EDITOR: | October 7th, 2014 | 19 Comments

Graphite stocks down 3rd week in a row, fundamentals be damned

| October 07, 2014 | 19 Comments
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Alabama Graphite Market Review

Graphite Market Review — The graphite sector was down for the third week in a row, down -6.29% for the week ending October 3, 2014, based on the the stocks we are following listed below. As I said previously, graphite stocks are not immune from the overall selloff in natural resource stocks and the weakness in gold and silver was a downer as well. China’s growth rate is slowing, yet the offsetting decline in Chinese exports of graphite have not yet kicked in to boost pricing. Intuitively, everyone should want to see graphite prices go up, but in fact since there is so little graphite production outside of China, a low price keeps China’s production at bay. Of course, a higher price might get emerging projects funded, but most of the top 10 projects are still a few years from production. In other words, low prices are the best cure for low prices and higher prices should be in place right when key projects are ramping up in 2016-2017.

In two prior articles I laid out my thesis that BOTH the demand and supply of graphite could easily surprise to the upside and downside, respectively, creating a perfect storm for pricing. Without repeating too much of the other articles, I made the case that demand for electric vehicles alone could grow at Compound Annual Growth Rate “CAGR” well above the 10%-25% pundits and company management teams forecast. On the supply side, China’s a huge wild card, but all roads lead to China’s dominance of graphite exports, (it currently accounts for roughly 75% of global supply) coming to an end. Of the handful of graphite mines that will likely make it into production by 2020, most will take time to ramp up to nameplate capacity. Some won’t reach nameplate capacity if they can’t sell the entire range of products they produce.

I also wrote an article last week about the uranium spot price being up close to 30%, yet many uranium stocks are languishing near 52-week lows. The same can be said for graphite stocks when it comes to stock prices getting hammered. The following chart shows some of the poorly performing stocks from recent 3 month highs, i.e. from this past summer, through October 3rd. Notice the average decline of this group is 34.4%.

Graphite-Chart

Despite my bullish view on graphite fundamentals, the stocks are off significantly from 3-month highs

This unsavory performance makes little sense, albeit most likely tied to the rout in many natural resource sectors such as coal, iron ore, gold, silver and uranium. The fact that the gold price ended last week below the important sentiment level of $1,200/oz did not help any of the TSXV juniors or the Australian, “penny dreadfuls.” Comparing graphite to uranium is not particularly useful except to say two things. First, both uranium and graphite are explicitly stated as highly strategic and critical commodities by the EU and the U.S., not to mention China. Many believe that China is cleaning up its act in graphite for environmental reasons, but conserving domestic graphite reserves is a priority as well. That’s why China is not only closing and consolidating graphite mines, but also proposing to import flake graphite from companies like Syrah Resources Ltd. and Focus Graphite Inc. Some think China will become a net importer of flake graphite within 5-10 years. Think of the implications of that possible scenario. Second, both uranium and graphite are poised to see continued gains in pricing. The spot uranium price is already up 30% from it’s low, while graphite prices remain fairly close to multi-year lows. Of the two, I think that the fundamentals of graphite is more compelling in the short-to-intermedate term due to the lack of supply overhang in graphite compared to that of uranium.

With all the talk about electric vehicles, including by me, the market might be forgetting about other key end markets for graphite. End uses are described in most of the corporate presentations of the usual suspects such as Mason Graphite, Triton Minerals, Alabama Graphite, Graphite One, Focus Graphite, Northern Graphite, Great Lakes Graphite, Elcora Resources and Energizer Resources. Some of these presentations have been recently updated and contain excellent information for investors. One area that used to receive more airtime (hard to believe) than electric vehicles was fuel cells. In fact, there’s a famous quote from five years ago that the global demand for graphite for fuel cells could be greater than the demand for all other uses combined. This obviously has not happened. But, fuel cells have not gone away like VHS machines or tape recorders. The prospects for fuel cell cars remains quite a strong, albeit currently taking a back seat to electric vehicles for the time being. That said, Northern Graphite reports that more graphite is used in fuel cell cars than in electric vehicles. Therefore yet another growing market to watch out for. Substantially more fuel cell cars, buses, taxi fleets, forklifts, etc. will be hitting the market in the next five years, i.e. at the same time that electric vehicles are massively more deployed. As an aside, it’s been reported that California alone will have 1 million zero-to-near-zero emission vehicles within 10 years and China 5 million by the end of 2020.

