graphite

ANALYST: Kiril Mugerman SECTOR: Mining [email protected] (514) 284 4175

What is graphite?

Why are companies suddenly exploring for it?

Why the rush?

These are some of the questions that investors have already found answers to

through the multitude of companies presently active in the sector. However, this

is not all what investors want to know. What has not been properly addressed is

what makes one deposit stand out above others, how to recognize a company

with the right assets and what to expect from exploration companies in the next

12 to 24 months.

In this report we review the fundamentals behind graphite supply and demand

which are ultimately pointing towards supply shortage in the upcoming years.

Our model for future graphite supply and demand suggests that a minimum of 4

new mines and as many as 23 will be needed to go into production outside of

India and China between now and 2020 to satisfy the growth in demand.

CONCLUSION

This report reviews 36 companies and 98 properties which are presently being

explored for graphite across the globe. We separate these companies based on the

stage of their project into three risk groups. The Top Tier is made up of 3

companies with advanced projects and 3 with historical resources that could be

quickly upgraded to 43-101 status. This group offers investors both short and

long term growth.

The Mid Tier includes 12 companies with established targets, most of them drill

ready. We expect several large discoveries to come from this group that could

offer the largest return for investors in the graphite sector.

The Lower Tier comprises the remaining 18 companies forming the highest risk

investment at the moment in the sector.

Disclaimer: The opinions put forth in this report are those of the mining analyst. Great care should

be taken when making judgments based on this report. Please see the legal disclosures at the end of

the report for more information.

May 1st, 2012

GRAPHITE

GRAPHITE –Black Gold of the 21st Century

SECTOR OVERVIEW

CompanyFlagship

ProjectLocation

M&I

(Mt)

M&I

Grade

(%Cg)

Inferred

(Mt)

Inferred

Grade

(%Cg)

Recovery

(%)

Purity

(%C)Flake Distribution

Northern Graphite Corp. Bissett Creek ON, Canada 25.98 1.81 55.04 1.57 97.1 96.7 80% @ +32/+50/+80

Focus Metals Inc. Lac Knife QC, Canada 4.94 15.76 3.00 15.58 85.9 N/A 85% @ +48/+65/+150/+200

Talga Gold Ltd. Nunasvaara Sweden 3.6 23 N/A N/A 87% @ +80/+140

Flinders Resrouces Ltd. Woxna Sweden 6.93* 8.82* N/A 94* 68% @ +80/+200*

Uragold Bay Resources Inc. Asbury Mine QC, Canada 0.58* 10* 85* 90* 75% @ +80/+200*

Standard Graphite Corp. Mousseau East QC, Canada 1.11* 8.28* N/A N/A 60% @ +100*

Northern Graphite Corp. (TSX.V: NGC)

Price (04/30/2012) $2.22

Avg. Volume 90 Days 802,600

52 week High/Low $3.42 - $0.71

Shares Outstanding (M) 45.6

Market Cap ($M) 100.3

Focus Metals Inc. (TSX.V: FMS)

Price (04/30/2012) $0.98


52 week High/Low $1.33 - $0.52



Talga Gold Ltd. (ASX: TLG)

Price (04/30/2012) $0.51


52 week High/Low $0.52 - $0.12



Flinders Resources Ltd. (TSX.V: FDR)

Price (04/30/2012) $2.16


52 week High/Low $3.02 - $1.60



Uragold Bay Resources (TSX.V: UBR)

Price (04/30/2012) $0.035


52 week High/Low $0.07 - $0.02


Market Cap ($M) 5.5

Standard Graphite Corp. (TSX.V: SGH)

Price (04/30/2012) $0.465


52 week High/Low $1.08 - $0.12



Graphite Sector Overview May 1st, 2012

2 of 31 Kiril Mugerman

Table of Contents

CARBON –OIL, DIAMONDS, GRAPHITE AND MORE .......................................................... 3

PROPERTIES OF GRAPHITE ...................................................................................................... 4

TYPES OF GRAPHITE AND GRAPHITE DEPOSITS .............................................................. 4

GROUP I (FLAKE) – METAMORPHOSED SILICA & CARBONATE RICH SEDIMENTARY ROCKS ........................ 5 GROUP II (AMORPHOUS) – METAMORPHOSED COAL / CARBON RICH SEDIMENTS ........................................ 6 GROUP III (VEIN / FLAKE / AMORPHOUS) – HYDROTHERMAL / SKARN / MAGMATIC .................................... 6

LAB WORK – GRADE, SIZE AND METALLURGY ................................................................. 6

GRADE DETERMINATION .............................................................................................................................. 6 FLAKE SIZE DETERMINATION ....................................................................................................................... 7 PROCESSING AND BENEFICIATION ................................................................................................................. 8

USES OF GRAPHITE ..................................................................................................................... 9

SYNTHETIC / NATURAL ................................................................................................................................. 9 SPHERICAL FLAKE GRAPHITE ..................................................................................................................... 10 EXPANDED FLAKE GRAPHITE ..................................................................................................................... 10 GRAPHITE IN BATTERIES & ENERGY STORAGE APPLICATIONS ................................................................... 11 GRAPHITE IN NUCLEAR APPLICATIONS ....................................................................................................... 11 GRAPHENE – THE MIRACLE MATERIAL ...................................................................................................... 12

GLOBAL RESERVES, PRODUCTION AND FUTURE TRENDS .......................................... 14

GRAPHITE PRICES ..................................................................................................................... 17

WHY THE RUSH FOR LARGE FLAKE - THE COST FACTOR .......................................... 19

GRAPHITE – FROM EXPLORATION TO MINING............................................................... 20

KEY CHARACTERISTICS OF GRAPHITE DEPOSITS ........................................................................................ 21 GRAPHITE EXPLORATION - CLASS OF 2012 ................................................................................................. 22

CONCLUSION ............................................................................................................................... 28

LEGAL DISCLOSURE ................................................................................................................. 29



CARBON –OIL, DIAMONDS, GRAPHITE AND MORE

Carbon forms a multitude of compounds both organic (e.g. oil, gas) and

inorganic (e.g. calcite, carbon dioxide) but additionally, takes on crystalline

forms composed purely of carbon (diamond, graphite and coal). These

minerals are among several carbon allotropes, or structural variations of the

element carbon. Other allotropes include graphene, fullerenes and other

structures which are part of a large area of research in the fields of

nanomaterials and high-technology. All allotropes form distinct shapes and

exhibit different physical properties (Figure 1).

