This Risky Idea Could Pay Off Big Time
As you may know, my job as Chief Investment Strategist for Game-Changing Stocks means I’m always searching for what I call “The Next Big Thing” that can deliver triple-digit gains for investors.
That means, along with a highly dedicated research team, I spend hundreds of hours every year poring through financial journals, SEC filings, earnings releases, trade publications and many other resources to try to find the next great investment opportunity.
#-ad_banner-#Sometimes it’s a revolutionary new piece of technology that could change the world. Other times it’s just an innovative new company that makes life easier for consumers.
Still, other times we will venture into somewhat risky territory. This is what I would characterize as “beer money” plays. You should invest carefully in these plays, and only with money that you can afford to lose. These sorts of investments are high-risk allocations that should not comprise a major portion of your aggressive growth portfolio.
But if you carefully find one or two of these “beer money” plays that pan out every year, it can dramatically alter the performance of your overall portfolio.
I’d like to share one of these ideas with you today…
Northern Graphite (OTC: NGPHF) is a company that trades on a Canadian exchange and over-the-counter in the United States. At this point, it is basically a publicly traded business plan.
These make me nervous. For the past several years I’ve been personally involved, as a communications consultant, in several startups that had fantastic business plans. I know they were fantastic because, ahem, I wrote them. And I personally presented one to a half-dozen investment bankers on Wall Street, with an 83% “yes” rate. Here I am, this dumb farm kid from Nowhere, Kansas, and I’m not only walking in and asking for $100 million, I’m asking and they’re saying yes.
But a business plan is just a document, and “yes” in the world of finance does not a done deal make. “Yes” gets you only to due diligence, when the investment bank sends in a team of analysts to pore over every document, inspect all your facilities and even investigate you. Fact: One of them even called my mother.
Let’s do a little due diligence on Northern Graphite. First, we’ll accept the notion that graphite is a vital commodity. It’s a lightweight form of carbon that’s heat-resistant and used in a ton of devices. It’s vital to batteries. In fact, it takes about 35 times as much graphite as lithium to make a lithium ion battery.
The electric car maker Tesla’s (Nasdaq: TSLA) new factory will require six graphite plants to supply it, and right now there is only one in North America. All major manufacturers depend on China for graphite, which controls 80% of the supply and has imposed all sorts of tariffs and restrictions on its export. So clearly there’s a strong need and scant stateside supply.
Northern had a study done on its Bissett Creek property, which concluded the site had 28 million tons of usable graphite, enough for about 28 years of production. The mine will cost upwards of $100 million, assuming that financing can be secured. It will take 18 months to build, and Northern is hopeful it can get started next year. So probably we can assume that serious financial results — barring any construction delays — will take until sometime in 2019. Northern already has the necessary permits to get started. It has no debt and a $1.5 million in cash on its books. Company insiders own 10% of shares.
Northern has said it has secured a term sheet from Caterpillar for nearly $20 million in equipment. A lot of people will think that this is a big deal. I am not impressed. At the end of the day, you still have to have the cash or the credit to meet the terms.
Now, the broader math: High-quality large-flake graphite, which this site is chock full of, goes for about $1,800 a ton. Northern says it will take $640 a ton in operating costs to mine it. That’s a gross spread of $1,160/ton. Northern expects 20,800 tons per year of production.
A good ballpark figure to play with, then, is gross revenue of about $24.13 million a year.
Now: The mine. Let’s be honest. We’ve all done a remodel and learned the same lesson: It takes longer than they say and always costs more. That the project will take so long in the first place adds some additional worry: Materials cost could rise significantly from the start date to completion. Concrete and steel will be two of the biggest items on the list, and those prices aren’t getting any cheaper.
So let’s put the price tag on the mine not at $100 million but at $120 million. That’s conservative.
Financing that at 8% over 10 years will cost $17.5 million a year. Frankly, if I were a banker lending to projects like this, I wouldn’t lend at 8% on a bet, at least not for the first tranche of the loan. Twelve percent is a more realistic figure. That would up the nut to nearly $21 million. That leaves about $3.1 million in profit.
If you survey the mining companies out there — and there are about 114 of them — the average price-to-earnings multiple is 17.7. This gives Northern a fair market value at the end of 2019, when it’s actually likely to generate results, of $54.9 million, or a little more than twice its current valuation of some $21.1 million.
Having said that, the company says it will only be mining 20,800 tons a year, which seems like a drop in the bucket. So given this 1% estimated recovery rate early on, we can assume that a reasonable ramp-up in production over time is at least theoretically possible. This should juice earnings, assuming that price holds, and that costs — including natural gas — also hold. Incidentally, the nearest natural gas pipeline is about 13 km away. At a million bucks a mile, that’s another $8 million in costs.
Graphite is a critically important market, and a mine is a good business provided the study that the company touts is legit. Short of sending a team of geologists with a boring drill and a map, it’s hard to know. But to be sure, adding a major graphite mine to North America is a game-changer.
To make a long story short, Northern Graphite is one hell of a risky play. We all love the idea of loading up on a few thousand shares at $0.41 a pop and watching them balloon to ten bucks. I give the odds of that at 1 in 10, and I think any investor who buys these shares must be prepared to stomach considerable volatility. Do not buy these shares without setting a stop at which you cut your losses and exit. These shares’ beta — that is their price movement relative to the market — is 3.33. That’s three times as much volatility as the general market.
But that doesn’t mean the opportunity should simply be dismissed. It’s a compelling narrative; it’s a favorable market. The mine does have potential, and if it can secure financing, then there is no reason this stock can’t offer some reward.
But before you buy these shares, make sure you review the risks. Forget the upside. Then think about the most you’d be willing to invest — and hold through 2020 — and maybe think long and hard about cutting that number in half. Rather than a firm recommendation, I suggest that interested investors looking for seriously aggressive growth might like to have 1,000 or maybe 2,000 shares.
Let me make one thing clear if I haven’t already: this isn’t one of my top ideas. It might be a worthwhile gamble for some, but this stock isn’t what I would characterize as a “high conviction” pick. For that, I’d point you to my “shocking predictions” report for 2016. There you’ll find my absolute favorite ideas for earning triple-digit gains from some of the most ground-breaking companies and trends on the planet.
Predictions from previous years have returned 296%, 310%, 408% and more. And this year’s predictions could be the most promising yet. To get your hands on this report, all you have to do is go here right now.