Lomiko’s Quatre Milles...

...a Billion Dollar ‘STUD’

Lomiko Metals LMR-V $0.075

Shares Out... 55M
Fully Diluted... 61M
FD Market Cap... $4.6M


Winner, Winner, Chicken Dinner

Lomiko Metals LMR-V recently announced they acquired the Quatre Milles Graphite Project in southwestern Quebec, which is a large flake graphite deposit in a producing graphite region that includes Canada’s largest graphite mine, Lac des Iles.  It is the most advanced graphite project of the recent new entrants with 26 historic drill holes totaling 1,625 meters in 3 near surface interconnected flat lying graphite beds.  Early indications are that this project compares favorably to the industry leaders, Focus Metals’ FMS-V Lac Knife and Northern Graphite’s NGC-V Bisset Creek. This makes Lomiko Metals LMR-V a very exciting growth story acquiring an advanced graphite project with mineralization and grade that suggest Quatre Milles will be a very profitable mining operation.  Lomiko has an aggressive strategy to explore and develop this advanced graphite project establishing a resource on the property and evaluating the production potential of Quatre Milles.  This acquisition may be a carbon copy story to Focus Metals, who of went from a $0.05 low in late 2010 to $1.80 high in early 2011 on the back of the high value historical graphite resource at Lac Knife in Quebec that is planned for production in 2014.

Quatre Milles was discovered by Graphicor in 1989 by a regional airborne survey and subsequently drilled the following year with very good results that warranted further exploration.  It was discovered at a time when the Chinese were flooding the market with excess supply which put Quatre Milles on the shelf with other graphite projects such as Bisset Creek, at full feasibility in 1989.  Quatre Milles has a project highlight drill result of 28.6 meters at 8.07% graphite (Cg).  Most holes averaged at least 4% graphite indicating Quatre Milles has a minimum grade twice that of Northern Graphite including a wide, high grade core that is quadruple the grade of Bisset Creek.  3 confirmed graphitic lenses on the property give potential for Lomiko to add up the tonnage quickly, especially with long thick intersections mentioned above.  Quatre Milles has great metrics; the deposit is near surface, has been defined over an area of 300 meters by 400 meters and is open for expansion.  More importantly Quarter Milles is large flake mineralization which is the right type of mineralization for Lithium Ion batteries and commands a premium to the rest if the graphite market.  Historical drilling indicates the potential to define a much greater resource than the ~10Mt zone defined.  Quatre Milles is wide open for expansion in every direction, and as mentioned above, was a very large target being picked up on a regional airborne survey.    

When you have the combination of grade, tonnage, and in the case of graphite, right type of mineralization; you are going to have a winner every time and that is what Lomiko may have with Quatre Milles. It’s in the right district near Canada’s only major producer, it was an exciting discovery in 1989/90 by Graphicor, and has a lot of high value work in the property making Quatre Milles a low risk and extremely undervalued high impact graphite project similar to Lac Knife.  It also has the potential to be fast tracked to production, is drill ready and the company has indicated drilling could start as early as February if permits are received in time. Lomiko will be the first of the new entrants to be drilling and has the largest and highest grading historical deposit to boot.  Lomiko should be a $20M market cap company on its way to developing a high margin mine, not the $4M it is currently valued at.   

Quarte Milles is a STUD!

Quatre Milles... Cream of the early ‘Graphite’ Crop

Lac des Iles, Bisset Creek, and Quatre Milles were subject to exploration and development last time graphite went through a boom in the late 80's. While Bisset Creek (in full feasibility) was put on the shelf due to low grade and not being able to withstand the Chinese flood of graphite; Lac des Iles was put in production in 1989 and has been a producing ever since. This gives early indication that Quatre Milles possessing a much higher grade than Bisset Creek has the potential to be a low cost producer similar to Lac des Iles with a good combination of grade and potential tonnage.  If Quatre Milles was at the stage Bisset Creek or Lac des Iles were when the graphite prices caved, there is argument that Quatre Milles could have survived the Chinese flood like Lac des Iles.

Lomiko’s Quatre Milles is by far and away the premium advanced stage project available.

At $0.08 the risk reward ratio is stacked heavily in you favor that the value will be unlocked rather quickly as Lomiko has an aggressive growth strategy to develop Quatre Milles and unlock shareholder value.

What I cannot stress enough is Lomiko Metals LMR-V has acquired a STUD that is worthy of being taken to the Kentucky Derby, the Preakness, and Belmont Stakes!!!

It is the most advanced project of the new entrants with all indications that this project has the right metrics for eventual production. The area has excellent infrastructure, supports mining, and is in a region known to produce high purity flake graphite.  The project is drill ready and Lomiko has indicated that if permits are received in time, they will be drilling in February.   Did you hear me?

Potentially drilling as early as February!!!

