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Great Lakes Graphite (GLK.V) Developing Plan to Ramp Up High-Value Capacity

07/06/2017


OTC:GLKIF
TSX:GLK.V

Summary

• Great Lakes Graphite is positioned to participate and benefit from the increasing demand for graphite material. 
• Great Lakes Graphite continues to generating revenue from the sale of synthetic graphite. 
• Management is pursuing a fast-track approach into the graphite market with a direct sales effort in order to secure long-term supply contracts. 
• Recently, management has indicated the development of a plan with its partner Ashland Advanced Materials to pursue initiatives to prepare for a ramp up in manufacturing capacity of high-value graphite products, particularly to the battery market.

Headquartered in Toronto, Great Lakes Graphite (TSX:GLK.V) (OTC:GLKIF) is an industrial minerals company that is focused on marketing and supplying value-added graphite products to customers in North America.  The company continually provides samples of graphite products for qualification to potential customers across a range of targeted industries. The company posts photos of some of its samples on its Facebook page and twitter feed. Below are images of some recent samples shipped to prospective customers. During 2016 and 2017, Great Lakes Graphite sent out 208 samples. Sampling, especially for qualification processes, provides opportunities to broaden the company’s customer base.

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Management’s goals are to establish the Great Lakes Graphite brand by fast-tracking the availability of the company’s graphite products by sourcing and processing graphite through third-party partners and ultimately to initiate commercial operations of mining graphite from its 100%-owned Lochaber Graphite Project in the Province of Québec in order to sell it into the company’s developed customer base. In the meantime, the company is sourcing graphite through an off-take agreement with DNI Metals Inc. and utilizing Shamokin Carbons to process the procured supply into micronized synthetic and micronized natural flake graphite products. In addition the company is in a technology partnership with Process Research ORTECH (PRO of Mississauga, Ontario) to develop a proprietary graphite purification process with the goal of achieving 99.9%-purity lithium ion battery grade graphite products.

On June 29th, Great Lakes Graphite filed second fiscal quarter results for the quarter ending April 30, 2017. The company reported graphite sales of $105,010. A year-over-year (YOY) comparison is meaningless since the company only began generating in revenue in the third fiscal quarter last year. However, sequentially, quarterly graphite sales declined 27.5%. However, comparing six-month periods, during the first half of fiscal 2017, graphite sales have increased 10.3% sequentially to $249,861 versus the $226,522 generated during the second half of fiscal 2016 when 400 tons of product was sold. Thus far during fiscal 2017, Great Lakes Graphite has booked orders for 840 tons of graphite products.

Currently, synthetic graphite is being sourced and sold at a negative margin while the company is establishing and developing a client base. Management’s immediate focus remains on the sale of graphite material sources from third-party facilities as the company develops a customer base in the marketplace. Management anticipates that positive margins will be attained when the company’s product mix migrates to the sale of higher grade graphite products and ultimately when commercial production is attained from its mineral interests at the Lochaber Graphite Project. In the meantime, management expects to report annual deficits while relying on equity and/or debt financings to fund on-going operations, including exploration and resource development initiatives.

For the second fiscal quarter, Great Lakes Graphite reported a net loss of $1,360,045 (or $0.01 per diluted share) compared to a loss of $323,737 reported for the comparable fiscal quarter last year. Operating expenses increased $121,530 or 37.3% YOY, primarily due to $60,853 in stock-based compensation and a 28.9% increase (or $44,325) in management and consulting fees. 

A significant one-time event impacted the bottom line. As a result of the termination of the Facilities Use Agreement concerning the use and operation of the Matheson Micronization Facility on May 3, 2017, during the second fiscal quarter, Great Lakes Graphite wrote-down the leasehold improvements at the facility, which totaled $798,564 ($1,206,374 in leasehold improvements costs minus a write-down of $407,810 representing a deferred rent liability associated with the facility). Also as a result of terminating the Facilities Use Agreement at the Matheson facility, the company received a Notice of Default from the Northern Ontario Heritage Fund Corporation (NOHFC) on May 15, 2017. Accordingly, the full amount of the term loan and the conditional amount (totaling $405,563) were recognized as a current liability on the company’s balance sheet. Consequently, the company’s working capital deficit increased from $1.17 million at the end of the first fiscal quarter to $1.70 million. Repayment of the loans with the NOHFC is currently under negotiation.

Recent Financing 

On May 13, 2017, Great Lakes Graphite closed a non-brokered private-placement offering of 2,212,500 Units for gross proceeds of CDN$177,000. Each Unit is comprised of one common share and one two-year common share-purchase warrant exercisable at $0.10. The net proceeds will be used to bolster working capital. 

