Graphite: The market’s new favourite

THE BOURSE WHISPERER: Graphite, it seems, is the ‘new market darling’ of the resources sector.

During a recent day of trading in the boards of the Australian Securities Exchange (ASX) graphite was the key word on a number of company releases.

Lamboo Resources (ASX: LMB) proclaimed: “Significant Thick Flake Graphite Intersections From Phase 2 Drilling Program at Geumam Graphite Project.”

Not to be outdone Uranex (ASX: UNX) released an announcement titled: “LARGE GRAPHITE INTERCEPTS AT NACHU,” in regards to its graphite project in Tanzania

Closer to home Buxton Resources (ASX: BUX) added a healthy 25 per cent to its share price by announcing:  “27 METRES at 13.4 per cent TGC (total graphitic carbon) – YALBRA GRAPHITE DRILLING,” for its project located east of Gascoyne Junction in Western Australia.

Gold and base metals-focused company Montezuma Mining (ASX: MZM) was determined to join the fun by bouncing out the Buxton release to ensure market followers knew it holds a large chunk of Buxton shares (15 per cent).

A smart move as it turned out with Montezuma shares also enjoying a healthy eight per cent jump for the day’s trade.

A couple of days later Kibaran Resources (ASX: KNL) reported RC drilling at its Epanko deposit in Tanzania had surpassed its expectations.

Then up jumped Castle Minerals (ASX: CDT) to claim a new graphite discovery while drilling its Wa gold project in Ghana.

Roadhouse Regular Correspondent and market analyst, Gavin Wendt recently identified opportunities in the graphite space to be quite considerable.

“The European Commission has included graphite amongst 14 materials that it considered high in both economic importance and supply risk,” Wendt wrote in a recent article.

“The British Geological Survey has also listed graphite as one of the materials to most likely be in short supply globally.

“China, India and Canada are currently responsible for most of the world’s graphite mining and processing, with China producing the lion’s share of between 70 to 80 per cent; however China’s production comprises 70 per cent amorphous and lower-value, smaller flake graphite.”

Wendt indicated the future demand for graphite is most likely to be driven by new technologies, in particular Lithium-ion batteries, fuel cells, vanadium redox batteries – and further into the future, pebble-bed nuclear reactors.

“Graphite demand from li-ion batteries has grown from virtually zero five years ago to almost 100,000 tonnes per annum and now represents 20 per cent of the flake market and continues to grow at 20 per cent annually,” he said.

“The fuel cell market is now a billion-dollar-a-year industry and many products are now going mainstream.”

A recent Industry Report from Patersons Securities, suggested investors should consider some important factors before taking the graphite plunge.

Patersons has come up with six key factors it considers to be important in evaluating investment opportunities in the graphite sector.

“While size of deposit and grade are key metrics in evaluating mining projects, the evaluation of graphite projects is more complex,” Patersons said.

“Out of the myriad of considerations, key attributes (in addition to size of deposit and grade) are flake size distribution, purity of the graphite and the extent to which the company has signed binding sales agreements.”

Factor 1 – Deposit size and quality

Evaluating the first factor, Patersons scored companies out of a total of 10 as it takes into consideration the size (20 per cent) and grade (30 per cent) of the deposit as well as the Enterprise Value per tonne (EV/t) of contained graphite (50 per cent).

The company explained its reasoning encompasses the traditional size and grade metrics of a normal mineral deposit (where bigger and higher is better) and adds an element of valuation to the mix with the (EV/t) metric.

Factor 2 – Location

Patersons’ second factor scored the risk of project location using the Fraser Institute Annual Survey of Mining Companies 2013 (Policy Perception Index), which it supplemented with a subjective score for non-ranked countries.

“Country risk is often underestimated until the risk is realised, often with significant consequences for investors,” Patersons explained.

Coming out on top in the location stakes was Talga Resources (10/10) with its deposit in the Fraser Institute Survey’s number one ranked country, Sweden.

Lamboo Resources also did well (9/10), however this was in relation to its deposit in Western Australia rather than the company’s Geumam graphite project, which is located in South Korea.

The lower scores on this scale were given to companies with African and Sri Lankan projects.

Factor 3 – Flake size distribution

Patersons’ third factor scored the flake distribution, or suitability, of the graphite produced to be used in higher value applications.

If there is one aspect of graphite projects to remain a mystery to most investors, flake size and distribution of a graphite deposit would be it and probably requires more explanation than others.

Patersons said this particular aspect was one of the hotly-debated graphite project factors.

It put the argument down to some companies emphasising its importance while others play it down.

According to Patersons the companies falling into the latter camp are usually the companies that don’t have elevated quantities of larger flakes in their deposit.

“However, a number of facts about flake size are true, firstly, the larger the flake the higher the purity of the graphite and secondly, the larger the flake size the higher the price (all else equal),” Patersons explained.

“In addition, as certain end use applications require certain minimum specifications of graphite, the demand profile for different flake sizes (among other factors) is a key driver in project decisions.

“For that reason, projects with particularly large proportions of ultrafine flake graphite may not proceed into development as this is the segment of the market most at risk of over-supply.”

 

Flake size distribution. Source: Patersons Securities

Factor 4 – Product purity

Patersons fourth factor to keep in mind when considering graphite projects is the purity of the graphite after simple processing – before it is subjected to acid or thermal upgrading.

“The purity of the graphite is particularly important for the higher value end uses like lithium-ion batteries and is a key determinant in saleability of the product,” Patersons said.

“It is also a key factor in the cost of production, as if further processing is required to make the product saleable this could dramatically increase the operating cost.”

Factor 5 – Product off take

Obviously there is little point producing any commodity if there is no market, or customer, ready to receive it.

This has been highlighted recently with the state of the uranium market, which is in limbo as it waits for anticipated Chinese demand to kick in.

It is for reasons like this Patersons declared signing binding off take agreements and Memoranda of Understanding (MoU) for intended production is important for intending graphite producers.

“The graphite market is largely one of contracted sales agreements between buyers and sellers for product meeting the buyer’s specific requirements,” Patersons observed.

“For this reason a formal sales agreement with buyers for a substantial portion of the intended production is of particular importance (there have been cases of companies being forced to close because they could not sell a large enough portion of product produced).”

Factor 6 – Timeframe to production

As with all commodities, proving up a Resource or Reserve is one thing, but as gold producers such as Doray Minerals (ASX: DRY) have proved, getting it out of the ground and shipping it out is more conducive to keeping shareholders happy.

“The interest in securing ex-China sources of supply coupled with Chinese closures and the growth in higher specification product demand has resulted in a window of opportunity to introduce new supply to the market,” Patersons said.

“The race to bring the right product to the market and secure those sought after offtake agreements means that those companies further advanced in their timeline to first commercial production have an advantage over those further behind (on the assumption that they have the required product specifications).”