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FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Focus on Graphite Companies with Green Energy and Technology Strategies

Commodities / Graphene Oct 22, 2014 - 09:26 PM GMT

By: The_Gold_Report


Graphite equities continue to trade sideways, but a handful are starting to emerge as best-in-class plays as they race to secure offtake agreements by derisking their projects through resource upgrading and economic studies. Ron Struthers, editor and publisher of Struthers' Resource Stock Report, says that investors need to focus on companies with strategies designed to position themselves with green energy and technology firms. In this interview with The Gold Report, he names a few players that make the grade.

The Gold Report: In your view, what are the two most bullish factors in the graphite space right now?

Ron Struthers: I don't think the fundamentals have changed for quite a while. China controls most of the graphite supply, so keeping prices up is in its best interest. The second factor would be the potential demand that comes from batteries, particularly those used in electric vehicles.

TGR: Chinese graphite production is in the early stages of consolidation, mostly for environmental reasons. Do you expect that consolidation to affect 2015 prices?

RS: China is certainly capable of producing more graphite. China has taken advantage of weaker graphite prices to eliminate some inefficient mines or others that do not meet higher environmental standards. The consolidation will continue to underpin graphite prices, and perhaps raise them slightly. If there were a significant price increase, we would likely see an increase in graphite production in China.

China controls 70–80% of global graphite production but it's also one of the big end-users. There's been talk of China restricting graphite exports as it did with rare earth elements quotas. That could provide greater price support, which is going to benefit the companies outside of China because it allows them to build profitable mines.

TGR: Could China lose its stranglehold on graphite production?

RS: I see no signs of that. A number of new graphite deposits are being developed in other parts of the world but none is in production. With graphite there's no set market, so companies need to have offtake agreements to sell their graphite, probably even before they finance their mines. The only company with an offtake agreement thus far is Focus Graphite Inc. (FMS:TSX.V; FCSMF:OTCQX; FKC:FSE), and that's with a Chinese company. Like most commodities, China continues to accumulate supply.

TGR: Will a stronger U.S. economy influence graphite prices?

RS: I don't think the U.S. will have any effect on prices. The economic recovery has been weak and capacity utilization remains well below the level needed to push prices higher. But more importantly, graphite demand, like industrial metal demand, comes from other parts of the world. For example, the biggest use of natural graphite is in refractories used in steelmaking—and China produces about 10 times as much steel as the U.S. That said, the new Tesla Motors Inc. (TSLA:NASDAQ) battery plant in Nevada could dramatically increase graphite demand in the U.S.

TGR: The batteries that will be produced in Tesla's Gigafactory require lots of lithium and graphite. Is there sufficient battery-grade graphite to supply the plant's needs? How could the existence of that plant affect some of the publicly traded companies you follow?

RS: For Tesla to reach the stated number of batteries it plans to produce, it is going to have difficulty sourcing enough battery-grade graphite. Tesla is currently using synthetic graphite from Panasonic, which is expensive due to the energy-intensive process by which it's made. Tesla's main objective is to lower battery costs. I expect that Tesla will start working with one or more of the more advance-stage graphite companies to explore the use of natural graphite in its batteries. Perhaps that has already happened, but nothing has been reported. It would be a huge development for any company to work with Tesla. It could eventually lead to some type of offtake agreement or mine financing.

TGR: Which companies have a realistic chance of becoming one of Tesla's graphite suppliers?

RS: At this point, I think Tesla would want to be talking with the companies with proven deposits. The two with the most advanced-stage graphite projects are Focus Graphite and Northern Graphite Corporation (NGC:TSX.V; NGPHF:OTCQX).

TGR: Many graphite companies are touting the idea of producing graphene or microscopic layers of graphite from mined graphite. Graphene has been created with synthetic graphite. Can the same be done en masse with mined graphite?

RS: In theory it's possible. Graphene is basically one atom set of pure carbon. It's quite difficult to produce, and certain sources and types of graphite work better than others. Due to its high cost there is almost no market for graphene now, probably only a few kilograms a year for research. The challenge is to make graphene at a fraction of today's price, which would spur demand. Elcora Resources Corp. (ERA:TSX.V) is working on this, as are some other companies, like Focus Graphite and Mason Graphite Inc. (LLG:TSX.V; MGPHF:OTCQX). They have agreements with graphene research companies.

TGR: What would those agreements cover?

RS: At this point they would be working on processes and ways to produce graphene at much lower costs. The potential is huge. But if graphene is ever to become a viable industrial material, the costs have to come way down.

TGR: In a recent edition of the Struthers' Resource Stock Report, you wrote, "In the graphite sector we have seen the first big wave of speculation and exploration and consolidation, and the leaders are starting to emerge." What would you suggest are the key characteristics of leaders in this space?

RS: Gold is a monetary metal. Copper is an industrial metal. But graphite is tied to green energy and technology. Look for companies that are focused on a certain mandate in these areas, something that separates them from the rest. That's one of the key factors.

As with any mineral deposit, you should also look at location and infrastructure. A graphite deposit needs to be close to infrastructure to keep costs down. The grade, flake size, distribution and carbon purity are also key factors, but in the end it's how these combine to produce a product that meets an end-user's particular needs.

TGR: What are some examples of companies seeking to meet end-user needs?

RS: Northern Graphite, for example, is one of only two North American graphite companies with a completed feasibility study. Its primary deposit, Bissett Creek, is just off the Trans Canada Highway in eastern Ontario. Bissett Creek has a high proportion of large and jumbo flake graphite, and Northern Graphite has done a lot of work testing and upgrading its graphite for battery use. For instance, it developed and successfully tested a process to coat spherical graphite, which is required for use in batteries. The company even tested the process using production-scale equipment. The goal is to reduce graphite costs for batteries, which seems well aligned with Tesla's goals.

Focus Graphite recently announced the results of its feasibility study on the Lac Knife project, and it is really part of a technology conglomerate. Focus is the only North American graphite company with an offtake agreement and it successfully tested upgrading the Lac Knife graphite to battery grade. Its sister company, Stria Lithium Inc. (SRA:TSX.V), is working on a proprietary process to produce pure lithium at reduced cost.

Focus also owns a stake in Grafoid Inc., a graphene development company that recently acquired 75% of Braille Battery Inc., a leader in the development and sales of high-performance, ultralight lithium-ion batteries used in IndyCar, NASCAR, and Formula 1.

Grafoid just opened a technical plant in Kingston, Ontario, that was once Alcan Corp.'s metallurgical testing facility. Stria Lithium is developing its lithium process there. Focus really has a vertically integrated business strategy, and I think it is a leader in this regard.

TGR: What's the next step for Focus Graphite?

RS: It has to get mine financing. Its offtake agreement is basically for half its planned production, which certainly gives it the option to strike a second offtake agreement. That would be the next step, either the second offtake agreement or some other type of mine financing.

TGR: Northern Graphite has done a lot to upgrade its graphite, but has that brought the company any closer to an offtake agreement?

RS: We can only speculate that it has. There have been no announcements, but a lot of these companies are continuously in talks with end-users as part of an effort to secure offtake agreements or market their graphite. With graphite you really have to have some agreement with an end-user that will buy your graphite. You wouldn't want to spend a lot of money developing a mine and not be able to sell your output. News on that front has to come sooner or later for Northern.

TGR: What companies are closing the gap on Northern and Focus?

RS: Mason Graphite is working on its feasibility study on its Lac Guéret graphite project in northeastern Québec. The preliminary feasibility on Lac Guéret posted a 33.7% pretax internal rate of return and a payback of only 2.5 years. Lac Guéret is very high grade at 27% carbon, a grade it would extract over the life of the mine. The flake size and recovery seem around the average of others. The feasibility study should demonstrate the effect of the high grade on overall production costs. Mason is the leader as far as grade is concerned.

TGR: Are there other graphite names out there that our readers ought to know about?

RS: I mentioned Stria Lithium. I know it's lithium, but in combination with Focus it could jump into a leadership role on the lithium front, if its proprietary process to refine lithium proves true.

Another one is Elcora Resources—the only junior now with a producing mine, albeit a small-scale operation. It's in Sri Lanka—known for the best graphite in the world—and Elcora plans to boost production there.

TGR: Why is Sri Lankan graphite considered the best?

RS: Historically, it always commanded the highest price because of its high purity. It's the only place in the world where lump veins are mined, so it comes out of the ground at 94–99% carbon. The ore requires almost zero processing. Elcora is focused on making that graphite into battery-grade graphite and graphene. Elcora Chief Operating Officer Dr. Ian Flint has spent many years conducting graphite research. Given the high purity and the ease of the flake extraction, Sri Lankan graphite probably has the best odds of being the first to be turned into graphene at much lower costs.

TGR: Elcora is about to change its name to Graphene Corp. Given that it has yet to produce graphene, that seems somewhat misleading.

RS: Graphene is going to be its focus. Flint became involved in the company early on and he's been in graphene research for a long time. That's the focus of the company.

TGR: What are some other players in the space?

RS: I'm watching Valterra Resource Corp. (VQA:TSX.V). It has a project in Ontario with an excellent location and strong infrastructure. Its initial channel sampling results were very high grade, but it entered the market a little later and has had difficulty raising financing. Should it do so, its exploration results should be something to watch.

Another company I like is Alabama Graphite Co. (ALP:CNSX), in Alabama. The whole area was a past-producing graphite belt. The company probably has the best location and infrastructure of any graphite junior—year-round good climate, cheap labor, and it is the closest to Tesla. Alabama is focused on its 100%-owned Coosa graphite deposit and the past-producing Bama mine, which boasts a thick oxidized zone where the weathering has removed sulfide minerals and significantly reduced the hardness of the graphitic host rock. That basically means that it's cheaper and easier to liberate the minerals from the host rock, thereby preserving the flake. The first metallurgical test at Bama returned 54% large flake graphite, with about 18% jumbo flake. Pretty good results.

TGR: Your newsletter is known for finding companies with sufficient liquidity to allow investors to get in and get out. Do the companies you mentioned have the necessary liquidity?

RS: Maybe not Valterra. Elcora Resources is a relatively new company and the liquidity has picked up in the last several weeks. The others are fairly liquid.

TGR: The narratives of these companies to some extent tend to blend together. What should investors pay the most attention to as they vet these names?

RS: A lot of people will look at graphite companies as mining or exploration plays. With graphite, the more important thing to look for is some competitive advantage that will allow the company to align itself with what end-users want. There's going to be room for a handful of new mines over the course of the next several years, so several graphite companies will likely succeed. We know the cost of batteries has to come down for electric vehicles to go mainstream. Cheap, natural graphite could play a role in supplying the battery-grade graphite necessary for that to happen.

TMR: Parting thoughts?

RS: In general, the resource market in North America is priced at a very attractive level and the graphite space, in particular, is interesting. Over the last year investors in this space have watched stocks trade sideways with a downward bias, yet over the same period in Australia the graphite sector is up about 120%. In one part of the world the industry is shining, and in another part of the world it's probably oversold and a good bargain.

TGR: Thank you for talking with us today, Ron.

Ron Struthers founded Struthers' Resource Stock Report 20 years ago. The report covers senior and junior companies with ample trading liquidity.

Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) Ron Struthers: I own, or my family owns, shares of the following companies mentioned in this interview: Northern Graphite, Focus Graphite Inc., Stria Lithium Inc. and Elcora Resources Corp. I personally am, or my family is, paid by the following companies mentioned in this interview: Elcora Resources Corp. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
3) The following companies mentioned in the interview are sponsors of Streetwise Reports: Focus Graphite Inc., Mason Graphite Inc. and Grafoid Inc. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
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