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Graphite Applications Expanding: Ryan Fletcher
Source: Sally Lowder of The Critical Metals Report (1/24/12)
Graphite, once the stuff of pencil lead, figures prominently in post-paper-age consumer electronics, and escalating spot prices reflect its critical role in electric vehicle manufacturing. In this exclusive interview with The Critical Metals Report, Zimtu Capital Director Ryan Fletcher explains the fundamentals underpinning the graphite market. It adds up to ample opportunities for investors.
Ryan Fletcher: The space should be on investors' radars. Demand for graphite is increasing quite rapidly. Not only are historic uses growing, but new applications are adding demand. A number of professional investors, analysts and researchers have studied the fundamentals, and they see the potential. But it's not yet front and center on the investment community's radar. It should be.
TCMR: In terms of graphite's historic uses, it's used in tennis rackets, golf clubs and is important to the steel industry. What are some of graphite's properties and historic applications?
RF: Graphite is an excellent conductor of heat and electricity and is corrosion and heat resistant. It's a strong substance. It's light. All of those qualities make it valuable. It's used in the steel industry. The automotive industry is also a major consumer. Because of its heat resistance, it's also used in crucible liners and so forth. Those are big applications.
TCMR: Would you say that demand in these historic markets is increasing?
RF: Absolutely. The historic markets are still growing and you can't forget about them. The demand from these markets is increasing, say, at a rate of 3–5% per year, based largely on global economic growth fueled by Asia, India, Russia and Brazil. But now we are seeing graphite's application in lithium-ion batteries, fuel cells and nuclear technology, and in plastics and composite frames that find their way into products such as Boeing Co.'s (NYSE:BA) new Dreamliner as well as wind mills. These applications will add a big, incremental demand push to the market. This is all new demand.
TCMR: How does graphite figure into energy storage applications?
RF: The most important applications in energy storage are lithium-ion batteries and fuel cells. A lithium-ion battery needs 20 to 30 times more graphite by weight than lithium. Based on that, the number of end user transactions, the amount of capital and the level of interest in the graphite space should be about 20 to 30 times more than in the lithium space, but graphite has been flying under the radar.
TCMR: Maybe that's partly because the lithium-ion battery isn't called the graphite-lithium-ion battery.
RF: True. These batteries have two parts—the cathode and the anode. Lithium is the cathode. The anode is graphite. It's become clear that these batteries will power not only electric vehicles but also our tools, our phones, our laptops, our electronics, our toys. They all use these batteries, and that's going to be a big demand driver.
TCMR: How about in fuel cells?
RF: In the same way, graphite is used in plating and is an important component of a fuel cell. A lot of the same things I said about lithium-ion batteries also apply to vanadium redox batteries. Vanadium's been getting a lot of attention. It takes a lot of graphite to produce these batteries as well.
TCMR: Are the batteries used in vehicles such as the Chevy Volt, Nissan Leaf and Tesla Roadster lithium-ion-graphite batteries?
RF: Yes. There was some debate whether a nickel-metal hydride battery would be the key driver for electric vehicles, and the original Volt was based on that technology. But the Leaf, the new hatchback version of the Volt, and the Tesla are now all based on the lithium-ion-graphite battery.
I've been speaking with a lot of the bright and experienced people who closely follow battery technology, such as the crew at Byron Capital, which has done a lot of good work in this space. Battery technology goes through phases and a certain technology typically can reign for some 10–20 years. It appears that the mass adoption of lithium-ion batteries has just started to take shape and will dominate for a long time. Graphite is so critical for that.
TCMR: Those changes in automotive technologies seem to moving faster than ever before. Consumers want the most current technology, whether it's a cell phone, a laptop or a vehicle, and it's exciting to watch demand pushing these new technologies into manufacturing.
RF: Yes. The natural graphite market is about 1.2 million tons per year (Mtpa) right now. Broadly speaking, that market consists of two different forms of graphite. The historic applications primarily use the amorphous graphite, whereas some of these emerging technologies and applications use flake graphite. About 40% of that 1.2-Mt market is flake and 60% amorphous, so the flake graphite market is just over 400,000 tons per year. Some of the players in the industry anticipate that just one application alone, the lithium-ion battery, could use well over 1.6 Mt of flake graphite per year by 2020, which is more than threefold the entire current market. Even if the market doubles, that's 800,000 tons of graphite per year by 2020. A large-scale producer puts out only about 20,000 to 40,000 tons per year, which means a lot of new mines and a lot of opportunity.
TCMR: And is it China that dominates this market?
RF: Yes. China controls 70% of the current graphite supply. Over the last 10 years, China has become dominant in a number of commodities, based on blessings of geology and other circumstances. Behind China on the supply side is India, Canada and Brazil. Over the last couple of years, China has imposed value-added taxes, export taxes and licenses.
North America has been aggressively seeking solutions to weaning itself off oil production and reducing consumption of fossil fuels. China is trying to do the same and will conserve the resources it will require for this to build its own internal industries, its own green growth and its own economy.
TCMR: Where can we expect to find new sources of graphite? Where is it most abundant, and in what types of geology?
RF: You have to look to geological terrains with metamorphic activity. Canada, particularly Ontario and Québec, has some great terrain, as do Brazil and India. Because graphite prices have been kept low over the past decade or so, there had been almost zero incentive to explore for, fund or develop new graphite projects. That's all changing right now, prices have increased threefold in the last few years. I think the best graphite deposits have yet to be found. There's potential for new discoveries in many jurisdictions.
An interesting thing about the market right now is not only that only a handful of players are exploring and developing projects but that they view each other more as "co-petition" rather than competition because demand necessitates many new mines, even if current development projects all move to production. There's also a premium for deposits outside of China, which will be more valuable to end users from Japan, Korea, Europe and the U.S.—all major consumers.