Orders Received 

On May 26, 2017, Great Lakes Graphite announced the receipt of two repeat purchase orders from an overseas manufacturer of stationary battery systems. Previously the customer had purchased a small quantity of material for initial qualification testing. Now, one of the new purchase orders is for 50 kilograms of of high-purity micronized flake graphite material for pre-production test manufacturing of an industrial battery unit. The second purchase order is composed of five different 5-kilogram samples of high-purity micronized synthetic and natural flake graphite ordered for evaluation. The purchase orders were fulfilled in early June. Management anticipates a supply agreement following the completion of pre-production testing.

Great Lakes Graphite is currently engaged in product qualifications with at least eight prospective battery and energy storage customers. The battery chemistries range from traditional lead-acid batteries and flow batteries for stationary energy storage applications to lithium-ion batteries. In addition, the company has backlogged requests for Spherical Purified Graphite (SPG) and Coated Spherical Purified Graphite (CSPG) from existing battery manufacturers (lithium-ion, lead-acid and redox flow batteries). 

According to Navigant Research, the international stationary battery market is expected to be a US$5.9 billion market by 2020. Management’s strategy includes targeting the battery supply chain where battery-grade CSPG currently sells for US$10,000-12,000 per ton and which Benchmark Minerals Intelligence projects the lithium-ion battery anode market to grow from 130,000 tons annually to 230,000 tons by 2020. 

Great Lakes Graphite and partner Ashland Advanced Materials are pursuing initiatives to prepare for a large-scale ramp up in manufacturing capacity of high-value graphite products. The project is estimated to cost approximately US$28 million and would require 24 months to complete. Great Lakes Graphite is in advanced discussions for financing options, specifically the issuance of both debt and equity.

Demand for Graphite Increasing 

According to MarketsandMarkets, the fastest-growing application in the global graphite market is the battery market during the forecast period of 2017 to 2022. The growing adoption of Electric Vehicles and the proliferating use of consumer electronics powered by storage batteries are projected to be primary catalyst for incremental growth, resulting in increased production of fuel cells and lithium-ion batteries. Consequently, the demand for graphite is expected to dramatically increase though 2022.

According to Benchmark Minerals Intelligence over $15 billion will be invested in new lithium-ion battery capacity through 2020, increasing the battery anode market to 230,000 tonnes. The traditional markets for graphite are automotive brake linings, lubricants, electric motor brushes, pencils, batteries, among others. However, the blue sky drivers of increasing demand for graphite are lithium-ion batteries and the Electrical Vehicle market, both of which are expected to grow 20%+ annually for the foreseeable future. 

The macro investment case for graphite is becoming more widely-known. With increasing demand for portable electronic consumer products (smartphones, tablets, notebooks, power tools, etc.), the rise of battery-building gigafactories and the step-up to mass production of hybrid and electric vehicles, more graphite will be needed for the manufacture of lithium-ion batteries. Though non-battery, graphite-related markets (such as refractories, brake linings, clutch facings, pencils, batteries and lubricants) have been lackluster, the dominate catalyst for future growth of the overall graphite market is anticipated to be the increasing demand for rechargeable lithium-ion batteries. 

Update on Graphite Stocks

Graphite stocks have performed well in the first half of 2017 with an average gain of 7.4%. An early-stage graphite company, Great Lakes Graphite was one of the top performers, rallying 28.6% in the first quarter, but corrected during the second quarter, giving up all the first quarter gain, resulting in flat performance for the first half. Management continues to implement its business model of strengthening its foothold in the graphite market, with an anticipated effort of moving up the value chain to selling and delivering high-purity micronized and spherical graphite products for energy storage and lithium-ion battery applications. 

Conclusion

Management is pursuing a business strategy of providing value-added, higher-margin, micronized and purified graphite directly to customers. Currently, management is executing its Go-To-Market business strategy, acquiring customers by generating sales with sourced graphite product. Management understands the unique procurement processes for graphite products and is in the process of attempting to build and solidify strong relationships with customers. This direct marketing effort is a key core competency of the company. Great Lakes Graphite’s marketing approach is to create strong customer relationships with end-users of graphite by thoroughly understanding of each prospective customer’s specific graphite requirements and by providing samples for qualification testing. The company’s sales and marketing activity continues in order to build a base of long-term customer relationships across a diversified cross section of graphite applications.

Great Lakes Graphite is still in the early stage of its development as management is not anticipating profit in the near-term. The company will continue to require equity and/or debt financing to fund operations. Currently, Great Lakes Graphite has a market capitalization of approximately CDN$8.17 million with 125,656,830 million shares outstanding.

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