The Landscape For Graphite Investing

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Includes: BSSMF, FCSMF, KBBRF, MGPHF, NGPHF, NMGRF, NSRCF, SRHYY, SYAAF, URNXF
by: Joshua Hall

Summary

Natural graphite mostly comes in 2 forms - amorphous and flake. Only flake can be used in lithium-ion batteries and other highly technical applications.

Graphite has superb properties that make it well suited for a wide range of industrial applications.

The average electric vehicle contains 30 times more graphite than lithium, however, about 50% of the graphite currently used in anodes is synthetic, not natural flake.

Types Of Graphite

Graphite is a non-metallic mineral. It is a form of crystalline carbon generally found in nature as one of two types - Amorphous or Flake. It is an excellent conductor of heat and electricity. Its electrical capacity is 1,000 times that of copper. It also has high lubricity, high resistance to corrosion, and is stable over a wide range of temperatures.

Amorphous is a type of naturally occurring graphite that consists of very small crystal-like particles. In mineralogy, the word "amorphous" actually means "noncrystalline, having neither definite form nor apparent structure." This type of graphite is conversely called Amorphous because its crystals are not visible to the naked eye. To the unknowing observer, it looks like anthracite coal. The final marketable product generally comes in a purity range of 60% to 90% carbon. Most of the world's amorphous production comes from China.

Flake, as the name implies, is a type of naturally occurring graphite that is found in flakes ranging from 50 to 800 micrometers (or microns) in diameter and 1 to 150 micrometers thick. It is found in grades ranging from 1% to 30%. The final marketable product generally comes in a purity range of 85% to 99%+ carbon. The preferred purity level is 94% to 97%.

Graphite is also produced synthetically from processing carbon material, typically petroleum coke, which is a byproduct of oil refining.Synthetic graphite can be produced with consistent quality and high purities and can be used for electrical and technical applications, however, it is more costly to produce than natural graphite.

Graphite Usage

Graphite demand can be broken down into 4 categories: metallurgy, electrical, technical, and other. The following graphic from a Mason Graphite investor presentation shows many of the specific applications in each category:

(Note: although it is shown on this graphic, natural Vein graphite is extremely rare and not relevant.)

About 40% of graphite demand is for metallurgical applications, mostly in the steel industry, so a good chunk of graphite demand growth is tied to the general global industrial economy. Graphite is used here because of its strength and ability to withstand extremely high temperatures.

About 25% of graphite demand is from technical applications, such as expandable graphite for flame retardant building materials and thermal management.

About 25% of graphite demand comes from electrical applications, notably lithium-ion batteries, which investors have focused on due to the expected demand growth in lithium-ion battery applications (e.g., electric vehicles).

Flake and synthetic graphite can be used for lithium-ion batteries but amorphous cannot. Given that flake costs less to produce than synthetic the focus has been on flake as the best source of supply for meeting the future demand for electrical applications. A whole swarm of graphite juniors with flake deposits has emerged with the hope of supplying this market that many see booming on the back of strong lithium-ion battery demand.

A lithium-ion battery contains a positive and negative electrode to enable the flow of electricity while it charges and discharges. When charging, the lithium ions migrate toward the negative electrode (anode) where they store electrons from an external energy source. When discharging, the lithium ions leave the anode and migrate to the positive electrode (cathode) to release power.

In current lithium-ion battery technologies, the cathode is made of a lithium-based compound containing various assortments of aluminum, cobalt, iron, manganese, or nickel, depending upon the type, and the anode consists of spherical graphite. There is actually at least 10 times more spherical graphite in these batteries than lithium. The average electric car contains more than 100 pounds of spherical graphite. Moreover, it takes roughly 3 tonnes of flake graphite to produce 1 tonne of spherical graphite so the average electric vehicle actually requires at least 30 times more graphite than lithium.

Spherical Graphite

Spherical graphite is flake graphite that has gone through the processes of micronization (sizing), spheroidization (rounding), purification, and coating. Sometimes it is referred to as CSPG for Coated Spherical Purified Graphite. Essentially, flake graphite is processed into standard micron-sized units of very high purity (99.9%+) graphite spheres for use in lithium-ion batteries. The following diagram shows the process flow from flake graphite mining to spherical graphite:

Source: Triton Minerals.