Lomiko Metals has the most advanced project, is the first to be drilling and is still the cheapest of the new graphite companies entering into the sector evaluating potential graphite projects.  This project has future mine stamped all over it with very little exploration dollars required to bring it up to snuff. There is no reason that Lomiko is not on its way to a $0.50 share price this summer developing a high margin project similar to Lac Knife.  The project will require 2,500m – 3,500m drilling to confirm and expand the known mineralized areas and put an initial resource on the project.  Less than a million dollars of initial drilling gets Quatre Milles  enough information for an initial resource!!!  A scoping study or PEA to follow will give early indications of the project metrics where the decision to advance this high value project towards production is made in less than a year.  With Quatre Milles being a great combination of tonnage and grade, the production decision is already obvious if LMR defines at minimum 10Mt. 

1. It’s in a historic producing graphite region
2. Similar geology to economical deposits – high purity large flake deposit
3. Close to existing infrastructure
4. Drill ready – February target – (permit and weather dependent)
5. Quebec exploration friendly - tax credits - expedited bureaucracy
6. Low risk / Value Added / High NPV / HIGH IRR

7. Fast-Track project 2015

Quatre Milles is the best of the new entrants and compares favorably to both NGC and FMS. The market will wake up very soon to this high quality project whose metrics are some of the best in the industry. With 1,625 meters of drilling results in the database to work off, there is lots of value and limited drilling and exploration is required to put a resource estimate on the property and bring it to a production decision.  Lomiko has 41% inside ownership including long-term holders Byron and Pinetree Capital.  Lomiko will attract favorable financings because the project is considered low risk with high margin potential and is not capital intensive. With a clear plan and strategy, it should not be hard for Lomiko to raise $5M to $10M needed to develop Quatre Milles over the next 18 months and still be well under 100M fully diluted when it comes to financing mine construction.  When Focus Metals came to the market with Lac Knife in 2010 at between $0.05 and $0.10 the company has successfully increased their share price 10 fold and raised well over $30M in financings and warrants for Lac knife.

FMS raised the majority for the money for Lac Knife at $1…

10 TIMES THE PRICE OF THE $0.10 ACQUISTION!!!

Now that is how you add value!

Lomiko has a high margin project similar to Lac Knife that could put investors on track for similar type returns. 

Investments of $5M to $10M at strategic stages and you have a company that is worth $50M to $100M in a year! LMR will need $80M to $100M to build a 2,500tpd - 3,000tpd mine, but a well demonstrated project to the market will command a premium and attract favorable top tier financings like Focus Metals did.  Lomiko needs minimal dollars to develop and can position themselves on the racetrack for favorable financings at much higher prices.

A GREAT PLAN FOR SUCCESS… JUST LIKE LAC KNIFE

Don’t believe financiers will pay top tier money for Quatre Milles?

PAYBACK IN LESS THAN A YEAR!!!

High grading projects like Lac Knife or Quatre Milles have the potential to payback in less than a year meaning that these projects can be heavily financed through debt as the production date gets closer.  An option that is limited on lower margin projects like Bisset Creek unless graphite prices continue to rise.


Potential High Value NPV/LOW CAP-EX projects

There is no other sector that currently offers such lucrative returns for mines that require minimal capex to build and where cash flows promise to consistently exceed $100M every year.   A project like Focus Metals Lac Knife will require a $60M to $80M to build and return close to $171M a year at current large and medium flake graphite prices ($2,500/t).  Lac Knife’s resource will support a 1,000 – 1,500tpd mill producing 50,000 to 75,000 tonnes of large and medium flake graphite per year.  A 1,500tpd mine producing at a 15.5% grade and selling at an average price of $2,000 per tonne has a Net Present Value of $1.1B over a 15 year mine life.  That value grows to $1.5B using $2,500 prices for premium medium flake product.  Focus plans on a small scale production sometime in 2013 and will enter full-scale production in early 2014.  Focus Metals also has patents involved in producing graphite into a specialty product called Graphene.  

Graphene is another potential market that could see huge demand over the next several decades.  Graphene is a revolutionary material that is projected to replace a wide variety of technologies including silicon in computer chips.   There is not much industrial demand as of yet, but Focus is working closely with several large fortune 500 companies developing Graphene for their R & D departments. 

With FMS sitting at a $90M market cap fully diluted, Lac Knife is extremely undervalued for a high margin producer who is 18 to 24 months away from production and trading at less than conservative cash flow estimates.  Most companies trade 4 to 5 times cash flow meaning Focus has the potential to increase in value from the current $90M fully diluted to $400M to $800M inferring a share price of $3 - $6 a share over the next 2 to 3 years. 

Even Northern Graphite’s project looks viable a current market prices… 

A 5,000tpd mill netting a premium of $3,000 per tonne vs. Lac Knife $2,000 per tonne gives Bisset Creek $30M in estimated cash flow per year and a NPV of $200M over a 20 year mine life.  Bisset Creek is a high cost producer, but produces mostly +80 mesh high purity flake graphite suitable for lithium ion batteries.  NGC will always achieve the highest sales price per tonne in the industry vs. its competitors.  Northern Graphite is hoping that building a 5,000tpd mill vs. the original 2,500tpd mill will achieve economies of scale and decrease production costs significantly. Nevertheless, Northern Graphite is a near term producer that has leverage to high flake graphite prices for which prices could still increase substantially.  It is not my favorite graphite company as NGC is inflexible to lower graphite prices. 

