Don't Tip the Balance on Graphite Supply: Stephen Riddle

TICKERS: EGZ; ENZR, FDR, NGC; NGPHF, SGH; DARDF, UBR

Source: Sally Lowder of The Critical Metals Report  (5/29/12)

Stephen Riddle Asbury Carbons CEO Stephen Riddle, the fourth-generation Riddle to run the 118-year-old company that bills itself as "the world's carbon and graphite source," is delighted to see sources of natural graphite resurfacing outside of China now that the commodity's price justifies investment in exploration and production. However, in this exclusive interview with The Critical Metals Report, Riddle tells us he's not convinced the buzz about exploding demand is justified—in fact, he worries overzealous producers may tip the balance toward too much supply.


Companies Mentioned: Energizer Resources Inc. : Flinders Resources Ltd. : Northern Graphite Corporation : Standard Graphite Corp. : Uragold Bay Resources

The Critical Metals Report: Your great-great grandfather founded your company in 1895. Tell us why graphite is important to manufacturing today.

Stephen Riddle: Graphite is thermally and electrically conductive; it's a very good lubricant, especially at high-temperatures, and each single graphene layer is very strong. That unique combination of these key properties makes it an excellent material in a variety of applications.

TCMR: How would you characterize the worldwide graphite market, both natural and synthetic?

SR: Generically, I'd estimate global graphite as a $13 billion (B) industry. Natural graphite, however, is a small portion of the overall market—no more than $1B. The major application of natural-flake graphite is the refractory industry. It uses at least 40%, if not more, of all the natural-flake graphite mined in the world to make refractory bricks for steel mills and high-temperature furnaces. Lithium-ion batteries, while the fastest-growing application, still account for a very small component of the industry. The traditional applications that have been out there for years are growing at a slow rate internationally, but the demand growth of more than 5% is coming from lithium-ion batteries. Current demand for natural-flake graphite accounts for maybe 500,000–600,000 tons (t) per year.

Natural flake, as well as synthetic graphite, are also used to make fuel cells, but the fuel cell market isn't going anywhere anytime soon. Natural graphite also has an application in pebble-bed nuclear reactors, but most of them can use only synthetic graphite. So while natural graphite has a future in the fuel sphere, proportionally it accounts for only about 20% of those applications. A lot of the growth applications are further down the line.

TCMR: Natural-flake graphite is the part of the graphite market that we've been hearing a lot of buzz about in terms of shortages. Do you see that part of the market expanding?

SR: We do. Over the last 22-years, the price of natural flake was so low that no new companies could justify mining it outside of China, India and Brazil, where low-cost production is concentrated. Elsewhere, mines either closed because of low prices or held on by a shoestring.

TCMR: What's driven up the price of natural-flake graphite?

SR: A surge in demand in the Q4/09 caught producers off guard. We'd just come out of the financial crisis, when everybody's business dropped off by about 35%. Then all of a sudden, Chinese demand increased in the lithium-ion battery market for making natural-graphite anode material, what we also refer to as spherical -flake graphite (SFG).

That surge in the Q4/09 came at a time of year when people are stockpiling the natural flake coming out Heilongjiang Province in China because those facilities close down for the winter. Under the circumstances, the miners or producers basically had the market in a position where everybody agreed to pay more for the natural-flake graphite because they needed it at that time. Capacity started to increase after the market steadied out in 2010. Now there's a bit of surplus of natural-flake graphite and prices have dropped some.

TCMR: Who are the major manufacturers of lithium-ion batteries?

SR: Production is concentrated in China. Chinese manufacturers are the most cost-effective by far because of the methods used to produce SFG. The process involves taking natural-flake graphite classification and milling the graphite, which then shapes the graphite particle. In that process, you lose about 50–60% of the graphite you start with. It's still good graphite, but it just doesn't shape well. Then you have to purify what remains. The Chinese use an acid purification process that's very low cost but not necessarily the most environmentally safe process. Finally, that graphite is sold mostly to other Asian countries, where it has to be coated. The Chinese recently started coating within China, so now its capacity in that area is growing tremendously.

TCMR: If natural-flake graphite is only 10% of the total market, would the other 90% be the synthetic graphite materials?

SR: The big application for synthetic graphite is graphite electrodes. There's about a $5.5B market. Graphite electrodes are used in the steel industry and ferroalloy production. No natural-flake or natural-amorphous graphite is used at all for those applications. For electrodes, they prefer to start out with a needle petroleum coke, which comes out of the oil refineries as a byproduct of refining sweet crude oils that have a needle structure.

The next-biggest application is what we in the graphite industry call carbon fibers, but the sporting goods industry still calls it graphite. It is about a $4B market. In addition to sporting goods, this material is used in the aircraft industry, plastics, windmills for wind energy and, more recently, the automotive market.

TCMR: A number of junior mining companies, particularly in Canada, are currently looking for graphite deposits because of their perceived increase in demand in the graphite market. You've seen this change in the last year to two-years, right?

SR: Yes. It's good that there are plenty of deposits of graphite outside of China. The world is more than covered for the next 100–200 years as demand grows for natural-flake graphite. On the other hand, most of these companies will not make it to the table because the demand won't grow fast enough for all of them to get into the business.

TCMR: Of the companies that are seeking or have found graphite deposits that they're in the process of developing, do you consider any to have particularly positive outlooks?

SR: Yes. I try to look at the deposits that will have a good cost structure and make a good quality product over the long-term—not necessarily which ones can get to the market the fastest. So I tend to look at the long-term basis when I'm looking for a supplier of natural-flake graphite or an investment opportunity.

