TD: Don, we have arrived at one of the most important parts of this article. Please comment further about Zenyatta’s applicability in the synthetic graphite market.

DH: Zenyatta will no doubt be producing a wide range of grades of graphite, in terms of particle size distribution. It’s very difficult to change the particle shape, but you can certainly change the particle size and the particle size distribution, as well as some of the other attributes of the material. It is highly crystalline so that will be a positive factor in many, many applications. In some applications it might be desirable to have less crystallinity, but we don’t know what those applications are at the moment.

TD: Zenyatta’s specifically targeting the synthetic graphite market, but are there other applications of Zenyatta’s graphite other than synthetic?

DH: It certainly can fit into use in lithium-ion batteries and other battery applications, as a component of the anode. You need high-purity graphite there. Everybody is talking about, ‘oh you need large flake because then you produce the spheroidal graphite that is needed in the anodes’, but the losses there are quite high in terms of the production process. If you have material that will give you the same surface area – and what they’re looking for is surface area – and the surface area that has been evaluated to date on the Zenyatta material is comparable to other products/materials out there and certainly to synthetic graphite. And so that is without doing any post-processing at all. That’s the stuff that came out of the initial test work; nothing’s been done to that at all. That was the final product that came out and it is what it is, and has not had anything else done to it. It has a comparable surface area to the materials that are currently being used, it’s highly crystalline and that’s quite desirable in most of these applications. High crystallinity translates to high conductivity, with minimal adverse impacts in terms of performance of the product and so forth. Whether end users will agree with that assessment, for example, anode manufactures or electrode manufacturers, that this is a suitable material, is subject to working with those potential customers and saying, ‘Here’s our stuff – try it, see if it works well. If it does we can do some business, if it doesn’t let us know – maybe there’s something we can do to make it work better– we’ll try that. If that doesn’t work then ok we agree that it doesn’t work for your particular product.’ But that doesn’t mean it won’t work in other products. And that’s the normal course of business.

TD: That brings us to an interesting point about graphite compared to other commodities that are traded at market spot prices. With graphite, it’s really about your relationships with the end users.

DH: Yes. All of these graphite products are sold on a supplier/customer direct relationship, with products tailored to the specific requirements of each and every customer. It’s not ‘oh we have 50 mesh material at 95% graphitic carbon – and here it is.’ You work with every customer to produce a product that they want so that – let’s say it is a graphite flake producer – if he has 50 different customers that want materials that are between say 50 and 80 mesh, he could have 50 different grades of that 50-80 mesh material; at 50 different prices.

TD: But what I want to underscore – this isn’t like potash – where it just goes to port to be sold on the market. With graphite producers, you are almost manufacturing custom orders of material.

DH: That is the nature of the business because the historic business of graphite producers is that they will produce a concentrate. Say a good concentrate, +80 mesh material at 95% graphitic carbon. That is sold to a graphite processor, who then further modifies it in terms of purity, particle size distribution and whatnot, and he sells it to the ultimate user. The demand for specific types of graphite material may vary considerably. For example, a producer may have thousands of tonnes of finished product sitting in the yard, but if the client wants +50 mesh material and you don’t have any of that and the client doesn’t want -140 mesh material, but you have a lot of that, guess what? You have a lot of -140 mesh material remaining in inventory.

TD: Don, you are a member of the Advisory Board at Zenyatta. What is your advisory role to the Company?

DH: I’m providing some scientific or applications process advice to Zenyatta, some market information, applications information and so forth. I’m a geologist, but I’ve spent all my life in industrial minerals, looking at the relationship between the geology, the processing and the end use of the materials. So I have to understand why end users are buying particular grades of material, what’s happening in their end-use technologies that might change, the type of materials that they need in terms of quality, quantities, properties, etc. I also provide in-depth assessments on deposits. But the industrial minerals business is understanding what are the requirements of my ultimate customer – not producing a commodity. It’s a highly market-driven, application-driven business. To be successful in the industrial minerals business, you have to know as much or more than your end user does about why he or she wants that particular commodity.

TD: With your over three decades expertise in the industrial minerals business, please comment on how you perceive Zenyatta?

