Time To Buy Some Graphite Miners

Aug 06, 2023

This article was first published on Trend Investing on March 4, 2018; therefore all data is as of that date.

For a background on the graphite miners investors can read my earlier articles:

The natural graphite market at around 1million tpa is larger than that of cobalt (~134ktpa) and lithium (~245ktpa), but smaller than nickel (~2.1mtpa). Note the synthetic graphite market is around 1.5mtpa.

Graphite is mostly used in the steel making industry, and for brake linings, and pencils; however lithium-ion batteries are increasingly becoming an important demand source.

Graphite is the main material used in the anode of lithium ion batteries used in electric vehicles [EVs] and energy storage. Around 55kgs of natural graphite is used in a 50kWh EV battery. My model suggests that natural graphite used in EVs is currently ~13% of the market, but can grow to ~30% of the market by 2020 if electric cars reach 6% market share. My model has accurately forecast the lithium and cobalt booms, and right now graphite is the number 3 in demand metal (along with NdPr) based on my model, suggesting the graphite boom is just starting now.

Whilst about half the graphite used in the lithium ion battery anode is typically synthetic, that is generally more expensive than the natural graphite. Both have their different qualities and are hence combined. There are almost no substitutes and little recycling of graphite. The end product is spherical graphite which involves further processing steps and hence costs more. There has been some talk of using some silicon in the anode, and eventually we may use graphene.

Annual global electric vehicle sales forecast to hit 24.4 million by 2030

Source

According to an October 2017 article in Energy Storage: "Spot prices for graphite had risen 300 percent since January, hitting $35,000 per metric ton, and demand for tech-grade material was expected to soar 200 percent in under three years." I assume the $35k/t is for spherical graphite.

Others have the graphite spot price at $7,000 and $12,000 per metric ton for natural spherical graphite anode material. Flake graphite prices are the precursor and tend to be in the USD 1,000 range.

Graphite flake price history (not updated)

Source

Graphite prices have risen strongly the past 1 year

Source: AsianMetal.com

Simon Moores said in my interview with him for Trend Investing -

On the flake graphite side, a fall in output from China together with a rebound in demand from steel (refractories and recarburizer) and lithium ion batteries has pushed prices up. Our flake graphite prices index is up 25% y-o-y.

This matches nicely with AsianMetal.com price changes in the chart above, where graphite prices are shown to be up 22.05% in the past year.

Demand

Graphite demand is driven by the steel industry, and in particular China. As the quote below states the new driver of excess demand is coming from the lithium-ion battery demand.

Energy Storage wrote last year -

China plans graphite megafactories to meet booming demand for battery storage. China is leading efforts to deliver an almost threefold increase in global graphite processing capacity by 2020, to meet mushrooming lithium-ion battery industry demand.

Battery Anode graphite demand forecast to triple by 2020

Source: Syrah Resources New York Investor presentation - Page 22 - December 2016

The above graph shows just "graphite battery anode" demand forecast to grow about 100,000 tonne pa. The graph below shows the "whole" graphite sector forecast demand to grow by around 200,000 tonne pa boosted by the battery sector.

Graphite demand graph - 2010-2020

Source: Mason Graphite presentation - December 2016 - Page 9

Supply

The main new supply to come on is from Syrah Resources who plans to bring on ~170,000 tpa in 2018. Syrah plans to sell 1/3 of the graphite to the industrial sector, and 2/3 to the lithium ion battery sector.

This should mean that despite Syrah Resources bringing on a large amount of new supply the graphite market should remain tight and reasonably well balanced.

Graphite dominates graphite production

Source

Expert's opinion

In my recent interview with Benchmark Minerals Simon Moores, he said:

Right now this space is experiencing what we have termed the ‘rise of the anode megafactories’. Spherical graphite anode plants, predominately based in China, were traditionally 5-10,000 tpa but now we are tracking four megafactories are looking to produce 60,000 to 100,000 tpa from 2020 onwards. This will have a significant impact on the precursor markets of flake and synthetic graphite....The timing is good for the opening of what will be the world’s largest flake graphite mine operated by Syrah Resources in Mozambique. The ramp up of this mine will have the most significant impact on the global graphite market in many years.