Fuel cell cars are still coming, not to mention aerospace and military applications for graphite

Another market not discussed nearly as much as others is aerospace and military applications. Graphite composites are lighter and stronger than steel for use in the bodies of modern aircraft and for military applications. Graphite and a host of other high tech materials are already being deployed in the aerospace and military markets. Globally, new aircraft designs don’t come out each year, but new composites, including graphite are spec’d into all new aircraft. Not only are high tech composites safer, their lighter weight saves on fuel and therefore fossil fuel emissions.

Turning back to the performance, or lack thereof of graphite stocks, an upcoming headwind if not already at play, could be tax loss selling in North America. Here we are in the 4th quarter of the year and the stocks are tumbling. I had hoped that this year would witness less tax loss selling, because natural resource juniors looked a lot healthier earlier in the summer. But, looking at the TSX Venture exchange index on October 3rd suggests otherwise. Still, after technically driven stock declines like tax loss selling as opposed to fundamental headwinds underlying the industry– buying opportunities arise. Notice I’m not saying which stocks to buy or when, but the end of last year marked a bottom that resulted in a rally in the first quarter of 2015. It makes sense to watch the graphite stocks closely and consider dollar-cost averaging (or doubling down) into one’s favorite names.

Graphite Market Review, for the week ending October 3, 2014:

As mentioned the weekly performance of the graphite stocks we cover was poor, down 6.29%. Relative out-performers included, Elcora Resources Corp. (TSXV: ERA) up 11.63%, Energizer Resources Inc. (OTCQX: ENZR) up 1.25%, (TSXV:EGZ) unchanged, Great Lakes Graphite (TSXV: GLK) unchanged and Valence Industries Ltd. (ASX: VXL) unchanged.

On October 1st, Alabama Graphite (TSXV: ALP) down 15.09% and (OTCQB: ABGPF) down 16.97%, announced that it has begun surface exploration at its Bama Mine Project in Alabama, USA. The Company is currently conducting detailed channel sampling on its recently acquired mineral leases. Of the 6 samples taken, 4 were from the existing pit wall of the prior producing Bama Mine and showed grades ranging from 2.81% to 5.24% C(g). In addition, KLM Geosciences is concurrently performing a ground-based GEM2 geophysical survey. Follow-up sonic drilling at the Coosa Project discovered several new occurrences outside the existing resource based on these two surveys. The Company’s plan at the Bama Mine Project is to use the results of the GEM2 and surface-sample programs to guide a preliminary round of sonic drilling in the coming months.

On October 3rd, Grafoid Inc. announced it has reached a final agreement and closed its acquisition of ALCERECO Inc., a technology leader in advanced composite materials, alloys and coatings and a company focused on the development, testing and production of advanced materials. Under the terms of Agreement, Grafoid purchased all of the issued and outstanding shares of ALCERECO from the shareholders of ALCERECO in exchange for 250,000 common shares of Grafoid at a price of US$5.00 per share, for a total value of US$1,250,000. Based in Kingston, Ontario, ALCERECO provides independent technical expertise, contract research, analytical and testing services. Notably, Focus Graphite Inc (TSXV: FMS) & (OTCQX: FCSMF) both down 14.0%., “holds a significant interest in Grafoid on behalf of its shareholders.”

Energizer Resources Inc. released its annual 10-k filing last week. The company has a June 30th fiscal yearend. Pages 12-16 have a good overview of the graphite and vanadium markets. I believe that annual 10k reports contain the most detailed descriptions of a company’s projects, opportunities and risk factors.

On September 29th, Great Lakes Graphite, unchanged on the week, announced that it has staked an additional 12 claims contiguous with the main block of claims included in the Company’s Lochaber Graphite Project in southwestern Québec. The Lochaber Graphite Project comprised 151 mineral claims, in four contiguous blocks, covering 9,062 ha. The Company is earning a 100% interest in the property as per an option and purchase agreement with Rock Tech Lithium Inc. The new claims add an additional 720 ha to the Project area. CEO Paul Gorman commented,

“The additional claims that the Company has staked are on trend with the mineralization that is the focus of our ongoing resource estimate. Given the positive results from beneficiation and graphite-flake classification studies that Great Lakes announced last week, we moved quickly to add these claims to our land package.”

