The Mining Report: What are the key advantages of vein or lump graphite deposits over flake deposits?
Luisa Moreno: Two advantages of vein or lump graphite deposits would be the natural high-grade purity of the graphite in the ground, as well as the relatively low cost of production, most of which comes from Sri Lanka. Another important point is that it is usually sold at a premium price relative to natural flake graphite.
TMR: Are there any advantages flake deposits have over vein deposits?
LM: I think an advantage is that they have more applications. The flake graphite market is much larger. Vein deposits are quite rare and make up less than 1% of the market.
TMR: Flake graphite deposits can be high grade too, can't they?
LM: Flake graphite deposits can be high grade but you won't find deposits grading 90–99% in the ground. Flake deposits tend to run 2–3% graphite. Some deposits in Quebec have 16–20% grade. It seems that there's a correlation between grade and the recovery of larger natural flake. For instance, Northern Graphite Corporation (NGC:TSX.V; NGPHF:OTCQX) has a deposit grading about 2% graphite yet it has been able to recover more large flake relative to others with higher-grade deposits.
TMR: Which one should an investor prefer?
LM: To start, investors should look at these graphite companies just as they would look at any other mining company. They need to understand the feasibility of the project—the capital requirements, operating costs, etc. For industrial and critical materials it is also important to understand size of the market, the project time to market, the type of product it will produce and how much it could be sold for.
"Focus Graphite Inc. is the only TSX-listed graphite company that has been able to secure an offtake agreement with an end-user."
We talked about flake versus lump graphite deposits, but within the flake type products there are the finer flake, the medium and the larger flake, and it is important to understanding how much of each a mine can produce, as they are sold at different prices. The shape of the flakes and other characteristics also influence the price and applications. In the case of lump graphite, the market is estimated to be ~5,000 tons (5 Kt) per year, but it's relatively rare. If there is a company with a lump or vein graphite deposit that requires low capital and operating costs, has secured an offtake agreement and the project has strong economics, that could potentially be a good investment.
TMR: Where's that 5 Kt coming from now?
LM: It's coming mainly from Sri Lanka. AMG Advanced Metallurgical Group N.V. (AMVMF:OTC) is a major producer. It's a German firm that owns a subsidiary called Graphit Kropfmühl, which owns a lump graphite mine in Sri Lanka. The asset produces about 3 Kt of the 5 Kt estimated world production. The rest comes from a private company owned by the Sri Lankan government. Elcora Resources Corp. (ERA:TSX.V) has also secured a lump graphite deposit in Sri Lanka, and expects to bring the project into production in a short period of time. It seems that the company is attracting great interest from end-users looking for additional supply of lump graphite.
TMR: Each electric car uses about 50 kilos of graphite and electric carmaker Tesla Motors Inc. (TSLA:NASDAQ) is proposing a battery-producing plant in the U.S. dubbed the Gigafactory. Graphite juniors are touting a potential boost in demand for graphite. Should investors believe the hype?
LM: By sourcing materials and building a Gigafactory in North America, Tesla is trying to lower the production costs and thus the price of its electric vehicles (EV). But I don't think the Gigafactory is a done deal. Investors should closely follow what's going on with Tesla and understand its business. Standard & Poor's recently rated Tesla's credit as "junk" and that could certainly affect its ability to raise funds. I don't think it will deter Tesla from going ahead with its Gigafactory. There will likely be some challenges, but the company seems determined to build the factory to lower its production costs and make its advanced electric cars more affordable.
TMR: What was your reaction when you read Tesla's Gigafactory news release?
LM: When I first read it I thought that it could potentially be a game-changer, not just for electric cars, but for the strategic materials sector, namely lithium, graphite, cobalt and other materials that might be used in the EV batteries.
TMR: Some experts believe it could be easier for Tesla to rely on synthetic graphite rather than natural graphite. What's your view?
"Nemaska Lithium Inc.'s Whabouchi project is the second-highest lithium grade deposit in the world."
LM: The two aspects that Tesla likely will be looking at are performance of the materials and cost. If natural graphite can compete with synthetic graphite on cost and performance in lithium-ion batteries, I think natural graphite has a good chance to secure a position in Tesla's supply chain.
TMR: What are some publicly traded companies that have graphite projects that could meet Tesla's requirements?
LM: In the natural graphite space most of the listed companies have essentially flake graphite type deposits and it has been suggested that at the moment flake graphite has a more direct application in lithium-ion batteries. The most advanced company in the flake graphite space is Northern Graphite. It was the first graphite company listed on the Toronto Stock Exchange (TSX) to complete a feasibility study. Northern is now pursuing financing for its plant.
"Northern Minerals Ltd. has been able to produce a concentrate that is about 20% total rare earth oxides."
Another company that just completed a feasibility study is Focus Graphite Inc. (FMS:TSX.V; FCSMF:OTCQX; FKC:FSE). The company's Lac Knife deposit has relatively high grades, and metallurgical tests show that Focus can recover a good percentage of the large flake, which carries a higher price and could potentially be used in lithium-ion batteries. Focus is the only TSX-listed graphite company that has been able to secure an offtake agreement (up to 40 Kt per year) with an end-user. I think that's very positive.
