Headquartered in Toronto, Great Lakes Graphite Inc. (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. In the company’s fiscal year ending October 31, 2016, the company joined the graphite supply chain generating $226,522 in revenue. Currently, synthetic graphite is being sourced domestically and sold at a negative margin while the company is establishing and developing a client base. Management anticipates a positive margin when the company ultimately will offer micronized and purified natural flake graphite products sourced from its Lochaber Graphite Project located in the Province of Québec and which will be processed at its industrial facility located in Matheson, Ontario. However, management’s immediate focus remains the sale of third-party graphite material as the company develops a customer base in the marketplace.
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.
In the meantime, the costs of developing management’s initiatives (including management, consulting and professional fees, along with exploration activities and the refurbishment of the Matheson milling facility) resulted in a net loss of $2.62 million ($0.03 per diluted share) for fiscal 2016. The company’s operations were funded by $1.3 million in net proceeds from the issuance of common shares through private placements and $288,652 from a loan facility from the Northern Ontario Heritage Fund Corporation.
Additional Orders Received
In February, Great Lakes Graphite received additional purchase orders. The Texas-based industrial customer placed another two purchase orders for a combined 40 tons of synthetic graphite products. The company’s customer in Texas ordered 400 tons of micronized synthetic graphite during calendar 2016 and has indicated that at least twice that amount is expected to be required during 2017. Through February, this customer alone has placed five purchase orders for a combined 100 tons.
In addition, a large corporation headquartered in Western Europe with production facilities in North America and the Middle East has placed an order for 400 kilograms (0.44 ton) of micronized natural flake graphite in order to conduct production-scale qualification tests; that corporation had received an initial two-kilogram sample for pre-qualification testing in December. The company continually provides samples of graphite products for qualification to potential customers across a range of targeted industries.
Lochaber Graphite Project
In mid-February, Great Lakes Graphite provided an update concerning the bulk sample material delivered to PRO (Process Research ORTECH) in Mississauga, Ontario for metallurgical and purification work. Management expects to receive results from further purity testing in the third quarter.
The material had been removed from the Lochaber Property from an area near the historic Plumbago Mine and from the diamond drilling program conducted in December 2014 through early 2015 (eight core boreholes totaling 1,200 meters). Located in southwestern Quebec, the Lochaber Graphite Project is approximately 30 miles northeast of Ottawa.
In June 2015, Great Lakes Graphite and PRO formed a partnership with PRO to develop a graphite purification process in order to achieve a graphite product with a 99%+ purity, the commercial benchmark for high technology applications, such as lithium-ion batteries. The process includes both physical beneficiation (flotation and comminution) to produce a high-grade graphite concentrate and chemical leaching to produce a commercial high-purity graphite product.
Increasing Demand for Graphite
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.
Over the next few years, the demand for high-purity graphite is poised to increase dramatically. The increasing adoption of lithium-ion batteries and the construction of gigafactories, like Tesla’s facility outside Sparks Nevada, are expected to significantly increase the demand for graphite. By the end of 2017, Tesla should indicate where its three additional battery gigafactories will be located.
Hitachi Chemical is planning to invest up to $90 million to expand their graphite anode capacity from 20,000 tonnes to 100,000 tonnes over four years. Also, incremental demand is expected from photovoltaic batteries of solar power systems, for carbon-graphite plates in fuel cells and from pebble-bed, graphite-moderated, gas-cooled nuclear reactors.
Management is pursuing a unique business strategy of providing value-added, higher-margin, micronized and purified graphite directly to customers. For now, management is executing its go-to-market business strategy, acquiring customers by generating sales with sourced graphite product. However, in due course, management anticipates micronizing and purifying graphite at its low-cost Matheson facility, and ultimately converting flake concentrate from its Lochaber Graphite Project to premium-grade spherical purified graphite. Great Lakes Graphite is still in the early stage of its development as management is not anticipating profit from operations 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$9.9 million with 123,444,330 million shares outstanding.
SUBSCRIBE TO ZACKS SMALL CAP RESEARCH to receive our articles and reports emailed directly to you each morning. Please visit our website for additional information on Zacks SCR and to view our disclaimer.