Figure 1: Carbon allotropes

Some allotrope structures of carbon: a) diamond; b) individual layers are graphene / combined layers

form graphite; c) lonsdaleite; d-f) fullerenes; g) amorphous carbon / coal; h) carbon nanotube

Source: Wikipedia: Carbon

Graphite was already known to the prehistoric man, later used by the

Egyptians and it became well known in the 16th century after the discovery of

the Borrowdale mine in England. Uses of graphite since then evolved from

the early refractory uses to pencils, applications in the steel manufacturing,

the electric industry and today in the energy storage applications.



PROPERTIES OF GRAPHITE

Graphite is a non-metallic, opaque mineral of grey to black color with

metallic luster. It possesses properties of both metals and non-metals, which

make it ideal for many industrial applications. The mineral is flexible, soft

(1-2 on the Mohs scale), compressible and malleable. It has low frictional

resistance which gives it a greasy texture making it an efficient lubricant. It is

thermally and electrically conductive. Its melting point is above 3,550°C in a

non-oxidizing environment and the vaporization temperature is around

4500°C and mostly infusible. It is nontoxic, chemically inert and has high

resistance to corrosion. Graphite has low thermal expansion and shrinkage

with high thermal shock resistance. Graphite has low density (1.1-1.7 g/cm3)

relative to conductive metals such as aluminum and copper. Ultimately, all

its properties vary depending on the purity and size of the graphite crystal. 1

TYPES OF GRAPHITE AND GRAPHITE DEPOSITS

Overall, natural graphite takes on three distinct types (flake, vein and

amorphous) that differ in purity, crystal size and shape and deposit style. All

three kinds form platy hexagonal crystals giving them their flaky appearance.

Amorphous graphite does not exhibit this texture due to the small size of the

crystals and instead, appears as massive graphite. In addition, there is

engineered synthetic graphite manufactured by calcination and subsequent

graphitization of petroleum coke with purity reaching up to 99.99% carbon.

The general requirements for the majority of graphite deposits are simple –

high grade metamorphism (prolonged heat exposure under high pressure

conditions) of carbonaceous or graphitic country rocks. These metamorphic

conditions are typically found where large mountain building events took

place in Earth’s history (e.g. the metasedimentary unit of the Grenville

Orogeny), high grade metamorphic basement rocks (e.g. the Precambrian

shield) or at the contacts of the two. Figure 2 shows some of the major

graphite provinces in relation to these geological occurrences. A variation of

factors such as the composition of the country rock, tectonic setting,

temperature, pressure, oxygen and other conditions will determine the

deposit style and the type of graphite present. A minority of graphite deposits

will form under different conditions such as contact metamorphism (skarn

style), hydrothermal, magmatic or residual styles of mineralization. The main

styles of deposit and the types of graphite associated with them are described

below2.

1 Merchant Research & Consulting Ltd. Graphite market review 2011 and various graphite producers filings

2 Industrial Minerals & Rocks: commodities, markets and uses. 7th Edition, 2006



Figure 2: Global potential for graphite deposits

Arrows are pointing to major graphite occurrences around the world

Source: USGS, IAS

GROUP I (FLAKE) – METAMORPHOSED SILICA & CARBONATE RICH SEDIMENTARY

ROCKS

This group of deposits constitutes a large part of global graphite production.

In the case of the silica metamorphosed rocks, the deposits are typically

associated with quartz-mica schist, quartzite and gneiss. These types of

deposits show average grades of around 10%-12% Cg (Graphitic carbon),

but can go as low as 2% and as high as 60% Cg. The mineralized zones are

in the form of lenses or layers depending on the degree of structural

deformation and range from flat lying to sub vertical. Even though these

deposits are known for their large flakes, crystal size actually varies a lot,

reflecting the grain size of the parent sedimentary rock. Graphite is relatively

well disseminated in, less deformed, lower grade layers with widths over

50m in thickness while lenses tend to be smaller and higher grade. In length,

individual deposits can extend over several thousands of meters. The purity

of the graphite in these deposits tends to be between 85% and 98% carbon.

Examples of such deposits in Canada are Bissett Creek and Lac Knife.

In the case of the carbonate rich metamorphosed rocks, the deposits are

hosted within marbles often intertwined with quartzite and gneiss. The

average grade in marble hosted deposits ranges from 1% to 10% Cg. These

deposits tend to be structurally complex with large variations in grade over

short distances. These deposits can produce the entire range of flake sizes

with purities between 85% and 98% carbon. The best example of such

deposits is the Lac-des-Iles mine in Quebec, Canada.



GROUP II (AMORPHOUS) – METAMORPHOSED COAL / CARBON RICH SEDIMENTS

The amorphous graphite deposits are formed by metamorphism of coal or

carbon-rich sediments and constitute a large part of the global graphite

production. The product is microcrystalline graphite less than 70 microns

(200 Mesh) in size. Graphite is found in seams similar to coal deposits and is

often folded and faulted. The deposits typically range from 30% to over 90%

Cg with content of non-graphitic content varying significantly from one

deposit to another. Graphite from these deposits tends to be of lower purity

ranging from 60% to 90% carbon. Some of the best examples of such

deposits are found in China and Mexico.

GROUP III (VEIN / FLAKE / AMORPHOUS) – HYDROTHERMAL / SKARN / MAGMATIC

These deposits can be associated both with metamorphosed calcareous

sedimentary and with non-calcareous host rocks. The styles of mineralization

are uncommon, poorly understood and additionally, highly localized. The

best example is the high purity Sri Lanka deposits that run at over 90% Cg

with a purity of over 98% carbon. Depending on the host rock and the heat

source, these deposits can produce both amorphous graphite and flake

graphite (Woxna deposit, Sweden) with variable grades and purities. Overall,

these types of deposits have high variability in flake size, purity and resource

size.

LAB WORK – GRADE, SIZE AND METALLURGY

Graphite exploration companies often quote historical graphite grades, visual

grades and flake size. Unfortunately, this only works as a very rough

indication at best for both grade and flake size. We discuss below various

analytical methods presently accepted, what they are used for, what results to

expect and how to interpret them.

