EDITOR: | September 30th, 2014 | 10 Comments

Graphite Market Review: China’s exports of graphite to decline markedly

| September 30, 2014 | 10 Comments
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Alabama Graphite Market Review

Graphite Market Review — The graphite sector was down -3.59% for the week ending September 26th, 2014 based on the list of graphite stocks we are following listed below. China’s intermediate-term supply crunch in graphite is not well appreciated by the market. This is surprising as 70% of the world’s graphite comes from China, and exports will without question decline markedly in coming years. Even though it has been widely reported that there will be major curtailments of supply in two of China’s major graphite mining provinces, graphite investors and end-users seem largely unfazed. China’s actions have not yet been fully implemented, so the impact on supply may not be readily apparent. Even without this major catalyst, China also intends to keep more of its graphite for domestic uses. Make no mistake, this is a big deal. The moves by China have global implications.

We’ve seen this movie before. A few years ago, China announced that it was closing down small, polluting and/or illegal coal mines. At first, this was largely ignored by the market. It was known that China was trying to clean up its act. It was also thought that China wanted to slash the large number of mining deaths due to unsafe work environments. As a result, China’s imports of coal from Indonesia, Australia, Columbia, the U.S. and Canada started to increase, slowly at first, then by a more significant and consistent amount.

China’s explicit plans to close graphite mines will move the market

Astute readers can guess where I’m going with this. China can and does move commodity markets all the time. Global coal prices rose due to China closing thousands of small mines. So, when China talks of doing the same by closing small, inefficient, polluting and/or illegal graphite mines, investors should take note. This could be a perfect storm for graphite prices, maybe not this year, but as soon as 2015 and certainly by 2016-2017. Typically when commodity prices rise due to increasing demand, there’s a supply response to mop up that excess demand. The inverse is also true, excess supply begets lower prices.

We can see a prime example of excess supply crashing iron ore prices, down about 41% year-to-date. China’s graphite mines are depleting as many have been in operation for decades without proper mine management techniques. The Chinese government has mandated that two highly prolific graphite regions in China curtail a significant proportion of their smaller, dangerous and polluting mines. Exports from China are going to fall, it’s just a question of when and by how much. Pundits suggest that 10%-20% of global supply could be at longer-term risk.

Graphite prices could be facing a perfect storm

In many commodities, a 10% supply shock can send prices soaring. Sometimes supply shocks come out of left field, a wildcat strike of a major producer or unusually bad weather that floods mines. The fascinating thing with the graphite market is that the typical supply response to the upcoming shock is almost certainly not going to happen. The number of graphite mines in the pipeline, those expected to come online by the end of the decade, is fairly well known. Even some of the top candidates probably won’t make it for one reason or another or be delayed, due to lack of funding. Even if all dozen or so leading projects become mines, some of the mines will be relatively small. Among the larger mines, it’s essential to recognize that nameplate capacity won’t be achieved overnight.

It could take years for some of the mines to ramp up and some will never produce as much graphite as they’re logistically able to. Flinders Resources (TSXV:FDR) had a grand opening last week. That past producing mine was brought back into production on time and on budget. However, it’s expected to produce just 4,000 tonnes over the next 12 months and ramp up to 15,000-16,000 tones over a three year period. This is a one-off example of a small mine in Sweden, but it goes to show that new mines take time to ramp up. Selling ALL of the ore grades of a particular mine is quite challenging, therefore nameplate capacity can be overstated.

Unlike coal for example, where there’s ample excess production capacity on the sidelines waiting for coal prices to recover and large stockpiles of coal throughout the supply chain, there are limited stockpiles of graphite. There are virtually no projects that can be switched on in a matter of months upon a spike in graphite pricing. Therefore, if demand for graphite takes off while China’s supply inevitably falls, we could have a perfect storm for higher prices. Without question, new mine capacity in 2015 and most of 2016 will be sparse. Some projects are slated to reach initial production by then, but those mines will take time to ramp up and may not have the kinds of graphite most in demand.

New graphite mines can’t keep up with growing demand AND China’s reduced supply

Like coking coals, where customers test and test and retest prospective coals to find the ones they can best utilize in their blast furnaces, end-users in graphite have that same dynamic. A relatively long period of testing and adjustments and back and forth with prospective suppliers. Further, the end users might have several suppliers sending samples for testing, making the complex process even more time consuming. Simply, put, I see no way out for end-users, they will have to pay up as soon as next year for natural flake graphite or buy synthetic graphite that costs 10 times as much.

