Tesla Giga Factory, Among Others, May Cause Lithium Or Graphite Shortages

| About: Elcora Advanced (ECORF)

Summary

12 Giga factories on the horizon.

Tesla's Elon Musk "should be called Nickle Graphite Batteries".

Four to Six times more Graphite required than Lithium.

Batteries - Lithium or Graphite - which is it?

As investors, we have heard explosive growth stories for Lithium and Graphite from the rising demand for batteries, especially the numerous giga factories planned around the world. There are 12 planned between now and 2020, but most are in Europe and Asia, just two are in the U.S., in Nevada and Michigan.

Currently, over 60% of the demand for lithium and graphite is industrial use, but it is this anticipation of battery demand that gets all the optimistic forecasts and it is deserving.

Currently, lithium is getting all the attention, but when I crunched all the facts and numbers, it is clear the graphite investor should reap higher rewards.

First, some important battery basics

They are called lithium ion batteries not because they are filled with lithium, but it is the powerful reaction of lithium and the movement of the lithium ion that provides the power or electricity.

Inside the battery casing there is 3 basic components.

The Cathode that is typically a Lithium Nickel Cobalt Manganese Oxide. NCM for short and a successful combination is 5 parts nickel, 3 parts cobalt and 2 parts manganese.

The anode that is a graphite carbon that facilitates the absorption of lithium ions. Six Graphite atoms can hold 1 lithium atom, think of this as holding a charge.

And 3rd, the electrolyte that facilitates the movement of the lithium ion between the cathode and anode.

When a battery is used or discharges - the lithium ions move from the anode (graphite) to the cathode (nickel). When you recharge it, basically, you are moving the lithium ions back to the anode.

CEO, Elon Musk of Tesla Motors (NASDAQ:TSLA) recently commented,

"Our cells should be called Nickel-Graphite, because primarily the cathode is nickel and the anode side is graphite with silicon oxide… [there's] a little bit of lithium in there, but it's like the salt on the salad,"

I believe he was down playing the lithium more than warranted.

Musk said that the amount of lithium in a lithium ion battery is about 2% of its total volume

Volume is probably not a good metric because lithium, graphite and nickel are all sold by weight, tons or pounds.

There is actually more nickel and cobalt in these batteries than lithium. Nickel is priced higher than graphite about $10,000 per ton and half the cobalt reserves are in a precarious place, The Congo. For this report, I am going to focus on the lithium and graphite.

Lithium

Lithium is highly reactive and its ions are bursting to get on the move. I can remember back in Chemistry class, that lithium only had to be exposed to water and would start an explosive reaction immediately.

This is why you have heard of battery fires and there are strict guidelines or restrictions on lithium ion battery shipping. The amount of lithium in a battery is quite common knowledge because of this. You can refer to some regulations from UPS and their calculation on lithium content.

Just a couple weeks ago, Amazon (NASDAQ:AMZN) was fined $84,000 for shipping lithium ion batteries by air.

In the U.S. - Cells must not exceed 1.5 g of "equivalent lithium content"; - Batteries must not exceed 8 g of "equivalent lithium content." You may calculate "equivalent lithium content" by multiplying the cell's ampere-hours by 0.3. Since most small batteries are marked with milliampere-hours, you must first divide milliampere-hours by 1,000 before multiplying the result by 0.3

Example: A 2Ah 18650 Li-ion cell has 0.6 grams of lithium content. On a typical 60 Wh laptop battery with 8 cells (4 in series and 2 in parallel), this adds up to 4.8g. To stay under the 8-gram UN limit, the largest battery you can bring on a plane is 96 Wh (and must be in a device).

Tesla's Model S 85 KWH battery is made with thousands of small batteries or cells and would have about 6.8 Kg of lithium or 15 pounds, about $120 worth, based on the above numbers.

Based on some other current EVs that have provided some detail on their batteries, there is about 0.15 Kg lithium per 1KWH so the Model S could have 12.75 Kg or about $230 worth of Lithium, considering a very high price for lithium of $18,000/tonne.

In either case, the amount is significant but the cost of lithium is not a big factor

With both lithium and graphite, there is lots around and it is plentiful.

Most lithium is mined in South America-Argentina, Bolivia, and Chile. Bolivia especially has large reserves in the Salar de Uyuni, a salt flat so huge and blindingly white, that Neil Armstrong and Buzz Aldrin spied it from the moon. (They thought it a glacier.)