GRADE DETERMINATION

To determine the grade in either a surface or drilling sample, the most

accurate method used today is the LECO test which uses nitric acid digestion

versus in contrast to older methods like the LOI, Double-LOI and

Thermogravimetry which use heating and burning of the sample at different

temperatures under various atmospheric conditions. To illustrate, the Bissett

Creek deposit shows a 30% to 40% reduction in graphitic carbon content

when analyzed by LECO versus Double-LOI test.

As for visual estimations of grade and flake size, these can be highly

subjective estimates. In core, graphite tends to smear easily making it look

more graphitic than it actually is.



FLAKE SIZE DETERMINATION

The next step in identifying the economics of the deposit is to determine the

flake size distribution. This is done in several steps starting with a

petrographic thin-section study and a microprobe analysis. This gives an

accurate indication of flake sizes in the sample, but in no way does this

indicate whether these flakes would be easily liberated, concentrated and

whether their size would be conserved. In many cases, the processing and

beneficiation procedure will break down some of the larger flakes and create

finer graphite particles. This study does provide an initial indication to the

initial grinding needed to liberate the flakes using floatation.

The flake sizes to be used in determining the economics of the deposit should

come from analyzing fully processed samples by either wet or dry screening,

with the final measurements done under a microscope.

Figure 3: (A) Thin section microprobe analysis (~ 150 Mesh)

(B) Processed dry (+12 Mesh) flake graphite

Source: (A) Zenyatta Ventures and (B) Northern Graphite fillings

The actual flake sizes are reported in either microns or mesh sizes and are

usually distributed between several sizes indicating what percentage of the

recovered graphite flakes fall into large, medium and fine categories. Several

versions of the categories exist with one of the more common ones presented

in Figure 4. The “+” and the “–” before the mesh size are used to describe a

range, with “+” indicating that particles larger than that specific size are

retained in a sieve while the “–” indicates that particles finer than that

specific size pass through the sieve. For example, “–48 +80” means that the

majority of the flakes are retained by the 80 mesh sieve but pass through the

48 mesh sieve.

A B



Figure 4: Mesh Sizes & Graphite Classifications

Source: AGM Container Controls Inc.

PROCESSING AND BENEFICIATION

The recovery of flake graphite is generally achieved through flotation and

screening after primary crushing and grinding. Grinding size is project

specific and requires multiple optimization test runs to achieve the ideal

recovery and flake sizes. The main additive used in froth flotation to assist

graphite separation from gangue minerals is pine oil. The flotation process is

repeated several times in order to clean the graphite concentrate. Additional

upgrading of the carbon grade can be achieved through thermal treatment or

acid leaching.

The concentrate is analyzed for any undesirable oxides or trace metals, for

flake size distribution, humidity level and for final carbon grade – key

parameters that determine the selling price. That concentrate can then be

submitted to end-users for product evaluation.

The main problem expected at the beneficiation stage is complications with

overall recovery and of the larger graphite flakes. Recovery of the larger

graphite flakes might require significant finer grinding that will eventually

destroy the larger flakes and reduce the graphite selling price. Recoveries are

expected to exceed 90% in most cases but ore bodies flooded with silica or

which are significantly oxidized might show much lower recoveries. A

potential solution could be acid upgrading or acid liberation, but this is cost

intensive and will likely make a project uneconomical.

Graphite ClassificationUS Sieve

#

Mesh

Size

Microns

(µm)

Millimeters

(mm)Common Material

4 4 4760 4.760

8 8 2380 2.380

16 14 1190 1.190 Typical ground coffee

25 24 707 0.707 Beach Sand

30 28 595 0.595 Table salt

50 48 297 0.297 Sugar

60 60 250 0.250 Fine Sand / Human hair

70 65 210 0.210

80 80 177 0.177

100 100 149 0.149

120 115 125 0.125

140 150 105 0.105

170 170 88 0.088

200 200 74 0.074 Portland Cement

230 250 63 0.063

325 325 44 0.044 Silt

400 400 37 0.037 Plant Pollen

1200 1200 12 0.012 Red Blood Cell

4800 4800 2 0.002 Cigarette Smoke

-100 TO +200 MESH

FINE FLAKE

-200 MESH

AMORPHOUS

-48 TO +80 MESH

LARGE FLAKE

-80 TO +100 MESH

MEDIUM FLAKE

+48 MESH

EXTRA LARGE

FLAKE

LA

RG

ER

FL

AK

ES

FIN

ER

FL

AK

ES



USES OF GRAPHITE

The uses of graphite, both existing and up and coming, have been

extensively presented by the exploration companies and analysts, discussed

by newsletter writers and graphite related websites. Graphite has been

referred to as the material used in every industry yet in small enough

quantities that no one talks about it. The major consumers of graphite are the

steel and refractory industries at over 40% of global production followed by

lubricants and expanded graphite applications and carbon products. The

biggest growth is currently in the energy applications. Graphite substitution

is not considered a major issue especially in the traditional refractory,

lubricant and steel industries. In the more emerging uses, graphite could

eventually be engineered out later in the future either due to high costs or due

to the emergence of a superior composite material.

Below is a short summary of some of these uses divided by synthetic, natural

or processed graphite together with a quick review of graphene and its

potential uses.

SYNTHETIC / NATURAL

There is a certain overlap in uses between natural and synthetic graphite that

is controlled by price and purity. Synthetic graphite, less conductive than the

natural counterpart, is significantly more expensive. It can be engineered to

the exact required specifications through one of its various forms, the main

kinds being:

Primary – 99.9% purity synthetic graphite is made in electric

furnaces from calcined petroleum coke and coal tar pitch. Main

usage is in electrodes and carbon brushes.

Secondary – powder or scrap synthetic graphite is produced from

heating calcined petroleum pitch. Main usage is in refractories.

Fibrous – produced from organic materials such as rayon, tar pitch

and other synthetic organic polymer resins. Main usage is in

insulation and as a reinforcement agent in polymer composites.

