Fundamental Research Corp has raised its fair value estimate on Focus Graphite (CVE:FMS), after a recent preliminary economic assessment (PEA) on the graphite explorer's Lac Knife deposit in Quebec, and exploration work on its Lac Tétépisca property.
The equity research firm, which also highlighted Focus' strong cash position, raised its fair value estimate on the company to $1.44 per share from $1.21 per share previously.
Analyst Nicole Engbert notes the Lac Knife PEA shows high production rates, and three potential saleable products.
The long-awaited PEA, which was unveiled in late October, showed average concentrate grades of 92% graphitic carbon.
With a mine life of 20 years, the open pit operation is expected to yield 300,000 tonnes per year, with life-of-mine production of 928,000 tonnes of concentrate at 92% graphitic carbon on average, or approximately 46,600 tonnes of concentrate per year.
Pre-tax net present value - at a 10% discount rate - was estimated at $246 million with a 32% pre-tax internal rate of return and a pre-tax payback period of 2.8 years.
Initial capital cost was projected at $154 million, inclusive of $33 million and $24 million in working capital and contingency (25 per cent), respectively.
Three products are expected to be produced from the operation - two concentrates with fine and medium flake sizes, and a high purity battery-quality product.
The company says that Lac Knife is unique because of its cost-mitigating, high concentration of large, medium and small flake graphite. Flake graphite - the most actively pursued type of graphite and associated with next-generation technologies - is made up of layers of graphene, which is the mineral’s base structural element.
The Fundamental Research analyst compares Focus' Lac Knife project to Northern Graphite's (CVE:NGC) Bissett Creek graphite project, which has a net present value of $71.1 million at an 8 per cent discount rate and an IRR of 15.6 per cent.
Overall, the report says Focus has a larger contained graphite tonnage and a targeted large/medium flake production rate of more than double that of Northern’s rate.
"We believe that the higher contained graphite, higher production rate, lower operating costs, and accounting for revenues from the upgraded product are the primary drivers behind FMS’s higher pre-tax NPV value," notes Engbert.
"Overall, we believe that FMS shows more robust economics and has a greater potential for mineral resource expansion due to the Lac Knife property’s earlier stage of development and significantly higher graphite grades."
The company has decided to go straight to off-take and financing arrangements, eliminating the need for a new feasibility study. It has already initiated contacts with several major graphite consuming groups in North America, Europe and Asia.
In terms of expansion, the company this year completed two substantial drill programs - on Lac Knife and at its Kwyjibo rare earth element property in the Grenville region of northeastern Quebec.
Exploration results from these programs are expected in early January next year. The results from Lac Knife will be used to revise and upgrade the property's NI 43-101 compliant resource, published last December, which stands at 4.9 million tonnes at 15.8% graphitic carbon (Cgr) in the indicated category and 3.0 million tonnes at 15.6% Cgr in the inferred category.
Lac Knife drilling was done along strike and to the south, as the resource is open in all directions, including at depth.
At Kwyjibo, drilling began in August with the aim of confirming grades, thickness and continuity of the rare earth-iron-copper mineralization seen in the area of the Josette horizon.
The Kwyjibo property consists of 118 mining titles and covers 6,278 hectares, located several kilometres north of Manitou Lake and 125 kilometres northeast of Sept-Iles.
Meanwhile, the company also recently announced a "high grade graphite corridor", says Engbert, on the 100 per cent owned Lac Tétépisca property. The company has said that reconnaissance bedrock sampling carried out during the summer found a 900 metre long by up to 100 metre wide graphite-bearing corridor.
A total of 26 mineralized grab samples define the new "Manicouagan-Quest" graphitic corridor, 17 of which host Cgr grades of over 5.59% Cgr. The highest grade from the samples is 45.8% Cgr.
Fundamental Research also takes note of Focus Graphite's "extremely strong" cash position, with around $17.6 million in the treasury. It has a capex budget of only $4 million for the next 12 months.
Focus also holds a 40 per cent stake in Grafoid Inc - a privately held joint venture that holds an economically scalable production process for graphene - derived from raw, unprocessed graphite ore.
The JV is a one year agreement, through which work toward the development of a catalyst material derived from grapheme derivatives and carbon nanotubes will occur. "We believe this agreement has the potential to further the development of graphite end products in the high-tech sector.
"Although it is too early for us to speculate on the outcome of Grafoid, we believe it is good for FMS to be involved with the development of graphene at this stage, as the upside potential for graphene players could be very significant going forward," Engbert adds.
Graphene occurs naturally in graphite, is 200 times stronger than steel and is so thin it is transparent. It is also flexible and electrically conductive.
The substance can be used as a transistor, as a component for industrial, aviation and infrastructural use, and can be produced for battery and super-charging capacitor applications.
