Pinnacle Activity Ticker
Critical Metals Report on Graphite
Investing in Graphite's Growth: Kevin Puil
TICKERS: FMS, MEGA, NGC; NGPHF, SGH, SER
Source: Brian Sylvester of The Critical Metals Report (4/10/12)
As the boundaries of technology continually expand, so does the demand for graphite. With uses developing and supply mainly controlled by China, prices for graphite should continue to climb, says Kevin Puil, senior analyst for the Encompass Fund and portfolio manager with San Francisco-based Malcolm H. Gissen & Associates. In this exclusive interview with The Critical Metals Report, Puil shares some junior miners set to soar alongside demand.
COMPANIES MENTIONED: FOCUS METALS INC. - MEGA GRAPHITE INC. - NORTHERN GRAPHITE CORPORATION - STANDARD GRAPHITE CORP. - STRATEGIC ENERGY RESOURCES LTD.
The Critical Metals Report: Over the last two to three years, your firm has had a lot of success with small-cap mining equities, especially those involving rare earth elements (REEs). Are you hoping to achieve similar success with small-cap graphite equities?
Kevin Puil: I am. Since I joined the firm three years ago, I've always tried to find great opportunities and put our fund and clients in a position to benefit from them. This is definitely the case with graphite companies.
TCMR: China controls the majority of the world's graphite supply and has implemented export quotas and duties. This has caused the price of graphite to more than double in some cases. Do you see more price pressure ahead?
KP: China definitely has a stranglehold on the global graphite supply, producing nearly 70% of the world's supply. Its 20% export duty, 17% value added tax and export licensing system should further tighten supply and drive prices higher.
TCMR: How do graphite plays differ from rare earth plays?
KP: Rare earths often involve large capital expenditure (capex) requirements and complex metallurgy. Graphite, on the other hand, is relatively simple to mine. It's an excellent electrical and heat conductor and shows up well on electromagnetic surveys, which offer an inexpensive way to explore for deposits. Most flake and amorphous graphite is found near the surface, reducing the risk and uncertainty involved in drilling deep deposits. This also shortens the time from discovery to production. A good deal of flake and amorphous graphite is mined using the open-pit method, which is also comparatively inexpensive. The majority of graphite is crushed, ground and floated, as opposed to rare earths, which are often refractory and need to be roasted at a high cost.
TCMR: What are the primary uses for graphite in manufacturing?
KP: Amorphous and lump graphite has long been used in refractories, steel, brake linings, lubricants and pencils. However, a lot of attention these days is being placed on flake graphite, which is sought after for its applications in new technologies like lithium-ion batteries, fuel cells, solar panels, pebble bed nuclear reactors and vanadium redox batteries. Less than half of the graphite produced is of the flake variety, and this, coupled with the increased demand for this essential mineral, has seen flake graphite command a much higher price than fine-mesh or amorphous graphite.
TCMR: Will new technologies drive growth in the graphite industry?
KP: Absolutely. Currently, there is no substitute for graphite in many technologies, such as lithium-ion batteries. Between cell phones, tablets, laptops, hybrid and electric cars, all of which require a lot of graphite, the industry is growing at 25—30% annually. Large-scale uses include hybrid cars, which can require up to 40 pounds of graphite for the battery alone, while the new Boeing 787 Dreamliner's fuselage is made from a graphite composite. Vanadium redox batteries are used to store energy generated from wind turbines and solar panels and require up to 300 tons (t) of graphite per 1,000 megawatts of storage. This is all flake graphite. In addition, pebble bed nuclear reactors, which are slated to come online this decade, require 3,000 t of graphite to start and 1,000 t a year to operate.
TCMR: There are lots of misconceptions about graphite. Fact or myth? Natural graphite is more expensive than synthetic graphite.
KP: Myth. Synthetic graphite is more expensive than natural.
TCMR: Fact or myth? Graphite is used more in steel manufacturing than in batteries.
KP: That is a fact.
TCMR: But batteries use more of the large-flake graphite.
KP: That's right.
TCMR: Fact or myth? Large-flake graphite deposits generally make for low-cost mines.
KP: That's a fact. Most of the large-flake graphite deposits are found at or near surface and are amenable to open-pit mining.
TCMR: Fact or myth: Graphite flake size is more important than carbon content.
KP: They're both important. Most high-tech manufacturers would prefer to use high-grade (94–99% graphitic carbon), large-flake (+80 mesh) graphite for their products, so they're equally important.
TCMR: Fact or myth? Graphite metallurgy is less important than it is with rare earth deposits.
KP: Graphite metallurgy is simpler to deal with than rare earths. It's equally important, but less complex.
TCMR: Do you think we're going to see an explosion in graphite-focused equities listings, as we did with REEs?
KP: I don't think there will be the same explosion of listings in graphite as there was in the REE space, but there will definitely be more as the public becomes aware of the importance of graphite. However, there aren't as many potential deposits out there to justify dozens of new companies.
TCMR: What are some key factors that make Malcolm H. Gissen & Associates write a check to a small-cap graphite company seeking investors?