On September 29th, Valence Industries Limited, (ASX: VXL) unchanged on the week, announced it’s nearing completion of the refurbishment of the Phase 1 Plant at its flagship Uley Graphite facilities in South Australia. Over the past week Valence Industries received delivery of the new mill that forms part of the primary processing circuit in the Phase I Plant. The installation of the mill along with the remainder of the primary processing circuit will be completed over the coming weeks. Work on the secondary processing circuit is effectively complete and ready for recommissioning using the stockpiled fines materials once final governmental approval is received. Completion of the Phase I refurbishment program is an exciting stage for the company and will be a significant milestone. The capacity to run the only graphite processing facility in Australia with Phase I to produce up to 14,000 tonnes of graphite each year is a significant step forward.

In an October 1st corporate presentation, Syrah Resources Ltd. (ASX: SYR) down 13.17%, announced it demerged its Tanzanian assets from the company. The demerged assets include Mineral Sands, Graphite, Nickel and Coal prospects. An IPO is planned to raise $10 million for further exploration of the Tanzanian assets.

On September 30th, Kibaran Resources Ltd. (ASX: KNL) down 3.57%, announced that its Environmental and Social Impact Assessment for its Epanko Graphite Project in Tanzania has been completed and officially lodged with the National Environmental Management Council of Tanzania. Under Tanzanian environmental legislation, NEMC have up to 90 days to review the ESIA and recommend to the Ministry of Environment that an Environmental Certificate be issued for the project. Kibaran anticipates it will receive the certificate for Epanko prior to calendar year-end.

2014-10-3-Graphite-Stocks

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

  • SteauaOilers

    I will continue to ask every week, even if Tracy (or her “police” staff) decides to delete my posts, as they did over the weekend: how is it possible that none of the graphite experts on investorintel are taking notice on what Canada Carbon announced in their series of news releases (as recent as Friday)? That is, spectacular metallurgical result at the pilot plant level using flotation only.

    October 7, 2014 - 10:32 AM

  • Tim Ainsworth

    In the context of your summary Valence also appears to have timed a fully underwritten cash raise rather exquisitely.
    While confirming and improving on the baseline numbers from the original scoping study they have also delayed the Feasibility Study to assess the additional potential of newly discovered high grade zones both in the known resource plus a “new mineralised pegmatite zone indicates the potential existence of a unique flake graphite mineralisation of considerable grade” outside the existing JORC.
    Further assay results pending.

    October 7, 2014 - 11:28 AM

  • Susana Sueldo

    Well, perhaps they should sponsor this amazing site and the writers will be happy to address it

    October 7, 2014 - 3:46 PM

  • SteauaOilers

    Susana, you must be joking. Is this a professional site or just an advertising site?

    October 7, 2014 - 5:35 PM

  • Islay

    The Technical Report on the company’s web site, which contains more than 400 pages, has this to say about the company’s resource, reserves, mining methods, capex and operating costs:

    ” No mineral resource estimates have been carried out by the issuer.”
    ” No mineral reserve estimates have been carried out by the issuer.”
    ” No mining methods analysis have been carried out by the issuer.”
    ” No capital and operating cost estimates have been carried out by the issuer”

    Could it be that some more information is required?

    http://www.canadacarbon.com/docs/Miller_Mine_Technical_Report.pdf

    October 8, 2014 - 1:57 AM

  • SteauaOilers

    Islay, it’s a vein type deposit of hydrothermal graphite. Think Sri Lanka graphite, but one which can be purified easier to obtain nuclear graphite (as measured by Equivalent Boron Content) and by flotation only. Not only that, but it was measured to have properties similar or surpassing synthetic graphite (surface area, porosity, density).

    Vein type deposits are harder to quantify, but they are working on it with IP surveys on the ground and trenching and drilling. Sri Lanka never had a resource estimate and this didn’t stop its graphite from being the most sought after and mined year over year.

    As far as being economical, when you can purify to 99.60+% all particle sizes larger than 200 mesh (which represent about 70% of the graphite distribution at Miller site) and you can do it at the pilot level (100t) by flotation only, you know it will work out just fine.

