Beat The Market
. The first quarter of the graphite boom in 2012 has been one of the best quarters for a group of stocks since uranium started to take off in 2004. It has been nothing short of extraordinary considering all other materials stocks continue to struggle to attract investment in 2012. It shows how strong this emerging investment story is. The graphite theme has all the elements of the perfect storm. It has strong industrial growth with a large market and it has strong incremental demand coming from multiple fronts. Li-Ion batteries, nuclear pebble bed reactors and eventually fuel cells will all add to the demand curve for graphite over the next decade and beyond. . Graphite is also at the center of a 21st century revolution in technology with graphene, the 2 dimensional wonder material that will change how we view physics. . Graphene is a discovery so revolutionary that is already being used in hundreds of new technological applications on an R and D level with hundreds of new patents already filed involving graphene. Bendable phones, graphene computer chips, coatings for re-inforcement and strength, coatings for efficiencies, space elevators and so much more. This is just the beginning of discovery when it comes to graphene. The uses we find for graphene years from now I am sure will be mind blowing to any of us or what is being conceived and thought of today. The first mass produced products with graphene are at least 5 - 8 years away while scientists are still trying to figure out how to produce large quantities of the material and most technology using graphene won’t well into the 2020’s it is a technology that is a wild care to the long term future of the industry. Is graphite a potential 5Mt amrket, or is it a 20Mt or 30Mt market? Along with increasing adoption rates of electric and hybrid vehicles and the other lage demand drivers, the graphene wild card could combine to create the perfect storm in demand by the end of the decade. While the mining super cycle ends for many metals in the next 10 years, the graphite theme could be one of the few going long and strong. . Between graphene, Li-ion polymer batteries, pebble bed reactors and ultimately fuel cells, it creates an environment to brew the perfect investing storm. . Not since the invention of steel has there been a substance that can potentially revolutionize and change the world in a dramatic way. . Am I exaggerating comparing graphene to the invention of steel? . I don’t think so. Not when NASA is talking about space elevators made possible by graphene. The properties that graphene demonstrates open up limitless opportunity. Not when graphene could eventually find its way into almost everything we use. . Since none of us were alive when steel was invented, finding something recent for comparison will do better justice to appreciate the types of gains ahead for the investing community. 2011/2012 graphite activity closely matches what happened 8 years ago in the uranium sector. If this is the case, the next 12 to 18 months are going to see the early entrants’ (SRK, SGH, FGR) and industry leaders’ (NGC, FMS, FDR) share prices go to astronomical levels, just like uranium stocks did for 3 to 4 years. . The perfect storm that is driving graphite has one key element that neither uranium nor rare earths had that is unique to graphite… 1Mt to 1.5Mt of potential incremental demand over the next 10 years and the potential for graphene to be one of the most common materials used in technology by the end of the 21st century. . Incremental graphite demand is 10 times the size of the uranium market! . The future is bright indeed. The impending market for graphite is 10 times the size of the current rare earths’ or uranium markets. What this means is that while in the uranium sector the mines come online at a snail’s pace, if ever. The companies exploring the graphite sector will have 10:1 odds that they will have a mine over their counterparts in the uranium sector. In some mining sectors a supply crunch can be eased by 1 or 2 large mines coming on line. 1 or 2 new mines in the graphite sector would not even put a dent into the potential demand curve, a curve that is set to grow exponentially with the mass production of EV’s starting in earnest by 2015 through to the end of the decade.
. You are witnessing the birth of a new industry to meet new demand growth for the next 20 to 30 years. Li-Ion batteries are expected to demand up to 300,000 tonne of graphite by 2020 on assumed adoption rates of less than 10%. If EV saturation by 2040 is 70% to 90% and graphite is still the main component in the EV batteries, demand could exceed a 5Mt market when the industry matures. To get an idea where this market could be at 100% saturation, just multiply by a factor of 10. Just to satisfy an auto market at 100% saturation, the industry will need to produce 3Mt to 5Mt of high purity graphite per year. Canaccord estimates that with only a 20% EV saturation and 25% HEV saturation that would require 2.75Mt of graphite per year at a total saturation of 45%. . The growth in demand and subsequent mines needed to supply an extra 1Mt to 1.5Mt of graphite per year by 2020 is jaw dropping. 1Mt per year by 2020 is the equivalent of 20 new graphite mines with an average production of 50,000 tonnes per year. More than double what Northern Graphite currently plans to produce.
