EDITOR: | September 23rd, 2014 | 7 Comments

Graphite Market Review: Graphite Stocks not immune from the overall selloff

| September 23, 2014 | 7 Comments
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Alabama Graphite Market Review

Graphite Market Review — The graphite sector was down -5.37% for the week ending September 19, 2014 based on the list of graphite stocks we are following listed below. Graphite stocks were not immune from the overall selloff in natural resource stocks. The selloff is in part due to the significant weakness in gold and silver, and iron ore and coal prices at multi-year lows isn’t helping investor sentiment either. The uranium spot price has risen 30% lately, but even that failed to move uranium stocks. China’s growth rate is slowing, and its housing market is showing continued signs of weakening, causing fears that demand for many commodities will remain weak into next year.

Graphite demand for 100% Electrical Vehicle, i.e. pure EVs will exceed expectations

There’s constant talk and articles written about the demand for graphite over the next decade with pundits pointing to Electric Vehicles (EV) as a main driver. These commentaries invariably describe the $6 billion Tesla giga-factory with awe and fascination. I have alluded in the past to the fact that this single plant will merely be one of dozens, all needing copious amounts of high quality graphite. What evidence do I have of this? Caveat, I’m not a car person, but in reading a number of articles and speaking with experts it becomes apparent that Tesla is far from the only game in town.

I’m focusing only on 100% EVs, pure EVs, because the market is clearly headed in that direction as hybrid gas/electric cars start to fall by the wayside. Early adopters will increasingly opt for pure EVs over hybrids. How many 100% EVs models exist globally 10? 20? I would say up to 40. The top 12 are well represented in articles, but Europe, Japan and especially China have lesser know domestic offerings popping up all the time. Therefore, the much ballyhooed Tesla plant will not necessary stand out in 5-10 years, although it might remain one of the largest.

Demand for graphite for EV’s will grow much faster than many believe. To focus largely on Tesla is a mistake simply because pure EVs that cost a quarter or third of Tesla’s $90k-$100k Model S will dominate the market in a few short years. It turns out that the cost of ownership as measured by a car’s total cost divided by its range in miles places plenty of models ahead of Tesla. That might be surprising because Tesla’s range is comfortably more than twice the average of the top 12 EVs I researched. However, as mentioned, many of the peers have price tags of 1/4 to 1/3 that of Tesla’s S model.

Overall cost of ownership will result in a tipping point in favor of pure EVs sometime in the next few years. Range anxiety (fear of not being able to find charging stations) remains a mitigating factor in the wider spread of EVs. But, the top 12 North American models have an average range of 82 miles. Including the Tesla’s S model, the average range jumps to 96 miles. That’s only about a quarter the range of conventional gas guzzling models, of which their are of course hundreds. Adding Tesla’s next offering, the Model X model would increase the average range of the group to 108 miles. Consumers don’t typically think this way, but the average number of miles a soccer mom drives per day is about half the current 82 mile range average. Long story shorter, Tesla’s sales will be in the top 10 of pure EVs for the next few years, but cars like the top selling Nissan Leaf will continue to widen the gap with Tesla. Let’s face it, Tesla is a great car, but only in a niche market so far. As an aside, Mercedes announced that it will be introducing 10 new hybrid EVs by 2017.

A rough calculation of savings from a pure EV is $1,400 per year, assuming $2.5 per electrical charge at home for 100 mile range, vs. 12,000 miles driven at 25 mpg and a gas price of $3.5/gallon. No oil changes, ever, for EVs is an added benefit. Will the U.S. and other countries reach a tipping point for pure EVs anytime soon? I think we will, but as always timing is everything. Penetration of pure EVs in the U.S is still less than 1%. There’s tremendous room for growth. What if the average CAGR over the next decade for graphite in car batteries grows at 50%-75% vs. current estimates of 10%-20%?

Elon Musk recently opined that there could be 100 giga-factories within the next 10 years. He could be correct, but again most probably not the sheer size of his own proposed facility in Nevada. Notice again that I’m not including hybrid EVs into the mix. Data on those many dozens of vehicles is harder to summarize, but I assume that hybrids use 1/10 the graphite of pure EV’s. Therefore, hybrids will take up a lot of graphite demand as well, albeit starting to decline as buyers skip the hybrid step and go directly to pure EVs. Increasingly, municipalities and corporate car fleets are switching to EVs, including things like forklifts in warehouses.

