Nextsource Materials Inc (NSRCF)

[StoogeNo4]

I spoke with Energizer management. It was a good discussion. In response to some of my questions, management discussed the following information with me:

Regarding compensation, on the 10-K, salaries will fluctuate as a function of the fact one must account for stock options that have been granted as compensation. Therefore salaries will fluctuate up and down every year based on when financings occur - which is the only time that options can be granted. Rules allow a rolling 10% (maximum) of the total fully diluted shares, issued and outstanding. Options granted do not account for a cash payment of any kind (as stated on the 10-K). So the stock options appear as income at first glance only, but must be counted as income if granted as compensation under under TSX rules. These of course have no value unless they are a) "in the money" and b) are exercised.

None of Management has not sold any of their options ever, nor any shares since the Company changed its name to Energizer over 2 years ago. Management has also purchased shares themselves at prices much higher than the stock is today. Options are only granted under the approved stock option plan as stipulated and approved by the TSX stock option grants plan, which is set out as a resolution each and every AGM and is voted on by shareholders. Option plans are a legitimate and an essential part of the compensation plan of virtually every junior mining exploration company on the TSX-V, TSX, OTCBB, etc. For example, on Dec 20, 2012, Northern Graphite just granted options to insiders http://ca.finance.yahoo.com/news/northern-graphite-announces-grant-options-210000654.html.

Yes, exercised options dilute the number of outstanding shares. However, their incentive with options is for the share price to appreciate and it will only do that if they run the company properly. If the share price depreciates, then they will lose like the rest of us.

Regarding the new timeline for the PEA to be completed, this was a result of 2 things. 1. The majority of junior mining exploration company's PEAs are done as 'desktop' studies. Energizer's was not. DRA, being a full EPCM engineering firm actually put out to tender 3 RFPs to price components of the future mine based on the assumption the resource would be around 100 million tonnes with an average grade of 6% carbon. When the resource came back much higher in both tonnage and grade, DRA advised that this new info would have a positive effect on CAPEX, etc. and had to 'reprice' the components (put back out to tender) again. SO it was almost a start from scratch approach on certain cost elements. As well, being located in South Africa, and they take close to a month off around Christmas. That's the reason for the longer-than-usual delay. So the PEA will be out around mid-February. Many shareholders failed to realize that the delay was a result of good news and the reasons, as stated in the recent NI43-101 news release, were that the material grades were much better and will reduce mining costs significantly. I think investors have missed the importance of that.

I was a bit upset about the timing of the recent financing (because I thought they could get better terms after releasing the PEA), but I didn't know the reasons for it until speaking with management. The reason that the recent financing was done at the time was so that they could obtain the cash to initiate parts of the PEA and certain elements that are actually part of a BFS (such as the initiation of a pilot plant). The pilot plant must be built in order for Energizer to produce finished samples of graphite flake to give potential off take partners samples for evaluation. This would imply that, having been pleased with smaller samples, potential off-take partners now need to see if they would get the same quality of graphite with a larger sample. I consider this extremely bullish. Also, timing is key…Energizer reminded me that in these tough markets, good news is no guarantee that the stock will rise. In fact, the very positive 43-101 resource which confirmed the Molo is the largest known graphite deposit in the world had no appreciation on the share price. Mgmt said first mover advantage is key, and waiting until mid Feb to start financing would delay things by 2 months.

Energizer plans to have a completed mine up and running by the first quarter of 2015. completion of the BFS... I don't know of any junior graphite company of any significance that can make that estimation at this point. Given the purity and economics of the resource, they can potentially use profits from graphite to construct a vanadium mine for when worldwide vanadium demand eventually increases. Those things being said, even though there has been concern about the experience levels of the management team, that has been well addressed with the partnering with DRA as their mine builder . Most people do not realize how important it was to land DRA. They are huge. They've built over 200 mines and operate 23 for tier 1 (Anglo, Xstrata, Vale); and they have prominent industry people appointed to their board.

On public relations. Mgmt. made it very clear that they are not a 'hype' company and never will be. Case in point - They waited to even announce they had graphite until after they drilled 17 holes, had the metallurgy tested by 3 separate labs and had assays back. Based on feedback from bankers in Canada, it was deemed a waste of time to go out and promote the Molo without a resource statement and preferably a PEA. Now that the PEA is right around the corner, Energizer will be ramping up PR significantly but in the right way. Because they are TSX listed, the rules and scrutiny on them is far higher than on any other graphite play. They can not say or do anything that would be deemed promotional and are not allowed like others to assume or estimate additional grade or tonnage. Very handcuffed in dissemination of news and even email updates to shareholders that many of us get direct from Energizer.
What they will not do is employ the U.S. PR firms that are classic pump firms or utilize highly promotional and boiler-room type tactics to drive the stock. (like you see Graphite Corp and USA Graphite doing). Yes, they may be getting a lift on their stock price but at big costs and drains to the treasury and it is artificial - not sustainable. Articles have said they are spending with these pump houses $50-$75,000 per month for min. of 3 months, in some cases 6 month contracts. These companies have not even started exploration in some cases and never will and once the spending stops and it has to, shares will rocket down.

When I heard this and then compared these type of plays to what Energizer has done, I begin to understand that Energizer may just be the tortoise that will win the race.


There are certain things that cannot be ignored:

1) In less than one year of discovering the graphite, Energizer has produced an NI43-101 compliant report for the graphite and it is world class. It has leaped frogged and or caught up to companies that had a 3 year head start. The year prior, they produced an NI43-101 compliant report on the vanadium pentoxide and began a PEA on the vanadium. In slightly over a year, they will have completed the PEA on the graphite (due mid-February, 2013).
2) They plan to initiate a bankable feasibility this Spring and and complete it by the fall.
3) Management is underpinning the company with the necessary people and expertise to bring a mine into production. They have hired some impressive people (DRA), and put them into board positions that will enable them to move the company into production. It seems to me that that is what any intelligent person would do.
4) They have obviously been working to secure off-take partners for the resource(s).
5) They made a very intelligent move in securing all graphite properties around Molo. This reduces the possibility of potential competitors taking advantage of the geology in the area.
6) Energizer is the only graphite/industrial mineral company on the TSX big board. Everyone else is either TSX-Venture, Bulletin Board, or ASX listed company (where outstanding shares are mostly north of 500,000)

Another piece of information that I did not know is that DRA, over their 30 years in business, has only invested in 4 mining companies throughout the world and never at the pre-BFS stage. ENZR is one of them. DRA typically stays out of investing and sticks to the design, construction and sometimes running of the mines. As you know, DRA is world renowned. Also, as you know, DRA made an US$850,000 investment into Energizer. They joined their board. The are the authors of the PEA and will be for the BFS. Read between the lines on this one.

It seems to me, given all of the information above, that we in essence do have a professional and competent team with plenty of incentive working on the shareholder's behalf. They emphasized that the US market will be a high priority for promoting the project right after the PEA results. Perhaps that is worth some of the share dilution that many have been complaining about.

I would also note that there are small companies on the TSX with tried and true management teams that have share prices suffering right now (Matamec of note). The TSX has been a blood bath for well over a year, and there is no money out there to be had because of the current risk appetites. That ENZR has essentially been able to maintain a stable share price while other companies have plummeted is, in my opinion, quite bullish.

From what I gleaned from my chat, 2013 will be a significant year for them. Many milestones coming to bear that should manifest in the stock price.