Byron Capital Research Report

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Please see end of this report for important disclosures Equity Research Recent Price: $1.00 52 Week Range: $0.86 - $1.55 Shares O/S: Basic (MM) 31.5 F.D. (MM) 45.6 Market Cap (MM): $31.5 Average Daily Vol. (3 mo.) 86,500 Fiscal Year End: Dec. 31 Cash (Est.) (MM): $3.0 Company Description: Northern Graphite is a mine developer with its 100% owned asset, Bissett Creek, located in Maria Township right off the Trans-Canada highway and approximately 100 km east of North Bay. Northern Graphite plans on bringing the project to production by end of year 2012. July 11, 2011 Rating: SPECULATIVE BUY Northern Graphite Corp. Target Price: $1.90 (NGC – TSXV) All figures in C$, unless otherwise noted. High-Yield of High-Value Battery Material Initiating Coverage: We are initiating coverage on Northern Graphite Corp. (“Northern Graphite”), a company with 100% ownership of the Bissett Creek graphite deposit located less than 17 km from Highway 17 near Mattawa, Ontario. In the near term, the advanced project should deliver positive results from a pilot plant, a new resource estimate and a Bankable Feasibility Study (“BFS”) on its way to production by early 2013. Low Strip Ratio, Shallow Dip and Low Capex: The mineralization is covered by up to 10 metres of overburden and given the flat lying nature of the deposit (approximately 20%), the strip ratio will be less than one; roughly 0.66:1. With logging roads to the site, power and natural gas lines less than 17 km away and a simple flow sheet, capital costs for a 20,000 tonne per annum (“tpa”) plant is minimal at approximately $70 million. Upcoming Catalysts with Known Metallurgy and an Expanded Resource: Metallurgical work has been performed numerous times, in 1989 and confirmed in 2007, yielding a 95% recovery. A pilot plant test will be done in September of this year to confirm the easy flotation, but more importantly, we believe it will provide test material of its high value large flake, high carbon graphite content graphite for strategic investors. A BFS is expected shortly thereafter in November 2011, which will incorporate the pilot plant work and the new resource from a recent drill program. Can Easily Double Production: Northern Graphite can currently double production and still have a 20-year life of mine (“LOM”), and with the upcoming catalyst of incorporating May 2011 drill results into a new resource, Northern Graphite will easily extend the LOM over 20 years. This will help the company meet increased demand of its higher value graphite from the growth in lithium-ion batteries. Summary: With known metallurgy, infrastructure in place, a relatively low capex and a short time to production, risk is minimized for the Bissett Creek project that is expected to have $19.5 million per year in gross profit in 2013, with the potential to generate $39 million in gross profit by doubling production to meet demand from growing battery production. We are initiating coverage on Northern Graphite with a SPECULATIVE BUY rating and $1.90 target price based on 1.0x NAV using a 14% discount rate. Jonathan Lee, MBA Battery Materials & Technologies 647.426.1674 [email protected] Sandy Lam Associate 647.426.0287 [email protected]

Transcript of Byron Capital Research Report

Page 1: Byron Capital Research Report

Please see end of this report for important disclosures

Equity Research

Recent Price: $1.00 52 Week Range: $0.86 - $1.55 Shares O/S: Basic (MM) 31.5

F.D. (MM) 45.6 Market Cap (MM): $31.5 Average Daily Vol. (3 mo.) 86,500 Fiscal Year End: Dec. 31 Cash (Est.) (MM): $3.0

Company Description: Northern Graphite is a mine developer with its 100% owned asset, Bissett Creek, located in Maria Township right off the Trans-Canada highway and approximately 100 km east of North Bay. Northern Graphite plans on bringing the project to production by end of year 2012.

July 11, 2011

Rating: SPECULATIVE BUY Northern Graphite Corp. Target Price: $1.90 (NGC – TSXV) All figures in C$, unless otherwise noted. High-Yield of High-Value Battery Material

Initiating Coverage: We are initiating coverage on Northern Graphite Corp. (“Northern Graphite”), a company with 100% ownership of the Bissett Creek graphite deposit located less than 17 km from Highway 17 near Mattawa, Ontario. In the near term, the advanced project should deliver positive results from a pilot plant, a new resource estimate and a Bankable Feasibility Study (“BFS”) on its way to production by early 2013.

Low Strip Ratio, Shallow Dip and Low Capex: The mineralization is covered by up to 10 metres of overburden and given the flat lying nature of the deposit (approximately 20%), the strip ratio will be less than one; roughly 0.66:1. With logging roads to the site, power and natural gas lines less than 17 km away and a simple flow sheet, capital costs for a 20,000 tonne per annum (“tpa”) plant is minimal at approximately $70 million.