Flake graphite comes from mines in different sizes which generally fall into the following categories:

Flake Name Mesh Size Microns Sample Price per tonne (2006 - 2017)
Extra Large +50 +300 ~ $1,600
Large +80 +180 ~ $1,200
Medium +100 +150 ~ $1,000
Small -100 -150 ~ $800

You can see here that the larger the flake the higher the sales price tends to be. Purity is also an important factor. The higher the flake size and the higher the purity, the higher the price.

Because they are less common and cost more, larger flakes tend to be used for higher value-added applications, such as expandable graphite. They can be broken down into smaller sizes for use in battery anodes but this is not as economic as simply using smaller flakes that cost less. Thus, small-to-medium size flakes are generally used to make spherical graphite.

When it comes to the flotation process (see pyramid chart above), larger flakes are usually recovered first at higher purities which reduces the need for additional flotation stages and reagent consumption thereby reducing the cost of production. Smaller flakes typically require additional flotation to achieve the necessary levels of purity.

Spherical graphite has historically sold for about $3,000 per tonne uncoated and $7,000 per tonne coated. The following graphic shows the additional costs for spherical graphite that go beyond the initial ~$1,000 or so per tonne for just the flake:

Source: Canaccord Genuity.

You can see here that mining flake graphite is just a small piece of the overall process of producing the final spherical graphite product for battery anodes.

Spherical graphite made from natural flakes competes with synthetic graphite for use in batteries. Synthetic graphite costs about twice as much to produce, however, it has more consistent purity and better cycle life which is critical for battery performance, especially high-cost EV batteries. Some battery manufacturers have apparently begun blending natural and synthetic graphite to reduce costs without sacrificing performance.

It is estimated that about half of the graphite currently used in lithium-ion batteries is (natural) spherical graphite. This is expected to continue increasing over time as battery manufacturers look to reduce costs. That being said, graphite is not a major cost component of the lithium-ion battery, as shown here:


Source: Canaccord Genuity.

Adoption of the Nickel-Manganese-Cobalt (NMC) battery, in particular, is increasing and you can see here that graphite is only 6% of its cost. The risk to natural graphite demand is that synthetic graphite continues to maintain its share of the market for performance reasons. However, I expect lithium-ion battery manufacturers to continue to integrate as much natural graphite into their anodes as they can for the following two reasons:

  1. It is critical for EVs to become less expensive to obtain widespread adoption. Battery manufacturing is a low-margin business so producers have every incentive to reduces costs and, to the extent that they can, this makes their batteries more attractive to automobile and electronics producers who buy them.
  2. Given that synthetic graphite is a by-product of oil refining, its cost is likely to continue to rise alongside now higher coal and oil prices.

In my graphite supply and demand model, I have synthetic's share of the battery market slowly decreasing from 50% to 35% over the next 6 years.

The Graphite Market

The graphite market reminds me of the lithium market with respect to the fact that there is an abundance of the resource but a lack of technical capability available to produce it. The easy part is mining it and the difficult part is successfully processing it to the standards needed by industry.

Graphite does not trade on a metals exchange and there is no daily quoted market price. Prices are negotiated by buyers and sellers depending upon flake size and purity. Current prices are similar to the examples I listed in the previous table.

Natural graphite mine production was roughly 630,000 tonnes in 2017 - about half amorphous and about half flake. Chinese mines accounted for about 75% of this. Natural graphite supply looked like this:

Country Type Amount (tonnes)
China amorphous 240,000
China flake 230,000
Brazil amorphous 22,500
Brazil flake 67,500
India, Norway, Ukraine flake 46,000
Other flake 24,000
TOTAL 630,000

As you can see here, there was very little flake production outside of China in 2017 and, to my knowledge, none of it came from a miner that you or I could purchase on a stock exchange. However, Australia-based Syrah Resources (OTCPK:SYAAF; OTC:SRHYY) has moved onto the scene this year with their giant Balama mine in Mozambique going into production.

Management expects to produce ~140,000 tonnes this year before ramping to 260,000 tonnes next year, and then 340,000 tonnes thereafter. Australian-based Bass Metals (BSM in Australia; OTC:BSSMF) also restarted the Graphmada mine in Madagascar this year. They expect to produce 6,000 tonnes this year before ramping to 20,000 tonnes next year.