The global reserves of lithium carbonate equivalent-which is the amount that can be economically mined right now-is estimated to be about 14 million tons, according to the United States Geological Survey. (USGS). The actual amount produced each year is very little of this, 32,500 tons - again according to USGS.

With the increase in Lithium prices a lot of money has come into the sector that is bound to bring on new supply

The real issue is ramping up production as demand increases

The market is dominated by a few big producers. FMC will produce an additional 4,000 tonnes of lithium hydroxide next year, raising the company's total global capacity to 18,000 tonnes. It did not give details of the electric vehicle manufacturer it struck a deal with. The additional production would be almost enough to supply Tesla's Gigafactory or roughly 500,000 mass-market electric vehicles, according to Aleksey Yefremov, an analyst at Japanese bank Nomura.

However, a point was made that, "The fact that FMC wants to bring incremental capacity on in the near term confirms a tight market for battery grade lithium," Aleksey said.

Australia is the biggest producer, slightly ahead of Chile, and production is ramping up down under.

There are 16 lithium projects estimated to begin production between 2016 and 2020. The majority of these are hard rock projects, which have the ability to come online relatively quickly (5 years expenditure to production) given their shorter production lead times.

While there could be some timing issues and a bit of a tight market the next year or two. It is already priced in!!!

Graphite

For Graphite, the USGS lists reserves at 230 million tons and production in 2015 of 1.19 million tons. Although production is about 36 times more than lithium, there is also a lot of synthetic graphite produced. The USGS estimated in 2013, the U.S. consumption of natural and synthetic graphite was 52,200 tons and 159,000 tons respectively.

Simply based on USGS numbers there are 430 years of lithium reserves based on current consumption and 193 years supply of graphite. There appears to be way more lithium available, but keep in mind that bringing the reserves into production is a whole different matter.

Graphite promoters will claim there is twice as much graphite in a battery than lithium. If you go by weight which is the best measurement, it might be more like 1.6 times

A large EV battery requires about 25kg (55 lb) of graphite for the Li-ion anode, which is around twice the 15 to 28 pounds of lithium I calculated. At 28 pounds lithium, it is close at 1.9 times more graphite.

Benchmark Mineral Intelligence estimates in 2021, based on Tesla manufacturing 150,000 Model 3 units, Benchmark estimates that the company will consume 10,800 tonnes of spherical graphite for its anodes and 7,200 tonnes of lithium hydroxide as a cathode raw material.

That equates to 1.5 times so I would say that 1.5 to 2 times is an accurate number.

So that in itself is more bullish for graphite, but there are two larger factors at play.

Spherical graphite has to be 99.9% pure carbon and go through a refining process to make and as a result, on average over half the flake graphite mined is lost in the concentration process. So to make ton of spherical graphite you need 2 tons or more of natural graphite produced. So in essence there is about 3 to 4 times as much graphite required for a battery than lithium.

With lithium, it currently comes out of the mining process at between 90% to 95% pure, so not much waste to get the purity over 99% but it is an energy intensive and expensive process.

There are currently two sources of carbon for the graphite anode. A synthetic process and spherical graphite derived from flake graphite.

Spherical at $3,000 to $4,000 per ton has a cost advantage over synthetic at $10,000 per ton and spherical is far less energy intensify and more environmentally friendly to produce.

The Benchmark article of April 1 also highlights that 100% of natural spherical graphite is produced in China, and last year alone production expanded by nearly 50%. Increasing demand has seen prices of uncoated spherical graphite increase by 10% in the last two months.

Therefore, on top of battery demand increasing, we are also seeing demand increasing for natural graphite by a further factor because spherical is getting the nod over synthetic and it is believed this is Tesla's preference as well.

China SG growth

Just these two factors means that demand or amount of graphite could outpace lithium demand by a factor of 4 to 6 times as it equates to the battery market.

Most investors fail to understand or to have done the research to uncover these facts.

"The main determinants on the cost of the cell are the price of the nickel in the form that we need it… and the cost of the synthetic graphite with silicon oxide coating," explained Musk of Tesla.

When you consider that there is more graphite in a lithium ion battery than lithium, the cost of graphite to a battery is more significant than lithium. Currently, the market is just focused on part of the equation and is ignoring graphite - but currently, to our benefit, I might add.

