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Tap Profits in the Growing Graphite Market: Simon Moores
Source: Brian Sylvester of The Critical Metals Report (4/17/12)
Graphite is the Next Big Thing for resource investors, but as in any sector, due diligence is a prerequisite for success. Enter Simon Moores, graphite market specialist with Industrial Minerals in London. In this exclusive interview with The Critical Metals Report, he explains why graphite is "the perfect mineral," why we're still going to be talking about it years from now and which companies to watch in this emerging industry.
Simon Moores: It's conductive; it's a lubricant; it's resistant to high temperatures and it's a strong mineral. This means it doesn't have just one major market; it has an abundance of markets and uses. It's key to existing technologies that have been around for 100 years as well as new technologies, like lithium-ion batteries.
But despite what many think, it's not a niche industry. Rare earths and lithium are niche industries. Each year, 1.1 million tons (Mt) of graphite is produced. It's bigger by volume than molybdenum, vanadium, cobalt, tungsten, rare earths and lithium combined.
Graphite miners operate all around the world in Canada, Brazil, Europe, India and, of course, China, which accounts for 80% of production. That's a new figure that our research at Industrial Minerals has just uncovered for the new Natural Graphite Report 2012. China's grip on graphite production is greater than people thought previously.
TCMR: What is China's next move in the graphite market? Do you think there will be more quotas and export restrictions?
SM: There are no rare-earth style quotas at the moment. China doesn't say, "We are only allowing 400,000 tons (t) of graphite to be exported every year." But the country is doing things that could restrict the raw materials supply. The government doesn't like exporting raw materials that other people make money from. It is trying to build a value chain to unlock the value in its natural resources.
For example, China exports flake graphite to Japan. Japan turns it into battery-grade graphite, which is then used to make anodes, which is then used to make batteries, which Japan then ships for a much higher cost than the raw graphite. Now China is trying to build those finished products domestically. As a result, less raw material will come out of the country. In addition, China is trying to control its sprawling mining industry by forcing consolidation. Graphite is a perfect example of a sprawling Chinese mining industry.
TCMR: China is already encouraging foreign companies who depend on rare earth elements (REEs) to set up shop in the country. Do you see the same story unfolding in the graphite industry?
SM: The difference with rare earths is that China is the only place you can get good supply. It operates the world's only mine in Inner Mongolia until Molycorp and Lynas truly get underway.
China is aware that companies can get graphite elsewhere. It is also aware that at the moment it makes good business sense to sell quality raw material at high prices for the short term. Longer term, the story is different.
TCMR: China's had environmental problems with some of its rare earth operations. You visited some graphite mines in China. Are the graphite mines environmentally problematic?
SM: No, it's basic mining that has been around for centuries—extracting from the ground, crushing and grinding. You then put it in a floatation tank with reagents. This part of the process requires chemicals, but these are well known chemicals used in many other industries. Finally, graphite processors dry it and bag it. Graphite is an inert mineral, so it's not harmful. There are no underlying environmental problems in graphite mining.
The only area that holds some controversy is processing into spherical graphite, which requires additional chemical and physical treatment. Acid treatment is quite intensive and there could be future controversy surrounding the disposal of acids used.
TCMR: Are the Chinese mines primarily producing large-flake graphite or a lower-end product?
SM: It's almost a 50-50 split. Flake graphite mining exists all the way down the country's spine. This is good-quality material suitable for both domestic and international refractory and battery markets.
The Hunan province, in the south, is home to amorphous graphite, the old-style graphite people first started mining around the world. Amorphous is more common because the graphitization is lower and closer to coal, whereas flake graphite is closer to diamonds. Amorphous graphite supplies lower-end markets that produce products like pencils and lubricants.
TCMR: You describe the graphite market as having "layers" of demand. What does that mean?
SM: When graphite first came into use, it was mainly employed in lubricants and pencils. Those were the primary demands until after World War II, when the steel industry, driven by construction, became an additional end user, forming a second layer that boosted demand by about 30%. In the 1960s, the auto boom and car construction, especially in North America and Europe, formed yet another layer. Throughout graphite's industrial history, new technologies keep emerging while demand from traditional industries hasn't dropped off. This has built graphite into the 1.1 Mt industry it is today.
TCMR: Are there any graphite substitutes for these new technologies?
SM: Synthetic graphite is a substitute. Cost is still prohibitive, and people prefer flake graphite's properties. Batteries, for example, require a good porosity and surface area so the lithium ions can flow through the anode and generate the charge. Man-made graphite doesn't really provide that.
TCMR: What are some characteristics of an economic graphite deposit?
SM: The carbon content throughout the deposit is very important. A lot of companies are reporting the top range of carbon content, but because mining needs to stretch over many years, carbon content needs to be consistent throughout and not just good for three months.
The type of graphite is critical—flake and vein graphite are the best. Flake is the good stuff. Vein graphite is even better—it is found in lumps in the ground and is "cooked" by long geological processes. It is the form closest to diamond mineralization, and for this reason is much rarer, only found in Sri Lanka today.