TMR: Focus has a project in Québec. Northern has a project in Ontario. Are they in a better position because they are North American-based companies?
LM: Tesla has indicated that it would prefer to source its battery materials in North America, so these companies would likely be favored over companies that are not in North America. That said, if Tesla can achieve the sales that it believes it can by 2020, that could launch a new trend where we could see an increase in the sales of EVs across the board, not just with Tesla.
Recently Tesla CEO Elon Musk indicated that he is willing to share Tesla's intellectual property with other companies. Tesla is clearly trying to generate a much wider adoption of these vehicles, and we may see an increase in the adoption of EVs not just in North America, but also in Europe and Asia. While North American graphite projects could be favored by Tesla in its Gigafactory, other projects with sound economics would be in a very good position going forward as well.
"Alaska has proposed a $144M bond to help finance Ucore Rare Metals Inc.'s Bokan-Dotson Ridge REE project."
TMR: We should note that you don't cover any graphite companies but that you may at some point. Lithium is also used in EV batteries. Could this factory also possibly change the economic outcome of certain companies in the lithium space?
LM: Certainly. EVs use more lithium and more graphite than hybrids. If we see a greater adoption of EVs, we would definitely see an increase in demand for lithium carbonate and lithium hydroxide—the lithium products that go into these batteries.
Our forecast for lithium is based on the sales of hybrid vehicles only, which could reach 3.8 million (3.8M) per year by 2020 versus less than 2M now.
Current estimated annual lithium demand is roughly 170–180 Kt. If EV adoption rates meet projections, estimates suggest that demand could go north of 250 Kt by 2020. That is a significant increase and it will offer the opportunity for new projects to be developed.
TMR: How many EVs are currently being produced?
LM: Industry estimates indicate that there are currently over 400,000 EVs on the road, compared to about 100,000 EVs in 2012. It seems that EV sales have doubled every year for the last three years and if this trend continues, over 1 million EVs may be on the road in three years.
TMR: Do you cover any lithium companies?
LM: We cover RB Energy Inc. (RBI:TSX), which was formed as a result of the merger between Sirocco Mining, an iodine mining company with assets in South America, and Canada Lithium, which has the Québec lithium deposit. RB Energy is advancing the Québec mine and plant and expects to reach annualized name plate capacity of 20 Kt by the end of this year.
TMR: RB Energy recently closed a $22M bought-deal financing. What will the funds be used for?
LM: It's for working capital, as well as for improvements at the plant. When the new management took over the Quebec lithium project, it decided to slow down commissioning to make plant improvements that would lower costs. Those include an ore sorter, as well as a gas pipeline.
TMR: Do you cover other lithium companies?
LM: The other name that we cover is Nemaska Lithium Inc. (NMX:TSX.V; NMKEF:OTCQX). Nemaska has the Whabouchi project, the second-highest lithium grade deposit in the world. It's also in Québec and has 27 million tons in Proven and Probable resources. It is a project that we are watching very closely. It's in the early stages, but it has great potential.
TMR: Is having the second-highest grade deposit in the world enough to get a small modular plant built near James Bay in Québec?
LM: The grade alone wouldn't do it, but the fact that Nemaska has a sizeable deposit close to good infrastructure—hydropower, road access—and a positive feasibility study, means it could potentially build an economically competitive lithium mine and plant in Quebec.
TMR: In a June research update you listed four rare earth elements (REE) companies that recently arranged financings. These financings occurred at near record low share prices. One even offered a half a warrant with its deal. Is this simply life in the rare earths space right now or poor management?
LM: I think it's life in the mining space. If we look at the performance of most mining companies, especially the juniors, they've been struggling for a while. The REE juniors are no exception. Some investors are looking more at more advanced projects like Largo Resources Ltd. (LGO:TSX.V), which has a vanadium deposit that is close to reaching production, or Orbite Aluminae Inc. (ORT:TSX) and RB Energy, which are also close to commercial production. Companies with projects that only have a preliminary economic assessment or prefeasibility study and require $15–25M or more to reach the feasibility stage are finding it difficult to raise funds.
TMR: Are there signs the REE market could improve sooner rather than later?
LM: According to global economic estimates, we should see an increase in economic growth in the West, as well as in China, through the next couple of years. If we see that, I think that will be good news for REEs, as well as other critical metals. There could be a little light at the end of the tunnel here.
TMR: Some recent reports suggest that China may replace REE quotas with taxes. Please tell us more about the potential impact on the market.
LM: The World Trade Organization (WTO) ruled against China and its use of quotas. If China decides to comply with the recommendations of the WTO, I think that increasing taxes on REE exports or adopting tariffs would be effective ways China could still impose its policies.
China is determined to use rare earths resources to benefit its economy. China was supplying more than 90% of the world's REEs but only has about 36% of the world's resources.
TMR: Do you see the Gigafactory having any impact on REE demand?
LM: It is likely, as electrified vehicles use larger quantities of rare earth elements in magnets for their electric motors and in their more complex automotive systems.