KP: I have a personal checklist of factors I consider before investing in any exploration or mining company. Among others, some of them include: Is management good? Are they experienced? Are they capable of developing this project? The deposit has got to have good grade and quality. I need to see good infrastructure close by or at a reasonable capex to develop. Permitting has to be relatively easy. Bottom line: Is it mineable? Do the economics make sense?
TCMR: What are some graphite equities that meet those criteria?
KP: I've taken a position in a couple and am in the process of evaluating a few more. Northern Graphite Corp. (NGC:TSX; NGPHF:OTCQX) is definitely one of the top companies on my list. It has an excellent management team. Its entire Bissett Creek deposit in Ontario is flake graphite, which sets it apart from a lot of the deposits out there. It has great infrastructure nearby, including power, gas, roads and a small community. It's good, high-quality flake graphite that is going to be open pittable. Its operating costs aren't going to be on the low-end, but its flake size and purity should ensure that it will fetch a very high price per ton for its concentrate, making for a very profitable operation. I'm awaiting its feasibility study, but anticipate that it could be ready to begin construction next year.
TCMR: Do you expect to see graphite offtake agreements, as has taken place in the rare earth space?
KP: Yes; because graphite doesn't trade on an exchange, like copper futures or gold, end consumers must secure graphite feed from a producing mine. I absolutely think that you'll see offtake agreements in the graphite space.
TCMR: What about Northern Graphite? Given its success in the market to date, is an offtake agreement probable?
KP: Sure, it could structure an offtake agreement. Because there are no operating mines in the U.S. and Northern Graphite is close to lines of transportation and infrastructure, I could see the company having an offtake agreement with a U.S. company and easily shipping the concentrate to it. That wouldn't surprise me at all.
I also like Strategic Energy Resources Ltd. (SER:ASX), a junior Australian resource company with mineral and oil and gas projects. One of its projects is the Uley graphite deposit, one of the largest graphite deposits in the world. It was a previously producing mine that was shut down in about 1993 due to weak graphite prices. It's 100% flake graphite and open pittable; in fact, it's more of an earth-moving operation than a mining operation. It has a plant on site that will probably have to be updated a little bit, but Strategic could be up and running next year. The permits are in place. It has great infrastructure. It's going to be another low-cost, high-margin operation.
TCMR: What do you think of its deal with Mega Graphite Inc. (MEGA)?
KP: I think it's a good deal. Strategic is going to spin off 80% of its graphite deposit to a separate, publicly traded vehicle and retain 20%. Mega will provide offtakes, marketing, engineering expertise and access to capital markets for the new entity.
TCMR: What about on the exploration side?
KP: On the exploration side, I like Standard Graphite Corp. (SGH:TSX.V). It has a large portfolio of 12 graphite projects in Ontario and Québec, some of which are adjacent to the past-producing Black Donald graphite mine and Northern Graphite's Bissett Creek project. It just completed a successful airborne electromagnetic survey on a large portion of the Québec property and got back very favorable results–some of the properties lit up like a Christmas tree.
Its management team is probably one of the only graphite exploration companies out there with a head geologist who's got graphite exploration experience. He discovered Focus Metals Inc.'s (FMS:TSX.V) Lac Knife graphite deposit. In addition, the past president of Hathor Exploration, which was recently purchased by Rio Tinto (RIO:NYSE; RIO:ASX), also joined Standard. It has good projects, decent board members, good management and a favorable share structure.
TCMR: Does it need to focus on one property specifically?
KP: Yes, it has several potential flagship properties. It's going to have to narrow that down and choose which property to go with. I imagine that it will develop a couple and sell the others off. But as it stands, Standard probably has the best pipeline of properties out of any I've seen.
TCMR: What's another interesting name?
KP: I don't own it, but another one that I like is Focus Metals, which has the high-grade Lac Knife deposit in Québec. It's a very large-flake graphite deposit. It could easily be in production within the next 18 months or so.
TCMR: Focus is an interesting title for the company given that it has REE, iron ore, copper-gold and graphite projects. Is it difficult for companies invested in three different commodities to communicate its story to the market?
KP: Well, that's one of the reasons I don't own it as of yet. It is also focused on graphene, a single layer of graphite, which is highly conductive and stronger than steel. Unfortunately, it's not commercially economic to produce and use yet.
TCMR: It may end up spinning out at least one of those plays into some other company as well. I think when most people think about Focus, up until very recently, they thought of it as an REE play.
KP: I certainly did before it came out with graphite. It has a promising REE deposit in Quebec that it is developing with its partner, SOQUEM Inc. (private).
TCMR: What sort of advice would you offer an investor who is new to the graphite space?
KP: The advice I would give new investors is to do your due diligence. As with any other mining company, make sure that it has a decent deposit with all the right ingredients: infrastructure, management, grade, purity, that it's able to be mined, that it's economic and that it can be a standalone mine if it isn't acquired. Keep in mind, only 2–3% of junior exploration companies actually become mines.
TCMR: Thanks for your time.
KP: You're welcome, anytime.
Kevin Puil has more than 15 years' experience in the investment management business. He is a portfolio manager at Malcolm H. Gissen & Associates and is the senior analyst at the Encompass Fund in San Francisco. He spent the majority of his career working in Canada before relocating to California. He studied economics at the University of Victoria and the University of British Columbia and is a Chartered Financial Analyst.