    InvestorIntel could for example interview Oliver Peters, from SGS Lakefield where all this metallurgical work was done, who is an unbiased professional and I bet he will tell you that these metallurgical results are unheard of. By the way, Oliver Peters acted as the Independent Qualified Person approving all the latest news releases from Canada Carbon.

    October 8, 2014 - 6:41 AM

  • Islay

    SteauaOilers, I was trying to politely suggest that, in the absence of any information regarding:

    (a) Quantity of ore
    (b) Grade of ore
    (c) Required capex
    (d) Estimated operating cost per tonne of product
    (e) Mining methods to be used

    it’s a little difficult for anybody to determine whether there actually is a potential mine, and therefore whether CanadaCarbons should be included in the list which Peter Epstein is publishing. The type of deposit is very interesting, but people can still reasonably ask whether there actually is a deposit, which is likely to be viable in today’s world.

    The company website quotes glowing reports from as far back as the 19th century, but with no concrete figures, so it’s not obvious how much they help with investment assessment. Clearly, there has to be a cutoff somewhere; I’m sure that if, and when, he can get some handle on some or all of these pertinent questions, Peter will add the company to the list.

    October 8, 2014 - 7:31 AM

  • Dr. Copper

    Nihou again Islay, how about suitability of ore to extraction ?

    lol

    fool

    October 8, 2014 - 8:01 AM

  • SteauaOilers

    Islay, your argument doesn’t “float” that well I am afraid.

    You can still find on the right hand side of the main page the interview in which Tracy talks to Dr. Ian Flint, from Elcora Resources. There is some useful general graphite information there (thank you Tracy) but at the end they talk about the Sri Lanka property acquired by Elcora and what its competitive advantage is. Can you please direct me to any mineral resource estimate, mineral resource reserves, economic studies regarding the Elcora property in Sri Lanka. If you want, you could ask Mr. Peter Epstein to help you.

    October 8, 2014 - 9:05 AM

  • Peter Epstein

    My thesis on graphite is simply that supply will be challenged from 2016 on and that demand is taking off now, and will be very strong within a few years. Only a handful of companies can possibly be in production by the end of the decade– graphite prices are sure to move higher.

    With regard to Elcora, I will find out the answer to your question and post it here. Thank you.

    October 8, 2014 - 9:44 AM

  • Tracy Weslosky

    Back away from Susana — SteauaOilers, please…clearly she is a valuable audience member, as she is gracious and polite – and understands that you like to hijack our Graphite Market Review to tout a company that you are irritated that InvestorIntel and our team is not presently raising the flag for. For the record, we do prioritize our clients because they make this forum and our ability to employ some of the brightest minds in the industry a reality. This model will change as we continue to strive to have the smartest content for the smartest audience in the world….

    As Peter just explains in his comment — only so many companies will race that flag down, and across the finish line….and I never promised you that I would work 24-7 to cover every single graphite company in the world. This said, you will be happy to know that I have the 24-7 down….

    PS. I have reviewed ALL of your comments since you first started writing in March 2013 and you used to be polite and complimentary. You like Jack Lifton — so when I call him this morning, I will ask him to get you ‘redirected’….positively. Now please find another forum to tout the stock in your portfolio — thanks.

    October 8, 2014 - 9:51 AM

  • SteauaOilers

    Thank you Peter. You will be surprised when you will find out that Canada Carbon will be among that handful of companies that you mention will be in production (albeit at a smaller scale and for a niche market of very high quality graphite), maybe even next year. But then it will be too late to write about them 🙂

    October 8, 2014 - 9:58 AM

  • SteauaOilers

    Tracy, what about the suggestion to interview again Oliver Peters from SGS. You had an interview with him a year ago (thank you, and to Ty Dinwoodie as well):

    http://investorintel.wpengine.com/graphite-graphene-intel/what-every-investor-needs-to-know-about-investing-in-graphite/

    Every time I had the chance I advertised this interview on other graphite forums (you are welcome). I can guarantee you that if you ask an unbiased person as Oliver Peters about metallurgical advances in the industry, the most interesting thing he will say is about … you guessed it :-). I don’t necessarily tout the stock, I find it unbelievable that you guys pretend to be blind to this.