Quatre Milles could be another high margin producer….

Historical information at Quatre Milles suggests a minimum 10Mt deposit grading between 4%-8%.  Majority of this mineralization will be large and medium flake.  Quatre Milles has excellent potential to be expanded even further with the deposit being a very large target and wide open in all directions.  Current metrics indicate potential for a 3,000tpd mine over 10 years.   If Quatre Milles can define 10Mt to 20Mt and build a 3,000tpd mine for a $100M capex and realize a selling price that is in the range of FMS and NGC… the numbers start to look very impressive.   At a $2,500 combined large and medium flake selling price, Quatre Milles stands to net $100M per year in cash flow and is worth in excess of $600M NPV discounted at 6% over a 10 year mine. 

If Lomiko can prove a 20Mt resource at Quatre Milles, a 20 year mine discounted @ 6% has an estimated NPV of $1B!!! 

Quatre Milles is a… 

A BILLION DOLLAR STUD!!!

A comparison of the 2 advanced graphite projects and Quatre Milles.

These stats are for comparison reasons only and are not indicative of a projects economics or even production at each site.  

	Bisset Creek @ 2%			Lac Knife @ 15.5%			Quatre Milles @ 6%
Mill Rate	5,000tpd			1,500tpd			3,000tpd
Est. Capex*	$120M			$64M			$100M
Large Flake %	80% large flake			25% large + medium			large + medium
Est. Sales/tonne	$3,000			$2,000			$2,500
Op Costs	$40			$42			$44
Recoveries	95%			95%			95%
Total Graphite Production	33,250			77,306 tonnes			59,850 tonnes
Est. Annual Cash Flow	$30M			$131M			$102M
NPV @ 6%	10 year	15 year	20 year	10 year	15 year	20 year	10 year	15 year	20 year
	$93M	$159M	$208M	$852M	$1.1B	$1.4B	$613M	$839M	$1B
Payback	4 years			6 months			~1 year
Market Cap	$40M			$70M			$4M
Pre-production Target Market Cap***	>$100M			>$300M			>$200M
Production target date	2013			2014			2015

Obviously this is a crude model and would not pass feasibility tests, but it is a good model to analyze the industry leading projects, the tonnage, grade, scalability, value and potential cash flow at different realized prices.  This analysis should help investors evaluate the early mining potential of a project.  It also clearly highlights the potential of Lomiko’s Quatre Milles large flake graphite project.  When estimating sales price, Northern Graphite’s product will command a higher price per ton because their product is 80% large flake while Focus Metals Lac Knife is around 25% large flake and a large portion of the remaining in the medium flake category.  Focus is awaiting results of a scoping study, so until Lac Knife’s production can be categorized more accurately, I have used a conservative $2,000/tonne price compared to Northern Graphite’s $3,000/tonne.   $2,500 is used for Lomiko assuming Quatre Milles tonnage will have greater large and medium flake percentages than Lac Knife.

Current prices as of January 10^th 2012…

Large Flake +80 (94% to 97%C)....   $2,500 to $3,000

Medium Flake +100 (94%-97%C)... $2,200 to $2,500

Medium Flake +100 (90%C)….          $1,500 to $2,000

Medium Flake +100 (85%-87%C)...  $1,500 to $2,000

Amorphous powder 80%-85%C…     $600 to $800

Quatre Milles Longevity and Price Sensitivity

Grade is what sets Quatre Milles apart in the same graphite trend that spawned Bisset Creek, Lac des Iles and Ontario Graphite’s Kearny Mine.  It is certainly they most important factor in determining if you are a low cost producer.  Quatre Milles has the right combination of grade, large flake content and tonnage to achieve some of the highest margins in the industry.  If Lomiko’s Quatre Milles can achieve a 50% - 80% large and medium flake distribution, Quatre Milles production could command a premium at market similar to Bisset Creek AND be a low cost producer at a fraction of Bisset Creek.  Potential costs at Quatre Milles could be as low as $700 or $800 per tonne at a 6% grade.   If Quatre Milles does meet conceptual targets of a 10Mt – 20Mt resource of 4% to 8% Cg, it is by far and away the better mining operation.  Quatre Milles has price sensitivity to well under $1,000/tonne while Northern Graphite will have a hard time staying in business if graphite prices drop much below $2000/tonne.  It will take graphite prices of less than $700/tonne to make Quatre Milles unprofitable. 

I got news for you…

$700 large flake graphite is something that just isn’t going to happen!!!

At a $4M market cap vs. $40M market cap and minimal dollars required to develop this high impact project, the choice for investors should be obvious.

