Gary Economo, president and CEO, Focus Metals, Special to Proactive Investors
As the graphite market bubble grows, so does investor interest and scrutiny of a mining sector bedeviled historically by supply/demand cycles, aided and abetted by China’s overwhelming market influence.
The United States, Europe and China regard graphite as a critical material for future industrial growth. Global markets know this fact and the response has been an explosion of interest, investment and growth in new graphite mine development.
China, despite its productive capacity, remains and will continue to remain a net importer of graphite destined for industrial and technology applications including its new pebble bed nuclear reactors, lithium-ion battery manufacturing and of course, a source of graphene, the world’s new wonder material.
If there is any doubt about graphite’s importance as a commodity, one only has to look at the trebling of market prices for 97% graphite concentrate during the last decade.
Green, off-petroleum technologies are driving demand growth towards a market bubble that even a tsunami of new global production will be unable to deflate by 2020.
And planning for that day has become a reality for North America and European end-users, whose civilian and military customers who have read the numbers and see the potential for future supply shortages.
Demand today is approximately 1.2 million tons annually on a global basis. Should demand double by 2020, spawned by growth in the electric vehicle market alone, the competition for supply between East and West will create a bonanza for investors who bet on junior graphite developers today.
China supplies about 80% of the world’s graphite production today – half natural graphite for advanced and technology applications and half synthetic graphite.
But China has moved, as it has with Rare Earth Metals, to control exports in order to protect its domestic needs. Continuity of supplies is a risk factor for end-users in Asia, the United States and Europe.
And the markets are reacting.
Consolidation of supply through mergers and acquisitions, investing in new graphite exploration and mine development, and the expansion of existing deposits are critical for the creation of a level-playing field with China on the supply side.
Investing in a publicly traded junior mining developer now, with the emphasis on now, might be a good starting point to provide additional development impetus to the resurgent junior graphite mining sector.
Industrial Minerals, the international source for commodity intelligence, reports that graphite prices between mid-2011 and the end of January 2012 appear to have stabilized after dropping through the end of last year.
A current surplus of product in the world market and end-user depletion of stockpiles contributed to the downturn.
For example, the price for 100 mesh 97% graphite concentrate fell to a $1700 to $2,000 per ton range from its $2,400 highs earlier last year, Industrial Minerals said in its report.
Whether this trend continues during the course of this year is a matter of speculation, but it creates an opportunity to incorporate cyclical volatility into investment risk, where China’s overwhelming productive capacity, if unleashed to its fullest, could financially flatten new entrants to the graphite supply market.
China now controls some 80% of the global graphite market and has closed hundreds of producing mines during the last two years for reasons of its own, ostensibly because of environmental considerations.
A reasonable guess might lead one to conclude those closures were intended to protect, in part, China’s access to future supplies and/or the ability to influence market prices.
It was reported recently that the largest graphite miner in China, Heilongjiang Aoyu Energy Technology Company, formally asked the Chinese government to apply the same protectionist controls on graphite as it does on rare earths.
So what does that mean for emerging producers in Canada, Australia, Europe, Africa and South America and ultimately, how do investors de-risk their short and long-term positions in new, emerging producers?
The United States produces no graphite and is 100% dependent on imports to meet its industrial and technology needs. As a continental neighbor, it makes sense for Canada to look south first, then Europe and Asia as it builds its customer base.
Equally, U.S. investors would see the unique competitive advantages of a risk-averse, stable, reliable source of supply sitting on their doorstep.
Choosing a Graphite Investment
When assessing junior graphite companies, it is important to look at the grade of deposit, the size, the quality, and technology innovation.
Graphite mining’s market competitive nature holds that the best grade of ore makes both the business and the investment case.
Focus Metals’ (CVE:FMS) Lac Knife, Quebec natural flake deposit holds the highest grade of graphite in the world. The company’s NI 43-101 compliant resource estimate validated its 16% grading and its commercial bragging rights to that claim.
On February 23, Focus Metals entered into an agreement with Cormark Securities and Byron Capital for a bought deal private placement worth some $6.5 million, with an option to acquire an additional $3.5 million in shares structured under Canada’s flow-through share investing rules.
Proceeds from the bought deal will be used to cover exploratory drilling costs this year. In part, funds will be used for nine potentially promising high-grade graphite targets on the Lac Knife property, in addition to the company’s previously announced expanded drilling program for its eight million ton deposit.