DH: They’re a very typical junior company in that they got a property and they’re exploring it. I’d say they’re quite methodical in terms of how they’re doing their work, which is very good. And they’re not exaggerating what they’re getting. They’re not promoters and that’s somewhat different from a lot of junior companies that tend to be more promotionally oriented, in terms of driving up the stock price and promoting the hell out of the company. They are not putting out press releases every second day saying they’ve done this and that and everything else. They put out a press release when there’s some information to disclose and only when they’re sure that information is going to be of value to shareholders and the investing public. There are a number of junior companies both in the graphite sphere as well as a number of other areas that put out press releases essentially saying ‘we had a coffee today.’

TD: Zenyatta has changed the description of their deposit from vein to hydrothermal.

DH: Yes, it’s a hydrothermal altered brecciated pipe. And originally they weren’t quite sure what it was geologically (and the geological origin of the material), but now they’re much more sure because they’ve put some more holes in and got more data. Zenyatta originally called it a vein deposit because they weren’t entirely sure what they had. It’s not a classical vein deposit as found in Sri Lanka.

TD: Can you comment on the Albany deposit geologically?

DH: When you look at the core it looks quite good in terms of what you see in the core is very consistent in mineralization, which is good. There are some zones where it’s much richer than others, but that’s to be expected. In general, you see from one end of the core to the other – across the pipe – very consistent in material and so continuity is nice. And when you look at the core going down the hole in terms of the core from drill at upper elevations compared to core drilled from much lower down, it seems to be more or less the same, so that’s very good. So you have the potential to have a nice deposit. You’ve got the potential to have a relatively low-cost mining operation. It will most likely be an open pit. As far as the shape of the deposit, you have the pipe coming up and then branching off into two arms, but the arms aren’t that far apart, so having one reasonable sized open pit is possible. Given the nature of wall angles and so forth, it would be uneconomic to have two small pits. It’s close to infrastructure and they have a good relation with First Nations, so those are all very positive things going for it.

TD: A lot of industry experts, analysts and the like have stated that the graphite industry is really a race to production. The first one to make it to production wins.

DH: Yes it is. Very much so, in the sense that there are well over 300 junior companies exploring for graphite and by no stretch of the imagination can all of those companies get into production because there would just not be the market for it. Market size for graphite is limited. The fact that you’re producing graphite does not mean that you can sell it. Unlike if you were in the gold business, and produce gold, you sell it. It is the same with any other base metal. You produce zinc, you sell it. You produce copper, you sell it. But industrial minerals are market driven in terms that the market size is not infinite. In total graphite, the market size is around 2.5 million tonnes – for both natural and synthetic. And the graphite market is growing basically at the rate of growth of the world economy, but within that overall growth there may be specific sub segments of the market that are growing very rapidly, i.e. graphite for lithium ion batteries and some other applications, and some other segments of the market that are growing very slowly but are actually quite large, such as synthetic graphite for electrodes.

TD: We don’t know what the future may hold with additional applications for graphite.

DH: That’s right, we don’t know that. What you do know is that synthetic graphite costs a lot of money to produce. If Zenyatta goes into production, it will be likely that they have production costs that are substantially lower than synthetic graphite, but with a product that is comparable in properties. That will be a market advantage to Zenyatta. So one of the potential outcomes of the Zenyatta project is that one of the major synthetic graphite producers may take a significant equity interest or buy Zenyatta out in whole – as a source of material and shut down some of their higher cost facilities and increase their margins and make the Zenyatta shareholders quite happy. But whether that will happen, I have no idea. But that is a possibility.

TD: Let’s take the synthetic market off the table for a moment. What about other conventional flake graphite deposits? Can Zenyatta not compete effectively against those producers as well?

DH: Yes, they would compete at the market level – at the ultra-high purity level — that those guys are trying to go after. For example, I’ve done work for other graphite explorers, so I can’t go into too much detail, but one target application for those companies is a very highly purified natural graphite. Could Zenyatta compete in that market? It depends on how good the Zenyatta material is compared to the material other conventional graphite explorers might have and what the particular characteristics are of the material that the end users want. So can they compete directly for 100% of the market that other flake graphite juniors are going after in that ultra-high purity flake graphite market? I don’t know. Could they compete for a portion of that market? Maybe. Maybe not. We’ll wait and see.

