The following interview was conducted last week at the PDAC convention in Toronto. Answering my questions is Anthony Huston, President & CEO of Graphite One (OTCQX:GPHOF). Graphite One is an advanced exploration-stage Graphite company, with 100% of its assets in the State of Alaska. The market cap of the company is C$25 million/US$ 22.5 million. The company has a large, NI 43-101 compliant, inferred resource that is at surface and high-grade. Very substantial news in the Graphite space has drawn considerable attention to Graphite One and its peers. Please review the company's Corporate Presentation and Management Team Bios.
Peter Epstein: Your Corporate Presentation describes Graphite One as the, "USA's only advanced high-grade graphite deposit." What makes Graphite One unique?
Anthony Huston: Simply put, it's the combination of us having the largest and, we believe, most advanced high-grade, predominantly large-flake graphite deposit in North America. While still subject to further testing, initial metallurgy suggests that we could have 60%-75% large-flake material (greater than 80 mesh). The fact that our deposit is literally at surface should help us achieve competitive operating costs and robust project economics. As resource nationalism across commodities and across the globe appears only to be getting worse, safe supply is becoming increasingly valuable.
PE: Global graphite consumption approximates 1.2 million metric tonnes per year. How many new graphite projects can be absorbed without flooding the market?
AH: With an assumed 5% annual growth from a base of 1.2 million tonnes, that's 60k tonnes per year. That might not sound like much incremental demand, many proposed projects hope to be doing tens of thousands of tonnes annually. However, it's essential to understand that existing supply is contracting due to mine depletion and, more importantly, China is exporting less and less. The is key as China accounts for 70% of global graphite supply. Not only is China exporting less, Chinese companies are importing more flake graphite. Look no further than last week's announcement by Syrah Resources (OTCPK:SYAAF). In December, Cormark Securities reiterated its view that China could be a net importer of graphite by the end of the decade. Therefore, net NEW mine supply might have to grow by far more than consensus estimates to keep up.
PE: You mentioned the off-take agreement between Syrah Resources and Chinalco (4th-largest aluminum producer in the world). What are some takeaways from this deal?
AH: I believe the Syrah Resources announcement is huge for the industry. A report by Credit Suisse late last week hit the nail on the head. By way of background, Syrah's giant Mozambique deposit was considered by some industry pundits to be an overhang, i.e. big enough to flood the market. Not only is China's Chinalco absorbing upwards of 100k tonnes of Syrah's future output - that flake graphite is headed for a massive new end-market… aluminum anodes. It's as if 100k tonnes of annual supply suddenly disappeared. Even more important, Credit Suisse points out that aluminum anodes is a 13 million tonnes market, nearly 11 times the size of the natural graphite market. If Chinalco, the 4th-largest aluminum producer in the world, finds graphite to be superior to petroleum coke and anthracite, other aluminum producers presumably will as well.
Credit Suisse states an order of magnitude of graphite switching that could occur into the aluminum anode market. Upwards of 4 million tonnes of graphite could migrate to aluminum production. In my opinion, this could be nothing short of a paradigm shift in natural graphite demand and good for peers like Flinders Resources (OTCPK:FLNXF), Northern Graphite Corp. (OTCQX:NGPHF) and Mason Graphite (OTCQX:MGPHF).
PE: The other big news in the Graphite space was Tesla's announcement of plans to build a giga-factory in the U.S. Any thoughts on this development?
AH: Yes. Arguably, Tesla's (NASDAQ:TSLA) announcement is a game-changer for the electric vehicle and power storage markets. Unlike the Syrah off-take news, the Tesla news has been widely reported. Annual flake graphite demand from Tesla's proposed giga-factory is approximately 150,000 tonnes, 30% of the global market for that segment of the natural graphite market. Industry leader Industrial Minerals' analyst, Simon Moores wrote an interesting and informative article titled, "Tesla battery plant will need 6 new flake graphite mines." I guess that title says it all. I think 6 new mines is the most we might see in the next few years. And, I doubt companies like Syrah and Energizer Resources (OTCQB:ENZR), with deposits in Mozambique and Madagascar, respectively, will be key suppliers to Tesla's southwestern U.S. plant. Graphite One will be able to offer both security of supply and just-in-time inventory, with deliveries from Alaska to the southwest U.S. taking 1-2 weeks. Deliveries from China would take 4-8 weeks.
PE: Graphite One's stock spiked on Friday on very heavy volume. Was that due to the Tesla and Syrah Resources news?
AH: We believe our stock price has moved higher because investors are gaining greater comfort on the underpinnings of the Graphite market. The Tesla news certainly helped refocus attention on the Graphite space, but we don't believe the significance of the Syrah off-take news is necessary in the market yet. In addition to the Tesla news, our meetings at PDAC were an eye-opener for us. Interest in our company is exploding. Yes, our stock price has moved up nicely, but our market cap is up by only about $7 million. Our stock price remains 50% below its 2012 high. Given that we believe we have a blockbuster project with an NPV that could reach well into the hundreds of millions, we still believe our company's valuation is attractive.
PE: Companies frequently claim that the mining jurisdiction they are in is one of the best, how does Alaska rank?
AH: Like most companies, we are biased in liking our own jurisdiction, but we are not alone. The latest version of the Fraser Institute Survey of Mining Companies, 2013 ranked Alaska #1 in a key category, "Mineral Potential." In order to find minerals, it's best to go where they're most abundant. Increasingly, (remaining) mineral abundance is found in places one would hesitate to do business in, places like Papua New Guinea, Indonesia and the Democratic Republic of Congo, also scoring relatively high on the list of Mineral Potential.
PE: It seems like interesting times for the Graphite sector and for Graphite One. Thank you for your time. Any concluding thoughts?
AH: I agree there's a lot going on in the Graphite sector. As I mentioned, interest in our company is currently high. If Credit Suisse is correct in their assessment of the Syrah Resources situation, large, high-quality projects like ours could attract strategic and financial players sooner than we imagined just a few weeks ago. Make no mistake, we are still 3-4 years from production, but so is Syrah. We look forward to updating the market on our progress in coming months. Thank you, Peter for your interest in Graphite One.
Disclosure: I am long GPHOF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. I own shares of Graphite One. I have no former or existing business relationship with Graphite One or any company mentioned in this article. I may seek consulting business from Graphite One or others mentioned in this article. Readers beware, this is a small-cap stock and therefore a speculative investment.
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