Alternatively, natural graphite can be upgraded to the same specification

through intensive thermal and chemical upgrading. China introduced low

cost chemical purification methods for fine graphite in the ‘90s but these

methods are not economical in Western countries. Since then, processing and

purification has been improved and projects with high purity large flake

graphite that require less purification have emerged. Natural graphite has

another advantage in that it can be processed into other forms such as

spherical and expanded graphite. Each of these forms changes graphite

properties and makes it more adaptable to specific industry requirements.

With these advancements, the overlap between synthetic and natural graphite

applications is expected to grow.



SPHERICAL FLAKE GRAPHITE

Spherical flake graphite (SFG) is produced from milling flake graphite into

spherical shapes. Due to the strong anisotropic nature of graphite crystal, i.e.

its properties change from one plane to another, the process is needed for

applications where properties of the crystal flat plane (basal) are favored over

those of the crystal edges or vice versa (Figure 5). This is particularly

important for energy storage applications like Li-Ion batteries where graphite

is used as the anode material. The SFG can undergo additional surface

coating which stabilizes the material and enhances its performance. SFG sells

at a premium when compared to natural flakes with prices starting at $5000/t

for non-coated and increasing significantly for coated spherical graphite.

Production methods of SFG are well established and can be adopted by

mining operations to increase product value. The process is destructive in

terms of flake size as 30% to 70% can be lost to low value small size

fragments. Loss ratio is project specific.

Figure 5: Spherical flake graphite

Source: Angew. Chem. Int. Ed. 2003, 42, 4203-4206

EXPANDED FLAKE GRAPHITE

Expanded graphite or exfoliated graphite is produced by a chemical

treatment that forces the graphene layers in graphite to separate and therefore

expand in volume in an accordion-like fashion. Similarly to spherical

graphite, this is done to take advantage of one graphite crystal plane over the

other. In the case of expanded graphite, it often undergoes rolling to form

sheets or other mechanical processes to prepare the graphite for specific

applications.



Figure 6: Expanded flake graphite – theory and microscope view

Source: Asbury Carbons filings

GRAPHITE IN BATTERIES & ENERGY STORAGE APPLICATIONS

Fuel cells, Li-Ion and other kinds of batteries and photovoltaic solar cells

represent some of the largest growth areas for graphite. Presently, the

industry is still evolving in terms of materials and compositions being highly

variable. Therefore flake, synthetic and polymers of graphite and other

materials have been used to date. For example, our research indicates that the

amount of graphite used in the anode of Li-Ion batteries varies based on

cathode and anode chemical composition, energy and size requirements and

other factors. Based on that, a light vehicle battery could consume as much as

20x more graphite as it does lithium metal or it could be as little as 5-10x.

R&D work is presently underway by many manufacturers experimenting

with graphite-silicate polymers, various spherical graphite blends, purities

and other materials. We expect graphite parameters in the batteries and

energy storage industries to fluctuate significantly over the next 2-5 years as

standards are adopted, fuel cells developed and electric, hybrid and plug-in

vehicles grow in demand.

GRAPHITE IN NUCLEAR APPLICATIONS

From the earliest days of the nuclear power industry, graphite was one of the

main components in the traditional reactor where it was used as the

moderator in nuclear control rods. For this particular application, high purity

graphite is required and therefore the material of choice is predominantly

synthetic. On the other hand, generation IV nuclear reactors (e.g. pebble bed



reactor) are expected to be able to use both synthetic and natural graphite.

The fuel in the reactor is uranium dioxide particles coated by synthetic

graphite embedded in machined graphite spheres made of natural and

synthetic graphite. Exact ratios are hard to estimate as the only prototype is

still being developed in China. Industry estimates are that anywhere between

25% to 75% graphite is expected to be natural with the rest synthetic. This

can amount for as much as 200 tonnes of natural graphite for the

commissioning of the HTR-PM prototype in China and then an additional 40

to 70 tonnes to renew the fuel spheres. We believe it could become a high

volume application for natural graphite.

GRAPHENE – THE MIRACLE MATERIAL

An additional source of growth for graphite demand is the applications of

graphene, a one atom thick layer of carbon atoms arranged in a honeycomb

lattice that ultimately forms flakes of graphite when stacked together.

Produced in laboratories for the first time less than 10 years ago, the material

is a hot topic of research in the scientific community and in the R&D labs of

high tech companies. Graphene has a unique set of properties that show

potential to be used in a wide range of applications such as transistors, high

sensitivity sensors, transparent conductive films for touch screen displays,

more efficient solar cells and electrodes in energy storage devices. IBM has

already fabricated a simple graphene based integrated circuit and Samsung

has demonstrated a prototype flexible display, supposedly graphene based.

One of the main obstacles to all these applications becoming a reality is the

lack of economically viable large scale graphene production. Several

methods exist to produce both natural graphene (from flake graphite) and

synthetic graphene, but all have certain limitations. Graphene production is

still in its infancy and therefore it is hard to speculate which manufacturing

method, whether natural or synthetic, will become the method of choice.



Figure 7: Graphite uses

– Major source; – minor source of graphite for that particular use

Source: SGL Group, Superior Graphite, Asbury carbons, Industrial Minerals and other graphite producers public filings, IAS

Usage Synthetic Amorphous Flake VeinExpanded

Graphite

Spherical

Graphite

Graphite fibers, nanotubes & nanoparticles - Insulation,

reinforcing agent in polymers for solar cells, electrical circuits,

military, wind energy, aerospace and automotive applications

Refractories - crucibles, carbon-magnesite bricks (liners in

electric arc furnaces and steel ladles), alumina-graphite casting

ware, gunning and ramming mixes for monolithic refractories,

stopper heads for steel ladles

Batteries & energy storage - batteries, fuel cells, photovoltaic

solar cells

Construction materials - fillers, infrared shielding, heat

conductivity, heating systems, etc…

Industrial paint pigment and coatings - high resistance to

weathering and inertness

Lubricants - used in forging, thread anti-seize agent, gear

lubricant in mining equipment, drilling mud additives

Electrical components, powder metallurgy, plastic and resin

additives

Carbon brushes and bearings in motors & generators

Electrodes for electric arc furnaces

Graphite grinding wheels - mirror grinding and polishing

Friction materials - brake linings, pads

Nuclear reactors

Foundry mold facings

Pencils

Rubber additives

Steel making - carbon raiser additives

Catalysts

Graphite foil, heat sinks, gaskets, seals

Flame retardants additives

Graphene



GLOBAL RESERVES, PRODUCTION AND FUTURE TRENDS

Current global reserves are estimated at 76Mt of graphite. China holds over

70% followed by India and Mexico at 14% and 4% respectively (Figure 8).

