Graphite was an exciting area in the junior resource markets a few years ago, but it has proved to be difficult. The great potential remains and Great Lakes Graphite (TSXV:GLK) has proven itself to be a survivor who turned a corner in 2016 with a new line of business. The company now acts as an intermediary in the graphite markets, which helps develop their company internally and their reputation with partners.

Great Lakes Graphite is an "industrial minerals company focused on bringing value-added carbon products to a well-defined market". They currently have 123M shares outstanding, with 164M fully diluted, and a market cap of approximately $10M. As of July 3, 2016, they had cash of $130K with total debts of $1.6M. You can find out more at the company's website here

Great Lakes Graphite has been through a lot in the past, but I was impressed by my conversation with Paul Ferguson, Chief Marketing Officer, which you can read in full below. 


PB: Hello, Mr. Ferguson! Nice to connect with you here -- I'm keen to get some context on that news release from Great Lakes Graphite today and the broader story. Please let me have it!

PF: Great, thanks Peter. Nice to be with you.

PF: Today we announced three more purchase orders and an ongoing series of purchase orders for synthetic graphite products from a US-based industrial company. Each of the purchase orders represents 20 tonnes of material. If you do the math, then you see that we sold over 400 tonnes in 2016 and the buyer has indicated that they expect to require at least twice that amount in 2017.

PF: Interestingly enough, the synthetic graphite product is something that we didn't even include in our original business plan. We try to be a flexible group and respond to opportunities as they present themselves. As we were going along with our natural flake graphite business plan, we kept getting calls from people that were interested in synthetic products. Mike Coscia, SVP of Sales, went into his network and found a source for the material and an ability to outsource the processing of it.

PF: Basically, we have created a situation where for the time being, we are brokering this material. We don’t receive it, we don’t process it, we don’t bag it, we don’t ship it -- all that stuff is being done for us. Of course, we give up some margin in order to do that, but the bottom line is that we are delivering a product to a customer without having our own facility online. We used the resources that were available to us to keep moving forward. This was a way to make the customer happy, give them what they needed, and alleviate some pressures on us by generating cash flow.

PF: The company actually started back in 2004 as Shield Gold, a traditional junior mining play. We pivoted about four years ago into the graphite sector. Basically, the entire company turned over after that and we became Great Lakes Graphite. We have an entirely new management team, Board of Directors, property portfolio, and focus. Now, we are becoming an industrial minerals processing company with graphite being the first mineral that we're focusing on.

PF: The graphite market is interesting in that there is a lot of graphite in the ground. There are plenty of graphite deposits. The bottleneck in the market is in the processing of that material -- upgrading it into the higher-value products. There's a whole value chain of products in the graphite market and, at each stage, you have a different product and market. For example, to make material for lithium-ion batteries or graphite-anodes, you have to take graphite concentrate and run it through four stages of processing, which are micronization, purification, shaping, and coating. After these four stages, you get to the point where graphite is ready to be put into a battery anode.

PF: At the end of each of those four processes, you have salable material. Concentrate that comes out of the ground is salable. Micronized graphite is salable. Purified micronized graphite is salable. All these things have different markets.

PF: At the high end of the value chain is the lithium-ion battery. Beyond that, you get into niche markets like nuclear, that look to be very lucrative. Companies hoping to supply that market must be able to offer specialized material of extremely high purity. We take an opportunistic approach that enables us to participate in a number of markets. We want to provide graphite products to traditional markets that have been around for a long time, like lubricants, brake pads, alkaline batteries, and lead-acid batteries. We also want to participate in new markets -- the high-value, high-technology markets. Everything from Pebble Bed nuclear reactors to lithium-ion batteries.

PF: With our flake graphite business line, we are sourcing material from an existing producer in Brazil and then focusing on upgrading and distribution. Brazil is the #2 producer of graphite in the world, behind China, and the quality of graphite from there is very good. We are at a point where the market is a little nervous about China as a source of supply for a number of reasons. Some of the concerns around Chinese production of graphite products relate to their increasing internal consumption -- they are pushing towards electric vehicles in a big way because they have such terrible pollution problems.

PF: One of the ways China is dealing with their pollution problems is to convert their transportation to EV as quickly as possible. They are providing all kinds of subsidies and incentives to make that happen. Hence, they are beginning to consume more of their own graphite production. They've also been cracking down on some of the worst environmental practices in the graphite industry by shutting down some marginal operations and consolidating other operations. Most recently, they've cut their export tariffs on graphite. This has put immediate pressure on graphite concentrate prices.

PB: Wow -- I hadn't heard of that.

PF: It is quite recent. If you dig into the story, then you will find out that the Obama has been putting pressure on China to cut these tariffs for months. Going back to July, there have been articles about the rare earths and graphite. The American politicians felt that China was imposing a competitive disadvantage on American companies. Now, I don’t know if China is pre-empting a response to the incoming administration or not, but China recently announced that they are going to go ahead and remove this export tariff on graphite. This will make it even harder for people who are trying to sell graphite concentrate from a mine, but the value-added products tend to hold their value better than concentrate. Generally speaking, value-added products tend to hold their value better and are subject to a lesser degree of price volatility.

PF: We adopted this intermediary business plan and continue to fine-tune it as we go. Now, we're at the point where we shipped over 400 tonnes last year through our partners. We're going to do quite a bit more this year and replicate that success in other vertical markets. The way that you do that in industrial minerals like graphite is by sending out lots of samples to potential customers. Sometimes you have to call them, but we're finding that, more often, potential customers are calling us and requesting samples. After we prepare samples and send them, they have to test it. They either match what they are getting from a competitive product or in some cases they may be developing a new application.

PF: Once you get through that first gauntlet of testing, you go through the purchasing folks to discuss volume, pricing, and timing. You get a purchase order, hopefully, and then work your way to a supply agreement. That's where we are at with our first customer now. We have done almost two-dozen purchase orders with the customer we announced today. We have a supply agreement with them on the table and are working through the particulars on that.

PF: The process of working with this buyer has been a collaborative development process. They came to us with a specific problem that they were trying to solve. They didn’t know what particular characteristics of the product would solve it, so we started trying different things. Basically, that is different particle sizes and combinations of particles. We got exactly the right formula and they said "OK, that's it -- we want 40 tonnes of this."

PF: From the moment they gave us the green light to the time when we actually put the product in the truck was approximately from January until May. It took us 5 months to get all the pieces in place. After that, they started sending us one purchase order after another.

PF: We recently had an opportunity to sit down with the buyer and talk about why they were working us, as opposed to one of the large incumbents. That was a great conversation because we got on the other side of the table and understood their rationale in taking a chance with us. They were pretty open about the fact that they were taking a risk by working with us, but it was a controlled risk. Worst thing that could happen would be that they stick with their current supplier.

PB: Right. And you just said it -- they weren't talking about shifting their whole supply line over to you guys at that point.

PF: They weren't then.

PB: (Laughs)

PF: We think there is significant potential to grow this account beyond even the 1,000 tonnes that they've indicated for 2017. We just have to keep delivering the goods!

PB: Good for you. I see the name "Coulometrics" in a past news release and some other prospective targets in the presentation deck, but I don’t see a name of the client for the synthetic graphite.

PF: They have expressly prohibited us from naming them as a customer.

PB: OK, thanks for clarifying. I suspected that was the case. All good.

PF: Now it's time for us to replicate all of that. We are now replicating that process of back-forth discussion over 6-7 months to develop and optimize the product with other prospective customers in different markets.

PF: We are working with a group who do conventional motive batteries and are probably 16 months into their evaluation by this point. We expect that. We knew that these guys test this stuff extensively. It can take 18-24 months. If they put you into their production line, then they are going to use large amounts of this stuff. There have been examples in the mainstream media about what happens when batteries go bad -- it's not pretty. Whether it's a phone, or an electronic surfboard, or even Boeing Dreamliners.

PB: Flipping through the deck here, I see the first revenues from this synthetic graphite business were reported back in July 2016. I think that was the last time I looked closely at the company and was keen to check back in after a while, so it's good to be talking with you here today.

PF: Great to hear. The revenue in July was only $7,000. It was listed as "Graphite Sales" in the financials. We had just begun shipping product and getting initial payments for that quarterly report.

PB: And that's that May-January timeline that you mentioned before.

PF: The next financials will be coming out in the end of February and they will be much more meaningful.

PB: Well, I understand how difficult it can be to gleam any information out of the financials from a company at an inflection point like this.

PF: Right now, we are mostly competing against privately-held corporations that don’t have to disclose anything. The largest companies in the sector like Asbury and Superior do not have to report their financials, but they are certainly free to help themselves to ours.

An electron microscope image of graphite at 30,000x magnification.

PB: Being a public company, do you have any fears or concerns over hostile takeovers. 

PF: No, not at this point. That is not something we expect or would welcome right now.

PB: Well, that's it -- you have proven to be something of a survivor in what was a hyped area of the market, for good reason, but has been tough for a long time.

PF: It's gonna get tougher, I think. For anyone that is pursuing the traditional approach, it probably just got even tougher with those tariffs coming off. On top of that, there is the prospect of some large projects coming online which could continue to put pressure on concentrate pricing. We are okay with that.

PB: In terms of markets, the discussion around clearing events and capitulation may be relevant here. It's not easy to go through those events, but sometimes businesses have to go away to create opportunities for the next things to come.

PF: Our value-proposition is quality, consistency, and reliability. Consistency is so important to customers who require high quality material The shipment you get this month cannot vary from what you got last month. If you have a sensitive industrial process, then that can really mess you up.

PB: That's a big deal.

PB: I see you have a proven history of accessing public funding there. I was impressed by the funding you've had with NSERC and other groups noted in your deck.

PF: Yes, IRAP, NSERC, NOHFC are all excellent organizations. MentorWorks is a company that is a clearinghouse and are very helpful for that. They are grant writers and they know all the programs that are available. For a fee, they will write your application for you. It's a much more efficient way of going about it for us -- they know what the funding agencies want to see. It has been working.

PB: Looking at the capital table there, I see 100M+ shares out. Market cap of $10M, approximately. And I see a funding commitment from a New York-based private fund. That's interesting. Any comments on that?

PF: Yes, Global Corporate Finance is a private firm that created a structure that enables us to access up to $4 million USD over two years, in exchange for equity. The funding is done in tranches with pricing done at a small discount to the market price at the time. We have not accessed the facility as of yet but are working on it now. We’re fortunate to be working with Global. They are a great group, very nice people and very supportive of what we are doing.

PB: Today saw some heavy trading for you.

PF: Yes, huge. Over 1M shares. Not sure who it was, but it's good to see. I'm happy. I got another call from someone who read the news release today, it was the first time he heard about the company, and he went into the market to buy stock. He even said "I want to buy some more, but the next time I buy it, I hope I pay $0.14 or $0.15." You don't usually hear people say that and I thought that was funny at first, but then I thought about it and it makes sense.

PB: What a good shareholder, eh? He's thinking like an owner.

PF: I think the word is starting to get out there and I'm working hard to tell it. We work hard to reach potential investors, customers, and all kinds of people.

PB: Good work being on twitter, too. It's not easy to be out there but it's the right thing to do! Thanks much for the call -- great to talk with you.

PF: Thanks, Peter. My pleasure.