A third key factor is infrastructure. Transportation makes up a large portion of the costs of large-scale graphite production. Currently, graphite is going through a high price peak, so existing producers are enjoying themselves. Producers have to prepare for the worst: If the price comes back down to perhaps half of its current market value, a producer's logistics are critical because that's where it either spends a lot of money or saves a lot of money.
TCMR: We didn't hear much about graphite even a year ago, certainly not from publicly listed companies. Are we still going to be talking about graphite in three years?
SM: We will. Lithium is a perfect comparison, because, in 2009, it had the same boom graphite is now having. In 2010, it reached a peak. Lots of juniors entered the industry. Everyone got excited about it. In 2011, nearly all of the juniors fell away, and the remaining players were focusing on their projects and not making as much noise. This year, we're seeing consolidation in the industry. Graphite will follow the same pattern.
TCMR: Has the boom in the price of high-quality graphite over the last year or so surprised you?
SM: Not really, because you have to look at the fundamentals. Graphite supply has been neglected for a generation yet it's still used in a lot of growing markets. Graphite's demand security is in its diversity: when one market drops off, another steps up.
When you only have this situation with a handful of active mines and no new operations planned, then there's only really one outcome: Eventually prices are going to rise, because there's going to be a supply squeeze. China adds a huge element of future supply uncertainty as well.
TCMR: The last graphite boom was in the 1990s. But then prices fell, and a number of mines were mothballed. Who's to say that won't happen again?
SM: It could happen again. That's always the risk, when you have so many potential mines coming online.
China caused the bust in the 1990s. New producers flooded the world market and put a lot of people out of business with low-cost production. Today, in a twist of fate, China could now be the cause for making these mines viable again. We have to look at how much production China controls, and its long-term goals, what it wants to do with its economy and its raw materials. Any new bust, however, is not going to be as drastic as the one in the early 1990s.
TCMR: One of the graphite derivatives that is very misunderstood is graphene, which is a single layer of graphite that is created in labs. How close is the industry to commercial-scale graphene production?
SM: The industry is some way off. A Google search will throw up many companies claiming they can produce graphene. But I wouldn't call it graphene—I'd call it nano-graphite. There may be three, four, five layers of graphene in their products.
Graphene is used in intelligent inks, for example, which are used for security systems on bank cards. That's its first market, and others may emerge in the next few years. But I believe the production of true graphene is many years away—commercially producing true graphene one-molecule thick—is extremely challenging, one of the biggest materials scientists will face. But if they crack it, the possibilities for its use are almost endless and it would revolutionize they way we live our lives. But to get graphene's super properties we all read about, you need to peel away and isolate a one-molecule layer. It's almost impossible to do that on a commercial scale. In terms of serious large-scale commercial use, it's at least 15 years away, and predicting 15 years into the future is like trying to predict 1,500 years into the future.
TCMR: Will the steel and battery industry end users drive another layer of graphite's growth?
SM: Yes. The steel industry uses refractories, which are protective layers for vessels that hold molten steel. If you pour molten steel into metal, it's going to melt through. So refractories are lined with bricks that can handle extreme temperatures. A big component of brick is graphite—up to 15% per brick. The steel, cement, petrochemical, glass and ceramics industries all use graphite in this way.
TCMR: What about lithium-ion batteries for electric cars—that's a significant amount of graphite in those products, too, correct?
SM: Electric vehicles are not a big demand driver today. But that's where the potential lies. In an electric car battery 1.8 kilograms (kg) graphite is used per kilowatt hour (KWh). Then take a battery pack equating to 24 KWh (like Nissan's LEAF), that's 38kg natural graphite per battery. It's a long way off, but if a manufacturer were to sell a million of these cars, that amounts to 3.8 Mt natural graphite. The natural graphite market is 1.1 Mt a year at the moment. So you can see why people are excited about it.
TCMR: What are some companies with graphite projects that could fill the supply gap for natural graphite, especially large-flake graphite?
SM: I'd look first at the companies that are actually producing graphite now. There's Timcal Ltd., which is publicly traded by Imerys (NK:PA), based in Paris. Imerys is a big minerals company; graphite is just one small area of its business. But its mine in Quebec is the only major active mine in North America. In December, Imerys announced plans for three new mines in the area, which shows that existing companies have the ability to do it straightaway.
TCMR: Canada in general seems to have a lot of potential for economic graphite deposits.
SM: Exactly. It's got a handful of leading juniors: Focus Metals Inc. (FMS:TSX.V), Northern Graphite Corporation (NGC:TSX; NGPHF:OTCQX), Ontario Graphite Ltd. (private) and Mega Graphite Inc. (IPO expected by the end of Q112).
Focus Metals' primary graphite operation is the Lac Knife deposit in Quebec. The deposit is famous and has been on our radar for more than 20 years. It's a large, high-quality graphite deposit with about 8.1 Mt flake at 16% average carbon content, which is strong. And the company is investing in technology to make graphene, which sets it apart.
TCMR: How close is that project to production?
SM: It's at least two years from production, the same as any other new junior. Building a new mine anywhere in the world is never a quick process.
TCMR: Let's move on to Northern Graphite, the darling of the industry. It was publicly listed last year, and the trajectory has been steadily upward.
