AGORACOM Small-cap Investor Relations Blog

Investors looking for the next Zenyatta Ventures (TSX.V:ZEN) should be looking for companies that will perform as exceptions to the rule – rising strongly on continuous fundamental development, as opposed to drifting downward on progress. Another consideration would be a deposit that is better than Zenyatta’s Albany deposit.

What characteristics does such a company possess? Here are the three keys:

1. Ability to raise non-dilutive capital: The companies who are able to continuously raise funds at higher prices with each financing demonstrate that stakeholders are confident in management’s ability to take the project all the way;
2. Strong shareholders who aren’t running for the exits: Most companies in the resource space are seeing any and every bid hit on the slightest hint of positive news. Stock prices that actually rise and stay up on good news are green flags for “exception to the rule” companies;
3. A project that stands out from others within its sector due to key qualities such as grade, tonnage, proximity to markets, transportation and infrastructure.

In the graphite space, most, if not all of the companies, are touting unrealistic business models that are betting on new demand from as-yet un-commercial technologies, and are staffed by management with no particular expertise in graphite.

The exception to the rule?

Mason Graphite (TSX.V:LLG) is a Forbes and Manhattan company that has assembled a team of highly experienced graphite industry professionals who are hard at work on one of the highest grade graphite deposits in North America.

The Lac Guéret graphite deposit in Quebec has been a well-known high-profile deposit since at least 2006 due to its inordinately high native grade, which can easily be found in surface grab samples over 90%. Despite other high-flying graphite juniors such as Zenyatta Ventures and Energizer Resources (TSX:EGZ) hogging the limelight, Mason’s Lac Guéret deposit increasingly stands out as the most likely Next Graphite Mine in North America.

All one needs to do is compare the drill results of other would-be graphite producers with Mason Graphite’s grades, and you begin to understand the magnitude of Lac Guéret’s grade superiority.

Drill results released April 3 emphasize the point:

GC Zone
• Hole LG-221 intersected 55 meters at 26.1 % Cgr;
• Hole LG-234 intersected 128 meters at 21.1 % Cgr, including 27 meters at 37.3 %;
• Hole LG-235 intersected 197 meters at 17.1 % Cgr, including 39 meters at 33.9 %.

GR Zone
• Hole LG-248 intersected 31 meters at 20.2 % Cgr;
• Hole LG-257 intersected 32 meters at 15.9 % Cgr.

Mason Graphite’s consistent and long intercepts of very high grade large flake graphite make Mason Graphite superior to Zenyatta Ventures’ Albany deposit.

High grade drill intercepts from holes LG-221 (55 meters at 26.1 % Cgr) and LG-222 (36 meters at 27.5 % Cgr) located in the GC zone suggest a possible extension to the northeast of the July 2012 mineral resource envelope. Mason will follow up on these holes of interest in the next phase of drilling.

While investors are now apparently bamboozled by Zenyatta Ventures’ ‘Vein-type graphite’, it is neither as rare nor as valuable as suggested, when you consider the maximum grade of any significant intercept length is no more than 7.3%. Compare that to Mason Graphite’s existing measured and indicated resource averaging over 20%, and with long intercepts regularly averaging over 30%. Plus, with Zenyatta’s steeply dipping vein, and upwards of 40 metres of overburden, the Albany deposit is a large degree of separation inferior to Mason’s at surface deposit. In terms of purification, there is nothing special about the capability of purifying graphite to 99.96%. Purification is just a matter of process.

Grade is King – Especially in Battery Applications

Consider this: In the process of producing spherical graphite, which is the graphite type required to service the lithium-ion battery market, as much as 70 percent of the graphite is discarded in the process of shaping the graphite flakes into spheres. So any graphite producer going after the battery market is going to need a higher average grade and flake size to start with if they are to compete effectively against the high-grade large flake deposits such as Mason Graphite, whose Lac Guéret project’s indicated resource is above 20%.

