Elcora gains access to ‘very high’ purity graphite ready for production
At the end of last March, Elcora Resources (TSXV: ERA) entered into a definitive share purchase agreement with Sakura Graphite (PVT) Ltd of Sri Lanka (“Sakura”) under which it will own 40% of the issued and outstanding shares of Sakura, earning 20% of the mine’s net income as operator and 30% of net income as processor. Elcora’s president and CEO, Troy Grant, said that the Company would have taken larger positions had it not been for existing Sri Lankan mining laws, enforcing foreign ownership restrictions. Meanwhile, Sakura’s mine was operational between 1974 and 1985, reaching a production rate of some 18,000 tons per year of high purity crystalline vein graphite.
Elcora will not have to invest in significant upgrades – equipment – to bring the mine back to production at purity grades as high as 99.9% as Sakura has already been improving it over the last 3 years such that the mine is, for all practical purposes, ready to produce. Elcora, therefore, has gained access to very high purity graphite, which commands prices far higher than – as much as double – the current average. Prices stalled in 2012-2013 but they are still at the high end compared to previous decades, remaining at a range of between 1400-1500 dollars per ton. Moreover, production costs are below USD$ 200/ton and this gives Elcora tremendous profit margins. Given the quality and purity of the graphite, it is doubtful that China itself would be able to compete against Elcora’s blend of high purity and proven processing.
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Under the share purchase agreement, Elcora will merely provide the additional capital to launch production. Elcora, through Sakura, will be one of the world’s few producers of vein graphite, which is also known as Sri Lankan Graphite, because of its rarity in other parts of the world. Outside of Sri Lanka, Canada’s Zenyatta (TSX: ZEN) is one of the very few miners of a comparable mineral, but Zenyatta, is not at production stage yet, which means that the actual ‘real world’ production costs are not known yet, whereas, Elcora knows exactly how much it has to spend to get 99.9% purity. Vein graphite is reputed to show the best crystalline properties of all graphite varieties and it is can be adapted to various applications from electric motor brushes to automotive brake pads and clutches in purities reaching 99%.
The Sri Lankan government is very interested in promoting foreign private sector investment and it is taking steps to ease the bureaucratic process in order to attract more foreign companies. Graphite is one of Sri Lanka’s most important mineral products. The government has relaxed the laws so that mining companies are finding the island nation more appealing, especially in the graphite sector. By entering into an agreement with an existing graphite mine, needing little investment to resume production, Elcora has avoided many of the exploration stage problems faced by its competitors, especially in the present difficult investment climate, where there appears to be ‘no money’ and hardly anyone wants to invest in new exploration. By being operation ready, Elcora can get a jump start on the already increasing demand in 2014 just as China enters a more ‘reflective’ phase, marked by mine shutdowns and the adoption of unprecedented restrictions.
China has not only dominated the rare earths market; even if to a lesser extent, it has also dominated the mineral graphite market with a global share of about 70%. There is no doubt demand for graphite will increase in the next few years. Graphite will continue to be used for refractory materials – needed to produce steel – but it will take an increasingly important position in the production of Li-ion batteries. This suggests that graphite will offer one of the most exciting market dynamics of the next few years. The increased demand will need new suppliers with the caveat that both the refractories and battery markets will need as pure and high-quality graphite as possible. This is not always available; when it is available, it might not be of the desired quality and quantity.
There is no doubt that with the rising demand for electric vehicles, prices should start to rise in 2014 and even reach 1600-1800 dollars per ton by 2015. Apart from demand, prices will increase because of supply as Chinese authorities have become far more sensitive to environmental problems; graphite mines have been temporarily closed just as those producing other critical metals. Therefore consumers will be looking increasingly outside of China for raw graphite. Canada and the provinces of Quebec and Ontario have a number of promising and very high grade flake and vein graphite deposits; however, they will reach production stage over the next two-three years, leaving a gap in demand. Sri Lanka, meanwhile, has been one of the original suppliers of graphite. The British secured their own graphite needs there after it became too difficult to mine their own resources in Wales at the turn of the 19th century. This is where Elcora Resources becomes a very interesting prospect.