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Byron Capital Research Report

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Equity Research

July 11, 2011

Rating: SPECULATIVE BUY Target Price: $1.90All figures in C$, unless otherwise noted. Recent Price: 52 Week Range: Shares O/S: Basic (MM) F.D. (MM) Market Cap (MM): Average Daily Vol. (3 mo.) Fiscal Year End: Cash (Est.) (MM): $1.00 $0.86 - $1.55 31.5 45.6 $31.5 86,500 Dec. 31 $3.0

(NGC TSXV) High-Yield of High-Value Battery Material Initiating Coverage: We are initiating coverage on Northern Graphite Corp. (Northern Graphite), a company with 100% ownership of the Bissett Creek graphite deposit located less than 17 km from Highway 17 near Mattawa, Ontario. In the near term, the advanced project should deliver positive results from a pilot plant, a new resource estimate and a Bankable Feasibility Study (BFS) on its way to production by early 2013. Low Strip Ratio, Shallow Dip and Low Capex: The mineralization is covered by up to 10 metres of overburden and given the flat lying nature of the deposit (approximately 20%), the strip ratio will be less than one; roughly 0.66:1. With logging roads to the site, power and natural gas lines less than 17 km away and a simple flow sheet, capital costs for a 20,000 tonne per annum (tpa) plant is minimal at approximately $70 million. Upcoming Catalysts with Known Metallurgy and an Expanded Resource: Metallurgical work has been performed numerous times, in 1989 and confirmed in 2007, yielding a 95% recovery. A pilot plant test will be done in September of this year to confirm the easy flotation, but more importantly, we believe it will provide test material of its high value large flake, high carbon graphite content graphite for strategic investors. A BFS is expected shortly thereafter in November 2011, which will incorporate the pilot plant work and the new resource from a recent drill program. Can Easily Double Production: Northern Graphite can currently double production and still have a 20-year life of mine (LOM), and with the upcoming catalyst of incorporating May 2011 drill results into a new resource, Northern Graphite will easily extend the LOM over 20 years. This will help the company meet increased demand of its higher value graphite from the growth in lithium-ion batteries.

Northern Graphite Corp.

Company Description: Northern Graphite is a mine developer with its 100% owned asset, Bissett Creek, located in Maria Township right off the Trans-Canada highway and approximately 100 km east of North Bay. Northern Graphite plans on bringing the project to production by end of year 2012.

Jonathan Lee, MBA Battery Materials & Technologies 647.426.1674 [email protected] Sandy Lam Associate 647.426.0287 [email protected]

Summary: With known metallurgy, infrastructure in place, a relatively low capex and a short time to production, risk is minimized for the Bissett Creek project that is expected to have $19.5 million per year in gross profit in 2013, with the potential to generate $39 million in gross profit by doubling production to meet demand from growing battery production. We are initiating coverage on Northern Graphite with a SPECULATIVE BUY rating and $1.90 target price based on 1.0x NAV using a 14% discount rate.Please see end of this report for important disclosures

Northern Graphite Corp.

