“GigaProfits! — One tiny resource company essential to the Gigafactory”

Sleuthing through the Nick Hodge tease for a play on Tesla's Gigafactory

By Travis Johnson, Stock Gumshoe, July 29, 2014

“Tesla is building the largest battery factory ever…

“Groundbreaking is expected any day now. You could see…

“GigaProfits!

“It doesn’t matter what you think about electric cars… You could make a fortune off Tesla’s new $5 billion ‘Gigafactory’ — Even if it’s a colossal failure.

“One tiny resource company is essential to the Gigafactory. Here’s why its share price won’t stay under $1 much longer….”

That’s the intro to the latest ad from Nick Hodge for his Early Advantage newsletter ($499 a year), a letter that has previously teased attention-getting ideas like the “blue light” cancer detector and the “blue blood” mollusk cancer cure — so we’ll let you know that yes, these kinds of stocks teased with mega-hype often go up… but companies that are largely driven by this attention can also often go back down awful quick.

Since Tesla’s undoubtedly going to be getting all the headlines when it reports earnings late in the week, I’m sure the promos about ancillary stocks will continue — and the questions about this one are heating up. No, Hodge is not keeping the “blue” theme alive in his string of teaser pitches by stealing Michael Robinson’s “Operation Bluestar” title for that teaser about Tesla’s planned huge battery factory (the “Gigafactory”), but his pitch is also based on that same Gigafactory and the demand it will create for a needed battery ingredient.

So let’s find out which stock he’s touting, shall we?

Here’s the crux of Hodge’s argument:

“Forget what you think about Tesla or electric cars for a second.

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“I don’t care whether you consider it the most important company of the 21st century or just overpriced hype…

“It doesn’t matter.

“You could make a fortune off Tesla’s Gigafactory — even if it’s a total failure.

“Even if Tesla never sells another electric car — you’ll still profit.

“Remember, Elon Musk is an extremely rich man used to getting his way. And he’s already done deals with two giants: Apple and Panasonic…

“The Gigafactory is getting built — no matter what happens later.

“Musk says groundbreaking will happen this year.

“Production could start just 12 months later…

“But before he can build the Gigafactory, there’s one valuable resource he must secure in the next couple of months.

“And there’s only one place he can get it…”

And if there’s “only one place” Musk can get this resource for the Gigafactory, well, that would obviously mean that one supplier would make a mint, right?

So who is it? And is it truly the “only place?”

Some more hinting:

“There’s one material in particular that’s absolutely critical to the Gigafactory…

“And there’s only one place Tesla can get it.

“From a tiny North American company whose shares currently trade for less than $1.

“By the time construction begins on the Gigafactory, those shares could be over $3 and headed higher…”

So what’s the resource Hodge is talking up?

Graphite. Which is indeed a major component in lithium batteries (that’s what the Gigafactory will be building). More from Hodge:

“What you may not know is that there’s actually 12 times more graphite in a battery than lithium.

“Graphite is crucial to how batteries function. It’s used to make the anodes of a lithium-ion battery — the part that gives the battery its charge….

“And batteries for automobiles require far more graphite than a cell phone battery. The graphite flakes also have to be larger and contain more graphite, since car batteries are responsible for a bigger load.

“Current global battery demand for graphite is 83,000 tonnes of graphite a year. And it’s growing 20% to 30% annually, even without the Gigafactory.

“So if Tesla all of a sudden demands enough graphite for 500,000 batteries — on top of current demand — the price of the resource will shoot up quickly….

“…there’s one thing they can’t get around…

“Finding a company with that much graphite that can start supplying the Gigafactory next year.

“There are very few choices…

“China controls nearly 80% of the graphite market. And it only exports a small portion.”

That, then, is our spiel. And since Musk has publicly said that he wants the Gigafactory to use local (North American) resources, several folks — apparently including Hodge — are eying the minerals that go into batteries and checking to see whether there is enough local supply and where it might come from.

And newsletter editors get itchy palms when they think they can tie a big story (Tesla spurring dramatically higher demand) to a tiny stock. It’s almost always a stretch — there’s almost never really “just one” little company “under a dollar” that holds the secret store of some needed widgets or minerals or patents — but that doesn’t mean the story can’t work out for investors from time to time.

With that caveat, what’s the little North American graphite company being teased here?

We get a few more clues (you can always skim through the ad yourself if you want to see all of them, including some excerpts from a phone call Hodge says he had with this “secret” company’s CEO) — here are a few key hints:

“So where is Tesla going to get its graphite in North America?

“There’s really only one option…

“A tiny Canadian company sitting on a mother lode.

“They’ve got all the proper environmental permits, and their feasibility study was just edited up.

“They now have a couple billion dollars of graphite under their feet — over 730,000 tonnes of it — which could be used to make 365,000 tonnes of spherical coated graphite due to losses in the process.

“At a conservative $6,000 per tonne — though it could fetch upwards of $10,000 — this company is sitting on $2.19 billion worth of graphite….

“They’re just waiting for an investor — and they could start pulling up graphite the next day….

“When a $0.67 company with a $37.8 million market cap is sitting on at least a $2 billion resource, I think the stock implications are clear.”

So who is it? Thinkolator sez that we’re being teased (again) about Northern Graphite (NGC in Canada, NGPHF on the pink sheets), which was also teased by Hodge a couple years ago as a “graphene” play when Northern Graphite was a pretty new stock trying to ride that wave of investor enthusiasm for graphene (graphene is the wonder nano-material that can be made from graphite, but it’s years or decades from having an impact on graphite prices). Back then the stock shot from $1 to $3 in just a couple months, though it fell back down very quickly — it’s been around 60-70 cents for most of the past year, though the stock just shot up over a dollar in the last few days (meaning it’s now a $60 million company).

