EDITOR: | June 25th, 2014 | 24 Comments

All Signs Pointing to a Strong Graphite Market

| June 25, 2014 | 24 Comments
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graphite yearIn researching the graphite space, it seems everyone is intently focused on batteries, batteries, batteries. The February announcement of Tesla’s giga-factory set off a wave…more like a tsunami, of analysis and commentary about the positive implications for flake graphite demand. Less noticed by graphite investors, but well understood by car enthusiasts is the slew of new electric and hybrid vehicles coming by the end of the decade. The next giga-factory announcements could be coming from BMW or Mercedes, not Tesla. However, also potentially impactful for graphite demand in batteries is this June 2nd news story,

“Ford and Samsung’s SDI group today announced research on new battery technology designed to trim weight and improve efficiency on cars, trucks, and other automobiles. The two companies showed off a new dual-battery system that combines lithium-ion with lead-acid batteries to extend the life of the lead-acid battery on cars with start-stop engines.”

According to the article, Ford already incorporates the start-stop engines in 70% of its cars. Even if only a small amount of graphite per dual-battery is introduced into Ford’s annual sales of hundreds of thousands of cars, that could be meaningful, especially if other car makers adopt dual-battery systems. In addition to the batteries used in vehicles, another burgeoning field for graphite is in large-scale energy storage. The rapid growth of wind and solar energy has sharpened the focus on ways of storing massive amounts of energy when the wind isn’t blowing or the sun shining. Large-scale energy storage is the Holy grail of the renewables movement, but it’s been a tough nut to crack. Graphite plays a prominent role in many of the proposed solutions.

It’s Not Just About the Batteries…China a Powerful Force

While the battery and energy storage markets are key components of my bullish view of graphite demand, it’s just one part of the story. Perhaps more important is what’s happening in China regarding BOTH supply and demand. China has a severe pollution problem. Therefore, it’s stamping out small, inefficient, polluting mines and factories. We’ve seen this movie before, when China closed thousands of coal mines it subsequently switched from a large exporter of coal to a net importer. We could literally be seeing that same dynamic unfolding in graphite over the next 5-10 years.

The scrutiny is now squarely on graphite mines in the key producing province of Heilongjiang, where an ambitious State-mandated mine consolidation plan was announced in April. According to Simon Moores, Heilongjiang alone accounted for as much as 29% of global flake graphite production in 2013. Clearly, China is causing serious concerns for end users seeking security of supply. On the demand side, the Chinese are using more and exporting less. Look no further than Australian-listed Syrah Resource’s blockbuster off-take deal with Chinalco.

Syrah’s giant Mozambique deposit was considered by many pundits to be a daunting overhang, i.e. so big it would flood the market. Not only is China’s Chinalco proposing to take upwards of 100k tonnes of Syrah’s future output – that flake graphite is headed for a massive new end-market… aluminum anodes. Commenting on the news, Credit Suisse pointed out that aluminum anodes is a 13 million tonnes market, nearly 11 times the size of the natural graphite market. If Chinalco, the 4th-largest aluminum producer in the world, finds graphite to be superior to petroleum coke and anthracite in anodes, other aluminum producers might as well. Therefore, on both the demand and supply fronts the fundamental outlook for graphite is looking bright.

A way to Play the Graphite Renaissance — Graphite One Resources

There are a relatively few number of graphite juniors that have decent shots of making it big in the next 18-36 months. Some well known names include Syrah, Mason Graphite, Energizer Resources, Triton Minerals, Focus Graphite, Flinders Resources, Northern Graphite and Zenyatta. However, a U.S. graphite junior flying under the radar is Graphite One Resources (TSXV: GPH | OTCQX: GPHOF). According to the company, “… Graphite One has defined North America’s largest high-grade, large flake graphite deposit.”  From a total of 285 million Inferred metric tonnes “Mt,” is 12.76 million Mt of in-situ flake graphite (includes 8.6 million Mt @ 12.8% Graphitic Carbon Grade, “Cg” at-near-surface, equal to 1.1 million Mt of graphite). That’s on just a quarter of the deposit’s strike length!

Not only does Graphite One stack up well to those better known peers on some key metrics, it trades at a cheap valuation of just C$ 18 million, (C$0.14/share on 6/20/14). This, for a company that I believe is sitting on a highly economic deposit with a Net Present Value, “NPV” possibly reaching into the hundred(s) of millions of dollars. [Note: my opinion only] Graphite One is committed to releasing a Preliminary Economic Assessment, “PEA” by early next year. Reviewing peer PEAs from companies like Northern Graphite, Energizer Resources, Focus and Mason as a rough guide, Graphite One could be looking at a project with very low operating costs due to its high-grade, at-surface deposit and the economies of scale from a potentially large operation.

