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The Great Graphite Rush of 2012
(Initially Published February 23rd 2012)
Opportunities like a rebirth of a sector don’t come around every day and to be in on the ground floor of this BOOM is something special and you should consider yourself lucky for you early adopters. The last sectors that saw this type of excitement and share price appreciation were uranium and more recently rare earths. Although even uranium did not get off to the bang that graphite has since December. One reason for this is that developing a graphite mine, no easy task in itself is so much easier than uranium where radioactivity and special permits are needed or even rare earths where processing challenges keep many companies up with nightmares. Not so in the graphite industry that is both 10 times larger than the rare earth and uranium markets and is expected to experience unprecedented growth expected not seen in either sector. Growth so big that it could be ten times the size of either market. If the graphite market doubles, that is a factor of 10 when compared to the rare earth market doubling or the uranium market doubling. Meaning all things being constant, 10 times the mines will be needed when compared to either rare earth's or uranium. This long neglected sector that hasn’t seen any investment or development since Ballard in the early 2000’s has a long way to come back. You can’t even really call this mining sector with not one Canadian public company actually mining graphite although Northern Graphite looks to be in production by 201 and Focus Metals 6 to 9 months after NGC.
Gentlemen start your engines, pick your favorite stocks or a basket of them and outperform all your friends who still haven’t heard of graphite or the BOOM that is happening in this sector. Last summer when I first caught wind of this critical material for the electrification age... 1 in 20 had heard about graphite, now maybe 4 in 20 have heard about. There is still a lot of people to tell this story too. If you got graphite in your portfolio, it is going to outperform anything else this year as it is clear there is need for mines in this sector.
Further evidence is the amount of companies in the sector. Last summer there were 2… now there are at least 14 and counting.
Trading summer of 2011
1. Northern Graphite NGC-V
2. Focus Metals FMS-V
Acquired projects and actively exploring
3. Strike Graphite SRK-V
4. Standard Graphite (formerly Orocan) SGH-V
5. Lomiko Metals LMR-V
6. Solace Resources SOR-V
7. Cedar Mountain CED-V
8. Energizer Resources EGZ-T
9. Soldi Ventures SOV-V
10. GeoMega GMA-V
11. Greenlight Resources GR-V
12. Rare Earth Metals RA-V (subsequent to the Jan 23. initial publishing date)
Companies currently not trading or listed…
13. Mega Graphite (IPO March)
14. Tasex Capital (Flinders) TAX.p-V
15. High North (Canada Graphite) HN.p-V (IPO April)
There are companies that I have missed, but you can’t keep track of them all. NGC and FMS will remain the industry leaders while Standard Graphite, Lomiko, Cedar Mountain, Energizer, Solace and Strike are my early favorites in the next group down which is 2/3 of them. At this point in time it is hard to differentiate one from the other as it is early and all the projects now are similar to each other and are the best of the bunch from 20 years ago and on par or close to projects like Focus Metals Lac Knife and/or Northern Graphite's Bisset Creek. People keep asking me which graphite stock is better?
They are all good and any one of these companies in this list will be at least 100% high by next year, even the companies that are still not trading.
Mega, Tasex and High North are all big projects that require capital so are all holding off while companies like Lomiko, Strike, Cedar Mountain and Standard Graphite play catch up. Once these companies are valued between $20M to $30M market cap, the environment for larger capital projects becomes more favorable for the market to support. The market will not buy the more expensive valuations that these projects require because these projects still have risk and there is still too much perceived value with other companies. Why would you buy into a $20M placement value with a project that has less work when you can buy a project that has the same mining potential and a similar risk profile for $5M? You don’t. You buy the cheaper company because it has greater investment potential.
Northern Graphite NGC-V $2.00 / $76M market cap
January 1st 2012… $0.92 +$1.08 / 117%
NGC was $0.92 when I first mailed out the New Year’s letter mentioning graphite as a top theme for the year. It closed $2 today and looks like NGC is heading for $3, an important mark for any junior looking for money and a fast-track mine. NGC announced positive pilot plant test results with initial recoveries between 90.5% and 94.4% at a 94.5% purity or greater. What is important to note is that 80% of Northern Graphite’s production is +80 mesh with 96.7% purity and 50% of NGC production is +48 mesh achieving 97.7% purity. Purity is very important in lithium ion batteries which NGC production is of very high quality and will require little upgrading.
Another major announcement the company made in early February was that NGC entered into a partnership with Grafen Chemical Industries which has developed a process to make Graphene from Bisset Creek’s +48 and +32 mesh product. Signing this deal with Grafen reinforces that large fake mineralization is the premium product in the industry, not only for Li ion batteries but for Graphene production.
- Security of supply
- No large quantities of premium high purity flake graphite available
- Synthetic graphite, the only substitute product costs 15,000 to $20,000 per tonne.
- Cost reduction - with peak oil, synthetic graphite could easily move well above $25,000/tonne making natural graphite a cost-effective alternative with only mining costs and a natural demand curve.
Currently auto makers use synthetic graphite in Li-Ion batteries making natural flake graphite an obvious choice for manufacturers as a way to get materials prices down and secure supply. Synthetic graphite has both a limited supply and derived from oil, so as oil goes up in price, so does synthetic graphite. It is a natural progression to use large flake graphite in mass production as manufacturers will be looking to cut costs down. Tesla's battery is $32k and requires approximately 100kg of graphite. At synthetic graphite prices that is $1,500 to $2,000 and possibly much more depending on where crude oil prices go. Using natural graphite would reduce the material cost to $250 to $700 depending on where the the long term price of high purity large flake graphite ends up. So ya, the industry rumor that NGC is signing a very rich off-take agreement is very believable.
This is identical to what happened in the uranium market when end users started buying uranium in the ground... this happened when uranium was $30 - $40 dollars and it proceeded on a torrid pace for 18 months to top out well over $125. If these rumors are any indication, graphite prices are set to explode!!! This is only the beginning of the Great Graphite Rush of 2012.
Focus Metals FMS-V $1.04 / $88M market cap
January 1st 2012… $0.63 +$0.41 / 65%
FMS has had to deal with a little bit of disappointment since the beginning of the year. Lac Knife is not as good as it first appears. Information they released in a technical report showed that 53% of the graphite at Lac Knife is uneconomic. It is probably why the company staked more property in southwestern Quebec because their 15% deposit became a 7% deposit over night with less distribution of large flake. With companies like Lomiko sitting on 28 meter intervals at 8% and with better mineralization in a known large flake camp, there could be better opportunities out there than Lac Knife.
Lac Knife still looks like it is more economical than Bisset Creek and will provide higher returns per tonne… but the two companies are much more comparable. Even more so if Northern Graphite signs this rumored $7k off-take agreement. Certainly with Northern Graphite being closer to production, have a pilot plant running and high quality mineralization with top notch management, it deserves to be valued closer to FMS market cap than at the start of the year. When a lot of people got those numbers from the filed report on Sedar, the choice was an obvious one and they went straight to NGC.
What it should highlight is that Lomiko’s potential with Quatre Milles could be a project with similar numbers to Lac Knife now that we know Lac Knife is really 7% grade and not 15%.
Strike Graphite SRK-V $0.285 / $11M market cap
January 1st 2012… $0.115 +$0.17 / 148%
Strike Graphite has done what Strike does best. Raise money at cheap prices and grow the market cap by issuing shares. With the recent placement at $0.175 and the shares issued for projects in Tanzania and the Strike Graphite projects there is a lot of shares outstanding. These guys have done a great job of running up the shares with the company closing in on 70M fully diluted and now just starting exploration on the projects. Jody Darouge is running the projects at SRK meaning they have a competent technical consultant, but the share structure is already damaged with this company and SRK will always have to churn through shares. The company also dragged their feet on basic exploration procedures which should have been done as diligence. The brokers are in SRK really heavy so it is churning at $0.30 not gaining any momentum because the brokers are selling their warrants at a profit. The company recently released results of an airborne mag on Simon Lake that shows a very large and intensely mineralized graphitic conductor of up to 25km in strike length. But until there are some holes plugged into Simon Lake, Simon Lake remains a wild card and I am very surprised SRK has announced intervals with grades on holes that were visually estimated. No one in their right mind is going to build a mine on someone’s visual estimates from the 70’s.
SRK also announced the acquisition of the Wagon Graphite Project which is already a better project than Deep Bay East because of the camp and style of mineralization. It is located15km east of Timcal. 15 samples ranged from 0.57% to 18.13% Cgr with flake sizes recorded up to 3mm in diameter. The property has tons of potential being another Graphicor project back in the day and covers an 18km strike length of formations.
Standard Graphite SGH-V $0.59 / $10M market cap
January 1st 2012… $0.29 +$0.30 / 103%
Standard Graphite has gone about methodically doing their business staking land and running EM surveys right out of the gate. Something SRK should have been doing 4 months ago. With the latest information coming back from the little Bryan Property it looks like it might yield up some good exploration results. The EM survey yielded two conductors several kilometers long with the second conductor 1km north of the Little Bryan mine appearing quite intense and very continuous. Considering high grade material was mined on this site, the discovery of a graphitic trend in silicates/marble rocks bodes well for exploration on the project.
Solace Resources SOR-V $0.28 / $3.7M market cap
January 1st 2012… $0.10 + $0.18 / 180%
Solace finally announced acquisition of the Monpellier graphite project in Quebec. The exposed outcrop was sampled over a 7 meter width with individual grades ranging from 0.84% to 14.4% Cgr. SOR is following the Standard Graphite model and Monpellier is the first of 4 acquisitions with the biggest and baddest of the bunch yet to come. Solace is now the cheapest of the graphite stocks and is a company that will trade up very fast with a low float and quality graphite projects being vended into the company.
Lomiko Metals LMR-V $0.115 / $6.4M
January 1st 2012… $0.04 +$0.075 / 188%
Lomiko has finished correcting and is about to close the financing and start the next leg up. The company has the highest value project of any of the juniors and is still one of the cheapest. This company should at least have a similar valuation to SRK or SGH nad in my opinion should be worth more because of the advanced nature of Quatre Milles. LMR-V has the inside track to have a FMS/NGC type project. It has by far the most historical work on any project and Lomiko recently announced they will be completing a 43-101 with the historical work which will give investors a good idea of what Quatre Milles is all about. I would not expect a resource in the 43-101, but the historical work will be used in the resource report indicating grade size and drill hole location and give an indpeth review of the exploration work done in 1989/90. This will give LMR a great base to work off and a head start putting a resource together on their property in a cost effective manner. Technically Lomiko looks like it is ready to breakout after hitting a $0.13 and consolidating for a two weeks.
Lomiko has tons of news drivers including…
- 43-101 report
- Drilling announcement
- Closing of the financing
- Expanding the technical team
On top of the news drivers there are two other important fundamentals… our big insider is done selling and PDAC is 10 days away! Technically LMR is primed to break out and run right past $0.20 into PDAC and out the other side. All graphite stocks look like they will continue to run at least until the end of March/April period.
*Please note that market caps do not take in to account recent financings or any outstanding warrants.
In other events…
Energizer Resources EGZ-T $0.295 makes a very big discovery in Madagascar at Green Giant. Early indications are that they are on to a very large graphite camp. 118.6m @ 6.24% Cgr in drill core and 106m@ 7.11% in trench sampling show a very large high grading deposit. Energizer also signed a deal with DRA Mineral Projects to develop Green Giant. This is one that will be a mine in the next 3 to 5 years.
Cedar Mountain Exploration CED-V $0.23 acquires the Graphite Creek Project in Alaska. This project has 80% large flake distribution and grades between 5% and 10%. It has the potential for a 200Mt graphite deposit. Cedar Mountain is another early contender that is ideally located close to tidewater and easily shipped to Japan or even China.
Soldi Ventures SOV-V $0.155 acquired the Lochaber Graphite project in Quebec that has thin widths but was visually estimated to grade very high. They recently made another acquisition acquiring the Cameron Graphite Project in Quebec which appears a little better at 8 meter widths and grades of up to 15%. A bulk sample was conducted in 1965 with final test runs producing a 97.4% Carbon purity with 90.15% recoveries. On top of that +48 mesh recovery was greater than 50% in different crushing scenarios. The Cameron Graphite project could be a real winner in Quebec.
Graphene is exciting… but it’s Lithium Ion Battery Demand that Will Drive the Next 3-5 years.
What makes this sector even more exciting is graphite demand is clearly tied to peak oil and gasoline prices over the next decade. The drive to alternative energy vehicles is the key link to many of these companies and their hopes to mine, be bought out or secure off take deals. Without this incremental demand coming online over the next 2- 5 years… this theme is dead. As gasoline prices continue to edge higher in the age of inflation, consumers will be forced to adopt affordable alternative fuel vehicles and adoption rates will be much higher than anticipated. Adoption rates are the wild card in the demand equation and could choke supply because of not enough of the right type of graphite is available. There is already limited synthetic graphite on the market and it costs well over $15,000/tonne and increasing as the price of oil increases.
Graphene will play a more important role in graphite demand from 5 to 15 years from now, while getting mines into production to support electric/hybrid vehicle mass production rollout over the next 3 years is the priority. Just from Tesla’s Model X and S they could be selling 30,000 to 40,000 cars per year by 2014 which is a quarter of the total output of Northern Graphite. Tesla is designing power systems for other manufacturers as well. Every auto manufacturer is forced with the same choice and is going down the road of electric and hybrid vehicles. If gas prices go to over $5 a gallon in the US over the next 18 months, you will see much faster adoption rates than anyone anticipated.
Incremental demand for Lithium Ion batteries is expected to grow on average 25% a year. That is over 300,000 tonnes of large flake demand by 2020. Nuclear pebble bed reactors are expected to take up 400,000 tonnes of supply by 2020. While Li-Ion battery demand may be elastic and change accordingly to oil prices, pebble bed reactor demand is inelastic and the 400,000 tonnes needed per year is locked in stone unless all these reactors are cancelled now.
And then you have fuel cell technology which saw an emergence in graphite in the early 2000's with Ballard. Fuel cell technology has been long in developing and perfecting, but 10 years after the initial Ballard excitement, even fuel cells are a legitimate technology. Fuel cell technology could require the entire current 1.2Mt market for graphite!
This is a sector where there is real incremental demand from several angles and is a sector that has no companies and no major mines outside of China. It is also a sector where the largest mine in the industry is only 40,000 tonnes meaning there will be need for at least 10 to 20 to 30 new graphite mines outside of china over the next decade. That doesn't include the mines that will be depleted over this decade and need to be replaced as well like Timcal's Lac des Iles or the mines in China that are becoming less competitive. This is a sector where the returns are off the chart for the minimal dollars required. It is a sector where there is ton of excitement about chasing pencil lead. The fundamentals in this sector from mine to pencil suggest that the perfect storm is brewing in graphite and the early birds in this sector will get the worms.
Note… early birds and worms are plural.
Out of the 15 companies listed above… half may be mines in ten years. Those are odds that just don’t happen very often in mining. So are these prices rises justified? Every single penny is justified and my gut tells me that this is just the beginning and graphite stocks will be in high demand all year for several years. Themes just don’t come around like this very often. The last one was uranium 8 or 9 years ago and if projections are right, the graphite rush will make uranium in 2005/06 look like a blip.
There might not be another hot theme like this for another ten years. Don’t hum and haw about graphite and watch these stocks go up. Join the party and make some money!
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