Balama has enough graphite in its resource to literally supply the world for decades. Syrah's success with Balama, or lack thereof, will clearly have a significant impact on graphite supply.

Chinese production is expected to slowly decline in the coming years so the supply story will mainly be driven by (1) depleting Chinese production, (2) Balama, and (3) a few other up-and-coming Australian and Canadian juniors some of which may have significant production capacity.

Outside of Syrah and Bass, there are several other juniors that may be able to begin producing by early next decade. These are laid out in the following table:

Company Country Project Potential Production at Full Capacity (tonnes)
Focus Graphite (FMS on TSX Venture; OTCQB:FCSMF) Canada (Quebec) Lac Knife 44,300
Kibaran Resources (KNL in Australia; OTC:KBBRF) Tanzania Epanko 100,000
Magnis Resources (MNS in Australia; OTC:URNXF) Tanzania Nachu 221,000
Mason Graphite (LLG on TSX Venture; OTCQX:MGPHF) Canada (Quebec) Lac Gueret 51,900
NextSource Materials (NEXT in Toronto; OTCQB:NSRCF) Madagascar Molo 17,000
Northern Graphite (NGX on TSX Venture; OTCQX:NGPHF) Canada Bissett Creek 20,800
Nouveau Monde Graphite (NOU on TSX Venture; OTCQX:NMGRF) Canada (Quebec) Matawinie 52,000
SRG Graphite (SRG on TSX Venture) Guinea Lola 50,000
Triton Minerals (TON in Australia) Mozambique Ancuabe 60,000
Volt Resources (VRC in Australia) Tanzania Bunyu 20,000
TOTAL 637,000

Most of these projects have advanced to feasibility stage so it is a matter of financing and/or construction for them to begin producing and a matter of offtake agreements and/or the development of an integrated production model for them to begin impacting global supply.

Keeping in mind that Syrah's Balama itself may produce enough graphite to supply all the potential incremental demand growth over the next few years, these combined juniors could theoretically bring another wall of supply to the market in 3 to 5 years. Let us take a look at demand next and then we will consider the potential impact.

To understand graphite demand, I find it helpful to divide it into the following 4 categories:

  • Flake for batteries
  • Synthetic for batteries
  • Flake for everything else (industrial, metallurgical, & technical applications)
  • Synthetic for everything else

The following table shows how these demand drivers stacked up last year and how I see them moving forward out to 2025:

World Graphite Demand
Tonnes 2017 2019 2021 2023 2025
Flake for batteries 125,000 205,000 320,000 510,000 810,000
Synthetic for batteries 125,000 170,000 225,000 295,000 440,000
Flake for everything else 575,000 670,000 785,000 915,000 1,065,000
Synthetic for everything else 1,000,000 900,000 815,000 735,000 665,000
Overall Total 1,825,000 1,945,000 2,145,000 2,455,000 2,980,000
Natural Flake Total 700,000 875,000 1,105,000 1,425,000 1,875,000

Source: Company reports; Canaccord Genuity; my estimates

These demand projections include the following assumptions:

  • 22% average annual demand growth for graphite in batteries; this level of demand growth is in line with the projected demand growth for lithium-ion batteries.
  • Flake's share of battery graphite increases from 50% to 35%. Demand for synthetic continues to grow but slowly loses market share.
  • 8% average annual demand growth for flake in everything else; this reflects 3% world economic growth + 5% additional demand growth from taking market share away from synthetic. Increased use of flake versus synthetic seems likely for environmental reasons, namely (1) increased use of flake in recarburisers (additives to adjust carbon content in liquid iron) and electric arc furnaces and (2) increased use of flake vs. amorphous and synthetic.
  • 5% average annual decline in demand for synthetic for everything else as it slowly gets displaced by natural (see previous point). Such a transition could be enhanced by the likelihood of increased availability and diversification of flake supply.