Like the rest of the nation, penetration in this sector remains low. Notice that I didn’t even mention graphite demand from graphene applications or Pebble Bed Reactors, large-scale power storage or consumer electronics. The list goes on and on, yet the single Tesla giga-factory gets most of the attention. I’m very excited and bullish on the prospects of distributed solar and community-owned solar. Solar and wind power require graphite to store energy when the sun’s not shining and the wind’s not blowing. I think that a large number of EV buyers will opt to also have solar panels on their roofs. The combined savings of rooftop solar plus owning an EV could approach $200 per month. Importantly, that integrated consumer can largely lock-in those savings for an extended period. Avoiding oil price spikes and general inflation could become can quite important in coming years.

A quick comment on mine supply

Industry experts say that we will need 6 – 8 new graphite mines by the end of the decade to meet the demand for all graphite uses. I obviously believe we could require that many just for the explosive growth of EVs and Hybrid EV vehicles. Globally, mine depletion and actions by China are curtailing supply. China is widely known to be reigning in production of graphite to clean up severe air pollution and to keep more graphite domestically. China no longer wants to ship graphite to Japan to reap the rewards of selling batteries and electronics. Of the ten or so substantive graphite mines in the pipeline, some won’t make it to production or will be materially delayed.

Northern Graphite (TSXV: NGC) is an example of a delayed mine. It has a Bank Feasibility study completed, but can’t raise the capital to get started on construction. Importantly, many companies are forecasting production starts in 2017-18. Clearly there’s risk to those start dates being pushed back a year or more. However, even if we can get 6-8 or even 10 notably mines online, I think shortfalls are still likely. One reason, ramping up from initial production to nameplate capacity can take years as some companies will expand in phases. End users need to test new material, which can also take considerable time. Bottom line, I imagine that by the end of the decade there will be significant excess demand for graphite, lead by EV demand, and prices will be higher to reflect that dynamic.

A takeaway is that the many junior graphite companies saying that they are suited to be one of the suppliers for the giga-factory, can relax and recognize that there will be plenty of demand for graphite in coming years.

Graphite Market Review, for the week ending September 19, 2014:

Alabama Graphite Corp. (TSXV: ALP | OTCQB:ABGPF) was up 10.9% & 4.3%, respectively on two news items. It announced on September 18th that it entered into a mineral lease on a land package that includes a prior producing Bama flake graphite mine and surrounding property. The company also signed a mineral exploration lease on several parcels comprising 1,160 acres adjacent to the Bama Mine. This gives Alabama Graphite two advanced stage projects that could share key infrastructure including a mill, exploration staff and sample prep facilities. Note: The last company that bought a past producing mine, Big North Graphite (TSXV: NRT), was acquired by Flinders Resources Ltd. within a year. Flinders itself brought a past producing mine in Sweden into production this summer.

Alabama Graphite also reported on September 16th assay results from the summer 2014 sonic drilling program at its flagship Coosa Graphite Project. From the press release,

“The Company’s existing NI 43-101 resource estimate identifies an indicated resource of 38 million tons at 2.60% Cg, the largest indicated flake graphite resource in the U.S. and an inferred resource of 27 million tons at 2.87% Cg. The assay results show two of the new anomalies with intercept grades of 3.27% Cg and 3.65% Cg. The results also indicate that the Company’s existing inferred resource can be upgraded and could potentially increase the overall grade of the resource.”

Great Lakes Graphite Inc. (TSXV: GLK) was up 22.2% after reporting on September 18th that preliminary metallurgical testing of samples from the Company’s Lochaber Graphite Project in southwestern Québec demonstrated that a graphite concentrate containing over 57% large flakes can be produced. In addition over 45% of the concentrate was classified as jumbo flake. According to the press release,

“these results confirm the outcome of previous testing carried out on diamond drill core samples by Rock Tech Lithium Inc. in 2013. This testing has also validated the performance of a new process flow sheet that can be incorporated into future economic and feasibility studies to be commissioned by the Company.”

