Go time: Graphite One (GPH.V) brings in a $1 billion PEA… for America

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I’ve written about Graphite One (GPH.V) a few times over the years, and the thing that’s always best described their situation was one word: ‘Soon.’

Soon can be a great word for a company, or it can be a killer as timelines stretch and deadlines are missed. GPH has missed and stretched their fair share.

Last week, I bumped into the CEO of the company, Anthony Huston, across the street from the Equity.Guru building, for the first time in some time, and we caught up for a bit. He’s a good guy, a smooth cat, and was bouncing on his toes with enthusiasm for his project.

I don’t see that a lot. I mean, I see smooth operators who’ll schmear you with nice words and guys who’ll tell you how great their shell, I mean company, is, while never looking you in the eye. But you can tell when a guy is sitting on information that he just can’t wait to get out there. Not ‘my stock is going to go up’ kind of information, but ‘all our work is coming to a head’ kind of information.

Talking to Huston about how Graphite One came together, and the journey it’s been on, was one of the happier times of my week, because it’s a story of a company that came to be through smarts and hard work, that survived the worst of economic times and, yesterday, finally, announced itself to the world with conviction.

We’ll get to the PEA the company just released in a bit (which is probably why Huston was so giddy with life when we chatted), because to me it’s the exclamation point on a much bigger story as to why and how Graphite One came to be, and why I believe it will be pushed forward to production hard.

I’m going to be paraphrasing Huston a bit here, so forgive me if I focus on the story and not the words, but the story bears telling.

Alaskans are a weird breed. You know how, when you’re driving down the interstate from LA to Vegas or through deep New Mexico, and you look off in the distance and you see a trailer baking in the sun next to a distant rock, and you think, “Who the hell lives in that, and what are they running from?”

There are a lot of wisened old folks in Alaska. There are also a lot of Cousin Eddie’s. Mostly, they’re people who didn’t fit in elsewhere.

The rest of us sit in our comfort and luxury and our three-minute-walk-to-brunch worlds while, on the other side, Alaskans look at us in a similar way, with our mod-cons and social media and need to be around other people.

So when a big mining company comes to your door and says, “Hey, I know your grandpappy used to let the government mine graphite out of your backyard during the war, how about we give you a lot of money and you can let us take that over?”, the average Alaskan suggests you tell your story walking.

That’s what happened to Huston, a former real estate developer, when he became the third guy asking that question of the family that owns the property Graphite One is now developing.

“We don’t need money, we’ve got real estate investments,” said the patriarch. “This land has been in our family for generations and you’re not about to take it away. Goodbye.”

But Huston did something others never bothered to, when faced with that rejection. He asked, “Why?”

The answer was, “It’s just not worth the trouble.”

So he asked another question: “Do you know what’s down there? Do you know how much money you might be sitting on?”

The answer was, “No.” They’d never had it drilled. Too expensive. And the other companies that came through, they didn’t want to share any drilling knowledge they might acquire, so what are ya gonna do? Best to just go on with life.

Well, if you’re Anthony Huston and confronted with the ‘what are you gonna do’ question, you cut a cheque to do some drilling and tell the family they can have all the info, free of charge, and if they like what they see, maybe they can all do a deal together.

Because that’s how Alaskans do things. You’re an outsider until you’re not, and the ‘not’ doesn’t hit until you’ve shown your true colours.

“I slept on dirt floors for about six months,” Huston told me, as he went through the process of securing the property, getting to know the locals, figuring out what makes them tick, getting to know their kids and grandparents and ways.

“They won’t work with you until they know who you are,” he said. “You’ve got to understand their motivations and problems and what they love… they love walking outside into what you and I would see as terrible conditions, because they’re outdoor folk. Beer and a sunset under six jackets during a snow flurry. Nothing better.”

I’ve heard this before. I recently talked to Millrock Resources (MRO.V) execs, who have made a good business out of doing business in Alaska, for just the same reason. Once you’ve penetrated that community’s outer layer and shown you’re not out to fleece them, they’ll embrace you, support you, and help you. But up until that point?

No chance. Walk away, skid.

“To be honest with you,” Huston says, “a succession of big miners have come through these places and left them nothing. The local township, it’s seriously not got anything to it. The people just get by. The riches have been carted away and not a whole lot has been given back, so we made an effort to be a part of that community rather than exploit it.”

To that end, Graphite One has delivered hundreds of Christmas turkeys to the locals every holiday season. They’re developing a training program for the locals, to help them be ready for when the mine may be in production. But, mostly, Huston has befriended the people he hopes his company can be neighbours to. And that’s working.