Currently, Tesla sources their cells or batteries from Panasonic that uses synthetic and spherical graphite. However there are two important factors here, the trend towards spherical graphite and the fact that graphite contributes more of the cost of a battery than lithium.

Graphite has not experienced the price spikes that lithium is going through. As a result, graphite's supply situation has fallen under the radar.

There are a couple of other factors that could be very bullish for graphite. Lithium supply is diversified around the world with Australia and Chile as the top producers making up about 10% of supply each. Over 70% of graphite production is from China so any policy change there could dramatically move prices up.

And a 4th and very important factor for investors is that the price of lithium stocks have jumped much higher and graphite stocks have been soft or lackluster. The old mantra that always proves true is buy low and sell high.

Right now, the majority of investors are doing the opposite, buying the lithium stocks high and not buying the graphite stocks low.

There is nothing wrong with owning lithium stocks and with batteries an important aspect of our future you stand to profit.

However, from what I have uncovered for you here, I believe you should have 4 to 6 times more $$ in graphite stocks over lithium.

The Graphite Stocks

Most junior graphite companies know the potential of the market and are all trying to position themselves as a supplier of battery grade graphite. That is not their biggest challenge though!

They are all struggling through the financing, permitting, feasibility and environmental process to build a mine, especially with the current depressed market. On top of that, they need user or offtake agreements as well.

This points me towards two stocks because they have overcome most of this and a few others are worth considering as well.

Syrah Resources (SYAAF) - Recent Price $3.30

264 million shares outstanding approx.

With the softness in the mining market, Syrah is back to an attractive buy price again and far below their finance level of A$6.05

Syrah is the 1st company to bring a significant new graphite mine to production, its flagship Balama Project in Mozambique. The Project hosts the largest graphite ore reserves in the world with an Australasian Joint Ore Reserves Committee (JORC 2012) compliant Ore Reserve of 81.4Mt at 16.2% total graphitic carbon (NYSEMKT:TGC) for 13.1Mt of contained graphite.

A Feasibility Study completed during May 2015 confirmed that the Balama Project will be a first quartile producer due to its high grade, open pit operations which has an extremely low stripping ratio. The processing plant will have a feed rate of 2Mt per annum, and based on an average head grade of approximately 19% TGC over the first 10 years of operations, 356,000 tonnes of graphite concentrate will be produced per annum. This production profile will make Balama the largest producer of graphite globally, and ideally positioned to meet the anticipated increase in demand from lithium ion battery applications, as well as servicing traditional graphite markets.

They are fully financed to build the mine which is already well advanced with 1st production expected to start in Q2 2017 and ramp up during 2017.

There is numerous photos of the project on their website here.

Balama Project remains on schedule and budget with overall projection completion of 42.6% as at 31 August 2016.

They have a five-year Offtake Agreement signed with Marubeni Corporation to purchase a total of 50,000 tonnes of coated and uncoated spherical graphite per annum for major battery and anode customers in Japan and Korea, after extensive due diligence and product evaluation by these customers.

Also

  • Offtake agreement with Chalieco for 80ktpa of flake graphite over 3 years.

  • Statement of Sales Intent with a major global refractory producer for 15ktpa of flake graphite.

  • Statement of Sales Intent with Hiller Carbon for 25ktpa to 35ktpa of natural graphite recarburisers.

They currently have a spherical graphite pilot plant in China and Syrah has been considering a plant in the USA but nothing concrete or announced here yet.

What is of interest is what Syrah puts out as estimates for spherical graphite.

In order to maximize production yields, -100 US mesh natural graphite is the optimal material to use as feedstock in the spherical graphite production process. Typically, two to three tonnes of feedstock is required to produce one tonne of spherical graphite.

Approximately, one kilogram of coated spherical graphite is required to produce 1KWh of energy from a Li-ion battery.

Syrah is saying over 2 times and up to 3 times feed graphite. Their battery estimate is about 6 times more graphite than lithium. I think this is high but probably means my calculations are conservative!

Currently, it appears they will service a lot of expected demand in Asia which is currently more significant than Europe or North America.

This is a high grade and large mine with low cash costs estimated at US$286 per ton that will produce very significant cash flows and profits.

Trading is mostly in Australia so a stock chart there is most relevant and it shows that we have seen the share price come down to support just around the $4.00 and that has held. I expect this will hold as support and the stock see considerable appreciation when cash flow and profits commence next year, or sooner in anticipation.