TMR: A recent research report suggests that REE demand will grow at 6–10% annually through 2020. What accounts for that growth?
LM: It appears that some end-users are still using the stockpile material that they accumulated in 2011. Once those stockpiles diminish further we will see more end-users coming back to the market.
The other part of that is the normal growth in the economy. Demand for electronic products—cell phones, tablets, etc.—is in double digits in emerging markets. If we see the economic growth that's expected in the West and an increase in demand from emerging markets, over the next six years we may see a significant increase in REE demand.
TMR: Roughly speaking, how many development-stage REE projects reaching production would that growth in demand support?
LM: It depends. Some projects have production targets of 3 Kt, others 20 Kt. There is definitely opportunity for a few projects. We might see the need for about 100 Kt of new REE supply by 2020 if the global economy improves in a sustainable fashion. Asia is going to take some of the new supply as the consumption of China relative to the rest of the world may not change. I believe we should continue to see China as the largest consumer, followed by Japan.
TMR: What are some REE developers that you cover that are positioned to meet that demand?
LM: Some of the companies that may be well positioned are those that have been able to complete a positive feasibility study and those that have made significant advances in their metallurgy, examples include Avalon Rare Metals Inc. (AVL:TSX; AVL:NYSE; AVARF:OTCQX) and Matamec Explorations Inc. (MAT:TSX.V; MRHEF:OTCQX). Matamec is optimizing its metallurgical tests, while Avalon is focused on financing. Those two companies seem relatively well positioned to capture a significant increase in demand.
Another company that has made significant improvements in metallurgy is Northern Minerals Ltd. (NTU:ASX). Northern is now working toward a feasibility study. The company has a unique Xenotime REE deposit in Australia that favors the heavy rare earth elements (HREE). Without any chemical treatments, Northern has been able to produce a concentrate, unique to its deposit type, which is about 20% total rare earth oxides (TREO). Most others are not able to concentrate to those levels, so that's positive.
Another company with some positive results is Commerce Resources Corp. (CCE:TSX.V; D7H:FSE; CMRZF:OTCQX), which has the Ashram deposit in Québec. The company recently has shown that it can produce a concentrate running 40% TREO. Commerce introduced a leaching step and with that it has been able to achieve a much higher grade concentrate. Both companies have shown positive metallurgy results.
TMR: Avalon recently did a deal with Solvay SA (SOLB:NYSE; SOLB:BRU) to eventually process in France concentrates from Avalon's Nechalacho REE project. What are your thoughts on that news?
LM: We saw a benefit in that Avalon should be able to decrease its capital costs by not having to build a separation facility. Also, the company will be effectively decreasing technical risk by entering this agreement with Solvay, which has rare earth refining experience. We're still waiting for an updated feasibility report from Avalon to give us a better sense of what the new capital and operating costs will be; the feasibility should be completed this year.
TMR: Can you get us up to date on what is happening in Alaska?
LM: The Alaskan state government has proposed a $144M bond that would help finance the development of Ucore Rare Metals Inc.'s (UCU:TSX.V; UURAF:OTCQX) Bokan-Dotson Ridge REE project. I think it's unprecedented. We haven't before seen local support such as what Ucore has received in Alaska. It shows that the Alaska government recognizes the Ucore project as strategic for the state and, likely, the U.S. The financing arrangement has been signed into law and is contingent upon the completion of a feasibility study for the Bokan project and positive due diligence by the Alaska Industrial Development and Export Authority (AIDEA). Ucore has received some funding as well from the Department of Energy and is working with different research groups in the U.S.
Ucore's deposit leans toward HREEs so the company would be able to produce some of the less common and more critical elements. Ultimately the company still has to complete a feasibility study and prove that the metallurgy is feasible; Ucore is diligently advancing forward the feasibility study.
TMR: Do you have some parting thoughts for critical metals investors?
LM: Over the previous five years or so industrial metals and minerals have been increasingly adopted for use in advanced technologies. For instance, europium and thulium are used in LCD screens. High purity alumina and some rare earths are used in LED lights, which are replacing less efficient incandescent lights. Some rare earths are used to make magnets that go into motors. And these metals are being used to create even lighter strong metals. For instance, scandium and aluminum alloys have strength similar to titanium with the lightness of aluminum. There are so many different applications, but essentially these strategic materials are being used to improve our technologies and they're here to stay.
TMR: Thank you for taking the time to talk with us, Luisa.
Luisa Moreno is a mining and metals analyst with Euro Pacific Canada. She covers industry metals with a major focus on electric and energy metal companies. She has been a guest speaker on television and at international conferences. Moreno has published reports on rare earths and other critical metals and has been quoted in newspapers and industry blogs. She holds bachelor and master degrees in physics engineering, as well as a Ph.D. in materials and mechanics from Imperial College, London.
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1) Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Commerce Resources Corp., Focus Graphite Inc., Largo Resources Ltd., Nemaska Lithium Inc., Northern Minerals Ltd. and Ucore Rare Metals Inc. Streetwise Reports does not accept stock in exchange for its services.
3) Luisa Moreno: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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