Upcoming Catalysts with Known Metallurgy and an Expanded Resource: Metallurgical work has been performed numerous times, in 1989 and confirmed in 2007, yielding a 95% recovery. A pilot plant test will be done in September of this year to confirm the easy flotation, but more importantly, we believe it will provide test material of its high value large flake, high carbon graphite content graphite for strategic investors. A BFS is expected shortly thereafter in November 2011, which will incorporate the pilot plant work and the new resource from a recent drill program.

Can Easily Double Production: Northern Graphite can currently double production and still have a 20-year life of mine (“LOM”), and with the upcoming catalyst of incorporating May 2011 drill results into a new resource, Northern Graphite will easily extend the LOM over 20 years. This will help the company meet increased demand of its higher value graphite from the growth in lithium-ion batteries.

Summary: With known metallurgy, infrastructure in place, a relatively low capex and a short time to production, risk is minimized for the Bissett Creek project that is expected to have $19.5 million per year in gross profit in 2013, with the potential to generate $39 million in gross profit by doubling production to meet demand from growing battery production. We are initiating coverage on Northern Graphite with a SPECULATIVE BUY rating and $1.90 target price based on 1.0x NAV using a 14% discount rate.

Jonathan Lee, MBA Battery Materials & Technologies 647.426.1674 [email protected] Sandy Lam Associate 647.426.0287 [email protected]

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Northern Graphite Corp.

Jonathan Lee, MBA 647.426.1674 [email protected] P a g e | 2

Graphite Overview Graphite has long been an ugly and unloved material. Most of us are exposed to graphite only through the “lead” in the ubiquitous pencil, but industrial uses for graphite dominate this market. There are actually four forms of crystalline carbon; the most famous being diamond, but graphite is one of the four as well. Graphite has the advantage of being relatively chemically inert, while exhibiting the best electrical and thermal conductivity of all non-metallic solids.

The graphite industry is approximately 1.1 million tonnes per year with about 75% of graphite being produced in China and the bulk of the remaining material sourced from North Korea, Brazil, Sri Lanka and Canada. Given the dominant market share of China and its implementation of a 20% export duty and a 17% value added tax, graphite prices have more than doubled in the past year for a range of different graphite grades and products.

There are two sources of graphite. The first is mining graphite from deposits. This natural material has varying levels of quality/purity/size, ranging from lump (or vein) to amorphous to crystalline flake. However, contaminant loads can vary widely and this heavily influences the use of the material in some applications and its pricing; the carbon content of the graphite required for an application can range from 70% up to 99.9% or higher. The other source of graphite is to heat a feedstock such as petroleum coke to very high temperatures for days in a special furnace and create very pure synthetic graphite.

Natural graphite finds uses in such areas as the making of refractories, as it can handle very hot materials such as molten metals. Refractories are best made from crystalline graphite, but new developments are increasing the use of amorphous graphite in this application. Steelmaking requires the addition of carbon to bring its level up to a desired point, which is called “carbon raising.” While graphite can be used to do this, so too can any other source of carbon that contains little in the way of other metal contaminants, including petroleum coke. Thus, the price for carbon raising materials is very low. Expanded graphite is graphite that has been acid treated to separate the sheets of carbon atoms that make up flake graphite and make it amenable for use as a high temperature seal or insulator. Amorphous or small flake graphite is used to make brake linings, although some new materials are taking market share from graphite. Foundry facings, the use of amorphous or small flake graphite to coat moulds for molten metal and make it easier to remove the poured part, is also a use for natural graphite, albeit a smaller one.

Synthetic graphite is used to make electrodes that are used within arc furnaces, with the scrap from the manufacturing of these electrodes used as carbon raising material in the same steel plants. Synthetic graphite that is high in quality and purity is also used in the nuclear industry and to make carbon fibre products.

In the past, synthetic graphite was also the only choice for battery manufacturers making anodes for both primary (disposable) and secondary (rechargeable) cells. However, various processes have been developed, including chemical and thermal treatments, to purify natural graphite to the point where it can be used as a battery anode. And with some other properties that natural graphite brings to the table and its cost advantage, it may well prove to be the performance and value leader in the battery market in the future. With the amount of graphite used in batteries approximately 10 times more than that of lithium, and the replacement of synthetic graphite with flake, we believe the growth of larger flake graphite is robust in the future. Thus, Northern Graphite’s ability to produce high carbon content, large flake graphite will enable the company to take advantage of lithium-ion battery demand growth.

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Northern Graphite Corp.

Jonathan Lee, MBA 647.426.1674 [email protected] P a g e | 3

Right Off the Trans-Canada Highway The Bissett Creek deposit is just 70 km east of Mattawa, Ontario. It is accessible by 17 km of well-maintained logging roads to the site, and the road is an easy turn off from Highway 17. The deposit is close enough to towns that the company does not have to construct a camp for its workforce. A natural gas pipeline and electric power also run along Highway 17, which Northern Graphite can tap into to run its operations. The location is an enviable one, as the company is costing three power scenarios to determine the most economic: 1) connect to the nearby natural gas pipeline; 2) connect to the closest substation; or 3) construct a new substation closer to the property. Low capital costs due to the deposit’s proximity to infrastructure will shorten the payback for the company and enhance shareholder value.

Exhibit 1 – Property Location

Source: Company reports

More than Enough Resource An initial resource and a scoping study were completed for the 100%-owned Bissett Creek deposit in 2010. The graphite deposit is hosted in weathered graphitic gneiss. The deposit is fairly flat, dipping approximately 5 to 20 degrees and is at surface with less than 10 metres of overburden. The thickness of the deposit is approximately 75 metres providing for an easy open pit operation. The flatness of the deposit at surface is shown in Exhibit 2. Industrial Minerals Inc. (“Industrial Minerals”) previously tried to start up a small operation but because the company used a flawed dry recovery process, it was unable to achieve continuous operation. Northern Graphite will take advantage of these characteristics of the deposit. We believe minimal overburden will lower capital costs for clearing the overburden and the shallow dip will maintain a low mining strip ratio, reducing operating costs over the long term.

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Northern Graphite Corp.

Jonathan Lee, MBA 647.426.1674 [email protected] P a g e | 4

Exhibit 2 – The Flat Lying Deposit

Source: Byron Capital Markets

SGS compiled a resource in 2010 using previous drill results, in the indicated and inferred category. The resource is sufficient for over 35 years of production at 20,000 tpa using a 1.5% graphitic carbon cut-off grade. The deposit is associated with larger flake material with all material expected, after processing, to remain at greater than 100 mesh size while being over 94% carbon concentrate.

Exhibit 3 – NI 43-101 Compliant Resource Cutoff Grade (%C)

Indicated Inferred Total: Ore

(tonnes) Graph C-LECO (%)

Contained (000 tonnes C)

Contained (000 kg C)

Ore (tonnes)

Graph C-LECO (%)

Contained (000 tonnes C)

Contained (000 kg C)

Total Contained (000 tonnes C)

Mine Life (Years)1

1.00% 20,449 1.97% 403 402,843 26,232 1.90% 498 498,408 901 21.40 1.50% 14,641 2.24% 328 327,958 18,027 2.21% 398 398,397 726 17.25 2.00% 8779 2.58% 226 226,498 10682 2.51% 268 268,118 495 11.75 2.50% 4562 2.88% 131 131,386 4621 2.89% 134 133,547 265 6.29

1 Mine life based on expanded 40,000 tpa and 95% recovery Source: Company reports, Byron Capital Markets Ltd.

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Northern Graphite Corp.

Jonathan Lee, MBA 647.426.1674 [email protected] P a g e | 5

Easily Expandable Resource Recent drill results should result in a larger resource in the near future and will be an upcoming catalyst for the company. An increased resource will give the company the ability to increase production and generate cash faster. With indicated and inferred resources at 2.24% C and 2.21% C, respectively, the latest drill results averaged 2.36% C on a strike weighted basis, which should slightly increase the overall grade. More importantly, released drill results showed mineralization continues to the north and south as shown by the blue circles in Exhibit 4. Fifty of the 51 holes in the drill program intersected similar widths and similar grades, leading to a homogenous deposit. This should be incorporated in the upcoming BFS report (scheduled for November 2011) and easily let Northern Graphite expand beyond 19,000 tpa.

Exhibit 4 – Additional Drill Hole Locations

Source: Company reports

High Recovery of High Value Material in Simple Process

In the late 1980s Kilborn Engineering Ltd., KHD, Bacon Donaldson and Associates Ltd., and CESL performed metallurgical work on the deposit as part of a full feasibility study that was completed at the time. A simple grind and flotation process was achieved for the material. The same flotation recovery process was performed again by Systemes Geostat International Inc. in 2007. Graphite recovery was extremely high in the 95% range. Additionally, through the flotation and regrind process, a 93% carbon graphite concentrate was produced. Because of the minimal grinding to disassociate the gangue material from the carbon flakes, flake size remains intact throughout the process. From past testing, approximately 30% is in the +35 mesh size, 40% in -35+48 mesh size and 30% in the -48 mesh size. A smaller mesh size indicates a larger flake size. Additionally,

An inevitable added resource will let NGC double production while still maintaining a sufficient LOM

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Northern Graphite Corp.