TCMR: So for investors who want to participate in the upswing of demand and the compelling future for graphite, who are some players worth investigating?
RF: The two most well known public companies, both of which have projects in Canada, are Focus Metals Inc. (FMS:TSX.V) and Northern Graphite Corporation (NGC:TSX; NGPHF:OTCQX). Great teams are leading these companies.
Focus acquired the Lac Knife Graphite Project from a subsidiary of IAMGOLD Corp. (IMG:TSX; IAG:NYSE). This was a known deposit located in northern Québec, with feasibility work completed prior to NI 43-101. The project was discovered in the 1980s and at one point was being evaluated through a joint venture between Graftech International Holdings Inc. (GTI:NYSE) and Ballard Power Systems Inc. (BLDP:NASDAQ), which designs and manufactures clean energy hydrogen fuel cells. Focus has now come out with an NI 43-101 resource that shows an attractive grade—about 16%.
Another intriguing thing about Focus is its work with end-users on the technology side. The company's longer-term business plan is pretty intriguing—to become not only a producer of graphite but also developing end use markets, somewhat of a mine-to-market strategy.
TCMR: What about Northern Graphite?
RF: Northern Graphite, which just went public in April 2011, holds a 100% interest in Bissett Creek, a graphite project located close to infrastructure in southern Ontario. The interesting thing about the Bissett Creek deposit is that a large proportion of it is large- or jumbo-flake graphite—the stuff that gets end-users and the battery manufacturers excited. The company announced the plan for a bankable final feasibility study in June, and recently reported positive pilot plant results. The market seems to really be getting behind the company and for good reason.
TCMR: Do you expect Northern Graphite to develop end-user agreements?
RF: Sure. It's important for everyone looking at this space to remember that graphite isn't like gold or copper or oil—commodities that you produce and sell into a big global market at the market price. With minor and industrial commodities, such as graphite, the explorers, developers, and producers work with end-users. So all the companies that are moving these projects forward will be working with industry end-users, intimately. I can assure you that the end-users from Korea and Japan will be eager for these types of partnerships, just like the Europeans and the Americans are. They're all dependent on China right now.
TCMR: Are there any other names in this space?
RF: As I mentioned, I figured the best graphite deposits haven't been found yet. The disincentive of low prices meant that not much money has been raised nor dollars spent looking for graphite. That's starting to change. One company that I quite like is Orocan Resource Corp. (OR:TSX.V), which has acquired a portfolio of projects in Ontario and Québec. But more importantly, the company added Antoine Fournier to the team. A geologist, he was part of the field team that discovered the project that Focus is advancing, Lac Knife.
Orocan, which intends to propose a resolution to change its name to Standard Graphite Corporation later this month, has a market cap of about $5M, in comparison to the $30–60M for some of the bigger players. There's a lot of leverage for investors and a lot of opportunity when you take something that has a bit of information with the right team and make a new discovery. You can create a lot of value under those circumstances. Orocan will be working to do just that.
Also, early this month, Lomiko Metals Inc. (LMR:TSX.V) acquired 100% interest in the Quatre Milles Graphite Property in southwest Québec, a project that Graphicor Resources explored in the late 1980s. And in Saskatchewan, Strike Gold Corp. (SRK:TSX.V) is moving forward on a project where Superior Graphite had done drilling and geological and metallurgical work 20 years ago. These assets—the ones that had been worked and then had to halt when China took its grip on the market—are being snapped up right now. The market has changed and they are attractive again. Additionally, Eagle Graphite Corp. is a private company mining graphite in southeastern British Columbia, and TIMCAL Graphite & Carbon produces graphite at its Lac-des-Iles Mine in Québec. Both of them are operating, producing and selling to end-users. Both of the mines are in Canada.
TCMR: Except for Strike, all of the companies you've talked about are exploring in Québec or Ontario. Are there graphite projects elsewhere that you can tell us about too?
RF: There's an interesting past producer in Sweden that's being acquired. A capital pool called Tasex Capital Ltd. (TAX.P:TSX), which will become Flinders Resources once the transaction is complete, is acquiring 100% of this Swedish property—the Woxna Graphite Project. There's a quality management team on this, influential financiers involved, and I expect to see a lot of success there.
TCMR: It looks as if the graphite space is developing some traction, especially with all of the new applications you've talked about. It's been called one of the "quintessential wonder materials."
RF: I agree. It's very early, but with all the factors we discussed at play, I see a lot of opportunity for the investment community.
TCMR: Thank you so much, Ryan.
Ryan Fletcher is a director of Zimtu Capital Corporation, a Vancouver-headquartered public investment company that creates, invests in and grows resource companies. Fletcher has been responsible for identifying and sourcing projects, structuring companies and investments, marketing group companies and business development. He is a graduate of the University of British Columbia Okanagan with a Bachelor of Arts in economics. Before joining Zimtu in 2009, Fletcher worked as a consultant for publicly listed mineral exploration and development companies and a boutique private investment firm focused on the mineral exploration sector.
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1) Sally Lowder of The Critical Metals Report conducted this interview. She personally and/or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Critical Metals Report: Northern Graphite Corporation, Orocan Resource Corp. and Focus Metals Inc.
3) Ryan Fletcher: I personally and/or my family own shares of the following companies mentioned in this interview: Northern Graphite Corp., Orocan Resources Corp., Strike Gold Corp., Lomiko Metals Inc., and Zimtu Capital Corp.. I personally and/or my family am paid by the following companies mentioned in this interview: Zimtu Capital Corp.