Mining Markets


Picking winners in the graphite sector

Last May, there were only two graphite companies listed on Toronto Venture Exchange. Since then, the graphite sector has grabbed the attention of investors, and over 50 graphite companies globally, almost 40 of them listed in Toronto.

Last May, there were only two graphite companies listed on Toronto Venture Exchange. Since then, the graphite sector has grabbed the attention of investors, and over 50 graphite companies globally, almost 40 of them listed in Toronto.

While their share prices have come back to earth in the past month or so, from December 2011 to April, many graphite juniors doubled, tripled or quadrupled in price.

“Yes it is a bubble — 90-95% of these companies are going to fail,” says Mickey Fulp, the editor of the Mercenary Geologist newsletter.

Still, Fulp, who began looking at the sector about a year and a half ago, says there is demand for graphite and there are a few juniors that stand a chance of building a profitable mine.

Production of graphite is dominated by China, the source of about 80% of the world’s graphite. Most of the companies that have joined the graphite rush are looking for natural flake graphite, which is a small, but growing portion of the overall market that is dominated by synthetic graphite. (See “Rewriting the book on graphite” for more on the fundamentals of the graphite market.)

The investment thesis for graphite is that demand for lithium-ion batteries — which use up to 10 times more graphite than lithium — is going to continue to grow, and more production outside of China will have to come onstream to meet demand. Flake graphite has the potential to replace synthetic graphite in the production of anodes for these batteries.

“The real key to this right now is we now have the technology to use natural flake graphite (instead of synthetic in some applications),” Fulp says, explaining that synthetic graphite costs about 10 times the price of natural flake graphite. “So the idea is that the natural graphite market can be a cheaper substitute for synthetic graphite.”

So what does a winning natural flake deposit outside of China look like?

While graphite is an industrial mineral that will be unfamiliar to most investors, investing in graphite juniors isn’t all that different from investing in other junior miners, says Byron Capital Markets’ battery materials and technology analyst Jonathan Lee.

“One of the biggest things I look at is infrastructure costs,” Lee says. “In a lot of larger markets, you can scale up and pay for the infrastructure costs over a larger production scale so the infrastructure costs per unit can be fairly low. . . in the minor markets, it’s more difficult to do.”

Lee says in the same vein, a low strip ratio is also desirable to keep costs down.

Unlike rare earth elements deposits, the metallurgy of graphite deposits isn’t overly complex. However, many graphite juniors with early stage projects haven’t yet done much metallurgical work, which will ultimately determine the price of the end product.

Investors should look for a combination of higher grades and generally larger flake sizes.

“You get a better dollar value for a higher flake size and you get a better dollar value for a higher grade,” Lee says. “Now the grade potentially comes at a cost, so people say they can upgrade it to 99% — that’s nice, but what are the costs associated with getting it to 99%?”

Starting with a mined grade of anywhere from 2% to 20% carbon as graphite, grades of 50-90% can be achieved through crushing and grinding, with flotation achieving concentrate grades of 90-98% carbon.

Upgrading to high-purity, battery-grade graphite of 98-99.99% involves the use of hydrochloric acid, which is not environmentally benign.

The upgrading process to make spherical graphite (used in lithium-ion batteries) also involves the loss of up to 70% of the graphite, explained Simon Moores, deputy editor at U.K.-based Industrial Minerals at a recent graphite conference in Toronto.

“That’s why it costs more, that’s why you need more technical know-how and processing ability, and that’s what’s going to separate most of these companies will be the ability to produce those technology grades or battery-grade graphite.”

Junior Northern Graphite (NGC-V) reports that it has developed a proprietary method of producing spherical graphite and has already successfully tested it for use in lithium-ion batteries.

There is generally less wastage in the upgrading process with a larger flake.

Although large flake natural graphite generally sells for higher prices, there is a caveat, says Fulp.