A supply crunch due to China’s actions would not be such a big deal if demand growth for graphite in coming years was low. However, I’m on record as saying that demand for electrical vehicles alone will outpace expectations, perhaps by a large margin. Therefore, investors should consider paying closer attention to events in China.

Graphite Week in review: Wow, September 24th was a busy day in the graphite sector! Despite some important news, the sector was in the red once again, down 3.59% for the week. Top performers included Triton Minerals (ASX: TON) up +18.46%, Archer Exploration (ASX: AXE) up +7.69%, Alabama Graphite (TSXV: ALP) up +3.92% and Mason Graphite (TSXV: LLG) unchanged on the week.

Triton Minerals (ASX:TON) was up 18.46%. On September 24th, the company announced that it had posted a new and updated corporate presentation on its website. I did an exclusive interview of Triton Minerals CEO Brad Boyle that hit the tape in the U.S. on the morning of Friday the 26th on InvestorIntel.

Alabama Graphite (TSXV: ALP) was up 3.92% and (OTCQB: ABGPF) was unchanged for the week. On September 26th, the company announced that it has decided to suspend further work on its Hearst Graphite property in Ontario, Canada and focus all of the Company’s resources on the Coosa and Bama projects located in Alabama. The Hearst Project will be placed on standby because of the advanced stage of its flagship Coosa Graphite Project and the outstanding preliminary metallurgical results from its recently acquired Bama Project.

“Concentrating our efforts on our two advanced-stage projects in Alabama is the sensible decision for our Company,” stated Ron S. Roda, CEO. “Our work over the last two years has given us expertise in the Alabama graphite belt including a detailed understanding of the regional geology, hands-on knowledge of how to explore for graphite in oxidized environments, and a familiarity with the Alabama regulatory environment. Having two projects in close proximity to each other also allows for synergies regarding our staff and facilities.”

On September 24th, Alabama Graphite announced that it has received the first set of metallurgical results from sample material from its Bama property. Using only simple floatation (without chemical or thermal treatment) the Bama composite sample produced a graphite concentrate that contained an aggregate of 54.7% large flake (+80 mesh), of which 17.8% was in the jumbo flake (+48 mesh) category. For all size ranges coarser than +150 mesh the purity exceeded 96.3% with the jumbo flake fraction having a purity of 98.5% in Scoping Level Evaluations. Another notable characteristic is the sample’s low sulphur content at 0.02%.” The 5 kg composite sample was taken from the upper 50 feet of the existing Bama Mine pit wall. President and CEO Ron Roda commented:

“We are tremendously pleased to see such high purity values within a simple flotation, in our first sample of the Bama material. To combine this with over 50% large and jumbo flakes indicate that the Bama Property shows excellent economic potential. This combination of flake size distribution, purity and low sulphur content will allow us to support our mission of having one of the greenest graphite operations in the world. The Chilton properties we recently acquired will deservedly receive significant attention this fall and winter.”

Focus Graphite (TSXV: FMS) was down 3.85% and (OTCQX: FCSMF) down 4.46%. On September 24th, the company announced the launching of the project financing phase of the Lac Knife development project, with the closing of the first tranche of a non-brokered private placement offering of up to 13,000,000 units at a price of $0.50 per Unit for gross proceeds of $6,500,000. Each unit consists of one (1) common share and one (1) warrant. Each warrant entitles the holder to acquire one (1) additional common share of the Company at a price of $0.60 until September 23, 2018. The net proceeds from the offering will be used to work towards several milestones associated with the development of the Company’s Lac Knife natural flake graphite project.

Management’s emphasis during this development phase is placed on deploying best efforts to advance the potential mine start-up to 2016 from the scheduled 2017 start-up, as forecast in the Lac Knife project Feasibility Study announced on August 8th, 2014.

Don Baxter, Focus President and COO said, “This private placement officially launches the project financing phase of Lac Knife’s project development following the feasibility study results announced in August. The Company is actively working today with several interested parties to complete a total project financing structure.”

Graphite One Resources (TSXV: GPH) was down 9.38% and (OTCQX: GPHOF) down 10.34%. On September 24th, the company appointed David Hembree as its new U.S. based Operations Manager. Having played a pivotal role in advancing the development of several discoveries in the past, Mr. Hembree will be instrumental in progressing Graphite Creek through the resource definition, project feasibility analysis, environmental baseline studies and permitting process.

