Graphite Stocks On The Move

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Includes: CSPGF, ECORF, FCSMF, GLKIF, MGPHF, NGPHF, ZENYF
by: Ben Kramer-Miller

Summary

Graphite stocks are on the move, although hardly in lock-step.

Shares of Mason Graphite and Great Lakes Graphite are performing very well: we think they have convinced the market that they can generate customer interest given their emphasis on processing.

Northern Graphite has begun to emphasize processing as well, and while we're skeptical of the company's strategy this has temporarily stymied the share price melt-down.

Alabama Graphite pays lip-service to the importance of processing, although investors clearly aren't impressed with the information provided in its recent PEA as shares are hitting new all-time lows.

We recently put out an article suggesting that 2016 will be a difficult year for the graphite space. Over the past couple of years the rapid growth story (due to rising lithium-ion battery production) has been overshadowed by the industry's logistical proclivities. The sector suckered in a bunch of mining executives and investors who just thought that this is another commodity like copper or zinc, and that rising demand would send prices higher, which in turn would leverage the value of graphite deposits. But as we've emphasized time and again a graphite company needs customers, and these customers have unique specifications regarding the attributes of the graphites that they need.

In the mining world commodities are commodities--they are literally chemical elements on the periodic table that can be taken out of the ground, transformed into "pure" products, and sold into massive commodity markets. Graphite is a chemical product only insofar as all graphite is carbon--one of the most abundant elements on earth. But graphite in particular is a mineral product--the structure of the carbon atoms determines whether they constitute graphite. Furthermore, "graphite" is needed in all different forms, and since every graphite deposit is different, the processing required to sell it into specific end products will vary from deposit to deposit. Thus graphite is not a mining business, and it requires some form of vertical integration that is often times alien to people used to more traditional mining assets.

This last point is now commonplace in the literature released by various junior graphite companies, although this is largely a reactive response instead of a proactive one--if investors don't see this language they immediately become skeptical. But even paying lip-service to this realization is insufficient--investors apparently want more.

We've tried to outline what that is in the above-cited article and in others. Here, we want to compliment that with what the market is saying. There are a handful of graphite stocks on the move--in both directions, and here we will try to ascertain what the marked (dis)likes about a few of these stories. Please keep in mind that we are staunch opponents of "efficient market theory." Price action can be a useful tool in equity analysis, but it is one of many, and it cannot be trusted entirely.

Mason Graphite

Mason Graphite's (OTCQX:MGPHF) recent strong price action--including today's (Wednesday, February 10th) 33% share price increase on high volume was the inspiration behind this article. Shares are already up 55% year-to-date, and of the "old guard" (i.e. graphite companies that have been around since "the beginning" or 2011-12) this is the only graphite stock that is really gaining traction.

LLG Chart

Mason is a company that we've changed our opinion on a couple of times. We like several aspects of the company:

  1. Strong institutional and insider backing.
  2. Arguably the most experienced team among the junior miners.
  3. A high grade deposit that can produce graphite for a lifetime
  4. Serious investor communications that are non-promotional.

Despite this appeal we have our reservations, namely we can't see how the company will manage to sell 50,000 tonnes of graphite per year given that the global market is ~400,000 tonnes per year and that the local market (i.e. North America) is only slightly higher than Mason's expected production. Maybe they can do it, and we wouldn't be surprised to see it, but we can't get behind the stock not being able to map out this scenario for our readers.

As shares are performing so well on no news we can't help but think that somebody knows something--stocks don't just rise 33% in a day on high-volume (~5X the recent average). This likely has to do with the company's anticipated financing, or its soon-to-be released "downstream feasibility study," that will detail the processes and costs required to turn Lac Gueret graphite into industrially useful products. Despite our reservations we have maintained that if one company can get financing for its mine and processing plant it will likely be Mason given the aforementioned attributes. Lots of smart people with money believe in this story, and we think that this means Lac Gueret will move forward where others have/will not. Assuming this to be the case Mason shares can trade considerably higher. Although we stress that the company's ability to secure financing or its downstream feasibility study are not sufficient to allay our concerns regarding the company's ambitious sales projections. So we will be watching this one from the sidelines and tip our cap if proven wrong.

Northern Graphite

We never thought we'd be mentioning Northern Graphite (OTCQX:NGPHF) in a positive way considering that we don't think the company's proposed sales strategy makes sense. Management wishes to secure an offtake agreement for its graphite, and our discussions with industry experts have consistently led us to conclude that this is not the way the market works. The fact that Northern Graphite has been sitting on a feasibility study for nearly four years now is strong confirmation that this intuition is correct. The fact that shares have lost 2/3 of their value in the past year, and more than 90% of their value from the 2012 peak speak to this point as well. But shares do seem to have found a bottom: here's a 6-month chart:

NGC Chart

Volume has been unimpressive, although it is evident that the selling pressure has abated. We saw recent strength--although this wasn't supported by volume--after the company announced that it believes another graphite company has stolen its proprietary graphite purification process. Shares spiked on the news, which we believe may speak to the value that the market places on processing--the Bisset Creek's large flake "advantage" certainly hasn't inspired investors of late, so we're sticking to this hypothesis.