As exploration picks up over the next several years, a significant increase in

world reserves is expected.

Figure 8: Global Reserves - 2011

Source: USGS, IAS

Current production of natural graphite comes predominantly from China

(70%) and India (12%). The remaining production is distributed between

Brazil, North Korea, Canada, Sri Lanka, Mexico and several countries in

Europe and Africa. Similar to many other metals, China has dominated in

graphite production since the late ‘90s when the country flooded the market

with cheap flake and amorphous graphite.

Going forward, China still holds the largest reserves and it should be in

position to scale up their production. With the introduction of a 20% export

duty, a 17% VAT, new regulatory measures and the consolidation of existing

graphite mines, China has clearly indicated that it is trying to preserve their

graphite resources. These measures created supply restrictions at a time when

demand was growing, causing the price increase seen over the last 24-36

months. Besides China, Asia has additional major producers in India, North

Korea and Sri Lanka that can increase production organically.

In North America, Canada has the largest potential in adding supply. It

already has one major producer and several existing deposits close to

infrastructure that could be taken to production in the next 2-3 years. The

United States has not produced graphite in over 20 years but has included

graphite in the critical resources list in 2010. It has one active exploration

project in Alaska. Mexico has large reserves, the technical expertise and the

infrastructure to significantly increase its amorphous graphite production.

In South America, Brazil is the major source of graphite production with

large enough reserves and infrastructure to allow production growth.

72%

14%

4%

1%1%

8%

China

India

Mexico

Madagascar

Brazil

Other Countries



Europe has been commercially producing amorphous, flake and vein type

graphite for over 500 years and is in position to increase its production if

graphite prices remain at current levels. There are multiple active or recently

operational mines throughout Europe including Norway, Ukraine, Austria,

Germany, Romania, Czech Republic, Sweden and Turkey. Past producing

mines are already in the process of being reopened and exploration activity

has picked up. We see strong production growth coming from Europe in light

of higher prices and supply risks.

Australia has been a graphite producer in the past but its main large flake

mine was shut down in 1993 due to declining prices. Since then, exploration

for graphite has restarted and the mine is being reactivated. Australia has all

the ingredients to become a large flake producer over the next few years.

Africa is currently a small graphite producer with Madagascar and

Zimbabwe the two main producing countries. Previously a large producer,

many mines also closed due to declining graphite prices. All African graphite

deposits are plagued with poor infrastructure, high energy costs and high-risk

geopolitical jurisdictions. African graphite is world renowned for its large

and high purity flake that command high prices in today’s markets. There are

many deposits identified in African countries such as Mozambique, South

Africa, Uganda, Angola, Tanzania, Ethiopia and Namibia with several

exploration and production companies already busy acquiring the properties.

Africa has the potential to increase its production, however with the high risk

associated with operating on the continent, it would take the right

combination of deposit, location and company to start production of an

industrial metal that is yet to show its true face.

Figure 9: Production of Natural Graphite

Source: USGS, IAS

.0

.2

.4

.6

.8

1.0

1.2

Gra

ph

ite (

Mt)

Total India China

Country Production (t)

Brazil 76,000

Canada 25,000

China 800,000

India 140,000

North Korea 30,000

Madagascar 5,000

Mexico 7,000

Norway 2,000

Romania 20,000

Sri Lanka 8,000

Ukraine 6,000

Other Countries 185,000

Total for 2010 1,125,000



Looking at the period starting from 1994 to 2010 (Figure 9), the production

of natural graphite maintained a stable demand all the way until 1999 when

demand started growing at an overall annual rate of 4% to 6%. This growth

is attributed to both traditional uses of graphite coming from the

development of BRIC countries as well as from advances in the high tech

uses of graphite.

Assuming there was no major excess in supply in the mentioned period, we

use linear regression to estimate our base case growth in graphite demand at

approximately 2.5%. We then consider two growth scenarios, one at 4% and

the other at 6% (Figure 10). The 4% case assumes that amorphous and vein

graphite grow at a stable 2.5% annual rate (same as base case) and flake

graphite grows at an increasing annual rate from 4% to 8%. In this case, the

proportion of flake graphite to total demand grows from an initial 34% to

40%. The 6% growth case assumes the demand for all types of graphite

increases equally.

Based on these growth parameters, we estimate the number of additional

mines that will need to go into production to satisfy the global demand from

2012 to 2020. We take into account a conservative estimate for mine

depletion, organic growth and new mines in India and North Korea and

consider two cases for China: one at 1% production growth and the other at

2% growth. We assume that new mines will predominantly open in Canada,

Europe, Brazil, Australia, Africa and Mexico with an annual production

ranging between 15-20Ktpy.

Figure 10: Summary of Supply & Demand Estimates

*23 additional mines are not enough to meet the demand in that specific case Source: IAS

1% China

Growth

2% China

Growth

2.5% Base Case 7 4

4% Growth Case 12 8

6% Growth Case 23* 23

Annual Demand

Growth

Additional Mines Required



1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Gra

ph

ite (

Mt)

Supply Estimate (23 new mines) Supply Estimate (8 new mines) Supply Estimate (4 new mines)

Demand @ 6% Demand @ 4% Demand Base Case

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Gra

ph

ite (

Mt)

Supply Estimate (23 new mines*) Supply Estimate (12 new mines) Supply Estimate (7 new mines)

Demand @ 6% Demand @ 4% Demand Base Case

Figure 11: Estimated Supply and Demand – 2011 to 2020

*23 additional mines are not enough to meet the demand in that specific case

Source: IAS

GRAPHITE PRICES

The recent increase in graphite prices is undoubtedly the main cause for the

increased interest in this industry today, however ironically it is this metric

that has the least amount of data available. Graphite prices, just like most

industrial metals, are negotiated directly between the buyer and the seller

based on a common posted price. The main data available today is supplied

by Indusrial Minerals Magazine, the source of most graphite specific

research in the industry (Figure 12). The main parameters used in pricing

graphite are flake size and purity along with other factors such as ash content

and composition, humidity and sulfur content determining the final price.