Graphite OverviewGraphite has long been an ugly and unloved material. Most of us are exposed to graphite only through the lead in the ubiquitous pencil, but industrial uses for graphite dominate this market. There are actually four forms of crystalline carbon; the most famous being diamond, but graphite is one of the four as well. Graphite has the advantage of being relatively chemically inert, while exhibiting the best electrical and thermal conductivity of all non-metallic solids. The graphite industry is approximately 1.1 million tonnes per year with about 75% of graphite being produced in China and the bulk of the remaining material sourced from North Korea, Brazil, Sri Lanka and Canada. Given the dominant market share of China and its implementation of a 20% export duty and a 17% value added tax, graphite prices have more than doubled in the past year for a range of different graphite grades and products. There are two sources of graphite. The first is mining graphite from deposits. This natural material has varying levels of quality/purity/size, ranging from lump (or vein) to amorphous to crystalline flake. However, contaminant loads can vary widely and this heavily influences the use of the material in some applications and its pricing; the carbon content of the graphite required for an application can range from 70% up to 99.9% or higher. The other source of graphite is to heat a feedstock such as petroleum coke to very high temperatures for days in a special furnace and create very pure synthetic graphite. Natural graphite finds uses in such areas as the making of refractories, as it can handle very hot materials such as molten metals. Refractories are best made from crystalline graphite, but new developments are increasing the use of amorphous graphite in this application. Steelmaking requires the addition of carbon to bring its level up to a desired point, which is called carbon raising. While graphite can be used to do this, so too can any other source of carbon that contains little in the way of other metal contaminants, including petroleum coke. Thus, the price for carbon raising materials is very low. Expanded graphite is graphite that has been acid treated to separate the sheets of carbon atoms that make up flake graphite and make it amenable for use as a high temperature seal or insulator. Amorphous or small flake graphite is used to make brake linings, although some new materials are taking market share from graphite. Foundry facings, the use of amorphous or small flake graphite to coat moulds for molten metal and make it easier to remove the poured part, is also a use for natural graphite, albeit a smaller one. Synthetic graphite is used to make electrodes that are used within arc furnaces, with the scrap from the manufacturing of these electrodes used as carbon raising material in the same steel plants. Synthetic graphite that is high in quality and purity is also used in the nuclear industry and to make carbon fibre products. In the past, synthetic graphite was also the only choice for battery manufacturers making anodes for both primary (disposable) and secondary (rechargeable) cells. However, various processes have been developed, including chemical and thermal treatments, to purify natural graphite to the point where it can be used as a battery anode. And with some other properties that natural graphite brings to the table and its cost advantage, it may well prove to be the performance and value leader in the battery market in the future. With the amount of graphite used in batteries approximately 10 times more than that of lithium, and the replacement of synthetic graphite with flake, we believe the growth of larger flake graphite is robust in the future. Thus, Northern Graphites ability to produce high carbon content, large flake graphite will enable the company to take advantage of lithium-ion battery demand growth.Jonathan Lee, MBA 647.426.1674 [email protected]

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Northern Graphite Corp.

Right Off the Trans-Canada HighwayThe Bissett Creek deposit is just 70 km east of Mattawa, Ontario. It is accessible by 17 km of well-maintained logging roads to the site, and the road is an easy turn off from Highway 17. The deposit is close enough to towns that the company does not have to construct a camp for its workforce. A natural gas pipeline and electric power also run along Highway 17, which Northern Graphite can tap into to run its operations. The location is an enviable one, as the company is costing three power scenarios to determine the most economic: 1) connect to the nearby natural gas pipeline; 2) connect to the closest substation; or 3) construct a new substation closer to the property. Low capital costs due to the deposits proximity to infrastructure will shorten the payback for the company and enhance shareholder value. Exhibit 1 Property Location

Source: Company reports

An initial resource and a scoping study were completed for the 100%-owned Bissett Creek deposit in 2010. The graphite deposit is hosted in weathered graphitic gneiss. The deposit is fairly flat, dipping approximately 5 to 20 degrees and is at surface with less than 10 metres of overburden. The thickness of the deposit is approximately 75 metres providing for an easy open pit operation. The flatness of the deposit at surface is shown in Exhibit 2. Industrial Minerals Inc. (Industrial Minerals) previously tried to start up a small operation but because the company used a flawed dry recovery process, it was unable to achieve continuous operation. Northern Graphite will take advantage of these characteristics of the deposit. We believe minimal overburden will lower capital costs for clearing the overburden and the shallow dip will maintain a low mining strip ratio, reducing operating costs over the long term.

More than Enough Resource

Jonathan Lee, MBA 647.426.1674 [email protected]

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Northern Graphite Corp.

Exhibit 2 The Flat Lying Deposit

Source: Byron Capital Markets

SGS compiled a resource in 2010 using previous drill results, in the indicated and inferred category. The resource is sufficient for over 35 years of production at 20,000 tpa using a 1.5% graphitic carbon cut-off grade. The deposit is associated with larger flake material with all material expected, after processing, to remain at greater than 100 mesh size while being over 94% carbon concentrate. Exhibit 3 NI 43-101 Compliant ResourceCutoff Grade (%C) 1.00% 1.50% 2.00% 2.50%1

Ore (tonnes) 20,449 14,641 8779 4562

Indicated Graph CContained

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