With that being said we think shares may bounce from here, but the fundamental issue that the company faces--finding customers for its graphite--keeps us out of the stock.

Alabama Graphite

Alabama Graphite (ABGPF) has rapidly become the most vocal graphite company out there, although it has clearly not been drawing investors' attentions. Shares recently broke down to all-time lows on high volume--a very ominous sign. The "excuse" is that Alabama Graphite is the company being targeted by Northern Graphite for "stealing' its "proprietary" purification technology. But a look at the chart shows that the breakdown was likely inevitable:

ALP Chart

Alabama Graphite is one of the companies that has paid lip service to the importance of processing relative to mining, but from the literature we don't think the company is serious about this. The company rushed a PEA out in which it basically left out entire sections, namely its processing flowsheets for its spherical graphite production, its market analysis, and its environmental assessment. Furthermore, according to PEA numbers the company is basically break-even in its raw graphite operations, and all of the value comes from spherical graphite production (again, whose process is glossed over in the PEA). This begs the question: Why mine graphite when the focus is on processing and when they can't mine the raw graphite profitably (it would make more sense to buy it in this oversupplied market)?

Despite vehement message board support it is clear that investors are bailing. We suspect some simply don't want to be involved if Alabama Graphite is to be on the defensive end of a lawsuit (regardless of the claims' merits, and regardless of the fact that there isn't any litigation yet). We also suspect that several investors picked up shares in anticipation of a strong PEA, and that they were disappointed with it given the aforementioned issues. There was a lot of fanfare and anticipation going into the PEA-announcement, and elevated expectations simply weren't met.

We continue to avoid this stock, see further downside, and don't believe they have a reasonable chance of getting into production any time soon.

Great Lakes Graphite

Great Lakes Graphite (OTCQB:GLKIF) had a strong 2015 and 2016 is starting out strong as well, with shares up ~18% ytd:

GLK Chart

The company recently announced commissioning of its Matheson graphite micronization facility. Its business model differs from its peers in that it is buying graphite rather than mining it, and it is micronizing it (i.e. grinding it into fine, consistently sized particles). This product can be sold into various traditional markets such as paints and lubricants, but it can also be further processed into spherical graphite for lithium-ion batteries. Cash-flow generated from traditional markets will go towards research into the battery market, and we see this as a tremendous advantage.

This development has taken a fraction of the time and capital that mining companies will face, and the company's current technical hurdles are low relative to its peers. It is for these reasons that we've backed this horse over the others. Investors seem to be catching on as well, although we are seeing strong resistance at C$0.10/share, probably in part because several warrants have C$0.10/share strike prices.

Elcora Resources

Elcora (OTCQB:ECORF) arguably shouldn't even be on this list considering that their emphasis is graphene--a product that is very complex relative to the other products being considered by graphite juniors, including spherical graphite. it is also a very small market on a volume basis, both because it is in its infancy and because most graphene applications require very little material (this is actually one of its appeals). However, one look at the chart reveals that the market likes what it sees:

ERA Chart

We're no graphene experts and nor will we pretend to be in order to place judgment on Elcora. It could be a phenomenal story, even at current prices, although graphene is a product that requires advanced scientific knowledge, meaning that investments like Elcora fall well outside of our circle of competence.

The Bottom Line

Other graphite stocks are on the move as well:

  • Zenyatta Ventures (OTCPK:ZENYF) has slowly melted lower after spiking during the early phases of the graphite boom. Its hydrothermal graphite gives it something unique from a scientific standpoint, although how this translates into a cash-flowing business is beyond us. it seems to be beyond the market as well.
  • Focus Graphite (OTCQB:FCSMF) has continued to melt lower as the company has nothing to offer investors at this point other than a graphite deposit. We've established that these aren't very valuable without the necessary processing capability and a customer base.

What we can gather from this is that investors are looking for companies serious about developing processing capabilities. Mason Graphite is about to release a feasibility study focused on processing and is gaining investors' attentions. Northern Graphite is becoming more vocal about its processing capabilities, although we don't know much about its technique, and all we've seen is that the stock is no longer in decline. The jury is out as to whether the double bottom will hold or whether it is a dead cat bounce. Alabama Graphite pays lip service to the importance of processing, but it has not shown us much despite the fact that it is focused on complicated processes. Great Lakes has shown strength as it is focused exclusively on processing and has made strides towards achieving its production goals.

From what we can gather processing is the key, and we think it will continue to drive graphite stocks. Those companies that can demonstrate this capability will be the ones that can generate customer interest, and this will be essential in convincing the market that certain projects are worth financing over others.

Disclosure: I am/we are long GLKIF.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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