The following chart shows the top 10 graphite companies by market cap. The average of the top 10 is C$122 million, (or C$67 million not including Syrah Resources). As noted, Graphite One’s market cap is just C$ 18 million, a 73% discount to the $67 million average (not including Syrah).

Graphite-Mkt-Cap

The combination of a high-grade, large flake, near-surface deposit, possibly contributing to a long-term production profile, in the safe jurisdiction of Alaska, USA, places the company’s project as one of the top in 6 coming online anywhere in the world. First production is expected in 3-4 years.

Importantly, and unique to Graphite One, its project could benefit in a very meaningful way from a State of Alaska loan under the same program that Ucore Rare Metals signed off on last month. Ucore is slated to receive $145 million of proceeds from bonds issued to finance key infrastructure and construction of the company’s Alaskan project. A similar loan approval for Graphite One would be a game-changer and truly set it apart from global peers.

Conclusion

2014 has been a tremendously important year for graphite news, and the news has been almost exclusively bullish for on both the demand and supply fronts. The demand for batteries that use graphite could be far greater than even the promise of Tesla’s giga-factory. On the supply side, China has explicitly announced plans to clean up dirty industries, of which graphite mining is a prime offender. Further, China is exporting less graphite and importing more. Although several graphite juniors look like attractive investments and are likely to move higher with a rising tide, one of my favorites is U.S. player Graphite One. Even if Graphite One’s valuation were to double relative to peers, it would still be trading at close to a 50% discount to the average market cap. Therefore, I believe that Graphite One’s stock has more upside and probably less downside than peers.


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Comments

  • Tracy Weslosky

    It is a pleasure to have your savvy market analysis on InvestorIntel Peter…thank you. What stunned me in looking at your chart is TRITON. TRITON has moved rapidly into #3 in the last month or two…nice work to the team of TRITON.

    Our audience should add 2 more InvestorIntel members that are fast risers to their watch-list:
    Alabama Graphite Corp. C$ 13.4M
    Elcora Resources Corp. C$ 12.6M

    June 25, 2014 - 10:26 AM

  • Tom

    Does anyone like Lomiko going forward … they also claim significant graphite resources?

    June 25, 2014 - 10:37 AM

  • Peter Epstein

    I’m a fan of Alabama Graphite, I just listed the top 10 names by market cap. I would like to learn more about Elcora, anyone close to that story?

    Triton’s stock has had quite a run!

    Bottom line for me, Graphite One is in the sweet spot due to its small market cap, safe jurisdiction, large, near-surface, high-grade deposit (on just 1/4 of its strike length). U.S. sourcing of graphite will become increasingly important in years to come, good news for Alabama Graphite and Graphite One…..

    I’m really excited about GPH pursuing that State of Alaska loan program like Ucore was successful in obtaining. However, that loan application wouldn’t be submitted until late next year at the earliest, so it’s not a near-term catalyst.

    June 25, 2014 - 11:10 AM

  • Ross

    Well written article and informative. I am a novice when it comes to graphite investing but I will look further at Graphite One.

    June 25, 2014 - 12:12 PM

  • Peter Epstein

    Thanks Ross. I like Graphite One, but my overall view of the graphite sector is that a rising tide will lift all boats… well, it will lift a lot of boats, maybe not all of them. Only a handful of companies have projects that could possibly be in production by the end of the decade. I like other companies besides GPH.v / GPHOF in the graphite sector.

    That’s a very fascinating aspect of this sector. Demand for graphite appears to be rising and COULD rise alarmingly fast if certain events unfold, but there’s no way supply is going to be able to catch up IF a demand spike happens.

    Everyone was so worried about Syrah’s 200k tonnes of production flooding the market, now that’s largely spoken for from 2 MOUs, one of which is with Chinalco as described in my article….

    June 25, 2014 - 2:23 PM

    • Islay

      Peter, thanks for an excellent article, with some real-world warnings as to where things may stand in one or two years time.

      Most people seem to have dismissed Syrah as a competitor, given that their initial, published, planned production rate of 220K tonnes per year is essentially committed to their first two sales, to Chalieco and Asmet.

      This may be a premature assumption. Look at the implications. Both those sales are for product which is oriented towards finer flake (for aluminum anodes, and as a recarburizer, respectively). But the metallurgical work reported (for Balama East) shows that 56.8% of the Syrah product is Coarse, or Very Coarse (+80 mesh). So supplying 200K tonnes or so to Chalieco and Asmet will leave Syrah with about 260K tonnes of Coarse to Very Coarse flake material.