From here we want to focus on the natural flake demand versus the likely supply. Assuming all the juniors in the above list slowly come online, here is what they supply & demand balance could look like:

To reiterate, this supply projection assumes all the major projects from miners that have completed feasibility studies eventually come online. However, many of these still lack funding so I am sure it will not be this easy. There will be delays and setbacks. That being said, to the extent that flake graphite demand does pick up, especially from the lithium-ion battery segment, this will drive the development of projects forward. The picture I want to paint here is that I expect the two to be somewhat linked together but given the abundance of graphite there will likely be a tendency to have ample supply.

Graphite Miners Business Models

The following graphic from an SRG Graphite (SRG on TSX Venture) presentation slide shows how many of the juniors compare as it relates to flake size in their deposits:

This graphic reveals that Triton Minerals' (TON in Australia) Ancuabe deposit in Mozambique has the highest percentage of extra large and large flake whereas Mason Graphite's Lac Gueret deposit in Quebec has the lowest percentage of extra large and large flake.

The business models of these graphite miners tend to diverge in one of two paths. Those with extra large and large flakes tend to focus on extracting the higher sale value in these flakes by focusing on the markets that require the largest flakes, such as expandable graphite. Those with the small and medium flakes tend to focus on the higher volume battery market since the smaller flakes sell for less.

Putting It All Together — Investing Strategy

I have spent a lot of time digesting the graphite industry over the last couple of weeks. One thing that really strikes me is the potential for graphite demand to progressively increase over time alongside increases in production. Its exceptional qualities, such as strength and heat resistance, may continually open the door to more applications as supply expands and the research community seeks to leverage this through experimental usage.

This thought brings me to what I think is the critical feature of a potential graphite mining investment—integrated technology. I would say that the #1 aspect for choosing a graphite miner for me would be their ability to successfully integrate their production with end technologies and markets (while generating a solid profit margin in the process).

Overall, investing in graphite miners demands an understanding of the following considerations:

  • Graphite pricing is opaque so general price levels may not respond as quickly to oversupplied conditions as major metals markets, like copper, do with their daily published prices.
  • Supply & demand differs by flake size. For example, if lithium-ion battery demand accelerates, then smaller flakes may begin to sell for higher prices. However, because large flakes can be broken down into smaller flakes, such a price move would only go so far.
  • Given the abundance of graphite supply, financial models should incorporate lower price expectations.
  • Companies with management experienced in graphite development and/or those that have strong relationships with carbon product manufacturers deserve a premium.
  • Graphite is lightweight so miners who will have to ship a large volume of production may incur significant shipping costs.
  • Grade is less important when it comes to graphite deposits. What matters most is the size and purity of flakes after flotation and purification as this will determine price potential and the cost to get to that point.

The graphite developers tend to have after-tax, internal rates of return in the 20% to 30% range. In general, they are less economic than the best junior mining projects out there. In my mind, if one chooses to invest in a graphite miner, this demands a strategy of only buying at a steep discount. Let me explain further. There is a clear pathway for primary metals projects, such as copper, with the economic impetus to get developed and we know that the demand is definitely going to be there.

Graphite, on the other hand, is a young, unproven market with the potential for significant oversupply. Unless one is buying a graphite miner at a deep discount, there is the likelihood that they are entering into a transaction with higher risk and less reward.

One other thing that needs to be taken into account is the rise of competing technologies in lithium-ion batteries. Some battery manufacturers are already experimenting with silicon in anodes by mixing it with graphite. The use of significant amounts of silicon could dent graphite demand. Also, solid-state lithium batteries apparently do not use graphite at all. Investors need to be aware of such future technology changes. In my mind, the way to deal with this is to not look beyond 2025. In other words, an investment needs to be made with a clear path to strong returns before 2025.

In conclusion, my strategy for considering a graphite miner is to look for a company with:

  1. Highly successful integration - there must be a clear path from mine to finished product either through the company's own vertically integrated operation or through strong and proven offtake partners.
  2. High margin of final flake product (size & purity focus) resale value versus the cost to get there.
  3. Buy only at a deep discount with a clear path to strong returns within 3 to 5 years.

Disclaimer: I am an investment adviser and owner of True Vine Investments, a Registered Investment Advisor in the State of Pennsylvania (U.S.A.). I screen electronic communications from prospective clients in other states to ensure that I do not communicate directly with any prospect in another state where I have not met the registration requirements or do not have an applicable exemption.

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