Jonathan Lee, MBA 647.426.1674 [email protected] P a g e | 6

after speaking with management, recent test results indicate that almost all material will be larger than +100 mesh. +48 mesh will sell at premium prices even relative to +100 mesh. Higher graphite content and larger size increase the products’ average selling price on a per tonne basis.

Exhibit 5 - Simple Flow Schematic

Source: Company reports, Byron Capital Markets Ltd.

Comparable from a Private Company Going Upstream Much like Northern Graphite, Magnesita Refratarios S.A. (“Magnesita”), a producer of a broad range of refractory materials, is developing its own graphite project near its production facilities in Bahia, Brazil to vertically integrate its operations. The locations of Magnesita’s deposits are close to other graphite producing companies such as Nacional de Grafit and Grafite do Brasil. The company estimates producing 40,000 tpa of graphite; 30,800 tpa of which will be low-value graphite powder with the remainder being flake. Although lower grade, Bissett Creek’s high-value flake grade is comparable to both of Magnesita’s deposits. Additionally, we believe that Northern Graphite’s ability to achieve 95% grade while maintaining flake size is a key advantage.

Exhibit 6 – Comparable Deposit

Project Geologic Resource

(000 tonnes) Carbon

Content (%) +80 Mesh

(Flake) +80 Mesh Flake

Grade (%) Magnesita Projects: Pedra Azul/Cach. Pajeu 21,760 4.30% 31.60% 1.36% Almenara 35,477 5.18% 46.56% 2.41% Northern Graphite: Bissett Creek1 32,668 2.22% 80.00% 1.78%

1+80 mesh percentage is an approximate value. From the Scoping Study, 70% is expected to be +48 mesh and all material will be +100 mesh Source: Magnesita Refratarios S.A., Northern Graphite Corp.

Mine

Sag Mill Float Pebble Mill Cleaner Screen Thickener

Ball Mill Secondary Float Secondary Cleaner Dryer

Graphite Bins

NGC has a simple flow sheet to have a high recovery yield while preserving the large flake nature of the graphite

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Northern Graphite Corp.

Jonathan Lee, MBA 647.426.1674 [email protected] P a g e | 7

Valuation We estimate that the capital costs to build the mine will be $70 million with half of the capital costs being financed with debt at 10% for a duration of 10 years with the remaining $35 million through raised equity. Production will begin in 2013 at a rate of 19,000 tpa of graphite, with 70% sold at +48 mesh size at an average price of $2,200/tonne while the -48+100 mesh size graphite would be the remaining 30% being sold at $1,800/tonne graphite. On the cost side, we have taken operating costs to approximately $1,100/tonne graphite produced. This takes into consideration the simple flow sheet of mine, crush, grind, float and re-float while achieving 95% yield, which is in-line with previous metallurgical work and should be confirmed again in September 2011. Additionally, we have taken into consideration the $20/tonne royalty on graphite produced. Given our expectation that graphite demand growth will continue, especially for larger flake graphite used in Li-ion batteries, and Northern Graphite’s ability to scale up the project, we expect the company to double production in 2016 to meet that surging demand, mainly from the automotive sector. We have used conservative pricing for Northern Graphite’s large flake 94% carbon content material (see Exhibit 10). By looking at Exhibit 9, you can see the sensitivity to graphite pricing. Thus, less conservative graphite pricing can dramatically increase the value of the project.

Exhibit 7 – Discounted Cash Flow 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Fixed capital investments ($70,000) ($30,000) Capital costs: debt $35,000 1 2 3 4 5 6 7 8 9 10 Principal paid $0 ($2,196) ($2,416) ($2,657) ($2,923) ($3,215) ($3,537) ($3,891) ($4,280) ($4,708) ($5,178) $0 Debt service (10%, 10 year) $0 ($3,500) ($3,280) ($3,039) ($2,773) ($2,481) ($2,159) ($1,806) ($1,417) ($989) ($518) $0 Net Income ($1,723) ($19,684) $3,054 $5,707 $7,890 $23,054 $22,431 $23,389 $24,225 $24,973 $25,657 $28,216 Royalties (2.5%) $27 $27 $383 $383 $383 $766 $766 $766 $766 $766 $766 $766 Depreciation

$14,420 $11,449 $9,091 $7,218 $5,731 $4,551 $3,613 $2,869 $2,278 $1,809 $0

Change in working capital $291 $0 $3,494 $4 $4 $3,387 $2 $2 $1 $0 ($0) ($1) Cash flow to NGC ($2,041) ($42,487) $8,211 $11,753 ($18,201) $21,417 $22,677 $22,344 $22,048 $21,777 $21,522 $27,451 $274,506 Discount rate 14% Discounted cash flow ($2,041) ($37,269) $6,318 $7,933 ($10,777) $11,123 $10,331 $8,929 $7,729 $6,696 $5,805 $6,495 $56,976 NPV @ 14% $78,251 Cash (est) $3,000 Cash from warrants/options $5,174 Shares outstanding (FD) 45,602 Target price $1.90

Source: Byron Capital Markets Ltd.