Not only did that family with the land that has the graphite that helped the allies win the war do a deal with Graphite One, but local government, state government, and even federal government types are very interested in seeing the company succeed.

Why? Because not only is the US almost dependent on foreign countries for its graphite currently, but the graphite that Graphite One has got, did we mentioned it’s uniquity makes it very easy to process?

You know that story if you’ve been watching GPH for a few years, and they’ve definitely been plugging away for several. It has not been a quick march to production, mostly due to the vagaries of the resource market for the last several years, but also because, Alaska.

“We’ve had some moments, I can tell you, where I asked myself why I wasn’t just developing condos and living the high life, instead of wandering around Alaska, covered in dirt, making plans to dig holes for three or five years down the road. The answer to that question, however, is STAX.”

STAX is some weird shit, I’m going to tell you.

Long story short, when it comes to graphite, there’s the stuff that’s good for batteries and the stuff that’s good for pencils, with some tennis racquets in between. When graphite was a hot play a few years back, nobody gave much of a crap about the difference because everyone was making money on their shares. The market was chasing, and it really wasn’t hard to find graphite patches to stake, so for a while the sun shone on everyone’s ass.

But, as happens with such stories eventually, you’ve got to answer questions, like:

  • Are you ever going to put a drill in this cow patch?
  • When you put a drill into it, did pencil shavings fly out?

The answer to the first was, generally, no. To the second? Yes.

And so graphite became a bullshit play.

If we dig a little deeper into the non-bullshit plays that were getting dragged down by the rounders, things get a bit more technical. Do you have low grade graphite that would need to be processed heavily to make it useful? High grade but not much of it? Is it spherical or jagged or flakey? Could it be turned into graphene, the wondermetal that could give a car undercarriage the strength of a Sherman tank with negative added weight?

Here’s what we know about Graphite One’s STAX graphite, and I’m going to take it from people who know more about it than I do; the consultants from TRU Group, who Graphite One sent their graphite to for testing:

TRU in 2015 completed a conceptual feasibility study on what we discovered to be a previously unknown type of graphite: So different that we termed it “STAX Graphite” to highlight the ore’s unique natural Spheroidal, Thin, Aggregate and eXpanded morphology.

“Here’s the thing,” says Huston. “When they say that our graphite was not previously known before, they’re being deadly serious about it. This isn’t a pile of rock that had previously been encountered, and they’ve tested samples from everywhere it is found.”

So much so that Huston asked them to test it again. Which cost Graphite One serious cash, and time. The retesting didn’t change TRU’s perception that this was graphite that was both unique in the world, and also seriously suited to the end task that graphite investors are hoping for.

TRU Group’s test work findings point to potentially much less energy-intensive processing of Graphite Creek graphite into SPG compared to conventional flake graphite. Huston noted: “The unmilled material is clearly spheroidal, with particle size distribution that conforms to the requirements for EV batteries. Given the potential energy efficiencies we are seeing in our process, at a time when EV battery users see lower cost as the key to broader acceptance of electric and hybrid vehicles.”

And more:

Such coincident high values in Tap Density in conjunction with high Scott volume are rarely observed in other spherical graphites. Graphite One uncoated SPG Tap Density is on par or higher than its synthetic analogues while the Graphite One uncoated SPG Scott Volume compares to a high quality coated product.

The other day, I asked a panel of lithium company executives at the Vancouver Resrouce Investment Conference if the typical lithium investor actually knows what they’re investing in, and the answer was a round no.

We know lithum is going up in value and we know the demand will go up, but telling a shitty deal from a solid deal remains something most investors don’t even attempt. Hell, I rarely bother. There are enough mining nerds out there that will dig through data to learn what they want to learn, that you figure the market will tell you what’s likely to produce and what isn’t.

But, clearly, that expectation is one that doesn’t apply anymore. The market follows the market. The Greater Fool theory is in full effect, wherein every investor gets into things because every other investor is getting into that thing, and they all hope to get out with a profit before the pack moves on.

And graphite suffers the same malaise, in this respect, that lithium does. Ask the average investor in a graphite play a year ago what the end use of their favourite mining stock’s graphite would be, and they’ll kick the dirt and look at their watch and tell you they have to pump the parking meter.

Hell, even graphite CEOs have struggled to answer that question. I recall a consulting interview I did with a CEO of a then graphite deal, where I asked what this particular mine’s graphite would be useful for if it got to production and I got a, “My technical guy can probably answer that” response.