It is also well below the recent A$194 million financing at $6.05 per share completed in June.

Syrah chart

Syrah believes that further downstream processing of graphite concentrate presents a major potential opportunity to accrue additional value for shareholders!

Elcora Advanced Material (OTCQB:ECORF) - Recent Price US$0.26

Shares Outstanding: 72.2 million

I left off with the above statement by Syrah, because that is exactly the path of Elcora, a vertically integrated company to be involved in the processing and the resulting much higher margins of finished products.

Elcora is not a mining company but a processor and technology company.

They have already proven through a reputable 3rd party verification that their graphene, derived from graphite is significantly better than anyone else in the industry and they have built the 1st graphene production facility in North America. See news release Jan 14, 2016

It has only been commissioned a couple of months and is small scale as graphene is still at the R&D stage, but I expect we will soon see news on collaboration work with other graphene researchers that currently includes many Universities, Government Agencies and major Tech Companies.

While graphite sells for around $1,000 per ton, graphene sells for $20 to $50 per gram, so the margins are many multiples over selling graphite and it only costs Elcora pennies per gram to produce.

Currently, the graphene research market is about $30 to $50 million per year and Elcora really has no competition in this market. This would be their short-term source of cash flow and I expect news on this front in the months ahead.

Battery Graphite Strategy

On August 24, 2016, Elcora announced the successful initial test results of Elcora's proprietary graphite processes for lithium ion battery anodes. This is potentially huge news to reduce battery cost as pointed out by Dr. Ed Buiel who is close colleagues with Dr. Jeff Dahn of Tesla.

Elcora has developed a proprietary process to reduce the size of graphite crystals to those best suited for anode production. This process was developed in order to combine different sizes of particles so that anode packing density can be optimized and to minimize the use of spherical graphite.

The purpose of the tests was to validate Elcora's processes using grade, size analysis, BET surface area, calendar density and eChemistry.

"Elcora's high purity 99+% flake concentrate is significantly above the industry standard of 95-98%. This will have important implications for thermal processing which is the preferred method of purification for long-life automotive cells. Elcora graphite also exhibits a very high level of crystallinity and therefore reversible capacity consistent with the top 20% of graphite materials we have tested from junior graphite companies. The combination of high purity and high reversible capacity could prove to make Elcora a preferred graphite sources for LIB anode materials", states Dr. Edward R. Buiel, CEO and President of Coulometrics, LLC.

Elcora could have a much better solution for the battery anode, even it is just on par with current spherical graphite, it has huge potential for Elcora and this is why:

It was probably missed over the summer doldrums or investors did not grasp the implication, but in the August 17th news release, it says:

The traditional method of graphite preparation for anodes includes spheronization, purification and coatings. The Elcora processes are designed to reduce or eliminate each of these stages with the goal of reducing the carbon and energy footprint of the anodes and to reduce costs.

The company is in the process of sourcing from several mines in order to minimize supply risks and to ensure sufficient volume to supply the lithium ion battery anode market and worldwide giga factories. Tests are currently underway with industry experts to prove the technology and to design a production facility.

Summary

Elcora can just as easily buy the graphite as they can sell it and they already have the ins with industry-leading commodity distributor Thyssenkrupp with a 10 years sales agreement, see March 5th news release.

They have the Sri Lanka mine that has just started production with a goal to steadily ramp up. Currently, they have 1,000 tons graphite stock piled for onsite plant processing. Sri Lanka's lump vein graphite comes out of the mine at about 95% pure which is currently the only place in the world for this unique product. It is ideal for graphene production with battery grade graphite as the by-product. Elcora is currently looking to source from other producing mines as well. On October 4th, Elcora announced their 1st shipment of processed graphite from the mine.

Thus far, from 3rd party testing, Elcora's graphite process so far appears to be better and cheaper compared to the current spherical graphite being used for batteries.

Large Flake Graphite sells for $1,000 per ton and if you are lucky enough for all in costs to be $500, then you have $500 margin per ton.

Syrah is going a step further with a portion of their production and producing Spherical Graphite and it sells for $3,000 to $4,000 per ton, roughly. We don't know what all their input costs will be yet, but their margin will be a multiple of the $500 per ton.