TD: Regarding the ‘race to production,’ isn’t it the notion that whoever gets into production first is going to fill the production gap and make the other 300 graphite juniors – more or less – obsolete?

DH: Not necessarily, it depends on how successful you are at establishing customer linkages and at meeting the specific requirements of specific customers. Just because you’re in production doesn’t mean you’re going to sell anything. It means you may have a big inventory of finished product

TD: Based on the paradigm of the graphite market, I think that’s one of the things that Mason Graphite’s got going for them is Benoit Gascon’s connections from his 20 years at Timcal – his hands-on experience isn’t just in producing graphite of all kinds, it’s selling it to the end users. And I think his relationships, marketing and sales experience are major advantages for Mason.

DH: And those types of relationships are very important. Zenyatta has been talking to a wide variety of potential customers as well as (and it’s no secret, I think they’ve probably indicated in their literature) and Aubrey has probably said that we’ve had discussions with various significant graphite consumers and producers. I can’t tell you who Zenyatta has talked to, but certainly all of the major companies are interested in what Zenyatta’s doing. Aubrey would be certainly very derelict in his fiduciary duty if he were not talking to those companies because they might come along and say, ‘here’s a big check and we want to buy your project.’ Aubrey and the board might say, ‘that check is big enough for us, thanks very much.’ Or they may say, it has to be bigger.

TD: Why has Zenyatta done so well?

DH: It’s a different story. I think the analysts like a different story. Zenyatta is not another flake graphite project; there are lots of those around. And what differentiates Zenyatta is that it is a different geological story and, potentially, a different mining situation. That is one of the drivers in this whole thing in that it’s just a different story. Stock analysts and newsletter writers such as John Kaiser and so forth like different stories. That may be the only reason why the stock has done so well. And Zenyatta has not gone to the marketplace to raise money.

TD: What about the companies that have enormously large resources. How relevant is it to have a monstrous deposit or a trillion tonnes of graphite?

DH: A lot of graphite juniors companies say, ‘we’ve done more drilling, therefore, we have a larger resource, therefore our stock price should go up.’ Ty, in this kind of business you don’t normally get extra valuation for having a huge resource.

TD: Unlike, for example, a deposit like gold?

DH: That’s right because there is a finite market for the stuff. You can’t have an infinite production capability. Once you get to a certain resource size, you get no added credit for having more resource. You have to have a resource that will give you a reasonable mine life, but anything over and above that, the market place says, ‘big deal!’

TD: You have suggested that the industry can accommodate a few projects going into production, as opposed to whoever goes into production first kills the market for everyone else.

DH: Right, because it depends on what your customer base is and what your actual product mix is. So is there going to be a market for 20 or 30 junior companies? I doubt that very much. But is there a market for a few new producers, yes, I think so. And the two things that drive demand are: 1.) The overall growth of the market and 2.) What’s happening in China. China is a huge supplier of graphite, especially natural graphite. [Since the onset of the global financial crisis in 2008, the benchmark price of graphite has risen 42% on demand from economies such as China and India, according to Industrial Minerals. China leads the world in graphite mining, accounting for about 68% of 2012 output, according to an industry summary from the U.S. Geological Survey.]

TD: But low-grade graphite, right?

DH: Well, it depends. Some of the Chinese stuff is quite high grade, but not a lot of it. Most of it is relatively low grade. The Chinese came into the graphite business in the early to mid 1990s and totally destroyed the market. Graphite prices were quite high and there was a lot of exploration in Ontario (Canada), for example, in the early to mid 90s. Then the Chinese came in like a big wave and the prices dropped like a stone — and everybody went out of business. All those juniors went under and projects were shut down completely.

TD: What is your outlook on the graphite industry as a whole looking forward?

DH: It’s a fairly good market. Pricing will fluctuate quite a bit. And a lot of the enthusiasm for getting into the graphite business in the last couple of years has been this very rapid rise in prices for the larger flake grades of material. But those prices have subsequently deteriorated and, basically, reverted to the mean. So a lot of projects that looked very good at these very high prices, don’t look so attractive when prices fall down. You have to base your projections on whether you should get into production and whether it’s economic, in terms of realistic pricing going forward. And that is a very difficult thing to do in terms of saying, what do I think prices are going to be? Because there’s no true price transparency, the prices that are published are basically sort of a range of pricing obtained by various industry publishers that may or may not be real transaction prices.