The variation in these parameters creates a price range for a specific flake

size and purity as seen in Figure 12. The benchmark purity in the industry is

94-97% C for natural graphite. Increase in flake size at a constant purity adds

a gradual premium to the product (Figure 13) while a decrease in purity at

the same flake size causes a significant decrease in price (Figure 14). Prices

for upgraded purities or modified products such as spherical or expanded

graphite are not commonly quoted but are known to go as high as $20,000/t.

1% Production Growth in China




Figure 12: Graphite Price 2000-2011: Large Flake +80, 94-97% C

Source: Northern Graphite, Industrial Minerals Magazine

Figure 13: Average Graphite Price 2010-2012: Variation in flake size

Source: Industrial Minerals Magazine, IAS

Figure 14: Average Graphite Price 2010-2012: Variation in purity

Source: Industrial Minerals Magazine, IAS

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000Large Flake +80 94-97%C

Medium Flake +100 94-97%C

Amorphous 80-85%C

$0

$500

$1,000

$1,500

$2,000

$2,500

Medium Flake +100-80 94-97%C

Medium Flake +100-80 90%C

Medium Flake +100-80 85-87%C



2,300

2,400

2,500

2,600

2,700

2,800

2,900

1.0

1.1

1.2

1.3

1.4

1.5

1.6

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Gra

ph

ite P

ric

e (

$/t

)

Gra

ph

ite (

Mt)

Supply Estimate (4 new mines) Demand Base Case Avg. Large Flake +80, 94-97%C Estimated Price

Looking at the last 20 years, graphite prices sustained a low at below $1000/t

from the early 90’s to 2005 caused by the low cost Chinese graphite

production. Subsequently, new demand from the green tech sector, export

restrictions, stricter environmental regulations, mine depletion and rising

energy and transportation costs have all contributed to a rebound of graphite

prices in the recent years. Looking forward, and not withstanding significant

global events, we estimate future large flake and high purity graphite prices

based on the rebound level seen in the last 2 years together with our demand

growth base case model (Figure 15).

Figure 15: Average Graphite Prices 2010-2012: Variation in purity

Source: IAS

WHY THE RUSH FOR LARGE FLAKE - THE COST FACTOR

It is now fairly clear what potential graphite holds if all these new

technologies are adopted over the next 10 years. The main question

remaining is if the hunt for large flake deposits is justified or not? Do you

really need large flake or can the cheaper fine and amorphous material do the

same job?

Our discussions with manufacturers of graphite end products have

highlighted one common theme – all flakes can be worked with, but the

purification cost does not always allow it. As a rule of thumb, the larger the

flake, the higher the purity of the concentrate and therefore less treatment is

required to bring the graphite to above 97% C. This reduces production costs

for the miner who can then sell it at prices normally achieved through

chemical and thermal upgrading. The Chinese cost structure and lax

environmental regulations have allowed this purification at low cost in the

past, suppressing prices throughout the ‘90s. Recent changes in these

regulations and increases in energy and transportation costs have driven the

prices up to levels where high purity and thus larger flake deposits outside of

China can once more be economical. Prices for the lower quality amorphous

and flake graphite destined to traditional uses that do not require major

chemical and thermal upgrading, are significantly lower; production margins




are therefore less economical for projects outside of China. In addition to

that, indications are that production of SFG, which commands premium

prices, is more cost efficient when manufactured from larger flake as loss is

minimized.

Overall, there are mixed indications as to how much large and high purity

flake graphite China can produce at low cost going forward. Deposits with

larger flake production are therefore better positioned to weather the storm if

China does increase production significantly forcing prices down again.

GRAPHITE – FROM EXPLORATION TO MINING

Graphite is a common mineral that is found in many geological environments

but is mostly found in trace quantities or as an alteration mineral. Based on

the type of graphite explored, for a deposit to be economical it needs to have

a combination of characteristics. The exploration part is relatively quick and

straight forward. Initial discoveries are done by prospecting for graphite

showings in outcrops. This is then followed up by a geophysical conductivity

survey, also known as electromagnetic survey (EM), which is used to better

delineate the mineralized zones. The EM survey is very efficient due to

graphite’s conductivity. Nonetheless, due to the structural complexity of

many graphite deposits, anomalies may result from interfering conductive

effects and therefore need to be accepted only as an indication of potential

mineralization and not the size of the deposit. Furthermore, the lower grade

disseminated deposits might not respond well to an EM survey and therefore

could be identified primarily by prospecting. These potential targets would

then be followed up by surface mapping and sometimes trenching used to

understand the structural complexity of the ore body and to plan the drilling

exploration program. This concludes the target generation stage.

The next stage is the resource identification and definition portion which

includes drilling and metallurgical studies. Drilling programs are relatively

shallow as most deposits tend to be open pit operations. Some high grade

amorphous and vein graphite mines are underground but still relatively

shallow. Based on these parameters and depending on the structural

complexity of the deposit, around 10,000 to 15,000m of drilling are required

to properly delineate an ore body. Metallurgical sampling should begin

shortly after initial drilling as this will determine the economics of the

project in terms of recovery, separation, purity and flake distribution. Ideally,

a resource estimate should be produced once initial metallurgical data is

available. Without metallurgical data, even a large deposit might prove to be

uneconomical as recoveries, purity and flake distribution might prove to be

non favorable. The cost of these two stages will vary depending on the

existing infrastructure, jurisdiction and the remoteness of the project.

Overall, these costs could range from $2M to $5M and depending on the

pace of exploration, could be completed as quickly as 12-24 months.



Not all graphite discoveries follow that order. Some ore bodies are identified

through exploration for massive sulphides, gold and other metals. In that

case, the timeline and the cost structure changes. An example of that is the

Green Giant deposit of Energizer Resources where the company used to

explore for vanadium and the Albany deposit by Zenyatta Ventures that was

first explored for massive sulphides.

Pre-feasibility, feasibility, permitting and development are project specific in

terms of time but as a rough estimate, total cost is expected to be between

$100 and $200M.

KEY CHARACTERISTICS OF GRAPHITE DEPOSITS

For a graphite deposit to be economical, we estimate that the ore body needs

to contain over 500,000 tonnes of in situ graphite to support over 20 years of

mine life at a production rate around 15 to 20Ktpy. Most flake deposits are

relatively low grade and primarily open pittable operations. Hydrothermal,

magmatic, vein and amorphous deposits can be both open pittable and

underground. The economics of every deposit depend on five key

parameters:

Ore body geometry (shallow, flat dipping, etc.)