Imagine if you were selling zeolite-based nutritional supplements and someone asked what that might be useful for and you shrugged and said, “I’ve got guys, they’ll figure that out.”

That was graphite in 2014.

Huston knows what the STAX graphite is good for.

“You want to power a car? This is how you get there. You want solar cells to be useful at night, because you can properly store all the power they generated through the day? This is how you get there. You want wind turbines to be able to store the power they make on windy days, for days when the wind is still? This is how you get there. Cellphone batteries. Powerwalls. This graphite is easier to work with, cheaper to process, and we have a lot of it.”

How much of it? Well, he couldn’t give me an answer on that Friday, though he clearly wanted to.

The answer is, 55,350 metric tonnes per year (full production), for a minimum of 40 years. What’s that worth? According to the just-released PEA, you’re looking at over $1 billion in net present value (NPV).

themoreyouknow

Let’s take a quick pause for our younger investors to explain what Net Present Value is. NPV is where accounting pointyheads go through all the numbers and projections and costs and income expectations and lay out what they think will be the profitability of a project over a set period.

X dollars are going to need to be spent to run it, Y dollars are going to be likely received in return, and your NPV is what’s left.

For Graphite One, which currently has a market cap of $20 million, the NPV of this project is $1.037 billion. Around the office, we call that a ‘holy shitsnacks’ situation.

The Internal Rate of Return (IRR) is 27% pre-tax, at least for the sake of this PEA. The thing is, a 27% IRR is good, but those numbers were come to with a VERY conservative graphite price of US$6200 per tonne. Other companies use $8000, and the way the market is rolling, we can expect it won’t take 40 years for prices to run WAY higher.

I like that GPH has put out a conservative PEA that is still rife with upside. I like that they took their time to do this thing right, and that they double-checked when things seemed too good to be true. I like that the deposit is basically at surface, and that it can be quickly and cheaply moved to boats nearby and carted to Washington State, where it can be processed and moved to end users.

And I love, purely for selfish reasons, that the US currently produces NO GRAPHITE.

Look, you can talk lithium and manganese and cobalt all day long, but you need graphite to produce lithium-ion batteries and currently you’re getting that from China.

And when Samsung phones ignite in your pocket? That’s not happening because the lithium supply in China is A-grade. It’s happening because they don’t know what they’re using and from where and they swirl around a bunch of low grade crap and sell it cheap.

cellslam

I talked about this to some smarter guys than me at the Cambridge House show in Vancouver – basically, China has a ton of graphite mines, and most of them are ass. The ore pulled out of the ground needs to be baked and manipulated and processed to make it usable, but the way the system works out there, all the graphite gets poured into a pile, from multiple places, and it’s all treated at once.

That means, if you get ten bags of processed graphite for your cellphone battery, the first bag might be great, the second might be toilet, the third is fine, fourth fine, the fifth is unusable, the sixth okay…

THIS IS NOT HOW YOU RUN A SOCIETY.

Tesla has said it needs graphite for its gigafactory, but it wants it from the USA. Not Canada, but the USA. Samsung saw its phones being confiscated on flights because they CATCH ON FIRE. Best Buy had its best quarter in decades on the back of laptops, cellphones and battery pack sales. Go look at your local Best Buy store – the battery packs are sold out. Hell, the United States deems graphite a ‘critical material’, and yet it doesn’t produce it anymore.

This is madness. In 2015, 90 US firms imported graphite – 54,000 metric tonnes of it.

The PEA for Graphite One’s project, just to repeat, says it can produce 55,350 metric tonnes a year, otherwise known as THE ENTIRE NATIONAL NEED FOR GRAPHITE with a bit leftover for building a nice retaining wall for the garden and slapping some brake liners on a 67′ El Camino.

Who will keep us from a long national nightmare if Tesla can’t build powerwalls because there’s no strong graphite supply? Who will keep our Pokemon Go-drained cellphones fuelled? Who will we turn to if Russia decides it wants the Ukraine and China goes all, “meh, we’re cool with that, also NO GRAPHITE FOR YOU!”

The only hope for America is Graphite One. This is a national security issue.

Sweet spheroidal, high quality graphite, just lying there on the ground, waiting to be picked up, thrown onto a barge, cooked in Washington State and used locally.

Biggest deposit in America? Yep.

Highest quality deposit in America? Yep.

America First? You’re damn right. It starts with STAX.

— Chris Parry

FULL DISCLOSURE: Graphite One is not an Equity.Guru marketing client, though we are in discussions regarding possibly working together at a later date.

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