    October 8, 2014 - 10:18 AM

  • Peter Epstein

    I spoke with Elcora management just now. They have a non 43-101 compliant resource conducted by a third party firm from Quebec that states based on statistical models the company has 3.1 million tonnes of graphite. That’s only in a 300 by 300 meters zone down to 600 meters. The grade is 92%-99% as this is vein graphite. The company feels fairly confident about the resource because 1) there’s a lot more property under their control with no estimated resource 2) there has been decades of historical mining by locals who mined the graphite by hand and couldn’t go much deeper than 100 meters for safety reasons. The company prefers at this time to get into meaningful production next year and then work on a mine plan which would delineate a NI 43-101 compliant indicated resource.

    October 8, 2014 - 10:33 AM

  • Tim Ainsworth

    “60%+ GRADE ARTERIAL FLAKE TM GRAPHITE
    • Valence Industries has discovered a new globally unique flake graphite deposit zone with
    intercepts exceeding 60% graphitic carbon.
    • Significant intersections in the new zone include flake graphite grades of 61.5% graphitic
    carbon over 2.6 metres.
    • Super jumbo flake graphite sizes in the new zone exceed 4 millimetres (+5 mesh).
    • Results from in-fill drilling in the area of known mineralisation also demonstrate significant
    intersections at very high grades, including 21.7% gC over 16m (MD619).
    • The full impact of the discovery has yet to be established but has the potential to
    significantly enhance the economics of the Uley operation for Valence Industries.”

    http://www.asx.com.au/asxpdf/20141009/pdf/42ss5hx4jnch91.pdf

    October 8, 2014 - 9:27 PM

  • Tony Phillips

    I just posted this comment on the ‘Tesla Beauty Contest’ article but I feel it’s relevant to this thread, hence the repost:

    Could you please do a comparison piece on which company has what in the graphite space. Here is my quick breakdown of the ‘usual suspects’ in terms of Location / Total Resource (M&I) / Grade % / Purity (sourced from a GPH presentation):

    Focus Graphite Quebec 9.6 Mt 14.8% 98.3%

    Mason Graphite Quebec 50 Mt 15.6% 99.9%

    Flinders Sweden 2.8 Mt 10.7% 94.0%

    Energizer Madagascar 124.3 Mt 6.3% 99.9%

    Graphite One Alaska 285 Mt 4.5% 99.2%

    Zenyatta Ontario 45.2 Mt 3.1% 99.9%

    Northern Graphite Ontario 70 Mt 1.7% 99.9%

    It can appear convoluted when each company (and their newsletter writers) tout that they have the perfect combination. Is there any truth to such a sweet spot? 4 from the list have a resource greater than 50 Mt and 3 have grades over 5 % Cg.

    I know the relevance of flake size/distribution and purity is hotly debated (i.e. tailored processing for customers and varying end user preferences) but I didn’t have flake size data available for all, so I did not include it in my attempt. Perhaps somebody could add that. It would be great to see these ‘big boys’ in the graphite space dissected and charted this way.

    This all begs the question, does one company’s large resource offset another’s high grade, ever? Surely it has to come into play somewhere. Specific company structures, jurisdictions, infrastructure and geological settings are important but often divert us from making these simple evaluations, and are frequently used as the overriding factors so we cannot draw basic comparisons. With the market media and other reputable online sources of information being sponsored by (and often friends with) many of the names listed, it is understandable why this charting has never been performed impartially. No criticism of investorintel intended here, it’s just the nature of the industry.

    October 9, 2014 - 5:50 PM

  • Dr. Copper

    You gotta look at how much total graphitic carbon is melted and left
    behind by the accelleration of those writters ‘footprint’ marks when they
    spruik up the share trading menus. Ordinarily you’ll only be invited to
    the deserts table, making the whole affair and pretty slimline tonic
    experience and at best comparable to skimmed baby milk powder hence
    the reason why we still havnt seen any of those geologists wannabe chemists
    deliver any new graphite to market.

    My guess is they havnt figured that the larger the flake sizes the lesser
    the purity bleeding footsprint is diminishing the charactaristics of the
    flakes sizes in need of the right crystaliinity on a much smaller scale
    where the high prices is paid.

    Just ask Islay lol

    October 10, 2014 - 6:43 AM

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