Quatre Milles is the superior project when compared to NGC’s Bisset Creek

Quatre Milles vs. Bisset Creek

	Quatre Milles	Bisset Creek
Historic drilling	26 historic holes	162 historic holes
Current drilling	2,500 to 5,000 meters drilling	50 holes – 3,000 meters
Grade	4% - 8%	1% - 3%
Mining method	Open Pit	Open Pit
Costs	$40 - $50/tonne	$44/tonne
Average Ore Value @ $2000/t & $3000/t	@ 4% = $80/tonne @4% = $120/tonne	@ 2% = $40/tonne @ 2% = $60
Max Ore A Value @ $2000/t & $3000/t	@ 8% = $160/tonne @8% = $240/tonne	@ 3% = $60/tonne @3% = $90
Tonnage	10-20Mt (conceptual)	50Mt – 80Mt (depends on cut-off)
Resource target	1Mt to 1.5Mt Cg (target)	1.3Mt
Resource Quality	Large Flake +80 mesh	Large Flake +80 mesh
Financing status	Needs $1M to start development	Fully Financed
Market Capitalization	$4M	$40M
Production target	2015	2013

High Graphite Prices Are Here to Stay

Contrary to some people’s expectations.  High graphite prices are here to stay and may push higher in 2012.  The main reason that graphite prices will remain high is that there is low substitutability in the products, there is strong growth in the sector, and there is declining supply globally until 2013 when the first of the projects come online.  All of this is happening in a market where the Chinese are restricting international sales.  On top of strong growth forecasts with impending supply / demand constraints; there is looming incremental demand that is a ‘when’, not an ‘if’ it hits the market.  Industries from technological driven areas will continue to pay premium prices for premium large flake products and could afford to pay even more.  Tesla uses 100kg of graphite in its Roadster at a price of $250 to $300.  Is Tesla going to stop using graphite in its vehicles if it has to pay double for large flake graphite prices if they hit $5000/tonne?  No.  The car is $125k!!!  Even in a $30k to $40k vehicle that uses half the graphite, a $100 increase in the price of the materials will not make a big difference in an auto manufacturer’s profitability analysis.  This is not like rare earths where prices for simple rare earths increased 25 to 50 fold and forced manufacturers to consider alternatives and even re-engineering products without the metals. 

Any decrease in prices will see supply fall off

At current prices, the larger tonnage mines like Northern Graphite are on the precipice as far as profitability goes.  If prices drop much below current levels, we will see supply destruction from low grade producers such as Bisset Creek and Kearney in Ontario milling 2% C.   With only marginal production coming online in the next couple of years, these companies cannot afford to sell into a market priced any lower. 

Prices could spike in further in 2012 due to Chinese restrictions and limited supply as the Chinese continue to leverage critical commodities for technology in 2012. Prices may trickle back to around current levels in 2014/2015 once projects like Bisset Creek (2013), Lac Knife (2014) and the Kearney Mine (late 2012) can come online, but with incremental demand coming to the sector from many angles (Graphene, li- ion batteries, fuel cells, pebble bed reactors) over the next 10 to 20 years; expect the graphite market to be extremely tight over the next decade.   Prices have remained stable for graphite over the past 6 months despite price destruction in every other commodity indicating that this market is extremely tight and is far from a top.  When the Chinese return to growth in 2012, I would assume that graphite prices will start to rise by mid-year.

Canada’s planned Graphite Mines insufficient to meet demand

The planned mines in Canada will not make up for increasing demand for current applications which is projected to increase at a steady rate of 5% a year.  Even if Kearny, Deep Bay West, Bisset Creek, Lac Knife and Quatre Milles go into production as scheduled, there will still be a 100,000 tonne deficit in the market.  That is the equivalent of 2 Lac Knifes or Quatre Milles.  If demand for lithium ion batteries takes off around 2015, the supply demand deficit could shift dramatically without more meaningful graphite production. 

Year	2012	2013	2014	2015	2016
Growth at 5%	1.1Mt	1.16Mt	1.21Mt	1.27Mt	1.34Mt
Incremental demand	55,000t	57,750t	60,500t	63,500t	66,700t
Potential Supply	20,000t Kearney Mine	33,000t Bisset Creek 15,000t Deep Bay West	60,000t Lac Knife	60,000t Quatre Milles
Deficit/surplus	-30,000t	-39,750t	-40,250t	-43,900t	-110,600t

Graphite prices will not go lower as Ontario Graphite and Northern Graphite cannot afford to sell their product for any less than $3,000 per tonne, if they doing... 53,000 tonnes of graphite supply will disappear from the market.  Lac Knife has the potential to undercut the market, but again if projections for this sector are accurate, Lac Knife won’t be undercutting anybody and will be selling into a market starved for supply.  

Still leaving a large hole in the supply demand equation!!!

Obviously this does not account for planned production internationally, but the trend over the next couple years is declining production, not expansion meaning that if Canada jumps to the plate first, they could hit a homerun in the industry establishing themselves as a major supplier of graphite.  The only international graphite project I can find is Mega Graphite's Uley project in Australia which will produce 14,000 to 20,000tpa rate starting in March of 2012.  One knock on the Uley project is that it is in Australia, meaning freight costs for the Mega's product out of Australia will not compete.  Mega will eventually list in the Toronto Stock Exchange and has projects in Ontario as well.  Even at 6%-7% grade and a massive 350Mt deposit, this mine could not compete because of logistics and was put on care and maintenance in 1993.

