Heeman, I've had numerous chats with the company over the past...

Heeman, I've had numerous chats with the company over the past 12+ months or so, about all different aspects relating to moving to production, and all the boxes that needed to be ticked. This issue of buyers is one of those that has been discussed a number of times. My take on those discussions is as follows (although bearing in mind that my take on it is obviously second hand and I don't speak for management, but I doubt much of the message intent will get lost or garbled in translation)

While I wouldn't say that China has been "excluded", I do know that management chose a clearly defined path in advance, to progress with non-Chinese buyers. Even before we'd inked our first off-take, our management knew that Chinese MOUs were a dime a dozen, and weren't worth the paper they were written on. This was realised by them last year, well before the SYR extensions, the LMB fiasco, or the fact that not a single arms-length Chinese off-take has been signed (in retrospect, KNL management should be getting the kudos for their foresight, and eventually they will, even if the market is still not recognising it).

In addition, our management also knew that all the talk of future graphite uses was great, but future uses wasn't going to get their mine built and operating by 2016. They knew they needed existing users. Finally, they also knew (by being intimately connected in the graphite industry) that the bigger existing users were wanting to get away from relying on Chinese producers, and were actively making noises about getting small amounts of new supply from outside of China (I use the word small, not because I think 40 ktpa is small, but to starkly differentiate from the 200ktpa "wish lists production" that 3 particular companies are going to struggle to achieve full sales quotas for).

So, that's why I'd say that even if management haven't formally excluded the Chinese, they do know that they need genuine, verifiable non-Chinese buyers to satisfy the intended non-Chinese lenders, and hence have gone down the European path (although I know that they have also been speaking with a number of other non-European and non-Chinese buyers, but the European ones got done first). Once they've got the base amounts locked in for funding (which is sufficient with the EGT and TK), then I reckon they'll consider a Chinese buyer, if it suits them too. At that stage, they won't need a Chinese off-take, and so will have a vastly different bargaining position. For the non-finance people, think of it like this. When you need to lock in a certain amount of revenue to satisfy your funder, your first buyers know that they have you a bit over a barrel in terms of needing to prove their bona-fides to lenders, and they can potentially negotiate away things like "hurt money", guarantees, etc. Once KNL no longer need off-takes for financing, they will have the ability to negotiate harder with subsequent buyers. And if there is an element of concern over whether their off-take is worth the paper it's written on, then KNL can potentially demand enforceable guarantees (like Documentary Letters of Credit issued by a non-Chinese bank) to ensure their buyer is serious.

I can't stress enough how important it is to get buyers that are acceptable to funders, and provide the most realistic prospect of getting finance, and therefore getting into production. I also can't stress enough just how little many other companies and investors don't yet "get" this. Even this week I have seen two posts, on two different graphite companies, both advocating a "build it and they will come" message, with one even using that phrase. It is the height of hope, or arrogance, or naivety, for investors (and company management) to think like that. And any company that actually did that (i.e. spend $100m on capex, hoping that the buyers would materialise once their mine was built) should have their boards/management sacked, if not having some directors spend some time behind bars for ignoring their roles as directors of other peoples money.

Rest assured, there is a sound method to management's focus, and it's going to pay dividends, literally and figuratively, for long term investors.