Industrial Minerals indicates that batteries are the fastest growing market for graphite with growth at 15-25% per year; consumption is driven by requirements for portable electronics (mobile phones, smartphones and tablets). A significant and growing portion of demand comes from high-tech applications because of its use in batteries as anode material; natural graphite anodes are favored by all battery technologies. The battery sector is predicted to increase its share of graphite consumption from 8% to 10% in the next five years. The introduction of electric vehicle batteries may create a significant impact in the future, especially vehicles requiring batteries of 10 kWh and above.

But the explosion in battery grade graphite will take time to build, and likely over a period of 25 years, according to Stephen Riddle, president of US based natural graphite producer Asbury Carbons. “Demand for Li-ion graphite to reach 1million tonnes per year is at least 25 years away or longer and I believe some or most of this increasing demand will be synthetic graphite,” Riddle said.

So building a company on the premise that you are going to sell all or some of your graphite to battery manufacturers is a tad misleading, to say the least. High purity concentrations thinly dispersed through no-grade host material is nowhere near as desirable as consistent purity across the orebody. In this sense, Mason is head and shoulders above all the other would-be graphite miners.

Traditional Applications Drive Graphite Consumption

Industrial Minerals reports that 80% of natural graphite demand is driven by industrial applications. The dominant market, with 39% of demand, is refractories which is in turn dependant on steel and refined metal production. Demand for refractories is expected to maintain its share of the market going forward.

The main consumption of graphite products is found in traditional applications such as refractories for steel making, lubricants, and brakes.

Brake linings, foundries and lubricants represent about 26% of demand; increased use of graphite in friction materials, packings and gaskets was driven by reduced use of asbestos globally.

Thus, while 9 out of 10 TSX Venture listed graphite companies purport to be getting ready for a brisk battery supply business, a real graphite company needs to develop multiple product lines to satisfy a wide range of customers in diverse applications.

Graphite Companies Need to Build Customer Networks

Benoit Gascon, CEO of Mason Graphite, was the individual who built the bulk of the sales channels for the world’s largest supplier of graphite products, Timcal (http://www.timcal.com), which is a wholly-owned subsidiary of Paris-based Imerys SA (EPA:NK), a US$5 billion market cap world leader in industrial minerals. He was CEO of Stratmin, which in 1989 began operation as North America’s only producing graphite mine. He turned around the operation, developed over 50 finished products and sold it to Imerys in 1996. Timcal was created through the acquisition of Stratmin, where Gascon developed a sales channels consisting of over 700 customers globally.

“Chinese graphite producers do not have very close connections with North American end-users or European end-users, so that is an opening where North American companies can build a competitive advantage,” he said. “That’s what we did with Stratmin Graphite in the 1990s. We evolved into a customer-oriented operation from top to bottom. That means selecting management with the right mindset, introducing flexibility in the production process and, as always, understanding the markets/industries of your customers and adapting to meet their requirements. The customer is king.”

Mason is a Prime Takeout Target

Timcal’s Lac-des-Iles deposit in Quebec has about 4 years left of ore. Is it conceivable that Timcal may be eyeing Mason Graphite’s Lac Guéret project as a possible contender?

“We’ve had that discussion with them,” says Simon Marcotte, Mason’s Vice President of Corporate Development. “They are not expressing interest right now, but that could change as we move closer to production.”

Considering that Timcal’s sales force and customers were developed by Gascon, Timcal could astutely view the acquisition of Mason as a pre-emptive move to thwart a new serious competitor right in its back yard.

Other entities however, who may be interested in such a high-grade graphite deposit include:

• Rockwood Holdings Inc. (NYSE:ROC), the world’s largest vendor of lithium and specialty industrial chemicals for the battery manufacturing sector, recently bid $6.50 a share for Talison Lithium, demonstrating a strategy of growth through acquisition. Since lithium-ion batteries incorporate from 10 to 30 times more graphite than lithium, it makes sense that such suppliers should consider incorporating a product that includes the graphite required for such batteries.