Elcora is yet going one step further and is planning to sell the Anodes themselves that go for $10,000 to $20,000 per ton.

If Elcora pays $1,000 per ton for the graphite and as a guess costs to produce their Anode is $4,000 per ton (using the top of spherical range - even though they claim their process reduces cost) their margins are going to be $1,000s per ton.

Now some might say this is a tall order and sounds like pie in the sky, but Elcora has the expertise and the brains behind them to pull this off.

Dr. Ian Flint a 30-year expert in Graphite processing and Graphene is at the helm. They have Dr. Antonio Castro Neto (known as the Godfather of Graphite) as an Advisor and major shareholder.

The Graphene Research Centre (GRC), at the National University of Singapore (NYSE:NUS), is the first centre in Asia dedicated to graphene research. NUS established the GRC in 2010, under the leadership of Prof. Antonio H. Castro Neto, with a start-up fund from NUS of $40 Million. The GRC was established under the scientific advice of two Nobel Laureates in physics - Prof Andre Geim and Prof Konstantin Novoselov- who won the 2010 Nobel Prize in Physics for their discovery of graphene.

Prof. Antonio H. Castro Neto is colleagues with Nobel prize winners Giem and Novoselov. These are the first and brightest minds in graphene. The GRC rated Elcora's graphene best in the world and far above the 2nd place finisher.

Elcora also works with Dr. Edward Buiel, CEO and President of Coulometrics, LLC, who is colleagues with Dr. Jeff Dahn at Tesla, some of the brightest minds in lithium ion batteries.

This presentation video by Dr. Ian Flint gives good insight into Elcora's plan.

According to Dr. Flint: An important point of vertical integration is controlling the process all the way from the mine to the final product; the Anode for batteries, this is very important in the graphite business.

Elcora chart

Elcora mostly trades on TSXV, Canada hence the chart above. It appears to have built a base between C$0.30 and $0.36 the last couple of months. I would like to see a break above resistance, which I see around $0.39/0.40. On Balance Volume has moved up so appears the stock is under accumulation.

There are three other junior graphite companies I am following.

Northern Graphite's (NGPHF) Recent Price $0.23

Shares Outstanding 51.3 million

Northern is also working with Dr. Edward Buiel of Coulometrics, LLC. and has also demonstrated their graphite is excellent for batteries They have a proprietary coating process. Coating is one of the steps in upgrading graphite mine concentrate to spherical graphite, SPG the anode material.

Northern needs offtake agreements and financing to get their Bisset Creek in production.

Mason Graphite (MGPHF) - Recent Price $1.08

Shares outstanding 139.8 million

Mason has a feasibility for their Lac Gueret project in Quebec and they require more permitting work, off take agreements and mine financing.

Mason has done the best by far. The stock price has more than tripled this year and they just closed a C$28.7 million bought deal financing at C$1.10 per share.

With this recent financing, approximately $17 million for development expenses related to the company's Lac Gueret graphite project and concentrator plant project, the majority of which the company expects to incur over the next 12 months (or approximately $21 million if the overallotment option is exercised in full); these development expenses represent a portion of the project's estimated $165.9-million capital expenditure budget.

Energizer Resources (ENZR) - Recent Price $0.055

Shares outstanding 461 million

Energized closed a non-brokered private-placement offering of 96,064,286 common shares at a price of seven cents per share for aggregate gross proceeds of $6,724,500. Interesting is they attracted the likes of funds - Dundee and Sprott into this financing.

Their Molo Flake graphite deposit in Madagascar is advanced with a Feasibility Study, Environmental permit and mine permitting has started. Capex is $188 M that includes a $24 M contingency. They require offtakes and mine financing.

There is a lot of shares out for a junior company at about 461 million with recent financing and that was my biggest concern. A poor chance of getting mine financing. With Dundee and Sprott now investing I would have to say that they must see a road to mine financing ahead.

Summary

Elcora, Northern, Mason and Energizer trade thinly on the OTC, most trading occurs in Canada on the TSXV. The fact Mason just completed a bought deal financing and Energizer has attracted funding from two of the major resource funds in Canada is a sign to me that money has started to come back into the sector.

The share price of Mason Graphite and another junior Zenyatta Ventures have seen price spikes in the last few months and is another sign to me of money coming back to the sector.

Disclosure: I am/we are long SYAAF, ECORF, NGPHF.

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.

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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