      Isn’t it almost certain that they will want to send that product somewhere?
      And, because their production costs are so low, isn’t it equally certain that they will be able to do so at prices which few, if any, other producers can match?

      There have already been strong hints from Syrah that their initial production rate will be much greater than the figure of 220K tonnes per year – possibly 300K tonnes plus.

      If this turns out to be the case, then the “overhang” in world supply is right back there, and maybe more threatening than ever.

      June 26, 2014 - 6:55 AM

  • John O

    I too am a big believer in GPH, for all the reasons stated as well as the following; Tesla has publicly stated that they will in all reasonable cases, source their product and suppliers ‘at home’… which to me might in fact mean GPH will be a big winner. It could also mean the Tesla may well pony up some dough for GPH development and part ownership of a key ingredient for their supply chain. It is also of paramount importance that the timing of Tesla’s factory and GPH mine development coincide, which in fact they do. If and when Alaska throws in infrastructural development costs it is easily shipped down the coast… I am a believer!

    June 25, 2014 - 2:40 PM

  • David O’Brien

    Anthony Huston of GPH forwarded Peter’s article and we’d like to post it under Newsletter Writers complete with all credits and links on MineSnooper.com as GPH is a client.
    I’ll forward our Newsletter Writers’ form…to which person/email?

    June 25, 2014 - 3:21 PM

  • Aat Oskam

    China finds graphite in Africa, by a majority stake in Globe Metals & Mining in their Chiziro Graphite Project. Africa is not in the picture by most of you graphite people?

    June 25, 2014 - 3:29 PM

  • Peter Epstein

    I have no problem with Africa….Allana Potash has a terrific project in Africa, Syrah Resources’ project, the giant one with 80k-100k tonnes of graphite headed to China’s Chinalco, that project is in Mozambique.

    Africa’s fine, there’s a lot of iron ore, coal and gold coming from Africa as well. I think for security of supply and transportation logistics, North American graphite customers will want a majority of their graphite sourced from North America. Asia can soak up all of China’s graphite.

    June 25, 2014 - 3:47 PM

  • Tom

    Mr. Epstein … great article but for the sake of full disclosure, are you long Graphite One stock?

    June 25, 2014 - 4:45 PM

  • Peter Epstein

    Yes, I own shares of Graphite One.

    June 25, 2014 - 5:25 PM

  • Tom

    Thank you, Mr. Epstein, for the transparency.

    June 25, 2014 - 7:02 PM

  • Nathan Young

    Hi Peter,

    I really enjoyed reading this article. The future possibilities of graphite and graphene are quite amazing.

    You asked if anyone knows about Elcora. I only know that they have a MOU to acquire and interest in the Sakura mine in Sri Lanka.

    I know this as I am a non-executive director of Bora Bora Resources (ASX: BBR) and we just entered in to a binding Heads of Agreement to acquire 50% of the Queens Mine and their Graphene Oxide production facilities which is located close to the Kahatagaha Mine and the Sakura Mine. We also have adjoining exploration ground around these mines that we have recently conducted a VTEM survey over.

    Please contact me if you would like more information.

    Cheers
    Nathan

    June 25, 2014 - 8:07 PM

  • Venture capitalist

    “The following chart shows the top 10 graphite companies by market cap. The average of the top 10 is C$122 million, (or C$67 million not including Syrah Resources). As noted, Graphite One’s market cap is just C$ 18 million, a 73% discount to the $67 million average (not including Syrah).”

    So Graphite One’s market cap has a 73% discount to peer average. This statement is completely and utterly meaningless considering valuation, why should I actually think differently about the entire article?

    June 26, 2014 - 6:43 AM

  • metall

    Its amazing to read that Syrah production is committed to Chalieco and Asmet. The company misses a deadline for the MOU with Chalieco and yet some investors dare to say that the production is committed. Some even say that missing the deadline is good news.

    GPH is a sure winner. Tesla will source raw materials only from North America as they have stated several times.

    June 26, 2014 - 3:57 PM

    • Islay

      The Syrah deposit contains large amounts of vanadium which they can mine with the graphite, and which separates out at the first flotation stage. Syrah’s MOU with Chalieco is for vanadium, as well as graphite. Now that they have done more metallurgical work on the vanadium, they have found that they can fairly easily upgrade the vanadium concentrate from 98.5% (which is all Chalieco needs, as a steel strengthener), to 99.9%. Does that matter? You’d better believe it. 98.5% is worth about $12-15 per kilo, whereas 99.5% is apparently worth something like $50 per kilo.- and Syrah claim to have requests from Japanese, South Korean and European buyers for the high-grade product, for redox flow batteries.

      If it was your company, wouldn’t you want to sell as much product as possible at a higher margin?