One critical thing to look at is the quality of flake graphite a deposit can produce—I call it the footprint—through normal floatation or normal separation of the ore and the graphite. When we talk about footprint, we try to determine the particle size of the graphite ore, how much will be in coarse-flake graphite (which we call plus-50 mesh), in the medium flake (plus-80 mesh) and in the fine flake (minus-80 mesh). We also look at the purity level, again through normal floatation or separation. Will it be only 90% pure? Or can this producer achieve 94–96% purity?

TCMR: Considering the criteria you describe, what are some of the deposits where you see potential?

SR: From experience, I know the quality of graphite that comes out of Madagascar has been extremely good, so I'd like a company that can mine it cost-effectively and set up a production plant there. Energizer Resources Inc. (EGZ:TSX.V; ENZR:OTCBB) has found some good deposits in Madagascar. It's not an easy place to operate in, but that could be one good area for graphite in the future.

I also like Northern Graphite Corporation's (NGC:TSX.V; NGPHF:OTCQX) deposit at Bissett Creek, Ontario. Its project is further along than Energizer's, but what scares me with Northern is its high-cost of getting into the business. Its budgeted capex costs for building a graphite plant is extremely high.

TCMR: Any others?

Another area that I know can produce quality graphite surrounds Asbury's old mine near Notre-Dame-du-Laus, Québec, and the Lac-des-Îles graphite mine in the same area of Quebec. We all know the quality of the graphite in that whole region, the size of the flakes and the fact that the flake graphite separates well. We also know that it typically runs about 8% of the ore. Four or five different Canadian companies have picked up claims in that area. One of them is Uragold Bay Resources (UBR:TSX.V). Another is Standard Graphite Corp. (SGH:TSX.V). Some of the others are private.

Another company with a deposit that I think has a bright future is Flinders Resources Ltd. (FDR:TSX.V). Its property in Sweden has capex much lower than anybody else's because an existing mine operated there from 1996–2001, when production was halted due to falling graphite prices. Another plus is having a large market in Europe, right in its backyard. Flinders is just winding up a drill program to reclassify historic graphite resources estimates to current NI 43-101 standards, and the resources calculation is expected to be completed around the end of July.

I've been coaching a lot of junior mining companies that have been around for the last 20 years. Because natural-flake graphite prices were so low, I had to recommend that they keep the graphite in the ground, like an insurance policy—which is what they did on the Flinders property. The good news now is that current market prices can justify some investment in increasing natural-flake graphite sources outside of China. The concern is that the market won't grow as fast as everybody thinks it will. I just hope that as they invest in new sources, it doesn't create an overcapacity too quickly.

TCMR: Does Asbury Carbons own chunks any of these public companies that we've discussed, or consider any of their deposits among your potential sources of supply?

SR: We don't own any of them, not at present, but we do see them as potential supply sources.

TCMR: Do you see Asbury ever being in a position to acquire such an asset?

SR: Yes, that's very much a possibility if they are not over valued or Asbury could become their exclusive sales & market distribution agent like we did with the Lac-des-Îles graphite mine in the past.

TCMR: Does Asbury buy most of its raw material from China now?

SR: Yes. We get probably about 70–75% of our natural-flake graphite from China. We also still get some from Madagascar, as well as Brazil and Canada.

TCMR: How much of the other material you process at Asbury comes from China?

SR: Of all the different types of graphite and carbons, as a whole a company we probably get maybe 20% of our raw materials from China. We buy a lot of petroleum coke from the North American market, and import amorphous graphite from Mexico as well as China.

TCMR: How much of your business deals with natural-flake graphite?

SR: It's only about 20% of our overall business. We supply it two ways. For customers who can use it directly from the mine source, we can sell it to them via our mining partners around the world. The other alternative is to bring the graphite from selective sources to our processing plants in North America where we mill it, further screen it or blend it and then ship it along to the customer.

TCMR: How many processing facilities do you have?

SR: We have seven processing facilities throughout North America.

TCMR: What's Asbury's growth profile?

SR: We've had a good run for a while, with tremendous double-digit growth each year. Some new applications for our carbon and graphite products have brought some of the growth, but a high percentage has been from inflation, because as graphite prices have increased, so have prices of the other carbons Asbury processes and supplies.

TCMR: Do you see that continuing?

SR: We're starting to see it level out a little bit but we're constantly working on new products. We're very close to a graphene precursor, and we see a bright future in some nano-graphite powders Asbury has developed.

TCMR: Do you see the graphite space being an area where investors could anticipate continued growth over the next two, five or 10 years?

SR: I see growth, but not as fast as the promoters have written. I see hybrid vehicles being a big percentage of future car sales, but not the electric vehicles because they're just too expensive. Unfortunately, the hybrids don't use anywhere near the amount of graphite in their battery systems that the electric vehicle does. The volume of the anode material needed for smaller lithium-ion battery applications isn't anywhere close to what's needed in the automotive industry.

The key is just good people, and reinvesting in them and in the company. That's what Asbury has done.

Asbury Graphite Mills, Inc. Chief Executive Officer Stephen Riddle, widely regarded as an expert in the graphite and carbon industry, is the fourth-generation leader of the privately owned company. Founded in New Jersey in 1895, Asbury Graphite is a processor and supplier of all types of granular and powder natural and synthetic graphite, petroleum and metallurgical cokes, anthracite coal, carbon black, activated carbon, carbon fibers and other inert materials. Joining the company as territory sales manager in June of 1979, Riddle progressed to assistant sales manager (1984), sales and export marketing manager (1986), president (1995) and, in January 2011, to CEO. Riddle, who attended Lafayette College and Deerfield Academy, is a member of the Electrochemical Society, ASM International, the Casting Industry Supplier Association, American Foundry Society and, American Powder Metal Institute.

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DISCLOSURE:
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: Energizer Resources Inc., Northern Graphite Corp. and Standard Graphite Corp. This interview was edited for clarity.
3) Stephen Riddle: 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.




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