Mr. Hembree brings over 35 years of experience in the mineral resource industry including experience in exploration, development and production of both open pit and underground operations. Mr. Hembree will act as the Qualified Person for Graphite One under NI 43-101. Mr. Hembree commented,

“I am very pleased to join Graphite One and to be a part of the team that moves the Graphite Creek project from the exploration stage through the next logical step of resource definition and project feasibility analysis. The Graphite Creek property has many positive aspects including a large inferred resource base to build on with strong geophysical anomalies and widely spaced drill intercepts along 4.8 km of strike length to help guide the next round of resource definition drilling.”

Energizer Resources Inc. (TSX: EGZ) was down 2.70% and (OTCQX: ENZR) down 2.44%. On September 26th the company announced that it has closed the previously announced private placement offering of common shares of the company at an issue price of US$0.14 per share for gross proceeds of US$4,800,000. The brokered portion of the Offering was conducted by a syndicate of agents led by GMP Securities L.P. and including Dundee Securities Ltd. The net proceeds from the Offering will be used primarily to fund the production of additional graphite concentrate samples from the Molo Project in Madagascar for distribution to potential offtake groups and end users of graphite which the Company is in advanced discussions with and for general working capital purposes.

2014-9-30-Graphite-Market-REview

Graphite Market Review is a special weekly feature on InvestorIntel sponsored by Alabama Graphite Corp. (TSXV: ALP | OTCQX: ABGPF) and is written by US Analyst, Peter Epstein and is copyright protected by InvestorIntel.


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Comments

  • Tracy Weslosky

    This is good news for the graphite market as the pressure created by “China’s intermediate-term supply crunch in graphite….” — as 70% of the world’s graphite comes from China — and if their exports “without question decline markedly in coming years.” — means rise in graphite prices, and many of the developing graphite companies to prosper.

    Am I reading you right Peter?

    Also, for some reason — I have the understanding that China controls 80% of the worlds supply of graphite. Can you please call or email me please on the source of the 70% number?

    Good column Peter, and thank you Alabama Graphite for facilitating….

    September 30, 2014 - 1:24 PM

  • Peter Epstein

    Good question: I got the 70% figure (70% of global graphite supply comes from China) from Mason Graphite’s corporate presentation. In reviewing presentations from Focus Graphite, Northern Graphite Corp, Energizer Resources, Alabama Graphite, Graphite One, Flinders Resources and Triton Minerals, (not all of which had estimates), the range was from “over 60% to 80%, but there were 4 companies stating 74%-76%. Therefore, to your point Tracy, I think a better number to have used would have been 75%.

    September 30, 2014 - 2:01 PM

  • Islay

    Peter, thanks again for your update to the report.

    Could I suggest a small change, to avoid an inconsistency? The table currently adds up all the market caps of the companies quoted, which is obviously fine, but, in every case where a company is listed on more than one exchange, the market cap is added in a second time – literally, a case of double counting.

    The difficulty is compounded somewhat by the fact that the market cap figures are just added up, regardless of whether the amount is in US$, C$, or A$. Could an extra line or so be inserted in the Excel model to convert these market caps to a common currency base?

    I’m sure that I am not alone in wishing to make your excellent contribution even more valuable.

    October 1, 2014 - 5:34 AM

  • Adem Tumerkan

    Very nice chart for investors to get a clear view of graphite companies and helps shift through the clutter of companies to find the companies worth of capital.

    October 1, 2014 - 9:12 AM

  • Tracy Weslosky

    great idea Islay….will see what we can to reinforce Peter’s impressive efforts. I know that I for one, really look forward to this column and would like to thank Alabama Graphite (TSXV: ALP | OTCQX: ABGPF) for helping us facilitate this program for all of us to read complimentary.

    October 1, 2014 - 11:00 AM

  • SteauaOilers

    Any reason why Peter doesn’t include Canada Carbon in his table? Is he even aware of their spectacular metallurgical results (99.85%) after flotation ONLY and at the pilot plant level?

    Or maybe the company needs to be a sponsor of investorintel in order to be included in those discussion …

    October 1, 2014 - 4:15 PM

  • Dr. Copper

    Nihou Islay, long time no see, couldnt resist to comment that as far as
    market caps goes I’d take that with a pinch of salt wouldnt you agree ?

    lol

    Now any good and sane readers out there would know that natural
    graphite is NOT substitutable with synthetic graphite and visa versa
    which in return make the author of this article having to go take
    to do his home work.

    Could I suggest the common currency be named Balama hypodollars
    or perhaps Glencore micronpennies ?

    October 3, 2014 - 6:19 AM

  • Dr. Copper

    Hey Islay, it seem Glazenberg’s Glencore is having a waltz with Rio Tinto
    today…? Surely it couldnt be because of their written off Mozambiquan
    Ash could it ?

    lol

    October 6, 2014 - 5:45 PM

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