As a near-term mine developer, Northern Graphite can add value to the firm quickly by ramping up production and cash flow

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Jonathan Lee, MBA 647.426.1674 [email protected] P a g e | 8

Exhibit 8 – Discount Rate Sensitivity Discount

Rate NPV Price/Sh 16% $69,435 $1.52 15% $77,495 $1.70 14% $86,425 $1.90 13% $96,330 $2.11 12% $107,329 $2.35 11% $119,556 $2.62 10% $133,164 $2.92 9% $148,328 $3.25

Source: Byron Capital Markets Ltd.

Exhibit 9 – Aggregate Graphite Price Sensitivity Discount

Rate Average Graphite Price/Tonne

$3,000 $2,500 $2,120 $2,000 16% $3.63 $2.28 $1.52 $0.99 15% $3.98 $2.52 $1.70 $1.13 14% $4.37 $2.79 $1.90 $1.28 13% $4.80 $3.09 $2.11 $1.45 12% $5.28 $3.43 $2.35 $1.65 11% $5.82 $3.81 $2.62 $1.87 10% $6.42 $4.23 $2.92 $2.12 9% $7.09 $4.70 $3.25 $2.40

Source: Byron Capital Markets Ltd.

Exhibit 10 – Current Graphite Pricing

Flake Size Mesh

Carbon Content

(%)

Price Range (US$)

Large +80 94-97 2,500 to 3,000 Medium +100-80 94-97 2,200 to 2,500 Medium +100-80 90 1,300 to 1,450 Medium +100-80 85-87 1,500 to 1,900 Fine -100 90 1,400 to 1,800 Source: Industrial Minerals Magazine, Roskill Industry Report, Northern Graphite Corp.

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Northern Graphite Corp.

Jonathan Lee, MBA 647.426.1674 [email protected] P a g e | 9

Conclusion Northern Graphite is a late stage graphite mine developer that should have a producing mine by selling high-value graphite flakes in 2013 into the growing lithium-ion battery market. The company has begun the permitting process and given that the project flow sheet is simplistic and infrastructure is nearby, construction time should be about one year. We believe Bissett Creek’s deposit size will also allow for Northern Graphite to more than double its production while maintaining over 20 years of resource.

Low risk upcoming catalysts should keep investors excited about the company over the next six months. May 2011 results from step-out drilling indicate a significantly larger resource that will be released in a couple months followed by the BFS, which we expect to be released in November 2011. Also, pilot work is scheduled to be performed in September 2011 and given that the metallurgical work has been done twice, we foresee this as confirmation of past work. More importantly, it will provide Northern Graphite with material for strategic investors and/or off-take partners.

Graphite prices have exploded over the past year, as China dominates the market with over 70% of market share and imposing a 20% export duty and a 17% value added tax on its graphite. Northern Graphite’s ability to come to market quickly and cheaply will allow the company to take advantage of the situation as well as continue to deliver continued news flow to the investor. We initiate coverage on Northern Graphite with a SPECULATIVE BUY rating and $1.90 target price based on 1.0x NAV using a 14% discount rate.

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Northern Graphite Corp.