SM: Its Bissett Creek project in Ontario is great. Northern Graphite has been around for a while, under different names. Bissett Creek has also been on our radar for a long time – before others were interested in graphite, work was being conducted on the deposit which says a lot for its quality even in down times. The company has ramped up drilling and marketing activities in the last two years.
Northern Graphite's selling points with its project are the size of the flake and the purity of the carbon content. The company, like many others, still needs the funding to build the mine. That's the challenge for all these juniors in Canada. Bissett Creek is still a very good project. You can't deny that.
TCMR: Northern Graphite is also doing some research on graphene—what do you make of that?
SM: It's a new battleground for some of these juniors. They're battling not only for funding but for share of the headlines. Any company with a high-quality graphite deposit naturally lends itself to mechanical exfoliation production of graphene.
TCMR: The other junior you mentioned is Ontario Graphite, which has a project not far from Bissett Creek.
SM: Ontario Graphite is a bit different, because it's a mine-reactivation project. For that reason, I would think that it will be quicker to bring production onstream. The company will need a new plant and new equipment, which is relatively straightforward to install. It is scheduled for commissioning in September this year. I could see Ontario Graphite processing product within 2012. The resource is also a good size—43.5 Mt Measured and Indicated resources, 12.3 Mt Inferred resources.
TCMR: Are there enough metallurgists available to create the end product?
SM: Yes. It's not like the rare earth industry, in which North America lost all its intelligence and skilled workers. Graphite has been a consistent, worldwide mainstay, which means the knowledge base has been retained thanks mainly to U.S.-based companies like Asbury Carbons and Superior Graphite. The challenge may lay with higher-value graphite grades for the battery market. Spherical graphite is a key raw material for battery anodes and this is still a new process for everyone.
TCMR: You also mentioned Mega Graphite.
SM: Mega Graphite bought an Australian company called Strategic Energy Resources Ltd. (SER:ASX) and that gave it a fast track route into the graphite industry. Its Uley Mine is actually a big stockpile of processed and unprocessed material because, similar to Ontario Graphite, back in the early 1990s the mine was closed. It wasn't economical enough to compete with cheaper products from China.
Mega Graphite has upgraded the plant with modern equipment and is reprocessing the stockpiled material to make the various grades of graphite. It has the potential to produce about 20,000 tons good-quality graphite from that stockpile over the next three years. But it will need to start mining to replenish these stocks.
TCMR: Is there a significant mining industry in Australia? Will Mega Graphite and Strategic Energy face some competition?
SM: At the moment Australia has no graphite mining industry. Zimtu Capital Corp. (ZC:TSX.V) is buying up a lot of deposits there and has an impressive portfolio of assets around the world. Archer Exploration Ltd. (AXE:ASX) is another company that has a project as part of a larger portfolio of mineral assets. But Mega Graphite is far more focused on producing graphite so the company shouldn't encounter much production competition in the near term.
TCMR: What's the infrastructure like at Uley?
SM: It's fine. Australia is mining friendly. It is used to this kind of industry.
TCMR: It's not going to face any mining royalties there? Australia has implemented one on iron ore and coal.
SM: Australia will try to target its big businesses like iron ore and coal. Graphite is never going to be a comparatively big business there. If Australia heavily taxes the smaller mining companies, then it won't have much of a mining industry left. It needs to encourage these. Mining is the sole reason Australia didn't slip into recession.
TCMR: What advice would you give to investors who are interested in the graphite story?
SM: The resource is everything. The larger the flake and the higher the purity of carbon the more critical it will be to high-tech applications. Also look at what the company's plans are for selling this material and if it is targeting specific markets—co-operation with Japan and South Korea will be key here. Traders from these countries are usually the most savvy of long-term investors.
The most interesting graphite plays are those that are focused on technology end uses. Producing high-tech-compatible materials for emerging markets, like spherical graphite for batteries, will add the serious value.
Industrial Minerals is working on the Natural Graphite Report 2012, which should be out in the next two months. It's an extensive world overview of production, prices and demand and should answer any more questions readers may have.
TCMR: Thank you for speaking with us today.
SM: My pleasure.
Simon Moores has been reporting on, researching and analyzing the non-metallic minerals sector since 2006, when he joined London-based publishing and research house Industrial Minerals. He has specialist knowledge in critical and strategic minerals including graphite, lithium, rare earths and titanium.
He led the research and publication of the market study, The Natural Graphite Report 2012: data, analysis and forecast for the next five years. One of the study's key findings was China's dominance of production was significantly higher than previously thought, accounting for 80% of supply. He has chaired conferences and given keynote presentations around the world. He has also been interviewed by international press including London's The Times regarding Chinese control on world graphite production, and The New York Times with regard to rare earths after breaking the story that China blocked exports to Japan in 2009.
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1) Brian Sylvester of The Critical Metals Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned are sponsors of The Critical Metals Report: Focus Metals Inc., Northern Graphite Corp. and Strategic Energy Resources Ltd. Streetwise does not accept stock in exchange for services.
3) Simon Moores: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise for participating in this story.