Benchmark previously stated:

The 35 GWh Tesla (NASDAQ:TSLA) gigafactory (producing 500,000 EVs), would require 112,500 tonnes per year of flake graphite, 45,000 tonnes per year of spherical graphite. The proposed Tesla "gigafactory" alone will require four to six new graphite mines.

Graphite Miners comparison based on resource size and grade

Source: Syrah Resources New York Investor presentation - Page 23- December 2016

Below I take a look at the main graphite miners, and their recent price action, in particular their percentage falls from their 52 week high and analysts' consensus target upsides.

Note: I have not included the Chinese graphite miners as they are mostly not accessible to western investors.

A summary of the graphite miners to consider buying now

Price

52 week

high

Fall from

52 week high

Producer

or likely

year to

start production

Analysts target price

(Upside %)

Syrah Resources

Limited [ASX:SYR][GR:3S7](OTCPK:SYAAF)(OTC:SRHYY)

A$4.67

(47%)

3.09

(73%)

0.28

(200%)

0.70

(119%)

Zenyatta Ventures

[TSXV:ZEN] (OTCPK:ZENYF)

Note: All prices are on local exchanges in local currency, unless stated otherwise.

Note: Analyst consensus price targets were sourced from 4-traders.com. Note in some cases 4-traders had no analysts targets.

Note: Great Lakes Graphite is planning to change their business name to New Energy Metals & Minerals Inc., and to focus more on supplying existing and emerging battery markets with new energy metals.

The producers

The only graphite producer included is Syrah Resources which is down 36% from its 52 week high.

Upside to analyst's target for Syrah Resources is 47%.

Syrah Resources has only recently commenced production, has an industry lowest cost of production, will increase graphite production in 2018 (to ~170kt) and 2019 (to ~250-300ktpa), and will also look to grow a vanadium business from their existing resource. Given the graphite and vanadium demand, and strong recent price gains this maybe the last time we see Syrah Resources trading so cheaply (currently AUD 3.18).

You can read my past articles on Syrah Resources here and here.

The non-producers

The non-producers with the largest falls from their 52 week highs were Alabama Graphite (down 73%), Ceylon Graphite (down 60%), and Focus Graphite (down 54%).

In term of upside to reach analyst price targets the standouts are Triton Minerals (200%), Nouveau Monde Graphite (119%), and Mason Graphite (73%). Note many don't yet have analyst targets.

My top pick of the non-producers is Mason Graphite due to their quality high grade resource. Magnis Resources, Nouveau Monde Graphite, and Kibaran Resources also have appeal, as does Triton Minerals.

The graphite miners have fallen quite heavily the past few months. The group I covered here have falls from their 52 week highs ranging from 15%-73%.

This is at odds with a rising graphite price and booming demand from the battery sector. As with the other EV metals (lithium, cobalt and nickel) it is really mostly a sentiment swing and should be short term, followed by a nice rebound.

Of course the steel market will remain an important driver of graphite prices, but the booming battery market (driven by EVs) will have a significant effect on graphite - less than cobalt and lithium, but more than nickel and copper.

My view with graphite is to pick the top tier players with quality resources and low costs of production. My top picks right now are Syrah Resources and Mason Graphite. The other near term producers such as Kibaran Resources and SRG Graphite can also do well. For speculative graphite plays with higher risk and reward I like Triton Minerals and Nouveau Monde Graphite.

As usual all comments are welcome.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

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This article was written by

The Trend Investing group includes qualified financial personnel with a Graduate Diploma in Applied Finance and Investment (similar to CFA) and well over 20 years of professional experience in financial markets. Trend Investing searches the globe for great investments with a focus on "trend investing" themes. Some focus trends include electric vehicles and the lithium/cobalt/graphite/nickel/copper/vanadium miners, battery and plastics recycling, the online data boom, 5G, IoTs, AI, cloud computing, renewable energy, energy storage etc. Trend Investing was recently selected as the leading expert consultancy for a U.S government project on the EV supply chain and to the Board of Directors of the Critical Minerals Institute.

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Analyst’s Disclosure: I am/we are long SYRAH RESOURCES (ASX:SYR), KIBARAN RESOURCES (ASX:KNL), Triton Minerals [ASX:TON]. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. The information in this article is general in nature and should not be relied upon as financial advice.

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