      Syrah have still said that they fully expect an offtake agreement with Chalieco to be concluded. So the change can only help Syrah.

      Tesla is an interesting point. They are in a competitive business, and, as Peter Epstein has just said:

      “The next giga-factory announcements could be coming from BMW or Mercedes, not Tesla. ”

      Will Tesla really be able to afford to have their competitors buy graphite at half they price that they, Tesla, pay? When they have all put hand-on-heart, and saluted the flag, the accountants will have their day. Can GPH go close to matching the Syrah delivered cost? Maybe, maybe not. But that will be the major determining factor.

      June 26, 2014 - 7:35 PM

  • Michael O

    Why does no one talk about Focus Graphite? To me, I see FG to not only be a frontrunner, but THE frontrunner. Am I missing something here?

    June 26, 2014 - 5:15 PM

  • Peter Epstein

    Lots of good comments on this thread. Syrah is one that I’m not well versed in. It obviously has a lot going for it. However, the A$ 664 million market cap might be pricing in a lot of the good news?

    When will Syrah be ramped up 100k + tonnes? 2015? 2016? Thanks

    June 26, 2014 - 8:16 PM

    • Islay

      When will Syrah hit 300K tonnes of graphite per year? Good question, Peter, and, as yet, no official answer. But the announcements on vanadium mean that we can make a shrewd guess, because we know roughly the ratio of graphite to vanadium.

      The vanadium Scoping Study is considering two cases – 5K tonnes per year, and 10K tonnes per year. To produce 5K tonnes of V2O5, Syrah need to mine enough ore to produce a bit over 200K tonnes of graphite, which is what the production target was set at prior to the two large orders from Chalieco and Asmet. 10K tonnes of V2O5 would involve about 400K tonnes of graphite.

      We also know that, after “many enquiries from China-based graphite buyers requesting supply”, Syrah is “currently reviewing its production targets in light of this potential demand”. I don’t think that means the targets are likely to be reviewed downwards.

      A vanadium production figure in the middle of the Scoping Study figures would result in a graphite production of about 300K tonnes per year, probably not long after startup in mid 2016.

      As for whether a market cap of $A664m ($US630m) is too high, that’s one for individual investors. 300k tonnes of graphite plus 7500 tonnes of vanadium per year, while being, by a big margin, the world’s lowest-cost producer, sounds like a very healthy cash flow.

      June 28, 2014 - 9:32 PM

  • Paul Ferguson

    Great Lakes Graphite (GLK.V) is often overlooked but has several things going for it that investors may want to consider:

    Location: GLK’s properties in southern Quebec are close to infrastructure and host historic mines and multiple graphite occurrences. 7000+ meters of drilling by the previous operator will form the basis of a NI 43-101 resource estimate that is targeted for 2014. 30 minutes from Ottawa and driving distance from Toronto where the company office and metallurgy service providers are located.

    Grade: The relatively high grades for which this area is known are amenable to GLK’s small footprint / low CAPEX approach. GLK’s is targeting deposits that are 4% and above.

    Flake size/distribution: Historical metallurgy work on material from these properties showed a high proportion of large flake.

    Plan: GLK’s plan is designed to deliver maximum speed and flexibility at minimum cost. GLK is assembling a portfolio of assets with specific characteristics that are consistent with a modular, scalable approach.

    People: GLK has assembled a team of professionals with deep experience in areas that are critical to the success of an industrial minerals company. Between the management team and the Board, GLK has more than a century of experience in the mining industry, including decades of experience specifically with graphite.

    Pipeline: GLK announced the closing of a first tranche of their financing last week. Assuming the final close is not far behind, the Company will then be in a position to turn its full attention towards completing a resource estimate on the Lochaber property, followed by a preliminary economic assessment. All of that activity will generate news flow which, by marking the Company’s step-by-step progress, will build credibility and, ultimately, recognition by the market.

    That is the plan, at least!

    Paul Ferguson
    Director, Great Lakes Graphite Inc.

    June 28, 2014 - 5:57 AM

  • Orlando

    I am accumulating VQA:V

    June 28, 2014 - 6:30 AM

  • Peter Epstein

    Paul Ferguson Director, Great Lakes Graphite Inc.

    Paul, could I speak with you to learn more about Great Lakes Graphite?
    Please email me at epstein.peter4@gmail.com
    Thank you.

    June 28, 2014 - 7:02 AM

    • Paul Ferguson

      I have sent you a note Peter, thanks. Also, thanks much for the article. I forgot to mention that earlier! I am encouraged to see that investors are still keyed in on this sector. I think we’ve seen the first wave of enthusiasm come and go, but the best part is still to come.

      June 28, 2014 - 10:35 AM

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