Jonathan Lee, MBA 647.426.1674 [email protected] P a g e | 10

Appendix 1 – Income Statement Exhibit 11 – Income Statement

2011 2012 2013 2014 2015 2016 2017 2018

Saleable (C kg, 000) 0 0 19,152 19,152 19,152 38,304 38,304 38,304 C Price ($/kg) +48 mesh, 95% $2.20 $2.20 $2.20 $2.20 $2.20 $2.20 $2.20 $2.20 C Price ($/kg) +100 mesh, 95% $1.80 $1.80 $1.80 $1.80 $1.80 $1.80 $1.80 $1.80 Average realized graphite price $2.12 $2.12 $2.12 $2.12 $2.12 $2.12 Revenue (C kg, 000) $0 $0 $40,602 $40,602 $40,602 $81,204 $81,204 $81,204 Mining costs (000) $0 $0 $7,470 $7,470 $7,470 $14,940 $14,940 $14,940 Crushing costs (000) $0 $0 $1,494 $1,494 $1,494 $2,988 $2,988 $2,988 Processing cost (000) $0 $0 $12,150 $12,150 $12,150 $24,300 $24,300 $24,300 COGS $0 $0 $21,114 $21,114 $21,114 $42,228 $42,228 $42,228 COGS/tonne graphite $1.102 $1.102 $1.102 $1.102 $1.102 $1.102 Gross profit $0 $0 $19,488 $19,488 $19,488 $38,976 $38,976 $38,976 Mineral exploration $1,000 $1,020 $918 $826 $744 $669 $602 $542 General and administrative $640 $653 $686 $720 $756 $794 $833 $875 Stock-based compensation $83 $91 $100 $105 $107 $105 $103 $101 Expenses $1,723 $1,764 $1,704 $1,651 $1,607 $1,568 $1,539 $1,518 EBITDA ($1,723) ($1,764) $17,784 $17,837 $17,881 $37,408 $37,438 $37,458 Debt service (10%, 10 year) $0 $3,500 $3,280 $3,039 $2,773 $2,481 $2,159 $1,806 Depreciation $0 $14,420 $11,449 $9,091 $7,218 $5,731 $4,551 $3,613 EBT ($1,723) ($19,684) $3,054 $5,707 $7,890 $29,196 $30,728 $32,040 Tax expense (27%) $0 $0 $0 $0 $0 $6,143 $8,297 $8,651 Net income ($1,723) ($19,684) $3,054 $5,707 $7,890 $23,054 $22,431 $23,389 Royalties (2.5%) $27 $27 $383 $383 $383 $766 $766 $766 EPS ($0.04) ($0.43) $0.07 $0.13 $0.17 $0.64 $0.68 $0.71 ($1,750) ($19,711) $2,671 $5,324 $7,507 $22,288 $21,665 $22,623 Deficit, beginning of period ($3,498) ($5,248) ($24,959) ($22,288) ($16,963) ($9,456) $12,831 $34,496 Deficit, end of period ($5,248) ($24,959) ($22,288) ($16,963) ($9,456) $12,831 $34,496 $57,119

Source: Byron Capital Markets

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Appendix 2 – Management and Directors Gregory Bowes, President, CEO and Director Mr. Bowes has over 25 years of experience in the resource and engineering industries. He holds an MBA from Queens University and an Honours B.Sc., Geology degree from the University of Waterloo. Mr. Bowes was Senior Vice President of Orezone Gold Corporation (“Orezone Gold”) (Feb/09 - Oct/09); Vice President, Corporate Development of its predecessor, Orezone Resources Inc. (“Orezone Resources”) (Jan/04 - Sept/05) and Chief Financial Officer (Oct/05 - Mar/07 and Apr/08 - Feb/09). From December 2006 until April 2008, Mr. Bowes served as President, CEO and a director of San Anton Resource Corporation. Mr. Bowes is a director of Industrial Minerals.

Donald K.D. Baxter, President Mr. Baxter has a degree in Mining Engineering from Queens’ University (1987). For the past five years, he has been President of Ontario Graphite Limited, which is attempting to bring the Kearney graphite property, a past producing mine located near Huntsville, Ontario, back into production. Mr. Baxter was Mine Superintendent and Chief Mine Engineer at Kearney between 1990 and 1995. Prior to 1990, Mr. Baxter was involved in mine engineering and operations with INCO Ltd. and Noranda Minerals Inc.

Stephen Thompson, Chief Financial Officer Mr. Thompson holds a Bachelor of Commerce (honours) degree from Queens’ University (1991) and is a Chartered Accountant, as well as a Certified Public Accountant (Illinois) with more than 20 years of experience in accounting and finance. For the past three years, he has provided financial management and leadership services to a number of small Ottawa-based companies. He was previously Vice President, Finance of Espial Group Inc.; Vice President, Finance of Hydro Ottawa Limited; and Vice President Controller of Accelio Corporation.

Iain Scarr, Director Mr. Scarr is founder and principal of IMEX Consulting, which provides business development, mining and marketing services to the industrial minerals industry. Mr. Scarr spent 30 years with Rio Tinto Exploration and was most recently Commercial Director and Vice President, Exploration of the Industrial Minerals division. He holds a B.Sc. in Earth Sciences from California State Polytechnic University and MBA from Marshall School of Business at the University of Southern California. Mr. Scarr is currently Vice President, Development of Lithium One Inc.

Ron Little, Director Mr. Little is the President, CEO and a director of Orezone Gold. Mr. Little has more than 20 years of senior level experience in mineral exploration, mine development, mine operations and capital markets. He spent the past 15 years focused on African projects, where he was responsible for over $1.2 billion of transactions with the predecessor company Orezone Resources. Mr. Little has held directorships with other public and private companies and held senior operating positions in both major and junior gold producing companies.

