 5-10 years as is the case with many other companies. Big North will have very competitive transportation advantages in Mexico and the U.S. and be able to offer security of supply and just-in-time delivery.Finally, I would like to remind investors that Big North appointed to the Board the man who knows more about El Tejon than anyone on the planet! I could go on and on about Cesar J. Guajardo’s credentials, but suffice it to say that he has amazing experience in Mexico, in graphite and with El Tejon specifically. His connections with former customers of this past producing asset and understanding of the project will substantially improve the chances of success.

Management and Director Bios

Daniel Bleak, Chairman–

Mr. Bleak has over 30 years of experience in mineral exploraJon and has developed and managed a broad range of exploraJon projects throughout North America and Mexico. He has been instrumental in the discovery of several producing mineral deposits and has developed decorative rock and industrial materials businesses in the Southwest United States and Mexico. Mr. Bleak has served on the board of directors of several companies and as an officer of a number of mining, mineral exploration and development companies.

Spiro Kletas, President & CEO, Director

Over 10 years of experience in the financial industry, with 7 years in the public capital markets, working for several Toronto Exchange listed companies in project procurement, corporate development and financing. Mr Kletas has been a Director of Big North Graphite since June 2010 and President since Dec, 2011.

Cesar J Guajardo, Director

Mr. Guajardo is a Mexican national and has been involved in the Industrial Minerals and Gases Industries for 40 years. Mr. Guajardo spent 22 years with Praxair Mexico and was the former Managing Director of Praxair Mexico for ten years. Mr. Guajardo has 18 years of experience in the graphite business. He was the former owner and Chairman of the Board of Grafito de Mexico SA de CV, a private company and the former owner of the El Tejon Flake Graphite Mine and Mill in Oaxaca, Mexico that Big North acquired and is re-starting.

Erik Ostensoe, Director

Mr. Ostensoe is a consulting geologist with more than forty years direct involvement with the mining and mineral exploration industries. He is a graduate in Honours Geology of the University of British Columbia and is a member of the BC Association of Professional Engineers and Geoscientists and the Northwest Territories/Nunavut Association of Professional Engineers, Geologists and Geophysicists. Mr. Ostensoe supervises property exploration and development projects from “grassroots” to advanced stages and provides recommendations to management of junior and medium sized public companies.

DISCLAIMER:
Mr. Epstein owns shares of Big North Graphite. This article and all articles written on MyriadEquity.com by Mr. Epstein does not represent investment advice and express his opinions only. Mr. Epstein is not a registered investment advisor. Readers should consult with their own investment advisors before considering buying or selling any securities mentioned in this article. Mr. Epstein has been retained as a consultant for Big North Graphite.