Ann: Bass signs Sales Agreement for 50% of Stage 1 Production, page-53

Hey Stevo:

A few clarifications are in order...barriers to entrance into the graphite market are significant including the following:

1. Viable Resource
2. Capital
3. Graphite Experience (you have to understand graphite and target applications from a technical and commercial standpoint...reading articles, white papers, etc. does not provide the necessary information for graphite expertise, only overview.)

The average producing mine ranges from 20,000 MT to 25,000 MT in capacity. The largest mines in the world are located in China and one, NDG, in Brazil at ~ 40,000 to 70,000 MT capacity. It takes approximately 5 years to reach 90% sales capacity of a 20,000 MT mine as there is a wide range of mesh and purities produced by any one mine with varying pricing economics to arrive at an ASP or average margin. No one mine producer can achieve maximum ASP for top applications it cannot meet the specs of every application.

Bass (Ex-Stratmin) has been producing off and on for many years and have struggled with clay based ore issues which has inhibited them from reaching 95% LOI for any grade on a consistent basis. Some of their customers / applications include Asbury, crucibles, lubricants, limited refractories, & friction. They do not have the capacity to supply any real volume to refractories or be able to meet the low price point.

Bass has the luxury of providing commercial produced (not lab or pilot plant) samples for qualification for new business, which then translates to new sales. From my knowledge, Bass does not possess a company sales force and relies solely on distributors, processors, or sales agents.

Yes, the hype of battery is there, but unless you can produce a finished graphite battery grade product, you are limited to selling feedstock to a processor and a supplier will be subject to prevailing low market prices as EVERYONE in new start up graphite is looking to be battery feedstock suppliers.

Average feedstock price for fines used in battery grade raw material ranges from US$ 600 to US$ 700 MT EXW depending in the metallurgical analysis and negotiating partnership with the customer.

As for unpresented demand for Li-Ion, this has yet to materialize, but there is an increase demand in refractories, fire retardants, and automotive parts (friction, plastics, thermal parts, etc.) that is driven by increased sales of global cars and trucks (~94.5 million in 2017) up from 2016. Consumer goods are driving demand for Li-Ion at a steady state with each new gadget (iPhone, LG, Samsung, E-Bike). E-Bikes are selling at a rate in China at ~15 Million per annum with each bike using a 2 KG Li-Ion battery...now that's a lot of graphite!

Here are my economic takes:

External (non-exclusive) factors influencing the graphite market:

1. Oil prices have increased by 19% in 2017, thereby increasing rig count by8%, and increasing tube & steel pipe demand---(increased demand in graphite for drilling fluids, HMF, forging, upsetting, lubricants, descalants)
2. Increase in steel demand for construction, oil & gas exploration, military equipment / ships / submarines, and automotive production (light & heavy duty pickup trucks) ---(increase in demand for graphite in PM, steel, plastics, lead acid batteries, lubricants, capacitors, friction.)
3. Automotive sales reached ~94.5 million in 2017---(increase in demand for graphite in PM, steel, plastics, lead acid batteries, lubricants, capacitors, friction.)
4. Refractory output for steel has increased by double digits in 2017, thus an increase demand in raw materials used in refractory manufacturing---(increased demand for refractory grade graphite, lubricants, & descalants.)
5. World GDP increase by 3.5% creating an overall demand increase in consumer and durable goods. (IMF 2017)---(increased demand for graphite for PM, forging, steel, plastics, polymers, ceramics).

Exclusive factors influencing the graphite market:

1. Increase demand in expandable and expanded graphite for commercial and residential construction fire retardant materials driven in part by recent events in the UK and China where there was significant loss of life.
2. Increase demand in graphite powders for automotive applications including lubricants, plastics, aerospace, and military applications in response to increased defense spending by the US and its allies.
3. Significant government intervention non-compliant / non-environmental mining in China to improve air and water quality which continues to directly affect current graphite mines and pending graphite mines.
4. Significant government regulations and laws affecting purification processes for industrial minerals and precious metals and natural flake graphite driving demand for more external China processing plants that meet stringent ISO 9001 and ISO 14001 guidelines.
5. Demand increases in Li-Ion and Alkaline battery for consumer goods continues to show aggressive improvement through mobile phone introductions, expanded power tool introductions, and increased demand in disposable primary batteries including coin, cylindrical, and 9-volt formats. Li-Ion for HEV, EV, and PHEV continue to demonstrate a steady growth and expected to increase steadily over the next decade.