Northern Graphite falls on Bissett Creek feasibility study

A race is on amongst prospective graphite producers and Ottawa-based Northern Graphite (NGC-V) has been one of the favourites with its advanced-stage Bissett Creek property 100 km east of North Bay, Ont. The company released a bankable feasibility study for the project on July 10, and is aiming to kick-start construction by September.

According to Northern Graphite the proposed open-pit development would involve a 2,300-tonne-per-day flotation plant, a natural gas-fuelled power plant — including a 15-km pipeline installation that taps into the nearby TransCanada line — and construction of a 5-km access road and non-acid-generating tailings facility.

The feasibility study assumes 19 million tonnes of probable reserves at an average grade of 1.89% graphitic carbon, with annual production clocking in at 18,600 tonnes of graphite concentrate carrying 94.5% carbon, at average costs of $968 per tonne of concentrate. Bissett Creek would have a 23-year mine life and operate at $9.60 per tonne of ore processed. The property also contains an indicated resource totalling 19 million tonnes grading 1.85% carbon at a 1.5% cut-off that could nearly double its mine life.

As has been symptomatic across the industry, Northern Graphite saw capital costs spike since it filed its preliminary economic assessment in February 2011. Original estimates pegged the cost of Bissett Creek’s development at US$80 million, whereas the updated feasibility study carries a capital expenditure (capex) totalling US$103 million. The bulk of the spending comes courtesy of the processing facility, which carries a US$40-million price tag.

Northern Graphite’s processing plant will consist of typical crushing, grinding and flotation circuits, followed by a drying and screening stage. The company also intends to include a sulphide flotation circuit aimed at making 97% of its tailings benign.

Current economics peg Bissett Creek’s after-tax net present value (NPV) at US$125 million, with a 20% after-tax internal rate of return (IRR) at an 8% discount rate and a US$2,600 graphite concentrate price.

“The study confirms the technical and financial viability of constructing and operating an open-pit mine and processing plant on the Bissett Creek property, and establishes Northern Graphite as an industry leader with a large-flake, high-purity, scalable deposit that is located close to infrastructure and has competitive operating costs,” CEO Gregory Bowes commented following the release. “This is a conservative and realistic study that indicates the project has attractive economics, and that there are a number of immediate, low-risk opportunities to further enhance project returns.”

When Bowes mentions opportunities, he is referring to the indicated resource as well as an in-pit inferred resource totalling 1.5 million tonnes grading 1.54% carbon. The current study also assumes contract mining, and below-average metallurgical recoveries compared to recent testing.

The company’s biggest potential gain could be upgrading its graphite concentrate to tap into the profitable high-purity graphite market, which includes items like Lithium-ion batteries. Northern Graphite has not established a cost for any processing upgrades, though the company announced in mid-May that it had engaged Hazen Research — a Colorado-based engineering firm — to test and optimize processes relating to spherical graphite, which is used in Lithium-ion anodes. According to reports, Bissett Creek’s graphite does not contain any impurities that negatively affect battery-cell performance.

The company released its study after market close on July 9, so investors had a bit of time to digest its implications prior to trading the next day. The results were likely not what Northern Graphite had in mind, as a brief morning rise to a 52-week high of $1.99 per share was followed by a 12%, or 24¢ decline, back down to the $1.75 level on high 640,000 daily share volumes.

Along with the capex jump, it is possible investors noticed an acute sensitivity to modelled graphite prices. Though Northern Graphite used what it referred to as “conservative” prices based on 24- and 12-month weighted averages, it also recorded a scenario where prices decrease to the US$2,100-per-tonne concentrate range, which would drop Bissett Creek’s after-tax IRR down to a less appealing 13.7%.

Libertas Capital mining analyst Roger Bade speculated that a low  reserve grade, coupled with the sulphide-flotation removal and tailings impoundment, could also lead to poor returns on the project.

“The company believes a 10% increase in grade and a 10% reduction in operating costs could do the trick,” Bade noted in a July 10 research update. “But then again this is a bankable feasibility study, and not a preliminary feasibility study — the time at which these problems should have been started to be sorted out.”

Mackie Research analyst Matt Gowing had a more positive take on Bissett Creek’s prospects, though he decreased his target price by 40¢ due to the capex rise — down to $4. According to Gowing the cash-cost assumptions were in-line with Mackie estimates, as was the 94% metallurgical recovery rate.

“It is important to note that our current valuation assumes the company builds a spherical plant to produce spherical graphite, which can be used to manufacture batteries,” Gowing writes in a research note. “We view this as a realistic assumption given that the deposit contains high-quality graphite, and because of recent reports suggesting success in producing spherical graphite with concentrate. Therefore, we assume that the bulk of the graphite produced by the Bissett Creek mine is then processed at a spherical graphite production plant.”

Northern Graphite has yet to finalize offtake agreements. Bowes tells The Northern Miner by email that the company had “slowed down” offtake efforts pending its feasibility study, and speculated talks that should pick back up following the release.

The company maintains some breathing room in regards to equity financing, with 46 million shares outstanding and an $81.2-million presstime market capitalization.