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Graphene is a single layer of carbon - practically transparent, 100 times more electrically conductive than copper and 200 times stronger than steel. Graphene has been touted the 21st Century's miracle material which, like plastic or silicon, will have a profound impact on industrial production. Graphene may even provide employment for out-of-work lawyers (bless).

Figure 1: Visual representation of Graphene - "atomic chicken-wire"

(click to enlarge)

Source: Wikimedia Commons

I felt compelled to write this article as the "Invest in Graphene" articles that I've read to date don't differentiate between the companies that have an exposure to graphene and those that really don't (perhaps so not to upset their sponsors). However, as I explain below, when it comes to investing in graphene investors face a clear choice between good, bad and "ugly" stocks.

The Good (but providing relatively limited exposure)

If you're a value-oriented investor, you'll have plenty of choice from established large cap stocks, which are spending heavily on graphene research. Recently retrenched Samsung (OTC:SSNLF), which sports a P/E ratio of 6.6 and holds over 400 graphene patents, looks like a shoe-in. Given that graphene is still in a fundamental research stage, network linkages are important by integrating graphene production with end-usage. In this Samsung also excels through its cooperation with Korean research institutes, notably Sungkyunkwan University which is the world's second largest patent holder (although allowing for some overlap with Samsung's patents).

Lack of network linkages is arguably where IBM (NYSE:IBM) falls short in its graphene research efforts. Granted, IBM is big enough that there may be no need for external partners, but their graphene cooperation (limited to an unknown Egyptian research institute), looks miserly. To date IBM's most insightful conclusion from its research seems to be that for semiconductors (an area IBM would benefit from a breakthrough most) graphene won't replace silicon. This is due to the difficulty in creating a band gap using graphene (although new research has shown this may be accomplished by using bilayer graphene).

SanDisk (NASDAQ:SNDK) and Foxconn (OTC:HNHPF) are both patent leaders but have taken a narrow approach to their graphene research focusing on the material's eventual adoption. This may not result in significant exposure in the near future - look to these companies for rapid adoption once the more immediate challenge of mass graphene production has been overcome.

Nokia (NYSE:NOK), and Europe for that matter, is a potential wild card in the graphene race. The 2010 Nobel Prize in Physics was awarded to Geim and Novoselov at the University of Manchester for their ground-breaking work on graphene and the majority of academic research papers published on graphene have been from Europe. Despite this, Europe has significantly lagged behind patent applications from Asia and the US. The European-funded €1bn ($1.33bn) Graphene Flagship program, ten times larger than US federal research funding, aims to change this. This may help propel Nokia, a member of the core Flagship consortium, into a leading graphene player.

Despite being a late arrival to the scene BASF (OTCQX:BASFY) is another potentially interesting pick due to its experiments with graphene ink, laying the groundwork for printed flexible circuits. BASF's joint research program with privately owned Vorbeck Materials Corp. (associated with Princeton and the Pacific Northwest National Laboratory) is an important component in its graphene exposure. Vorbeck has been heralded as a US federal funding success story after NASA used its functionalized graphene sheets.

Table 1: Summary of large cap stocks with graphene exposure

Ticker

Mkt Cap ($)

Patents

Research focus

Network

Samsung

SSNLF.PK

162.04bn

403

Full value chain

Close cooperation Sungkyunkwan Univ, (world's 2nd largest patent portfolio)

IBM

IBM

163.55bn

131

Solar cells; optical sensors; transistors; semiconductors; water treatment

Cooperation with Nanotech Egypt

SanDisk

SNDK

13.62bn

36

Memory devices

Cooperation with Rice and Tsinghua universities

Hon Hai (Foxconn)

HNHPF.PK

30.41bn

35

Displays; semi-conductors

Cooperation with Tsinghua university

Nokia

NOK

15.44bn

16

End-user devices; Full value chain (Graphene Flagship)

Part of core Graphene Flagship consortium

BASF

BASFY.PK

84.88bn

9

Graphene composites; Batteries

Cooperation with Vorbeck Materials and Max Planck Society

Source: Yahoo! Finance; Espacenet.com

With the smallest market cap in the above list standing at over $13bn, the successful adoption of graphene by any of these companies, barring a Nokia turnaround story, unfortunately won't result in any multi-bagging gains. Investors that have been searching further afield for pure-play graphene stocks will quickly have been confronted with a host of OTC traded stocks claiming to be the next big thing in graphene. Investing in small-cap stocks, particularly on the OTC market, is inherently risky due to lower reporting requirements, less liquidity and spotty analyst coverage. The (so-called) graphene exposed stocks I categorize as "bad" are risky even by these standards.