And yes, that sudden surge of 50% or so sent the regulators knocking on Northern Graphite’s door — management responded on Thursday that it was…

“unaware of any undisclosed material change or corporate development that would account for the recent increase in the Company’s share price.”

We can probably answer that question for the regulators: It wasn’t a material change in the company, it was a new surge of hype-fueled shareholders driven to the stock by Nick Hodge.

Northern Graphite’s big project is the Bissett Creek graphite deposit in Canada. I have not scoured the details about their project, but from what I read from other pundits it is indeed the junior graphite producer that’s furthest along — they have their economic analysis and their mine plan and their permitting in place, they’re just waiting for financing so they can get started on actually building the mine. As you can probably imagine, financing is hard to come by for natural resources companies these days — and graphite prices have been pretty flat over the last year or so, which has made it hard for some of the companies who were originally raising equity for exploration and resource definition back when prices were at (unsustainable, apparently) highs in 2011 and 2012.

There is plenty of chatter around about the increasing demand for larger flake, higher quality graphite and that’s been true for a while, with reports that both the steel producers and refractories (the primary consumer of graphite now) and the battery producers (probably about 25% of high-quality large-flake graphite now) are starting to fight over the higher quality stuff. And there is also a heavy awareness of Tesla’s Gigafactory plans among the junior graphite companies, with the demand scenarios that Hodge cites being pretty well summed up in this article from Industrial Minerals.

But when it comes down to it, that hasn’t driven anyone to buy out or make major financing deals with the producers who have attractive deposits in North America, so it seems like they’re all in a waiting game. I take that back, there has been one major offtake agreement, which is a fairly common form of financing (“you produce it, we promise to buy most of it, and we’ll prepay X amount to help build the mine”), and that was the one Focus Graphite signed with a Chinese customer — so oddly enough, the world’s dominant graphite producing nation is planning to start importing the stuff. They don’t disclose pricing on that offtake agreement, though hopefully it will provide enough cash to get them into production because investors have been waiting for Focus to produce for a long time.

Northern Graphite is trying to be opportunistic — they’ve announced that they’re considering starting the mine at higher capacity instead of using a three year period to gradually build up, because they want to take advantage of expected graphite demand. But according to their preliminary economic analysis (PEA), the project right now is worth a bit under $150 million using their price estimates and discount rate… here’s how they put it in a recent press release:

“The PEA already indicates that the Bissett Creek project has very attractive economics even at or below current depressed graphite price levels. The pre-tax internal rate of return is 26.3% (22.0% after tax) and the pre-tax net present value is $231.1 million ($150.0 million after tax) using an 8% discount rate and a weighted average price of US$1,800/tonne of concentrate.”

And if they do indeed double that production, the return would be higher — but they also need $100-150 million or so in financing to get it built first (the market cap is about $65 million after the huge run, they have perhaps $2 million in cash on hand). So you can project this as possibly becoming a decent money-making enterprise, but with commodities markets so beaten down the “net present value” of an unbuilt project being roughly twice the market cap of the company is certainly not cheap.

And… that’s about all I know about this one. I know graphite prices are still fairly low compared to the last few years, largely because the demand from steel producers is weak and the volume demand from battery producers hasn’t dented the market yet… but yes, if electric cars take off in a big way, perhaps spurred by lower battery costs because the Gigafactory drives more efficient production of large lithium ion batteries, then demand for graphite from that sector could certainly catch up fairly quickly… though with projects the size of the Gigafactory there will be delays and the adoption of electric cars more widely could easily be slow, so “fairly quickly” could easily mean “a few years.” There is no shortage of supply, but it’s possible that higher quality reserves or geographically convenient reserves will get bid up.

In the case of Northern Graphite, there seems to be some consensus that they are first in line to get their mine built as soon as they get financing (they’re estimating financing this Fall, commercial production in 2016) — but they don’t have financing, so whether that means Tesla steps in with an offtake agreement or they get other financing they would still need to actually build the mine… and I’d guess that the stock would surge if and when they do get enough financing the build the mine (Focus Graphite saw their shares double almost overnight when they signed their offtake agreement in December, though they’ve been pretty flat since then). The stock has been soaring thanks to Nick Hodge, and is perhaps getting an extra kick from the fact that Panasonic has now signed on to fund part of the Gigafactory (which was expected, but still in some bit of doubt as Panasonic is doing some restructuring of its own), so you’ve got to have a fair amount of confidence in a renewed graphite rally to want to buy after the stock has doubled on a newsletter tout and some Tesla enthusiasm — not the kind of thing I want to chase, but it is, after all, your money and your choice.

If this is not the first salvo in a renewed graphite mania and if they don’t get a financing deal in relatively short order to actually start mine construction, then the odds are very good that the stock comes back down when Hodge’s touting eases off — that’s how it usually works with these teased and touted juniors, though whether that happens today or next week or after the stock has doubled again, that I certainly can’t tell you.

Other than that, I’d just be guessing and I don’t know much about the relative appeal of all the different junior graphite companies out there — our columnist Myron Martin has covered some of them with great enthusiasm over the past year, so perhaps he’ll chime in and share his thoughts again.

P.S. Interestingly enough, this is the first time in a while I’ve seen Nick Hodge tout his success in recommending AEHI — maybe he just thinks that the memory of that disastrous stock has faded:

“I learned that a $0.19 company, Alternate Energy Holdings, was building a nuclear power plant in Idaho before the market had a clue. The stock soared to $1.00, handing my readers 426% gains in just three months.”


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Johan Hendrix

Jim Rogers has been ‘promoting’ LLG.V Mason Graphite. He has been more wrong than right these last 7 years though.

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