Recoveries (flake liberation from simple crushing and grinding)

Grade & Size

Purity of graphite (without chemical or thermal upgrade)

Flake size distribution

Out of these 5 parameters, grade & size act as a buffer between purity and

flake distribution and ore body geometry and recoveries (Figure 16). The two

main factors controlling the price of graphite are purity and flake size

distribution which are related. As mentioned earlier, without using any

thermal or acid beneficiation, as flake size increases so does the purity and

therefore the price of graphite. On the other hand, main operating costs of the

deposit will depend on the geometry of the deposit and recoveries.

Considering that most graphite deposits will be structurally complex, the

geometry of the ore body will determine the amount of waste rock processed

while mining. To summarize, the steeper the deposit or the lower the

recoveries, the higher the purity and larger flake size are required to make a

project economical.



Figure 16: Key parameters for a graphite deposit

Source: IAS

GRAPHITE EXPLORATION - CLASS OF 2012

The last time a large number of graphite projects were being explored or

developed was during the ‘90s. Since then, the best deposits were either

acquired by large graphite producers (e.g. IMERYS, GK Graphite) or by

state owned companies, the smaller deposits abandoned and several mines

mothballed. The class of 2012 will face a similar destiny as we do not expect

the majority of the junior exploration companies to take their deposits into

production. Only the best deposits, if discovered in the beginning of the

demand growth cycle, have the potential to get developed by the actual

exploration company. The key to development will be vertical integration

through graphite upgrading although it will require a competent management

team with the industry knowledge and experience. Other projects will get

acquired by the likes of IMERYS and GK Graphite with the potential of

more major producers such as Superior Graphite and Asbury Carbons

returning to mining and exploration. Finally, a push by companies from

China and India is expected to take place as both nations look to secure

supply outside of their own borders.

As of end of April 2012, we identify 36 public exploration companies that

are targeting graphite. The number of projects exploded as of November

2011 when project acquisitions from private owners grew to over 12 projects

per month (Figure 17). Now, this amounts for a total of 98 projects

distributed across North and South America, Africa, Europe and Australia

(Figure 18).

Grade & Size

Purity &

Flake Distribution Recoveries &

Ore Body Geometry



Figure 17: Global growth in number of graphite projects

Source: Graphite focused exploration companies public filings and IAS

With such a large number of projects being added, it is inevitable that a large

portion of them will end up as low quality targets, never reaching

development or even resource definition drilling. We therefore use all the

key characteristics presented in this report to create categories into which we

classify all the 98 projects (Figure 19). Based on this division, we isolate 6

companies with 7 projects that we focus on as our Top Tier. This is followed

by 12 companies in the Mid Tier and 18 companies in the Lower Tier.

Companies with projects across several categories are ranked based on their

most advanced project. The 6 categories are defined as:

1. Target generation – Projects that are undergoing historic data

compilation with ongoing or historical geophysical work. Some of

these projects have been staked strategically close to existing or past

producing mines and require reconnaissance field work. Other

projects have been staked based on showings of graphite during

exploration for other metals.

2. Early stage exploration – Projects with active field work (trenching

or drilling), with historical drilling targeting graphite or with past

producing assets from 20 to 60 years ago. Assay results and early

metallurgical data is sometimes available.

3. Resource definition & historical resources – Active drilling

delineating a resource or projects with historical resources that

require confirmation drilling.

4. Advanced exploration – Active drilling to increase and / or upgrade

the resource with ongoing metallurgical test work. Projects with

recent history of commercial production including historical

resources, metallurgical work and historical infrastructure.

5. PFS & BFS – Projects with ongoing pre-feasibility or bankable

feasibility studies.

6. Development – Development of the mine and the processing

facilities.

0

20

40

60

80

100

120

Pre Nov

2011

Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12

Number of Projects



Figure 18: Geographic distribution of graphite exploration projects

Source: Company Filings

Figure 19: Stages of exploration by company – as of May 1st, 2012

Note: Several companies appear in multiple categories as they have several projects in different stages.

Source: IAS

In addition to these companies, we are tracking several private companies

that are intending to go public in the upcoming months with projects that

would fit the top and mid tier categories. For the projects in the lower tier,

we expect some to reach the mid tier status by the end of the year.

A performance analysis of the three individual groups (Figure 20-22)

highlights that investor interest in early stage graphite projects reached a

saturation point in April. The Mid Tier companies representing the fastest

growth potential with their drill ready projects grew steadily in the last 6

months while the Top Tier companies peaked in early April.

The Top Tier companies have the highest expectations as they need to

produce quality results and make the right moves to bring their projects

closer to production in order to benefit from the first mover advantage and

the high graphite prices. The Mid Tier group will supply the next crop of

high quality projects offering the largest growth potential in the short term.

Top Tier

6 companies

Mid Tier

12 companies

Lower Tier

18 companies

Stage CompaniesTotal

Projects

North

America

South

AmericaAfrica Europe Australia

1 27 69 50 0 1 0 19

2 14 22 12 1 2 5 2

3 2 2 2 0 0 0 0

4 3 4 1 0 0 3 0

5 1 1 1 0 0 0 0

6 0 0 0 0 0 0 0

Companies Tracked: 36 Projects Tracked: 98



The Lower Tier has the growth potential investors are looking for but due to

financing risks and lower project quality will see a large amount of projects

abandoned over the next 12-24 months.

Figure 20: 6 Month performance of Top Tier companies

Source: Goolge Finance

Figure 21: 6 Month performance of Mid Tier companies


Figure 22: 6 Month performance of Lower Tier companies




Figure 23: Comparison of Graphite Invested Exploration Companies

Source: Bloomberg, IAS

Figure 24: Comparison of Top Tier Graphite Exploration Companies

*Historical data. Non 43-101 compliant.

