Flinders’ Big North buyout unlikely to spark further junior graphite consolidation

By Laura Syrett
Published: Thursday, 04 September 2014

The tie-up between two apparent rivals at the fledgling end of the graphite production business grabbed the market’s attention, but commentators do not believe the wider industry is ready for a wave of M&A activity.

The acquisition of Mexico-focused graphite producer Big North Graphite Corp. by fellow Canadian competitor Flinders Resources Ltd surprised many industry observers this week.

 
Flinders' Woxna mine in Sweden is due to officially open
later this month (source: Flinders Resources). 

“If you’re like me, you may be tempted to ask ‘why?’. Why would Flinders take out a competitor, having just entered into commercial production at its Woxna mine in Sweden?,” wrote Chris Berry, founder of the research firm House Mountain Partners LLLC in his dissection of the deal.

“There are several likely answers, but acquiring a past-producing asset in North America (in Mexico) is chief among them,” he added.

The asset in question is Big North’s El Tejon flake graphite mine and mill, a 500 ha (5km2) concession comprising three deposits of flake graphite, located 38km northwest of Oaxaca in Mexico.

The mine and mill are both in need of refurbishment and will require permitting before they can be reactivated. Having brought the Woxna graphite mine in Sweden back into production in July this year, Flinders believes it has the experience to help Big North return El Tejon to an operating mine.

“Finding a former producer and bringing it on is what we have done with Woxna. We can get Big North into production for a low capital cost,” Flinders CEO, Blair Way, told IM.

Under the binding agreement to buy Big North, Flinders will pay each Big North shareholder one share for nine of theirs, resulting in the issuance of 9m Flinders shares for 81m Big North shares.

Big North has promised not to invite any other offers and pay a breakup fee of Canadian dollar (C) $500,000 ($461,400*) if the deal falls through.

Further consolidation not on the cards

While the tie-up of two early production stage companies is a rare deal in a sector where M&A activity has lagged that in other industries by a considerable margin, commentators do not think that the acquisition signals an imminent wave of consolidation in the graphite space.

“I'm not convinced that this takeover is the start of a wave of broad consolidation,” Berry told IM.

“I suppose you could see similar deals like the Flinders-Big North one, but there were a number of obvious synergies, in hindsight, that will allow both companies to benefit. I'm not sure I see something similar in the remaining pool of graphite juniors,” he added.

Berry also ruled out the prospect of any near term consolidation by means of vertical integration. “With graphite prices flat – but high on a historic basis – the majors don't appear to be in any hurry to tie up long term supply,” he said.

Another industry analyst, who preferred not to be named, said that the inducements behind the Flinders-Big North deal justified the arrangement, but added that similar deals between other graphite juniors or buyouts by larger companies were unlikely.

“I see this [Flinders-Big North deal] as two producers, albeit small ones, combining. They could have some real synergies on the distribution side. As for junior companies, what is the synergy? Cost savings? If you look at small graphite companies with no revenue, exchange listing and maintenance fees could be onerous,” the analyst said.

“I don't think there will be a buyout from Imerys or AMG. I haven't seen it in the past and [it looks] unlikely, given the valuation of some of these junior mining companies,” they added.

Friends with benefits

Flinders and Big North have hailed the deal as one that brings reciprocal benefits for the two companies in different key areas.

As Berry points out, Vancouver-headquartered Flinders will now have access to a property with medium-term potential to supply the US graphite market, while Big North can reassure its shareholders it has the backing of a company boasting a proven development strategy.

Built in 1980 by the Mexican government, the El Tejon mine was operational until 2002, finishing up in the private ownership of Grafito de Mexico SA. At the time of closing, Grafito was estimated to be selling 80% of its production to the US.

All of the resource estimates for the Mexican property predate NI 43-101, but historic surveys indicate a proven tonnage of over 3m tonnes graphite grading over 3.5% C across two of the sites three deposits.

A probable tonnage of more than 6m tonnes has been estimated for the entire project.

Big North, which is also based in Vancouver and owns two graphite properties in Canada, is already producing and selling modest quantities of amorphous graphite from the 11.1 ha (0.1km2) past-producing Nuevo San Pedro mine in Sonora, Mexico, providing it with a small amount of cash flow.

The company managed to get Nuevo San Pedro into production in the middle of what it described as a “punishing” year for junior graphite companies on the stock markets.

“2013 was a rough year for small mining companies,” Big North’s CEO, Spiro Kletas, told IM earlier this year.

He explained that the company had prioritised getting Nuevo San Pedro amorphous graphite mine into production before turning its attention to the El Tejon asset because it believes that taking “one thing at a time” is the best strategy for a small firm.

“If you spread yourself too thin, it looks bad,” he said. “It was a full time job to get into amorphous production, but we’re looking for a grand slam when it comes to graphite with flake and amorphous.”

Like Flinders, Big North plugged for a past-producing project “because it would cost us less to get going than a new development”.

Flinders’ Kringel deposit at Woxna has an NI 43-101 resource of 2.6m tonnes graphite at an average grade of 10.5% C and the mine, which commenced production in July, is due to be officially opened later this month.

With easy access to the European graphite market, Flinders has said that its approach will be to sell small amounts of graphite initially in an effort to build up market share and position itself as a credible alternative to Chinese suppliers.

As the first new graphite supplier in Europe, Flinders can afford to take its time – for now.

Setting a precedent?

Even if the Flinders-Big North deal is not the tip of an imminent consolidation iceberg, it could provide a model for other companies to emulate in the more distant future.

Flinders had been considering a potential merger with rare earths junior Tasman Metals Ltd, which is also exploring in Sweden, but cancelled negotiations in May after the parties failed to agree on a valuation for the new joint company.

Berry said that while it is probable that further graphite industry consolidation will take place at some stage, macroeconomic factors will act as a drag on M&A in the near term.

“The consolidation will continue, but it will be more sporadic and slower than many in the sector hope due to a challenging global growth picture,” he said.

Others hinted that the fact two apparent companies had considered it strategically prudent to join forces demonstrates the challenge of penetrating markets that new would-be graphite producers face.

“This goes to show you how hard it is to place the material and actually generate sales,” one commentator told IM.

“It also serves to highlight how the hype is better than reality [when it comes to the prospects for graphite juniors],” they added.

*Conversion made September 2014

Check www.indmin.com/graphite later this month for exclusive news and interviews from Flinders’ opening ceremony at Woxna. This and other developments in the graphite industry during 2014 will be discussed at the 4th Industrial Minerals Graphite and Graphene Conference in Berlin, Germany, 9-10 December.



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