The Bad (a collection of undercapitalized junior miners)

Nobel Prize winners Geim and Novoselov used scotch tape to isolate a flake of pure graphene from a chunk of graphite, as demonstrated in this video by Manchester University researcher Branson Belle.

Figure 2: Mr. Belle & stacked graphene (i.e. graphite)

(click to enlarge)

Source: Twitter (left); Wikimedia Commons (Right)

The method of removing flakes of pure graphene from graphite is called exfoliation. The process has evolved to include the more sophisticated "cheese grating" method, but the principle is the same. The notion that future graphene production will be based on exfoliation, resulting in insatiable graphite demand, has already led to some geopolitical angst (China produces 65% of the stuff).

But before we bring Kissinger out of retirement, realize that graphene flakes are only really useful for fundamental and applied science where limited amounts of high crystalline quality is required. Exfoliation is a time-consuming process that will never be practical for large-scale industrial production, limiting the scope for graphite to become a widely used graphene feedstock. More importantly, exfoliation results in randomly scattered micron-sized graphene flakes while for industrial use a continuous covering of graphene is needed.

Some efforts have been made to chemically meld flakes of graphene, but the result is an insulating graphene oxide - not conductive graphene. Even a potentially promising way to produce 3D graphene through a chemical process skips graphite by using a combination of lithium oxide with carbon monoxide. In fact almost any source of carbon can be used to make high quality graphene including a Girl Scout cookie, chocolate, dog feces and a cockroach leg.

The oversimplified link between graphite exfoliation and graphene production has been a field-day for OTC traded graphite mining companies who have jumped on the graphene bandwagon by issuing promising press releases - while at the same time making private placements to keep their cash-strapped companies afloat. This OTC business model is particularly suited for junior miners with negative equity that can't get an uplisting to a major exchange. These are risky investments and there are so many of these companies that I was able to construct an unofficial Graphene Snake-Oil Index.

Table 2: The Graphene Snake-oil Index

Ticker

Website claims…

BS Rating

Actually is…

American Graphite Technologies

OTCQB:AGIN

Non-exclusive technology license agreement [for] certain proprietary inventions and know-how related to "super paper"; Leading research on 3D printing using graphene

*****

Nothing really, junior miner without mining assets and no strategy for tech commercialization

Graftech International

GTI

Creation, innovation and manufacture of carbon and graphite material science based solutions

*

Company with a stated focus on graphite tech with their last graphene patent being 2008

Lomiko Metals

OTCQX:LMRMF

[O]pens a door for investors in North America who are looking to take part in the Graphene Revolution

***

A junior miner with only $8,000 in cash left to burn

Focus Graphite (owns 40% of Grafoid Inc.)

OTCQX:FCSMF

Grafoid Inc. surprised the scientific community when it announced its entrance into the graphene development arena [and] it has no competitors in its class; They [unspecified] will need tons - not kilos - of graphene for their manufacturing processes

****

Just a junior miner with as much exposure to rare earths and copper as graphite

Northern Graphite

OTCQX:NGPHF

Graphene is also being touted as the future for outer space

**

A reasonably well capitalized junior miner trying to rejuvenate a clapped-out mine

Snake-oil ratings guide: *****gross misrepresentation; **** misrepresentation; *** misleading; **probably felt it wouldn't harm to mention graphene on their website; *no overt attempt to mislead

Given graphite's host of other applications (notably Li-Ion batteries) I am not saying that all of these companies are an inherently bad, though risky, investment per se - simply that from a graphene mass production point of view graphite is an irrelevance. None of these graphite companies will give you any real exposure to graphene. American Graphite Technologies is a particularly bad offender in the snake oil department - they hold no assets and have no real tech exposure, despite suggesting they will revolutionize the 3D printing industry (why jump on one bandwagon if you can jump on two).

The Ugly (CVD equipment manufacturers)

Given what we know about the characteristics of graphene so far, the really big near-term potential applications of graphene are likely to be solar panels, battery electrodes, flexible displays and protective coatings. What these applications have in common is that they need a continuous sheet of graphene which, unlike exfoliated flakes, does not consist of discrete domains.