Source: Bloomberg, Company filings, IAS,

Company TickerMkt Cap

(M$)Projects

Flagship

ProjectJurisdiction

M&I

(Mt)

M&I

Grade

(%Cg)

Inferred

(Mt)

Inferred

Grade

(%Cg)

Recovery

(%)

Purity

(%C)Flake Distribution

Northern Graphite Corp. NGC 100 1 Bissett Creek Ontario, Canada 25.98 1.81 55.04 1.57 97.1 96.7 80% @ +32/+50/+80

Focus Metals Inc. FMS 84 1 Lac Knife Quebec, Canada 4.94 15.76 3.00 15.58 85.9 N/A 85% @ +48/+65/+150/+200

Talga Gold Ltd. TLG.AX 19 7 Nunasvaara Sweden 3.6 23 N/A N/A 87% @ +80/+140

Flinders Resrouces Ltd. FDR 95 1 Woxna Sweden 6.93* 8.82* N/A 94* 68% @ +80/+200*

Uragold Bay Resources Inc. UBR 5 2 Asbury Mine Quebec, Canada 0.58* 10* 85* 90* 75% @ +80/+200*

Standard Graphite Corp. SGH 11 13 Mousseau East QC & ON, Canada 1.11* 8.28* N/A N/A 60% @ +100*

NGC

FMS

TLG.AX

FDR

UBR

SGH

AXE.AX

EGZ

GPHLRA

LMRSRK

SYR.AX

ZEN20

40

60

80

100

120

140

160

Ma

rk

et

Ca

p (

$M

)

Top Tier

Mid Tier

Lower Tier



Figure 25: Mid and Lower Tier Graphite Exploration Companies

Source: Bloomberg, IAS

Company Ticker TierMkt Cap

(M$)Projects Jurisdiction

Archer Exploration Ltd. AXE.AX Mid 31 9 Australia

Canada Rare Earths Inc. CJC Mid 3 5 Quebec, Canada

Energizer Resources Inc. EGZ Mid 45 1 Madagascar

Graphite One Resources Inc. GPH Mid 21 1 Alaska, USA

Greenlight Resources Inc. GR Mid 2 2 NS & NB, Canada

Lara Exploration Ltd. LRA Mid 29 1 Brazil

Lomiko Metals Inc. LMR Mid 7 1 Quebec, Canada

Soldi Ventures Inc. SOV Mid 3 2 Quebec, Canada

Strike Graphite Corp. SRK Mid 14 3 Sask. & QC, Canada

Syrah Resources Limited SYR.AX Mid 162 2 Mozambique, Tanzania

Velocity Minerals Ltd. VLC Mid 6 3 Quebec, Canada

Zenyatta Ventures Ltd. ZEN Mid 22 1 Ontario, Canada

Amseco Exploration Ltd. AEL Lower 3 7 Quebec, Canada

Anglo Swiss Resources Inc. ASW Lower 9 1 BC, Canada

Atocha Resources Inc. ATT Lower 2 2 Quebec, Canada

Big North Graphite Corp. NRT Lower 2 2 QC & ON, Canada

Bravura Ventures Corp. BVQ Lower 1 3 Quebec, Canada

Canadian Mining Company Inc. CNG Lower 2 1 Mexico

Caribou King Resources Ltd. CKR Lower 2 3 Ontario, Canada

Cavan Ventures Inc. CVN Lower 2 2 QC & Sask, Canada

First Graphite Corp. FGR Lower 5 3 QC, BC & Sask, Canada

Galaxy Capital Corp. GXY Lower 2 2 Quebec, Canada

Geomega Resources Inc. GMA Lower 12 1 Quebec, Canada

Kent Exploration Inc. KEX Lower 3 1 New Zealand

Lincoln Minerals Ltd. LML.AX Lower 25 1 South Australia

Logan Copper Inc. LC Lower 1 1 Quebec, Canada

Monax Mining Limited MOX.AX Lower 10 1 South Australia

Pinestar Gold Inc. PNS Lower 3 9 NSW, SA & W. Australia

Rare Earth Metals Inc. RA Lower 6 1 Ontario, Canada

Terra Firma Resources Inc. TFR Lower 2 1 Ontario, Canada



CONCLUSION

Growth in demand has triggered Chinese export regulations which in

turn have resulted in a price increase, forming ideal conditions for the

graphite sector and attracting many exploration companies across the globe

in a short period of time. Our analysis of the entire sector confirms the

supply shortage scenario highly speculated by the industry and suggests that

a minimum of 4 new mines and as many as 23 will be needed to go into

production outside of India and China between now and 2020 to cope with

the growth in demand.

We identify 36 companies, out of which 6 qualify for our Top Tier category.

These companies operate the most advanced projects that could be taken into

production in a short time frame. Companies in this group are likely to enjoy

the first-mover advantage and produce returns for investors in both the short

and the long term. In our Mid Tier, we identify 22 projects operated by 12

Companies that have legitimate targets still requiring several exploration

campaigns to delineate the deposit. We expect several large discoveries to

come from this group that could ultimately provide the largest return for

investors in this sector. Our final group, the Lower Tier, represents the

highest risk category with many projects expected not to be taken even to the

initial drilling stages.

As the exploration season heats up, investors will need to look for the first

indications of which companies are wasting time and which are advancing

step by step in establishing the right deposit, the right management and most

importantly the right graphite to start production in the next 3 to 5 years.



LEGAL DISCLOSURE

Investment Recommendation Rating System

Top Pick: The stock represents our best investment ideas, the greatest potential value appreciation.

Strong Buy: The stock is expected to deliver a return exceeding 13% over the next 12 months.

Buy: The stock is expected to deliver a return between 9% and 13% over the next 12 months.

Hold: The stock is expected to deliver a return between 5% and 9% over the next 12 months.

Sell: The stock is expected to deliver a return lower than 5% over the next 12 months.

Speculative Buy: Stock bears significantly higher risk that typically cannot be valued by normal fundamental criteria.

Investment in the stock may result in material loss.

Distribution of Ratings, as of April 30, 2012

Rating Coverage

Universe

Top Pick 2%

Strong Buy 21%

Buy 14%

Speculative Buy 21%

Hold 7%

Tender 5%

Not Rated 30%

Sell 0%

100%

General: The information and any statistical data contained herein were obtained from sources which we believe to be

reliable but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis and

interpretation of this information and are not to be constructed as a solicitation or offer to buy or sell the securities

mentioned herein. All opinions expressed herein are subject to change without notice.

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