Canada makes sense with high value historical deposits that are located ideally next to the auto hub in North America where GM, Ford and Chrysler produce a majority of their cars.  The companies that go into production first will have the advantage of potentially supplying a major center responsible for a large portion of global auto sales.

There are a couple of larger graphite projects that could take up the slack after 2017.  These projects are at very early exploration stage and will require lengthy construction lead times of least 5 – 7 years and require extensive capital.  The mines to production first will win the big off-take agreements, will attract the top-tier financing and resist late entrants to the game.  Not all graphite projects are the same because of flake size distribution, purity and grade... but if they are comparable, the ones that are producing first and delivering a product will have the advantage over a company trying to build a mine even 3 or 4 years from now.

Lomiko’s Quatre Milles – On a trajectory similar to FMS-V

At only a $4M market cap, Lomiko provides exposure to one of the best historical graphite projects available on the market.  It provides the greatest leverage in the sector offering both EXTREME VALUE and a HIGH GROWTH opportunity.  It is a large flake graphite project whose product will command premium market prices, it has the grade to be a sustainable mine with price sensitivity, and it has the tonnage to offer scalability and longevity.  The deposit has been defined over a wide area and open in all directions offering great chance for material expansion.  It is a project that can be fast-tracked to production, is in an area that is mining friendly and has excellent infrastructure and a rich mining history.   

What is there not to like about this early stage future large flake graphite mine? 

There is no better early stage investment on the market when it comes to creating real value from the ground up.  This is a project that requires minimal dollars and offers huge returns.  Quatre Milles is a project that has similar high margin potential to Lac Knife and has a great chance of being advanced towards a mine.  With only 61M shares fully diluted, Lomiko is well positioned to add major shareholder value over the next year developing Quatre Milles into the next fast track graphite mine. 

LMR has focus, a clear path to success and a large flake graphite project with early projections that immediately make it the top large flake project outside of Lac Knife in Canada.

Investing highlights...

Exciting Graphite Discovery!

·         High Purity Large Flake Graphite (Battery grade)

·         Large target multiple graphite zones – deposit wide open

·         Advanced - drill tested - low risk exploration

·         28.6 meters grading 8.07% graphite

·         Holes average 4% - 8% with peak value of 15%

·         1Mt resource potential

Located in the top mining region in the world

·         Quebec (exploration tax credits)

·         Located near Canada's largest operating graphite mine

·         Potential mining synergies

·         Fast-track potential – drilling as early as Feb.

Great Value – Even Better Value Creation!!

·         LMR currently undervalued at $0.075 and $4M market cap

·         $10M acquisition value

·         Potential >$100M market cap graphite miner

Graphite…  A metal entering criticality

·         Graphite forecasts increasing demand from ~1Mt to ~2.5Mt over the next 10 year cycle

·         Several graphite mines needed to meet upcoming demand 10 – 20 (depending on size)

·         Current prices expected to increase further due to Chinese restrictions, little substitution and no new supply

Great Economics!!!

·         High degree of price sensitivity @ 6%

·         HIGH NPV / HIGH IRR / LOW CAP-EX

·         Potential to fast–track to production (3 years)

Lomiko Signs Agreement for Property in Quebec to Explore for Lithium-Ion Battery Grade, High Purity, Large Crystallite Flake Graphite

Christopher Skidmore

Beat the Market Stock Picks

Graphite... Set to Go Critical in 2012

Graphite…  Set to go critical in 2012
 
Graphite is set to go critical in 2012.  It is listed as being a critical metal by the EU because the commodity is vital in the greenspace revolution including a major component to electric cars.  The Chevy Volt uses 30kg of graphite while Tesla’s Roadster requires over a 100kg of graphite to make.  Graphite is the main component in Lithium Ion batteries and can require more than 15 times more graphite than they do lithium.  This distant cousin of diamonds is set to go through the roof as affordable mainstream electric cars are now on the market with what is clearly the preferred choice for the battery of the future, at least the next 10 years anyway.   Graphite’s qualities of being lightweight and a great conductor of electricity make it ideal for automobiles where shaving off pounds is important for the performance and efficiency of the vehicle. Tesla’s Model S leads the competition with a range of almost 500km per charge and a 3 – 5 hour charge time.  With these type of stats and a price range that starts to makes sense for early adopters (Prius type customers), electric vehicles are about to make major inroads into the retail marketplace. 
 
Demand for Graphite Could Double by 2020… Mines Needed!!!
 