TD: Because there isn’t a market price for graphite, per se.

DH: Generally, they aren’t real transaction prices. But industry-pricing publications call up producers, consumers, distributors saying, ‘what are you paying?’ or ‘what are you selling the stuff for?’ And that may be a true transaction price or it may be a graphite producer’s list price today. And the list price is a list price. It doesn’t mean anything.

TD: It’s hard to take that as a precise barometer of where graphite is at pricewise.

DH: If all of the prices reported are going up, we can presume that the actual prices are going up. If all of the reported prices are going down, we can presume that the actual received prices are probably going down. But is the pricing quoted accurate, especially within specific grades, customers, specific destinations, etc.? It’s very hard to say. How much of it is true requires a lot more digging.

TD: Please comment on what your thoughts are on what Zenyatta has achieved to date.

DH: For the amount of money that they’ve spent and the time that they’ve been seriously involved in looking at this, I think they’ve done an excellent job. In terms of developing the project, being able to identify what looks like a good resource, getting the necessary initial metallurgical testing done – saying, ‘yes, we can process the material and recover something that seems to have the properties that the marketplace wants’ — getting the test work done in terms of verifying those properties; and moving the project ahead in a very methodical, well planned, well organized way, without undue promotion or hype. They’re doing that both on the technical side and they have a very good relationship with the First Nations groups in the area, and that is highly positive for the project. All and all, Zenyatta’s doing an excellent job and they’ve been able to do this with quite reasonable cash burns and retain the equity of the original investors, so they haven’t gone through any significant dilution in the shares, and that’s retained value in the company. You know, they don’t have a lot of shares outstanding and a lot of the other guys do have an awful lot of shares outstanding. So any enthusiasm in the Zenyatta stock or story will translate into more of a bump in the price of the stock than it would for other guys because there’s just not as many shares out there.

TD: What are the upcoming benchmarks or milestones that people can look forward to with Zenyatta?

DH: The NI 43-101 resource will be out at the end of October or mid November at the latest, I would think. They will have a tonnage estimate out with a head grade and a cut-off grade saying – ‘we’ve got X millions of tonnes of ore at Y grade, at this cutoff.’

TD: Obviously there is a lot of anticipation.

DH: It depends on the expectations of the market. I don’t know what the market is expecting. If the market is expecting a deposit that is going to be hundreds of millions of tonnes of contained graphite, that’s just not in the cards. The nature of the deposit just doesn’t permit you to have that. Anybody can do that calculation regardless of the resource estimate. Because they’ve said in all their press releases and everything that’s been published that basically these are the intersections we’re getting, in terms of the width, and we’ve drilled down to this depth, and anyone with a calculator can do the calculation and say ‘the volume is this.’ Hopefully the market is not expecting something that says we’ve got 100 million tonnes of contained graphite – because that’s just not possible. Remember, a monstrously large deposit doesn’t matter. Whether the stock market thinks it matters is another question. Technically, it does not matter at all. What matters is that you have enough material to give you a reasonable mine life at a reasonable production rate and whether the deposit can support a 20-, 40- or 60-year mine. That’s what’s critical. But you don’t need a resource defined so that you can have a 300-year mine life.

TD: To reiterate your earlier point, immediate project economics are far more relevant than the vastness of the deposit, correct?

DH: Yes, so the next critical thing is the PEA. And what does a PEA say? Does the PEA come in at reasonable capital cost that is financeable? And I mean does it come in at a cost where you could go to market and say, we need $400 million and the market says, ‘that sounds like a reasonable number and we can split that up in terms of investment banks or whatever – and we can raise that kind of money.’ Whereas you come in and say you need $3 billion to put your project into production, nobody is going to give you the time of day because $3 billion is not available. That’s a fundamental issue. And then how good is your marketing? The PEA needs to have a very good analysis of the market, discussion of customers and what they’re looking for. We’ve got good recoveries in our process and good properties in our product; and our potential customers – without going into the proprietary details, of course – really like it.

TD: Is there an approximate timeline on the PEA?

DH: Aubrey is planning to have that completed towards the end of the first quarter of 2014.