• SQM (NYSE:SQM), the world’s largest miner and producer of lithium, is a logical buyer of Mason Graphite’s graphite project, since it has already built the supply channels to battery manufacturers and lithium refiners that would make it a complimentary product addition.

• Talison Lithium Corp. (TSX:TLH): Talison, as its name implies, is primarily in the lithium business. But as it envisions becoming a supplier of lithium to battery manufacturers, its offering might be enhanced if it can deliver both high purity lithium and graphite to customers.

• FMC Corporation (NYSE:FMC), a global specialty industrial chemical company, is the world’s second largest producer of lithium, and so its expectation for electric vehicles to and hybrid electric vehicles to reach 4 – 5% globlally suggests that graphite may become part of that strategy.

The Lac Guéret Deposit

The Lac Guéret graphite property currently hosts a National Instrument 43-101 compliant Mineral Resource of about 300,000 tonnes at 24.4% Cgr in the Measured category and 7.3 million tonnes at 20.2% Cgr in the Indicated category.

Lac Guéret is an exceptional deposit both for its high grade and high ratio of large flake graphite, and the fact that it starts right on surface for a potentially very low initial strip. With the current indicated resource averaging 20.4% Carbon Graphite, Lac Guéret could be in production as soon as 2015. Drilling is ongoing to deliver an updated resource calculation by the end of Q2 2013, and results continue to demonstrate excellent grade continuity throughout the deposit.

A Mason Graphite geo-technician inspects high grade graphite core at the Lac Guéret Camp in Quebec

I first wrote about the Lac Guéret deposit in 2006.

Back then, it was in the project portfolio of Quinto Mining, who was bought by Consolidated Thompson Iron Mines back in 2008 for its large Peppler Lake iron project. Consolidated Thompson was then acquired in early 2011 by Cliffs Natural Resources NYSE:CLF in a whopping $4.9 billion transaction (engineered by Forbes and Manhattan), again with the primary objective being Cliffs’ Bloom Lake Iron Ore mine.

Cliffs wasn’t interested in graphite, and so Forbes and Manhattan was able to negotiate the acquisition from Cliffs after several other juniors failed. Interestingly, Cliffs found themselves in the graphite game after all when they invested in Zenyatta to search for copper and nickel deposits in Ontario. The discovery of the graphite breccia by Zenyatta was a fluke.

CEO Benoit Gascon has spent substantially all of his life working in the graphite space as CEO and in other roles of Stratmin Graphite until it was merged into Timcal. He is probably one of the most qualified individuals in the entire graphite industry to repeat Timcal’s success – an asset that is glaringly absent in most other would-be graphite companies.

The Exception to the Rule

TSX Venture-listed mining explorers and developers have seen their valuations deteriorating over the last year by as much as much as 80%. The exceptions to the rule are few and far between. Mason has thus far stood out as a clear exception to the rule. The Forbes and Manhattan machine has demonstrated repeatedly that they can sell assets up the food chain to major companies, and also that they can raise capital regardless of market conditions. It will be interesting to see how other graphite stories end as this protracted bear market begins to take its toll on the number of publicly traded companies. Mason Graphite is one of the clear exceptions to that rule, and shareholders in the company will benefit from that. Its just a matter of time.

Disclosure

The author is a shareholder in Mason Graphite and so should be regarded as biased. No compensation has been received for the production or distribution of this article. This article is intended for information purposes only and is in no way to be construed as recommendation to buy or offer to sell any securities mentioned herein. The information contained in this article is derived from sources believed to be reliable, but no warranty of same is expressed or implied. The opinions expressed in this article are those of the author solely and in no way represent the opinions of management of Mason Graphite or any other company mentioned herein. Resource investing is inherently risky and you could lose all or part of your investment. Always consult a registered investment advisor in your jurisdiction before deciding if any investment is right for you.

Source: http://www.midasletter.com/2013/04/mason-graphite-continues-to-deliver-high-grades-1304046/