Beat The Market

Investment newsletter

 

 

Bringing you undervalued, high growth opportunities...

.

Graphite Report: April 2012

.

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...

  • Li-Ion batteries - 300Mt by 2020
  • Nuclear Pebble Bed Reactors - 400Mt by 2020
  • Fuel Cells - more than the entire current graphite market

.

Revolutionary technology graphene – could double demand again in the 2020’s
Declining production from China plus export restrictions
Magnitude of potential demand 10 times greater than rare earths or uranium
.
.
BIG NEWS FOR THE GRAPHITE INDUSTRY!!!
.
New pricing for high purity jumbo flake graphite!!!
.
99.9% Jumbo flake gets $6,000 per tonne!!!
.
Industrial Metals now quotes jumbo flake graphite at 99% to 99.9% purity. Prices start at $4,500 for 99% jumbo flake. The highest purity flake 99.9% commands $6,000 per tonne. This is big news as everyone will adjust cash flow models for Northern Graphite using double the price, $6,000 per tonne for their highest quality material instead of $3,000 or $2,500. It also makes high purity jumbo flake the most sought after material in the industry affirming that both purity and flake size are important. If you have jumbo flake and a high purity, you are going to have a winning product no matter how small the deposit.
.
A 200,000 tonne graphite deposit, if jumbo flake and high purity is worth $1.2B in-situ. For a reference, that would be around 2Mt at 10%Cg. Even defining a deposit as small as 2Mt, if it is the right flake size and purity, the potential spread is double or even triple your costs to mine and process.
.
The new pricing category for jumbo flake demonstrates where the industry is going giving out premium prices for the jumbo flake and higher purity products suitable for new industries like lithium ion batteries. 99.9% large flake is close to the purity of synthetic graphite at 99.95% which starts at $7,000 per tonne according to Industrial Metals. There is no price for natural graphite at purities of 99.95%, that is yet to be negotiated. $7,000 per tonne I would assume to be a floor but might not be if 99.95%C natural graphite is suitable to replace material that consumers are paying $20,000 per tonne for. Obviously battery manufacturers see natural graphite as a way to cut cost in producing the batteries over the long run as Tesla batteries current replacement cost is around $30,000 and they want it down to $7,000 in 3 to 5 years. Most of the cost savings can be achieved by mass production and economies of sales, but manufacturers will try to attain reasonable prices for materials and replacign synthetic graphtie with natural graphite if its cheaper and works as well jsut makes sense. There is a huge cost differential between synthetic and natural graphite. In the Tesla’s Roadster’s case, it would bring the cost of 100kg of graphite from $2,000 to $3,000 per battery at current synthetic prices to $700 to $1,000 per battery if the magic number for 99.95%C natural graphite is somewhere between $7,000 and $10,000 per tonne. That is a considerable savings in materials for a battery. At minimum a $1,300 spread.
.
New Pricing Lends to Potential Monster Cash Flow Valuations
.
When you revise Northern Graphite’s numbers to produce 99.9% jumbo flake at $6,000 per tonne or spherical graphite at $7,000 per tonne or greater, numbers at Bisset Creek start to jump off the page with a very juicy conservative ballpark valuation around $500M NPV. If you ramp up the operations at Bisset Creek to 5,000 tonnes per day averaging $5,000 to $6,000 per tonne, the NPV doubles to over $1B on a short 20 year mine life. A project like Energizer’s Green Giant at 8% grade and $80M capital costs for a 2,000tpd mill netting $5,000/t values in excess of $2.5B. It is potential returns like this from a minimal capex expenditure that is driving the industry forward looking for the ultimate high purity massive flake graphite discovery. What also helps is exploration costs are dirt cheap and simple meaning endless amounts of money won't have to be wasted on exploration like the gold sector.
.
Exploration for graphite consists of reading EM maps and drilling 100 meters maximum depth.
.
In mining, investments that return billion dollar valuations rarely cost less than $100M to explore, never mind b ein production for less. Most with billion dollar NPV will cost a billion. A rule of thumb is if you can spend a dollar to get a dollar in valuation you are doing ok, so to get 10 times return on initial investment is a once in a blue moon investing opportunity and is a huge reason these stocks are going crazy. News of pricing changes like this w ill further drive the industry as it is a material change for everyone and could help drive the next leg up in this fledgling industry.
.
The graphite investment theme is truly extraordinary and unique only to the graphite industry. It is clear that battery grade material will sell for a minimum of $7,000 per tonne. Even high purity jumbo flake will sell for at least $4,500 to $6,000 per tonne with minimal beneficiation process for the best deposits. As news creeps out about the new pricing for high purity jumbo flake, it should excite the market as returns on investment have potentially doubled if you have a high purity massive flake graphite deposit over just a large flake deposit. This pricing mechanism is great news for NGC and other 2% mines like Eagle Graphite and Ontario Graphite as it ensures that these 2% operations will mine handsome profits with a good cushion if prices ever do come down. Since prices are negotiated, there is now even more price stability with a negoitated product priced a lot higher.
.

Industry Leaders – capable of production within 18 – 24 months (Prices are Monday’s close)

.

Big North Graphite NRT-V
.20

.

Shares Out… 19.8 M
Graphite acquisitions… 5M
Options… 1.66M
Milestones… 2M
Fully Diluted… 28.46M
.
Market Cap… $5M (pre-financing)
.
Big North Graphite acquired two projects in S. Ontario near Standard Graphite’s Little Bryan Project which is in the area of Northern Graphite’s Bisset Creek and Ontario Graphite’s Kearney mine. What has really made this company interesting is the recent acquisition of a Lac Knife style deposit in eastern Quebec 140 km north of Sept Iles. The project has an anomaly that is 8km long and up to 2km wide representing a significant target to go after in an area where graphite deposits tend to be very high grade. The company hasn’t announced a financing yet, but I expect $1M to $1.5M financing around
.20 to
.25 cents and then these guys are good to go with an exploration program that includes a small drill program on both targets this summer.

.

Griffith and Brougham Graphite Properties
.

  • Southern Ontario
  • 6,500 hectares
  • Near Standard Graphite’s Little Bryan Property
  • Cost - $80k plus 3M shares

.

Lac du Nord graphite Project
.

  • Eastern Quebec
  • 140km NW of Sept-Iles
  • 2,009 hectares
  • Graphitic paragneiss formation 8km long and up to 2km wide
  • Cost - $80k and 3M shares plus milestones of $200k and 2M shares (200,000t of Cgr at 5% cut-off)