Lithium Ion battery demand could add a million tonnes of demand to the market over the next 8 - 10 years.  A majority of this demand is from the growing electric vehicle market is where a major portion of the incremental demand for graphite is seen to come from.  Without incremental demand the industry is still expected to see strong growth.  It is already a robust 1Mt per year industry and is expected to grow to 1.5Mt by 2020. Graphite has a strong industrial component and naturally tracks closely the demand of iron ore which also has strong demand projections over the next 15 years.  With a minimal 500,000 tonne to 1.5Mt of demand to potentially fill over the next 10 or 15 years in all ranges of quality of graphite, there are several opportunities in the industry to build graphite mines in a sector that is slowly being starved for supply.  

Estimates for the amount of mines needed to supply this growing market vary greatly depending on several factors including scalability of current projects, incremental demand etc…  but graphite deposits tend to be smaller in scale therefore production is limited meaning investment will be needed in several new mines.  Most graphite mines will be hard pressed to produce more than 50,000 tonnes of graphite a year.  Northern Graphite’s operation at Bisset Creek 2% Cg slated for production in 2013 will produce less than 20,000 tonnes per year and is scalable to around 35,000 to 40,000 tonnes.  You can do the math but with most companies producing between 10,000 tonnes to 40,000 tonnes per year, there is a big need for investment in mine development in this sector.

 



Don’t believe graphite is going critical?  Just look at what the Chinese are doing, they control at least 70% of the supply of the material and have recently moved to impose a 20% export duty and a 17% value added tax on the vital material that is essential for powering a green future.  The same developments that happened in the rare earth space in late 2009 and early 2010 are now happening in the graphite sector.   When it became apparent that Li Ion battery technology was winning out, prices in the sector have shot up over the past year with premium large flake graphite going for $3000 per tonne with industry analysts expecting prices to rise further in 2012 until production outside of China can come online which will start mid-2013.  China is doing everything they can to secure enough supply of this metal to meet their own electrification needs as China aims to be a world leader in electric vehicle market.  Recently China formed a partnership with GM to collaborate on an electric vehicle that will be mass produced in China.  One major reason that may have swayed GM in collaborating with Chinese authorities other than the lucrative Chinese market is that the Chinese will assure GM of security of supply of critical materials they need to build second generation Volts.  If electric automobiles are adopted at even moderate rates, it will be tough for miners to ever keep up with demand in this industry.  One key driver behind early adoption rates is peak oil theory and prices of fossil fuels are expected to steadily rise over this decade as peak oil nears.
 
There are many conditions that are coming together to create the perfect storm in the sector that could ignite a multi-year rally in these public companies exploring and developing graphite projects.  

The Perfect Storm?

·         Strong demand

o   Steady industrial growth

o   Strong incremental demand from green technologies

·         Restricted Supply

o   Chinese control 70% of the market

§  Declining Chinese quality and increasing mining costs

§  Chinese 20% Export Tax

§  17% Value Added Tax

o   Declining western nation graphite production

Discovery to Mine… Better Than Average Odds

There is no other sector that currently offers a better chance of investing from discovery to mine.  The graphite projects being vended right now are the most prospective of the known graphite deposits in Canada.  The Canadian Shield is the best place to explore for these economical deposits anywhere in the world and with an established mining investment community behind them, have the best chance of being advanced to production.   Currently there are two graphite miens in production.  The Eagle Graphite Mine operated by Eagle Graphite in British Columbia which commenced operations in 2007 and Lac des Iles operated by Timcal in Quebec which has been in production since 1989.  The Deep Bay West Mine, the Kearny Mine and Bisset Creek are the 3 projects being fast-tracked to production.  One thing to note is that opening up a graphite mine is not capital intensive and 4 of the 5 companies here with projects either in production or slated for near term production are private companies.  The capex for these projects is cheap when considering 1,000 to 3000tpd mill and the shallow open pit high grade nature of most of these projects where milled ore is at least double operating costs and much more when considering a project with 10% to 15% grades translating into high IRR projects.  This is the one sector where you can be from discovery to a production decision with less than $5M investment.  

 
The Public Sector Leaders
 
In June there were only two public companies in this sector, Northern Graphite NGC-V $0.85/$32M (low grade open pit 2% Bisset Creek) and Focus Metals FMS-V $0.82/$69M (high grade 15% Lac Knife project).  Both projects have their merit, although I always say grade is king in mining.. especially when the deposits have similar parameters.  Scalability and economies of scale offer the second best advantage in mining and can overcome a lower grade if the deposit is big enough, as may be the case with Bisset Creek although it is not price sensitive to Graphite and a 30% decrease in the price of graphite would extremely affect Northern Graphite's profitability.  If you can find a deposit that has a combination of large tonnage and higher grade like 4% - 8% then you might have something with potential economics that “Beat the Market”.  Fundamentals you want to see a great mining project off are its ability to be a low cost producer, its ability to be scaled up to a 5,000 - 7,500 tpd and the projects ability to operate for 20 - 30 years.  These are the two industry leaders with the 2 styles that are economic at current prices.  Graphite companies will be comparing their results to these companies depending on which type of deposit they have.
 
Rules of thumb to follow in the graphite industry...

• Minimum 2% Cg grade
• Minimum 1Mt of insitu graphite
• Minimum 40% +80 large mesh (large flake) distribution
• Minimum 1000tpd for Lac Knife style desposit 10 year mine life
• Minimum 2500tpd for Bisset Creek style 20 year mine life

Northern Graphite’s Bisset Creek at a 1.5% cut-off contains 20Mt tons at 1.99% Cg for 397k tonnes of in situ graphite indicated and another 34Mt at 1.81% Cg for an additional 609k tonnes of insitu graphite inferred.  That is a million tonnes of graphite with a market value between $2B to $3B in situ resource with a relatively low cap-ex mine that offers substantial returns at $3000/tonne Cg.   At a 1% cut-off where NGC feels is appropriate because current prices can support lower grades at the mill... contained metal at Bisset Creek balloons another 33%.  The one knock that I have on Bisset Creek is that Bisset Creek is not sensitive to prices and needs at least $2000/tonne to be profitable.  
 
Focus Metals Lac Knife project has 5Mt measured & indicated at 15.67% Cg for ~780k tonnes of insitu graphite and another 3Mt inferred at 15.58% for another half a million tonnes of insitu graphite.  What makes FMS much more valuable than Northern Graphite is that mining and milling costs are approximately the same for both projects and FMS is milling 7 or 8 times more valuable rock at the same cost which will translate into Focus being a low cost producer and having much better price sensitivity if there is ever a flood of graphite onto the market.  It also means that capex costs will be a bit lower as the can mill a third of what NGC mills and still produce more graphite.  Obviously Lac Knife is the superior deposit if they can add tonnage, but Bisset Creek has the advantage of being fast tracked to production by 2013 and taking advantage of high graphite prices.  Northern Graphite will be taking advantage of the higher grading mineralization in the early years to maximize returns where there are large areas of mineralization grading well over 2% to take advantage of in the early years.  


There is some question if Northern Graphite's Bisset Creek will survive the flood of new graphite production over the next 10 years as deposits are discovered and advanced.  It is a project that will do well over the next 5 to 7 years while graphite is in short supply, but after that I project this market will ultimately be flooded with a log jam of new graphite mines.  Graphite is not a scarce mineral, but there is a lack of projects in the industry due to lack of exploration and development for over 20 years making Northern Graphite viable short to medium to producer.  

 

Company	Deposit	M & I	% Cg	Inferred	% Cg	In-situ Cg	Market Cap
Focus Metals FMS-V	Lac Knife	4.97Mt	15.67%	3.0Mt	1.81%	1.25Mt	$69M
Northern Graphite NGC-V	Bisset Creek	25.98Mt	1.81%	33.67Mt	1.57%	1.33Mt	$32M

 
  
The New Entrants
 
Since it has become obvious that Li-Ion is in and NiMh is out, the sector has exploded with companies entering into the market in a big way.  Strike Gold SRK-V $0.17/$7M acquired some highly prospective projects in Saskatchewan.  Most notably the Deep Bay East which could be a potential high grade open pit project which could be a resource similar to FMS but have a bit more tonnage like NGC.  Deep Bay East is a near surface 10 - 15Mt graphite project grading 8% - 12%  Cg and could be a carbon copy of Deep Bay West, a private mine slated for production within the next couple of years.  Deep Bay East drill highlights include 35.05m @ 8.58% Cg and trenches grading as high as 27.52% Cg.  Simon Lake is what could be a company maker with extremely high grades estimated over long historic intervals covering a very large area on the southeast margins of the Athabasca Basin.

Please read my Strike Gold article in October for more information on the company and its graphite projects.

Beat the Market Stock Picks: Strike Gold SRK-V
 
OR-V Orocan Resources $0.29/$6M (Standard Graphite when the name change goes through) has acquired a package of 12 properties which make these guys the leaders when it comes to quantity of graphite projects.  Orocan’s portfolio consists of a depleted mine in Ontario and some early stage properties in the right areas in Ontario in Quebec but with just samples and no trench or drill results to work off all of these projects are early stage.   Quantity does not mean quality or that OR is the best early stage investment, at this stage a company acquiring one project has just as good a chance as a company acquiring a portfolio of 12 and the company with one project is focused. 

Considering one needs to drill 10,000 - 20,000 meters to bring a project up to Northern Graphite type numbers (160 historic holes and 50 current ones) or at least a 5,000 meter drill to define a deposit like Lac Knife.   You could spend a lot of money just drilling testing a 1000 meters on each before deciding where to concentrate your efforts.  Wasting a couple million dollars just trying to find that one development project as a penny can hurt you.  It is easy and cheap to get value out of one project like FMS or NGC, but when you are trying to work the value out of 12 at once, this proposition can find a company spinning its wheels.  The better strategy and certainly more cost effective for junior company is to focus spending the dollars on one or two projects with quality historical leads instead of trying properly investigate 12 prospects at once in a cost effective manner.  I am not saying OR-V doesn't have anything of merit, but currently Orocan lacks a flagship project.  


That being said, Orocan has some intriguing targets on their Ontario projects including Black Donald which has drill results ranging in grade from 2.67% to 5.8% Cg and widths ranging between 3m and 15m.  The Little Bryan property in the same region has trenches results over 1k in length indicating a wide orebody than Black Donald between 10m and 22m and ranging in grade from 3.72% to 5.15% cg.


Two Companies that are about to enter the Graphite Arena…
 
Lomiko Metals LMR-V $0.05/$2.7M and Solace Resources SOR-V $0.10/$1.3M are two companies that have stated intentions of evaluating and acquiring high impact graphite projects.  Both companies are tight lipped about what they are up to, but are actively engaged in entering in this sector.  These two companies are my top picks in this sector because they simply are the cheapest, have the highest leverage, have very little retail float to sell into the bid and make great ground floor stories going forward in a brand new theme.   All of the projects being vended at this point have the same value and worth meaning the projects vended into these two companies have just as much merit or more as the projects Orocan has.  Word on the street is that Lomiko's project has historical drill intercepts.  It also allows these companies to be more focused in development plans.  At $2M market cap or less for each company, these offer the best opportunities as an investment vehicles going forward for new projects in a brand new theme.  At $0.05 LMR doesn’t get much cheaper and offers great potential speculation returns and has the added marketing value of being known for their Lithium project which gives them a great promotional angle 'supplying materials for a green age".  

Since this article was written Lomiko announced a major graphite acquisition in Quebec called Quatre Milles with 26 holes drilled for 1600 and a project best intercept of 28.6 meters of 8.07% Cg.  The project is said to average around 4% grade and potentially be as large as a 30Mt resource.  This district is highly prospective for graphite, is in the same area where Orocan and Geomega have acquired properties.   and.  This 500km long graphitic trend extending from southwestern Quebec to North Bay in Ontario is host to Canada's largest graphite producer operated by Timcal, Lac des Iles and near term producers; Bisset Creek and the Kearney Graphite mine slated for production by 2013.  

Lomiko Signs Agreement for Property in Quebec to Explore for Lithium-Ion Battery Grade, High Purity, Large Crystallite Flake Graphite
 
Geomega GMA-V $1.17/$26M has also staked a portfolio of prospective graphite properties but as a grassroots investment in a new industry is not as appealing as a company that has leverage and can easily add value to with a high $22M market cap and starting with a portfolio that is the same as a Lomiko or Solace or Orocan.  

 
GMA entering into the graphite sector… More proof rare earth industry insiders see the writing on the wall.


Energizer Resources EGZ-V $0.175/$27M has announced a major graphite discovery on their Green Giant Property in Madagascar.  Within their Ni 43-101 compliant Vanadium resource is also host to graphite that grades 4% to 17%.  The graphite is of the amorphous type which commands only $850/tonne but the company has completed a exploration program outside of the resource where they have reported both larger flake size and higher carbon content than the graphite associated with the vanadium.   The company has just finished a recon program with10 holes totaling 1157 meters of drilling and 16 trenches for a total of 1912 meters.  An additional 19 holes for 2700 meters was completed in early January where the company has identified several graphitic trends extending off the Green Giant Property.  This may very well be one of the largest graphite resources in the world and one of the higher grading resources with almost 60Mt of Vanadium defined with graphite grading 4% to 17% in addition to the graphite discovery outside of the Vanadium deposit. 

 
Great Value…  Even Better Value Creation
 
What makes this sector unique and a great early stage value investment is that it is early, all these companies are extremely cheap and won’t get any cheaper… 

I have seen shells worth more than Lomiko and Solace! 

You have a great chance at creating real value from a grassroots acquisition into a FMS or NGC type story on the fast track lane to production.  These companies require little investment dollars to develop these near surface deposits and exploration is relatively low risk with these deposits sticking out like sore thumbs on cheap mag surveys.  It is easy to turn a $1M – $5M investment into $30M - $60M value in market cap with these early stage but highly prospective properties being vended.  With most drilling not much more than 100 meters deep;  a  5,000 meter drill program will give you enough information to take you to initial resource and PEA stage.   Advancing a project to a production decision will take 18 to 24 months and be the best bang for your dollar in any sector with the best chances of actually investing in a future mining operation. 

One major advantage to the low cost exploration is that most investors who want exposure to this industry will have to buy at market as this sector will not be flooded with private placement funds making the demand on the market side for these companies that much greater. 

Company	Location	Project(s)	Market Cap
Orocan Resources OR-V	Ont / Que	12 early projects – limited drilling 3% - 6%, trenches 3%-5%,	$8.6M
Strike Gold Corp SRK-V	Saskatchewan	Deep Bay East (35.05m @ 8.58%), Simon Lake	$5.3M
Lomiko Metals LMR-V	Quebec	Quatre Milles (advanced) 26 holes – 28.6m @ 8.07%	$2.8M
Geomega Resources GMA-V	Quebec	Early stage Mont-Laurier projects – samples up to 20%	$25.7M
Energizer Resources EGZ-V	Madagascar	Green Giant – awaiting results of drill program - amorphous	$27M