The potential for graphene sheets in solar panels is illustrative. The vast majority of solar panels use silicon, but despite years of research they struggle to reach over 20% efficiency and have a theoretical efficiency limit of 30%. Organic cells, the alternative to silicon, currently don't even reach 10% efficiency and are expensive. But organic cells require a top layer of conductive and transparent material to work - properties in which graphene excels. As luck would have it the same band gap problem stifling graphene's adoption in semiconductors allows it to absorb photons at every frequency. This means that solar cells made of graphene may reach efficiencies of up to 60%. Thanks to graphene organic solar technology may follow a typical disruptive technology trajectory.

Figure 4: Single layer organic solar cell in action

(click to enlarge)

Source (adapted): Pollard (2011)

Currently the only viable way to mass-produce transferable sheets of graphene is through Chemical Vapor Deposition or CVD - production equipment which is already used in the semiconductor industry. The standard CVD method for the production of graphene is by piping methane into a furnace containing a sheet of copper foil and exposing it to high temperatures (typically around a 1000 degrees Celsius). Technical challenges still remain with wrinkling and the creation of domain formation caused by the misalignment of graphene clusters, but experimentations with different substrates and multi-step CVD procedures have already shown improving results.

Figure 4: CVD process & CVD graphene with domain gaps

(click to enlarge)

Source: Minot Group, Oregon State University (left); American Chemical Society (right)

The nearest term graphene investment opportunity is therefore in CVD production and quality control equipment. There are only two listed companies that specialize in this field: Aixtron SE (NASDAQ:AIXG) and CVD Equipment Corp. (NASDAQ:CVV). But before you rush into investing into these companies be aware that, due to their exposure to the highly cyclical semiconductor and LED industries, their metrics are pig ugly:

Table 3: CVV and AIXG, ugly metrics and overpriced?

Ticker

EPS

P/S

P/B

ROE

CVV

-0.03

4.98

2.55

-0.57%

AIXG

-2.67

5.61

3.31

-43.16%

SNDK

2.92

2.43

1.86

9.99%

SSNLF.PK

170.35

0.82

1.35

22.95%

NOK

-0.44

0.44

1.6

-13.82%

Source: Yahoo! Finance

Aixtron and CVD Equipment both have a negative EPS and, compared to other graphene exposed stocks, their P/S and P/B metrics are significantly higher - to some extent pricing in a cyclical pickup in semiconductors and LEDs. Looking beyond the metrics however, Aixtron and, to a lesser extent, CVD Equipment are both in a stable financial position. In contrast to its headline negative earnings due to non-cash loss recognition, Aixtron actually enjoyed a €8.6m ($11.4m) positive cash inflow from operations during the first half of this year. This gives a measure of sustainability to Aixtron's €215.9m ($287.1m) cash pile which is driving its R&D investments - a source of potential future advantage in the sector. To put Aixtron's R&D budget into perspective - its yearly expenditure represents more than a quarter of the entire US federal multi-year funding for graphene research. CVD Equipment, being a far smaller company than Aixtron, may also make a tempting take-over target but due to it being a small-cap stock is also inherently riskier.

Table 4: AIXG and CVV beyond the metrics

Ticker

Market cap ($)

Cash / Debt ($)

R&D expenditure / staff (%total)

Network

AIXG

1.61bn

Cash 287.1m

No debt

$39.2m

315 staff (36%)

Production leader for the EU's Graphene Flagship

CVV

88.95m

Cash 11.16m

Debt 4.92m

$1.33m

36 staff (20%)

Joint IP development with Graphene Batteries AS

Source: SEC filings (FX rate 1.33 $/€)

Conclusion

If you're looking to obtain an exposure to graphene there is a trade-off to be made between investing in the "Good" and the "Ugly." Stocks like Samsung, Nokia and SanDisk will give you some exposure to graphene, but given their focus on end-use applications, the material will at most only be a small part of their business in the near term.

"Ugly" stocks Aixtron and CVD Equipment are the closest you can get to a pure-play graphene exposure. Given that these two companies focus on CVD production and quality control equipment they stand to benefit most from graphene adoption in its earliest stages. The disadvantage of investing in these companies is that they have been suffering from their exposure to cyclical industries and, as smaller caps, are relatively riskier. A future competitive risk for these two companies could come from a ramp-up of in-house CVD design and production at larger companies. There is also a non-negligible technology risk from CVD exposure should new graphene production methods be developed.

It's easier to give a categorically negative recommendation against investing in the "Bad" stocks listed in my snake-oil index. While some claim to be graphene pure-plays they comprise of small cash-strapped junior miners or tech companies with little to no commercialization strategy. Investors should stay away.

Source: Investing In Graphene: The Good, The Bad And The Ugly