. . The proof is in the pudding. While almost all other materials companies are suffering to raise any type of money in conditions that are downright predatory for financing from gold to rare earths, the investment community is tossing money at these early entrant juniors grabbing up all the prospective graphite occurrences in Canada and elsewhere in the world. . One easy clue is to follow the money… Where is it going?
Straight into graphite
. The perfect storm is brewing…
Unprecedented incremental demand from...
Some simple factors one might consider for graphite…
. MATERIAL – ITS ALL ABOUT MATERIAL...
Grade - low cost production per tonne of graphite produced potentially less than $1000 per tonne for a plus 5% operation. High grade also means a much smaller mill and a smaller capex project. Grade increases payback of a project and mines.
. Purity – THIS IS THE MOST IMPORTANT FACTOR - high purity of 99.9% is imperative for Li-Ion batteries and the industry is racing to find a suitable replacement for synthetic graphite which currently sells for $7,000 to $20,000 per tonne.
. Flake size – the larger flake is easier to work with and you can always crush it down to a smaller flake. Northern Graphite’s product and process together combine to use less than 50% of the smaller -100 mesh product to produce spherical graphite. What we do not know is how much of this efficient beneficiation is due to jumbo flake size and how much is credited to NGC’s technology and processes upgrading the material.
. Recovery - this is much more important for a lower grading operation NGC needs higher recoveries while a 7% and above mine could get by on 80% recoveries
. Ease of processing - some deposits like Bisset Creek and Green Giant are every easy to process and have a high purity meaning the need less intensive processes and less capital cost. EGZ claims all they need is $10M portable crusher to start producing a basic raw material to generate quick cash flow. This translates into low cost mining process which reduces costs at all points of the cash flow statement from capex investment to daily opex costs.
. Open Pit Mining Qualities
. Proximity to surface - greatly affects the strip ratio which is a major cost of mining simply b/c the closer to surface the deposit lies, less rock you have to move to mine it. Proximity to surface is one of the single biggest factors in determining the cost of a mine including an open pit mine’s strip ratio. Simply put, the further away from surface the deposit is, the more costly it is to mine it.
. Thickness of zone – this can affect the strip ratio as well including how deep an open pit can go and be economically viable. A vertical zone that is at surface and is 100 meters wide will have a low strip ratio vs. a vertical zone that is 10 meters wide and be able to pit much deeper.
. Shape of zone - how it lies in a conceptual open pit like flat lying vs dipping vertically. A shallow flat lying zone is preferable because you can scope it all in a pit while a steeply dipping zone will be a hard to pit.
. Product First, Mining Qualities Second .
When you are just starting out in an industry and looking for a niche product that caters to a certain industry and specifications such as flake size and purity; what is most important is finding a suitable product. This fundamental quality has been even more ingrained after the change in pricing adding high purity jumbo flake as a product at prices ranging from $4,500 to $6,000 per tonne. In an industry that is searching for the perfect product, thinner mining widths of 1 meter to 10 meters will not matter. In an industry where the top product used to sell for $2500 to $3,000... the pricing for jumbo flake at $6,000 per tonne is very material. It makes the mining variable much less a factor as long as you have the right stuff.... 99%-99.9% jumbo flake.
. Having the right product makes a small 5Mt deposit as valuable as a 100Mt deposit. The last thing that people will emphasize is mining qualities. It is why a project like Bisset Creek, despite an apparent lack of grade will do very well compared to others with grade that don't have the product. In reality Bisset Creek is liek a 4% deposit b/c of the pricing differences and FMS is like a 10% deposit. At this stage in the game, it’s all about finding the product and NGC has done that. If anyone else can do it like NGC, they are going to have a bright future and a high value mine on hand. They can do it all without proving up a 100Mt resource and apparent lack of size.
. The graphite story has just emerged as a top materials growth theme and the race is on to find the ideal deposits that lends to purity, flake size and grade. At $6,000 per tonne for the finest nuatral flake graphite the industry can find.. graphite is now a very lucratve business. .
Companies that round out my graphite watchlist: