The rapidly expanding list of junior mining companies chasing graphite projects will produce only a few successes but currently high graphite prices and the boom in the sector should continue – unlike other bubbles.
“I think this one has legs,” Michael S. “Mickey” Fulp, the Mercenary Geologist, told an audience at the New York Hard Assets Investment Conference last week. “The junior graphite bubble as with all bubbles is being built,” Fulp said. “It is being blown up right now. There will be very few contenders in this space and very many pretenders.”
When Fulp started studying the graphite sector a year ago he said only two graphite companies were listed on the Toronto Stock Exchange that had a flagship property of graphite. “A year later there are 50 or more,” he said, noting a new announcement by a copper company of the acquisition of three new graphite projects in northern Canada and another company that had moved from oil and gas to rare earth elements before in April becoming a graphite company.
Fulp calls graphite “the newest next big thing” following earlier junior mining moves into uranium and then rare earths. Graphite, he said, “is an up-and-coming semi-metal that I think has very strong upside in not only the short-term but the long-term.”
Graphite, he noted, has three market sectors that include synthetic graphite selling for around $10,000 to $20,000 per tonne and mainly used in for carbon electrodes for the steel industry; carbon fiber that has replaced fiberglass; and natural graphite, a $1 billion market, with 1.1 million tonnes of mine supply in 2011.
“Natural graphite, which is what we’re going to talk about mainly today, constitutes about 8% of the world market,” Fulp said. “If you know commodities, that's a lot of material.” He noted that the rare earths sector is only about 12% of natural graphite’s size and said nickel is also smaller in mined tonnes. “Once again China controls a majority of the world's production at 75%” but much of that is low grade amorphous graphite. Brazil, North Korea, Canada and India are also important producers, he said.
Graphite as a whole and especially flake graphite market is priced according to size of flakes and according to carbon content. “Generally you want your carbon content to be higher and so all these flake graphite criteria are based on 94% to 97% CG, which means carbon as graphite,” Fulp said. “You have to produce a very pure product.”
Natural graphite can be divided into five different products. “We have a very specialty market for vein or lump graphite and that is very coarse-grained graphite,” Fulp said. “It is very high priced, selling for something on the order of $8,000-$10,000 per tonne” This is produced by small, hand-cobbed mines in Sri Lanka, he noted.
Other natural graphite products are large flake graphite produced with +80 mesh or 150 micron size; medium flake graphite of 80 to 100 mesh; fine flake graphite of 100 to 300 mesh and amorphous graphite, which is essentially powder at -300 mesh, Fulp said. “Generally as the flake size decreases the price decreases,” he added.
“It's of interest to note that that this business has been driven lately by demand for lithium ion batteries and that market is increasing 20% to 40% per year,” Fulp said, noting that medium to fine flake graphite is mainly used for these batteries. “And what we're seeing is a concomitant increase in graphite prices.”
Over the last five years prices of amorphous graphite have increased from about $250 a tonne to current prices around $550 a tonne, while some flake graphite prices have climbed from under $1,000 a tonne to, in some cases for large flake graphite, more than $2,500 a tonne.
“I think insiders will tell you that that large flake graphite in bulk is going to sell for somewhere on the order of $1,800 a tonne,” Fulp said. “But look – five years ago or six years ago it was selling for $750 a ton. That's nearly at three times increase.”
Natural Graphite Prices
Source: Flinders Resources Ltd.
Fulp said the supply and demand picture for natural graphite has been influenced by technological advances in the past few years that have increasingly allowed flake graphite to substitute for synthetic graphite.
“That's the key here,” he said. “We've made inroads with technological advances so instead of paying $10-$20,000 a tonne for synthetic graphite we can now use large flake graphite or flake graphite in many of these applications.”
Natural graphite deposits are found in many parts of the world in very high grade metamorphic rocks where oxygen, water and methane have been driven off to leave pure carbon, Fulp explained. He noted that there are also many past producing countries.
“There are many past producers in many countries and that's the key to success in my opinion in the graphite space,” Fulp said. Many of those producers in prime high grade graphite mining terrain like Sweden, Quebec and Ontario were shut down in the late 1990s when China cut prices on amorphous graphite. But the relaunch of those projects are now being prepared.
“So how do we evaluate a graphite company?” Fulp asked. “The project really is the key for a graphite company. So you want in my opinion – and bear in mind this is what I am looking for and you must do your own due diligence and decide what works for you – but an advanced deposit or former mine is what I'm looking for. I'm also looking for a geopolitically stable and mining friendly country.”
Projects should also be close to infrastructure, Fulp said. ”These are bulk industrial minerals. These are not specialty metals. These are not critical metals. It's a critical commodity but it sells by the ton and it does not sell on the open market. It sells in off-take contracts.”
These contracts might involve 5,000 tons of large flake graphite at negotiated price, he said. “So you want to be close to infrastructure and that certainly requires a highway, power and water to the site or very nearby and I prefer a port nearby so we can ship this graphite where we need it.
“You want it to be high-grade. What do I mean by high-grade? I would put a minimum grade that I would most generally be looking for at greater than 5% of carbon as graphite. You want it to have a high percentage of flake. We’ve seen the price differential that has occurred so you want to make sure that it's mainly a flake graphite deposit and not an amorphous graphite deposit. The flake size is not nearly as important as the percentage of flake.
“You want it in my case to be an open pit mine because it's cheaper to mine and you want a low strip ratio – the strip ratio being the ratio of waste you have to mine to ore that you mine. And finally the metallurgical process. As I’ve already told you, you have to produce a high-grade concentrate of more or less ± 95% to command a good price for your graphite.”
Graphite beneficiation is a standard mineral process – unlike the rare earth element sector where each deposit was approached differently. “We’re still five or six years down the road for some of these rare earth element mines to come into production because they still have to solve the metallurgical processes,” Fulp said.
“This is easy. You crush, you grind, your float, you dry, you pack, you ship. That's how pretty much every commodity in the world, every metal commodity in the world happens in a milling situation.”
The fly in the ointment for graphite space, however, is that processing often requires a multistage grind and float process using surfactants. But because graphite is a good lubricant it coats the gangue or waste minerals, which requires that they be sent again through a recirculation process of grinding and floating.
“It can be an iterative process of grinding and floating to achieve your 95% graphite concentrate,” Fulp said, noting that regrinding reduces flake size. “Therefore that becomes a potential fatal flaw. So when you're evaluating a graphite company metallurgy is key.”
Graphite mines generally involve low capital expenditure prices of less than $100 million. “A savvy junior with the right management, the right connections, the right project, can raise $100 million or less,” Fulp said. “It will be a combination of off-take contracts and I think private debt because it's small. I look at hedge funds, small institutions and high net worth investors to be the people that fund this in combination with perhaps strategic alliances with established multibillion-dollar synthetic and carbon graphite companies.”
Fulp said he wants the graphite company investment to avoid equity dilution in the financing. “You want to be as always in the lowest quartile of operating cost,” he added. “You want to protect yourself in times of low commodity prices. If you are the lowest quartile, you will succeed during periods of low commodity prices. That's another key.”
As graphite companies near production, Fulp said he believes there will be “extreme merger and acquisition activity” either through off-take contracts or strategic alliances and business combinations. Of close to a dozen major companies in the synthetic graphite and carbon fiber segment only a couple currently have their own sources of natural graphite, he noted..
“I see the synthetic and carbon fiber companies being major players in this industry,” he said “I see a couple of juniors that will develop graphite mines very early on in the process will eventually probably go and cherry pick some of the struggling companies as the bubble starts to burst. What I envision is completely integrated mine to market companies for the most part.”
Fulp also listed a few companies he described as being among the cream of the crop in the graphite junior sector based on project, share structure and experienced personnel. “My favorite by far in the graphite space is Flinders Resources,” he said. “They have a deposit in central Sweden which is a past producing mine. Another contender with the richest deposit in the world is Focus Graphite with the Lac Knife deposit in northern Québec at 16% carbon as graphite.
“Northern Graphite is probably the furthest ahead at this point. They have a very interesting – completely flake, dominated by large flake – deposit in Ontario. But the problem with Northern Graphite: it’s relatively low-grade. They think they can make it work. It is open pitable, it has potential to be huge. It’s 2% graphite. So looking at the numbers that have ran – and I looked at Northern Graphite a year and a half ago – it's intriguing. But my choice in this is Flinders Resources.”
He noted that he has participated in three private placements for Flinders and that the company is also a paying sponsor of his website.
He also listed Galaxy Capital, a startup graphite company with a couple of early-stage projects, one in Quebec, one in Ontario, as another of his recent investments. “I like it because the people have had previous success in this business and it has 13 million shares out pending a financing, which is being done right now and which I participated in.”
He added, “This is a flyer. This would be one that I perhaps am not committed to but becomes a trade. I think I can make money on this company.”
Phil Burgert is managing editor of ResourceInvestor.com. He can be contacted at firstname.lastname@example.org.