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Jay Chmelauskas, Director Mr. Chmelauskas is President of Western Lithium Corp. and was previously the President and CEO of China Gold International Resources Corp. Ltd. (formerly Jinshan Gold Mines), where he successfully managed and led the company during all phases of the commissioning of one of China’s largest open pit gold mines. Mr. Chmelauskas has considerable experience in the exploration, development and mining industry, including a large Placer Dome Inc. gold mine, and business analyst position with chemical manufacturer Methanex Corporation. Mr. Chmelauskas has a Bachelor of Applied Science in Geological Engineering from the University of British Columbia and a Master of Business Administration from Queen’s University.

Donald Christie, Director Mr. Christie is a Chartered Accountant and currently a Partner and Chief Financial Officer with Alexander Capital Group (“Alexander Capital”). He is a director of Alpha One Corporation, a capital pool company. Prior to his involvement with Alexander Capital, Mr. Christie co-founded Ollerhead Christie & Company Ltd. (“Ollerhead Christie”), a privately held Toronto investment banking firm which sourced, structured and syndicated debt private placements and provided financial advisory services to a client base comprised primarily of colleges, universities, schools boards and provincial government agencies. Prior to founding Ollerhead Christie, Mr. Christie served as Vice President and a director of Newcourt Capital Inc. (“Newcourt”), formerly the corporate finance subsidiary of then publicly-traded Newcourt Credit Group, which subsequently combined with the CIT Group, Inc. While at Newcourt, Mr. Christie was involved in the structuring and syndication of over $1.5 billion of transactions. Mr. Christie holds a B.Comm degree from Queen’s University.

K. Sethu Raman, Director Dr. Raman is an independent mining consultant with over 35 years of international experience in all phases of exploration and development and has held senior executive positions in several public mining companies. He spent 13 years with Campbell Chibougamau Mines Ltd. and Royex Gold Group of companies (now Barrick Gold Corp.) in various management positions including Vice President (1980 - 86) where he played a key role in the discovery and development in six operating gold mines and major acquisitions including Hemlo Gold Mine and Nickel Plate Gold Mine. From 1986 to 2004, Dr. Raman was President and CEO of Holmer Gold Mines Limited, which discovered and developed the Timmins West Gold deposit. On December 31, 2004, Lake Shore Gold Corp. acquired all of the issued and outstanding shares of Holmer. Dr. Raman holds a Ph.D (1970) in geology from Carleton University, Ottawa and a UNESCO Post-Graduate Diploma (1965) from University of Vienna, Austria.

John S. Rogers, Senior Project Advisor Mr. Rogers was a formerly Manager of Nanisivik and Detour Lake Mines and Director of Operations, Saudi Arabian Mining Company.

George Hawley, Technical Advisor Mr. Hawley has 40 years of experience in Industrial Minerals in research, process and product development, market analysis and development.

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Notes

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Notes

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IMPORTANT DISCLOSURES Analyst's Certification All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of the subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report. The particulars contained herein were obtained from sources which we believe to be reliable but are not guaranteed by us and may be incomplete. Byron Capital Markets Ltd. (“Byron”) is a Member of IIROC and CIPF. Byron compensates its research analysts from a variety of sources. The research department is a cost centre and is funded by the business activities of Byron including institutional equity sales and trading, retail sales and investment banking. Since the revenues from these businesses vary, the funds for research compensation vary. No one business line has greater influence than any other for research analyst compensation. Dissemination of Research Byron endeavours to make all reasonable efforts to provide research simultaneously to all eligible clients. Byron equity research is distributed electronically via email and is posted on our proprietary website to ensure eligible clients receive coverage initiations and ratings changes, targets and opinions in a timely manner. Additional distribution may be done by the sales personnel via email, fax or regular mail. Clients may also receive our research via a third party. Company Specific Disclosures: 1 The research analyst(s) and/or associates who prepared our original research report have viewed the material operations of this company. 2 Their travel expenses were not reimbursed by this company, its employees or affiliates. 3 The research analyst(s) and/or associates who prepared this report (or their household members) hold an equity position in Industrial Minerals Inc., which holds 9,750,000 shares of Northern Graphite Corporation.

Investment Rating Criteria STRONG BUY BUY

The security represents extremely compelling value and is expected to appreciate significantly from the current price over the next 12-18 month time horizon. The security represents attractive value and is expected to appreciate significantly from the current price over the next 12-18 month time horizon.

SPECULATIVE BUY The security is considered a BUY but in the analyst’s opinion possesses certain operational and/or

financial risks that may be higher than average. HOLD The security represents fair value and no material appreciation is expected over the next 12-18 month

time horizon. SELL The security represents poor value and is expected to depreciate over the next 12-18 month time

horizon. Other Disclosures This report has been approved by Byron for distribution in Canada for the use of Byron’s clients. Clients wishing to effect transactions in any security discussed should do so through a qualified Byron salesperson, registered in their jurisdiction. Informational Reports From time to time, Byron will issue reports that are for information purposes only, and will not include investment ratings. These reports will be clearly labeled as appropriate.