In addition, last May, Cormark Securities led a syndicate in a $20 million bought deal private placement for Focus Metals shares, proving that the market is familiar with the company and its goals.
By the end of 2012, Focus Metals has said it should be in a position to revise and upwardly re-state its technology graphite holdings.
In business terms, this means Focus will be producing technology and industrial-grade graphite at the lowest cost with the highest revenues in the world.
With a 16% graphite grade, Focus Metals will produce a ton of 96-98% graphite concentrate from six tons of ore.
A producer with a 2.5% graphite grade would produce one ton of graphite from 48-50 tons or ore.
With rising fuel costs, or unanticipated additional supply coming onto the market as it did during the 1990s, the impact on emerging, marginal producers could be crippling.
With an industry average processing cost of $40-$60 per ton of ore, the company’s six-to-one ore-to-graphite ratio is unmatched globally and virtually immune from input cost shocks.
At the end of the day, the numbers have it.
As an investment, global markets are just now beginning to understand graphite’s rising prominence as a critical commodity and investment momentum is building. Based on both short and long-term realities, a bubble is coming because demand will outpace supply.
With an eight million ton graphite deposit, indications are that the Lac Knife property may hold double or triple that resource estimate. An aggressive expansion drilling program will start this spring to confirm scalability.
Still, at eight million tons, a 40-year mine life is forecast as the company’s productive starting point.
During the last six months, Focus Metals has acquired some 265 graphite mining claims and properties in the province of Quebec. The company also expects to announce additional acquisitions this year.
Most, if not all of Focus’ production, is destined for niche, high demand, technology applications and in particular, it holds fine-mesh graphite destined for the lithium-ion battery manufacturers.
The company also anticipates demand for its particular graphite from the international scientific and industrial development communities engaged in graphene research.
Focus Metals holds a 40% interest in Grafoid Inc., a graphene investment, research and development and patenting joint venture.
The company has developed a unique graphene extraction and production process using raw graphite ore from its Lac Knife deposit. The aim is to perfect a process that mass-produces graphene without destroying its electrically conductive properties, on an economically scalable basis.
As graphene developments and applications continue to grow, Focus Metals is positioned to exploit the wealth explosion it sees coming. The company anticipates completion of discussions with potential offtake partners by the end of 2012.
Focus Metals sees no foreseeable end in sight for growth in the graphite mining sector and its research is leading the company toward a patenting breakthrough for commercialized, low-cost, mass-produced graphene sourced from the Lac Knife deposit.
Written by president and CEO of Focus Metals, Gary Economo
Other Canadian graphite juniors to consider, by Proactiveinvestors
Another Canadian-listed junior graphite company that could soon be in focus is Pinestar Gold (CVE:PNS), which said earlier this month that it inked an option agreement to acquire a package of exploration-stage graphite projects in Australia from Zimtu Capital and Strategic Resource Management.
Of the 11 properties subject to the option, three comprise the Munglinup project in Western Australia, one comprises the Eyre Point project in South Australia, five make up various historical showings located in New South Wales, one covers the Furniss East project in Western Australia, and one covers the Emu Plain project located in Queensland.
No recent or systematic exploration program has been carried out for the exploration of graphite on any of the optioned properties, though they are considered highly prospective for occurrences of graphite.
Pinestar said it considers the 174-square kilometre Munglinup project the flagship asset. This property is located along strike and contiguous with the eastern and southern sides of the Munglinup deposit, which is held by Adelaide Prospecting Pty Ltd.
The Munglinup deposit, which is expected to become Western Australia's first commercial graphite mine, contains a reported in-situ historic non-NI 43-101-compliant geologic resource of graphite of 1.47 million tonnes at 18.2 percent fixed carbon. This work identified graphite mineralization of a length in excess of 500 metres and to a depth of 55 metres.
A reconnaissance field program by an independent consulting geologist has already been completed on the Munglinup project and samples have been taken where outcropping graphite and float have been observed, Pinestar said.
Other Canadian juniors in the graphite space include Rare Earth Metals (CVE:RA), which last month announced the acquisition of the 2,072 hectare Manitouwadge property in northwestern Ontario, along with Strike Graphite (CVE:SRK), and Northern Graphite (CVE:NGC), among others.