“There’s a misconception in the market that the larger the flake size the better and that’s absolutely not true at all. You see (juniors talking about) extra-large flake and jumbo flake — there’s no such product that’s sold,” Fulp says. “So yes, 100% flake is going to be the best deposit but the larger-flake deposits aren’t necessarily the best because, for instance, the lithium-ion battery industry uses small to medium flake.”

Grinding can make larger flake graphite into smaller flake.

Finally, management of the company and the specialized graphite expertise they bring on board is crucial.

“You always look at management for an investment thesis because management can, to a large extent, make or break a company,” Lee says.

Because graphite is not spot traded, but rather sold on contract for a negotiated price, juniors have to make sure they will be making a product for which a market exists.

“The end product has to meet a customer specification or a multitude of customer specifications, and so having different types of products, different grades, different sizes, having an end customer to help you with producing the right material is key.”

And because overproduction of graphite is also a danger if too many juniors bring mines online at once, companies with advanced projects — often ones that were discovered and tested previously — will have the best chance of success.

Both Lee and Fulp point to three companies that, while they may not have every base covered just yet, have a better chance of getting there in the near-term than the rest of the pack. The companies that make the short list are: newly listed Flinders Resources (FDR-V), which is reactivating its past-producing Kringel mine, in Sweden; Northern Graphite, which is working on a bankable feasibility study at its low-grade but large-flake Bissett Creek deposit, in Ontario; and Focus Graphite (FMS-V) (formerly Focus Metals), which is advancing the high-grade Lac Knife project, in Quebec.

“Those three are way ahead of the game — they’re the cream of the crop,” Fulp says.

“You want to get in with the right advanced companies early on — everything else is a crapshoot.”

Fulp owns shares in Flinders, acquired in a private placement last summer before the company’s initial public offering.

Flinders’ Kringel mine is fully permitted, and produced graphite concentrate from 1997-2001. The project enjoys excellent infrastructure, including highway access via a 10-km gravel road. In a recent report, Lee noted the company is gaining valuable knowledge of the market by reprocessing and selling stockpiled graphite to customers in Europe. Historic resources are 69 million tonnes grading 8.8% carbon as graphite, but the company expects to complete a National 43-101-compliant resource in late July.

Production at the mine averaged 94% carbon as graphite, with about 40% classified as large flake, and 28% as medium flake, with the remainder classified as fine.

Northern Graphite’s feasibility study on Bissett Creek is expected to be released at any time now. A recent preliminary economic assessment projected a 2,500-tonne-per-day operation could provide a 24% p
retax internal rate of return and achieve payback in six years. A full feasibility was completed by previous owners in 1989. The project is located just 17 km off the Trans-Canada Highway, between Ottawa and North Bay, with road, power and rail access.

Indicated resources as of September stood at 20 million tonnes grading 1.99% carbon as graphite for nearly 400,000 tonnes graphite at a cutoff grade of 1.5%. Inferred resources add 33.7 million tonnes grading 1.81% carbon as graphite for 610,000 tonnes.

Metallurgical testing has shown the company can produce a concentrate of 97% graphitic carbon, almost all of which is large flake.

Focus Graphite’s Lac Knife deposit, 35 km south of Fermont, Que., boasts the highest carbon as graphite grades in the world. Measured and indicated resources stand at 4.9 million tonnes grading 15.76% carbon as graphite at a cutoff grade of 5%. Inferred resources come to 3 million tonnes grading 15.58%.

The company is aiming to start producing 20,000 tonnes a year of graphite concentrate (95%) by the end of 2013, adding a refining facility to produce 3,000 tonnes a year of 99.9% graphite the following year.

Recent metallurgical tests on Lac Knife mineralization showed a recovery rate of 85.9% graphitic carbon, with 46% large flake and 39% medium flake.

Both Northern Graphite and Focus Graphite have entered into research partnerships on graphite purification and battery production outside of China, as well as on graphene production and technology.

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