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TORONTO VANCOUVER4 KING STREET WEST, SUITE 1100

TORONTO, ON M5H 1B61075 WEST GEORGIA STREET, SUITE 1330VANCOUVER, BC V6E 3C9

Company Directory

Campbell Becher Chief Executive Officer 647.426.1657 [email protected]

Geoff Clarke, MBA, LL.B., LL.M. President and Chief Operating Officer 416.867.8882 [email protected]

Dale Sampson Chief Compliance Officer 416.867.1569 [email protected]

Gill ian Wong-Hinds, CGA Chief Financial Officer 416.867.8883 [email protected]

Robert Orviss, CFA Managing Director 647.426.1668 [email protected]

Derrick Chiu Managing Director, Head of Equity Capital Markets 647.426.1662 [email protected]

Brad Freelan Vice President, Investment Banking 416.867.3144 [email protected] Rak Vice President, Investment Banking 604.697.2456 [email protected] Hobbs, CA Co-Head, Mergers and Acquisitions 647.426.0467 [email protected]

Greg Borsk, CA Co-Head, Mergers and Acquisitions 647.426.0466 [email protected]

Jamie Grundman Analyst, Investment Banking 647.426.0469 [email protected]

Steve Lambros, MD Associate 647.426.1659 [email protected]

Elisa Chio Associate 647.426.0288 [email protected]

Mary Stuart Associate 604.616.5311 [email protected]

Russell Mills Associate 647.426.0290 [email protected]

Marco Beretta Associate, Syndication 647.426.0289 [email protected]

Guy Gordon, CFA, MBA Managing Director, Head of Research, Oil & Gas Analyst 647.426.1672 [email protected]

Jon Hykawy, PhD, MBA Head of Global Research, Clean Tech and Materials Analyst 647.426.1656 [email protected]

Shawn Morgan Managing Editor & Production Coordinator 647.426.0473 [email protected]

Al P. Nagaraj, M.S., MBA Special Situations Analyst 647.426.0291 [email protected]

Byron Berry, M.A., CFA Strategist 416.867.1623 [email protected]

Jeff Wu, CFA Mining Analyst 604.697.2455 [email protected]

Brian Szeto, M.A., CFA Mining Analyst 647.426.1673 [email protected]

Jonathan Lee, MBA Battery Materials and Technologies Analyst 647.426.1674 [email protected]

Merril W. McHenry, CFA Mining and Metals Analyst 647.426.1660 [email protected]

Omid Ameri Associate 416.867.3984 [email protected] Lam Associate 416.867.2375 [email protected]

Trading Desk (main telephone line) 647.426.1670Nick Stajduhar Vice President, Head of Institutional Sales 647.426.1664 [email protected]

Jonathan Samahin, CFA Vice President, Head of Global Trading 647.426.1670 [email protected]

Tom Chudnovsky Vice President, Institutional Sales 647.426.1665 [email protected]

David Kemp Managing Director, Institutional Trading 647.426.1666 [email protected]

Cyrus Osena Vice President, Head of Business Development 647.426.1675 [email protected] Farrell Institutional Sales & Trading 647.426.1667 [email protected]

Kariv Oretsky Institutional Sales 647.426.1658 [email protected] Perkell Institutional Trading 647.426.1671 [email protected] Gardner Head of Proprietary Trading 416.867.8880 [email protected]

Charles Pollock Proprietary Trader 416.967.8880 [email protected]

Charlie Mitchell Proprietary Trader 416.469.9609 [email protected]

Taylor Davison Equity Trader 416.867.8880 [email protected]

Patsy Fernandes Associate, Sales and Trading 416.867.2375 [email protected]

Kathy Sherban Sr. Vice President, Operations and Administration 416.867.1650 [email protected] Ladeira Vice President, Compliance 647.426.1660 [email protected] Mohammad Controller / Regulatory Accountant 416.364.2678 [email protected] Wightwick Executive Assistant 416.867.8881 [email protected]

Dorothy Dudek Executive Assistant 647.426.0471 [email protected]

Sandra Stefanescu Compliance Officer 641.426.0470 [email protected]

Victoria Will iston Administrative Assistant 416.867.9800 vwill [email protected]

Jen Levy Associate, Operations and Administration 416.867.9064 [email protected]

Sandra Day Office Manager – Vancouver 604.697.2540 [email protected] Belcher Office Manager – Toronto 647.426.1660 [email protected]

EXECUTIVE

INVESTMENT BANKING

FINANCE, ADMINISTRATION AND OPERATIONS

SALES & TRADING

RESEARCH