Graphite One Resources Inc. (TSXV: GPH | OTCQX: GPHOF) was down 3% and up 0.6%, respectively as it announced that it’s increasing the size of its previously announced private placement due to increased demand. Oversubscribed by $1,000,000, the gross proceeds including both tranches is expected to total C$5 million. Net proceeds will be used for exploration and development of the Company’s Graphite Creek project and for general working capital purposes. From the press release,

“Graphite One is currently infill drilling Graphite Creek in 50m intervals, with the goal of converting a portion of the NI 43-101 compliant inferred resource to either the indicated and/or measured categories. Integration of this data will add significant value as the Company work towards a Preliminary Economic Assessment (PEA) over the upcoming months.”

Energizer Resources Inc. (TSXV: EGZ | OTCQX: ENZR) was down 24.5% and 25.4%, respectively after a BIG move up the prior week, up nearly 70%. For the month to September 19th, ENZR was up 14.3% from $0.14 to $0.16, with lots of volatility in between. On September 17th, the company announced it has engaged an agent to conduct a brokered private placement of common shares to raise gross proceeds of up to US$4,800,000 with an issue price of US$0.14 per share. Note: although a below market capital raise, no warrants are attached.

Flinders Resources Ltd. (TSXV: FDR) was down 13.3% for the week on no new news. The stock was one of the better performing stocks recently, but profit taking appears to be at hand. On Sept. 2nd the company announced the acquisition of Big North Graphite. Flinders is down 29% since the beginning of the month.

Lomiko Metals Inc. (TSXV: LMR | OTCQX: LMRMF) was down 12.5% and 8.4%, respectively. On September 18th the company clarified its holdings of Graphene 3D (TSXV: GGG). Lomiko owns 4,396,970 shares, representing approximately 11.23% of the outstanding shares. Of these shares, 3,196,970 were acquired at a deemed price of $0.075 pursuant to a securities exchange agreement dated June 6, 2014 between, among others, Graphene 3D and Lomiko. Lomiko acquired the shares for investment purposes and does not intend to acquire additional shares. The market value of Lomiko’s investment in Grahene 3D was C$6.8 million on Sept 19th.

Triton Minerals Limited (ASX: TON) was down 7.2%, inline with the market. On Sept. 16th, Triton confirmed receipt of the initial metallurgical and mineralogical results for the Nicanda Hill prospect. Triton Minerals’ Managing Director Brad Boyle said,

“These preliminary metallurgical and mineralogical results are very encouraging for Triton, showing once again that a very high grade graphitic concentrate of up to 97.3% TGC is obtainable from straight forward flotation methods.”

Northern Graphite Corp. (TSXV: NGC | OTCBB: NGPHF) was down 15.7% and 13.8%, respectively. There was no new news on the company.

2014-9-19-Graphite-MktCap

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.


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Comments

  • Michelle Schule

    This is GREAT. Thank you InvestorIntel & Alabama Graphite for putting together a quick chart of the graphite market sector for the week — will this be coming out every week? What day? Thank you.

    September 23, 2014 - 11:11 AM

  • Tim Ainsworth

    Lol, at least Valence made it into your table, even if recent developments deemed non newsworthy.

    September 23, 2014 - 11:29 AM

  • Tracy Weslosky

    I would like to personally thank Alabama Graphite for investing in the development of a proper and thorough sector update.

    September 23, 2014 - 11:37 AM

  • Tim Ainsworth

    What percentage of natural graphite is battery grade?

    September 23, 2014 - 12:55 PM

  • Islay

    Like Michelle, I think this is a great report, and Peter Epstein, Alabama Graphite and InvestorIntel all deserve our thanks.

    I was not aware, until seeing Peter Epstein’s numbers, that the market cap of Syrah Resources is only 8% less than the combined market caps of ALL the other companies listed, in the field. Whether we like it or not, we cannot pretend that Syrah is anything less than the elephant in the graphite room. What they do, and when they do it, is going to matter to everybody in the industry.

    September 24, 2014 - 2:02 AM

  • Tracy Weslosky

    Excellent question Tim — working on securing an answer, unless Peter gets to this first….Peter?

    Thank you Islay for commenting on InvestorIntel as your commentary is intelligent and adds value. Thanks to your comment, I will contact Syrah this evening and schedule an interview….good one.

    September 24, 2014 - 8:52 AM

  • metallica

    Please ask Syrah what happened to their two “MOUs”. This company has a huge market cap but has proved nothing so far. That’s the reality

    September 24, 2014 - 9:38 AM

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