Graphite stocks
BEAT THE MARKET
INVESTMENT NEWSLETTER
Bringing you undervalued, high growth opportunities...
The Great Graphite Rush of 2012
Graphite prices have yet to go critical in 2012 remaining stable since late last year, but the same can’t be said for the mining stocks as Graphite Fever has gripped the mining community. New acquisitions are announced on a weekly basis and share prices of almost all the companies in this sector are taking off. If price action is any indication that there is growing interest in this sector, one only has to look as far as the share prices of the companies in the sector doubling, tripling and quadrupling in 6 weeks. The Graphite theme has started the year with a bang and will continue to gain traction and momentum as all the household names in the sector are moving at a torrid pace and will continue to do so for the next 18 months and most likely continue out on a 5 year cycle.
Opportunities like a rebirth of a sector don’t come around every day and to be in on the ground floor of this BOOM is something special and you should consider yourself lucky for you early adopters. The last sector that saw this type of excitement and share price appreciation was uranium. Although even uranium didn’t get off to the bang that graphite has in the last 6 weeks. One reason for this is that developing a graphite mine, no easy task in itself is so much easier than uranium or even lithium where many companies put a lot of it back in the ground because the real market could not support all the companies with plans to produce. Not so in the Graphite industry that is both 10 times larger than lithium and uranium markets with unprecedented growth expected not seen in either. If the graphite market doubles, that is a factor of 10 to the lithium market doubling or the uranium market doubling. Meaning all things constant, 10 times the mines will be needed when compared to either lithium or uranium. This long neglected sector that hasn’t seen any investment since Ballard in the early 2000’s has a long way to come back. You can’t even really call this mining sector with not one Canadian public company actually mining graphite.
Gentlemen start your engines, pick your favorite stocks or a basket of them and outperform all your friends who still haven’t heard of graphite or the BOOM that is happening in this sector. A year ago 1 in 20 had heard about graphite, now maybe 4 in 20 have heard about. There is still a lot of people to tell this story too. If you got graphite in your portfolio, it is going to outperform anything else this year as it is clear there is need for mines in this sector.
Further evidence is the amount of companies in the sector. Last summer there were 2… now there are at least 14 and counting.
Trading summer of 2011
1. Northern Graphite NGC-V
2. Focus Metals FMS-V
Acquired projects and actively exploring
3. Strike Graphite SRK-V
4. Standard Graphite (formerly Orocan) SGH-V
5. Lomiko Metals LMR-V
6. Solace Resources SOR-V
7. Cedar Mountain CED-V
8. Energizer Resources EGZ-T
9. Soldi Ventures SOV-V
10. GeoMega GMA-V
11. Greenlight Resources GR-V
Companies currently not trading or listed…
12. Mega Graphite (IPO March)
13. Tasex Capital (Flinders) TAX.p-V
14. High North (Canada Graphite) HN.p-V (IPO April)
There are companies that I have missed, but you can’t keep track of them all. NGC and FMS will remain the industry leaders while Standard Graphite, Lomiko, Cedar Mountain, Energizer, Solace and Strike are my early favorites in the next group down which is 2/3 of them. At this point in time it is hard to differentiate one from the other as it is early and all the projects now are similar to each other and are the best of the bunch and on par or close to as companies like Focus and Northern Graphite. People keep asking me graphite tock is better? They are all good and any one of these companies in this list will be at least 100% high by next year, even the companies that are still not trading.
Mega, Tasex and High North are all big projects that require capital so are all holding off while companies like Lomiko, Strike, Cedar Mountain and Standard Graphite play catch up. Once these companies are valued between $20M to $30M market cap, the environment for larger capital projects becomes more favorable for the market to support. The market will not buy the more expensive valuations that these projects require because these projects still have risk and there is still too much perceived value with other companies. Why would you buy into a $20M placement value with a project that has less work when you can buy a project that has the same mining potential and a similar risk profile for $5M? You don’t. You buy the cheaper company because it has greater investment potential.
Northern Graphite NGC-V $2.00 / $76M market cap
January 1st 2012…
.92 +$1.08 / 117%
NGC was
.92 when I first mailed out the New Year’s letter mentioning graphite as a top theme for the year. It closed $2 today and looks like NGC is heading for $3, an important mark for any junior looking for money and a fast-track mine. NGC announced positive pilot plant test results with initial recoveries between 90.5% and 94.4% at a 94.5% purity or greater. What is important to note is that 80% of Northern Graphite’s production is +80 mesh with 96.7% purity and 50% of NGC production is +48 mesh achieving 97.7% purity. Purity is very important in lithium ion batteries which NGC production is of very high quality and will require little upgrading.
Another major announcement the company made in early February was that NGC entered into a partnership withGrafen Chemical Industries which has developed a process to make Graphene from Bisset Creek’s +48 and +32 mesh product. Signing this deal with Grafen reinforces that large fake mineralization is the premium product in the industry, not only for Li ion batteries but for Graphene production.
Focus Metals FMS-V $1.04 / $88M market cap
January 1st 2012…
.63 +
.41 / 65%
FMS has had to deal with a little bit of disappointment since the beginning of the year. Lac Knife is not as good as it first appears. Information they released in a technical report showed that 53% of the graphite at Lac Knife is uneconomic. It is probably why the company staked more property in southwestern Quebec because their 15% deposit became a 7% deposit over night with less distribution of large flake. With companies like Lomiko sitting on 28 meter intervals at 8% and with better mineralization in a known large flake camp, there could be better opportunities out there than Lac Knife.
Lac Knife still looks like it is more economical than Bisset Creek and will provide higher returns per tonne… but the two companies are much more comparable. Certainly with Northern Graphite being closer to production, have a pilot plant running and high quality mineralization with top notch management, it deserves to be valued closer to FMS than at the start of the year. When a lot of people got those numbers from the filed report o Sedar, they went straight to NGC.
What it should highlight is that Lomiko’s potential with Quatre Milles could be a project with similar number s to Lac Knife now that we now Lac Knife is really a 7% grade and not 15%.
Strike Graphite SRK-V
.285 / $11M market cap
January 1st 2012…
.115 +
.17 / 148%
Strike Graphite has done what Strike does best. Raise money at cheap prices and grow the market cap by issuing shares. With the recent placement at
.175 and the shares issued for projects in Tanzania and the Strike Graphite projects. These guys have done a great job of running up the shares on the company is closing in on 70M fully diluted with now just starting exploration on the projects. Jody Darouge is running the projects at SRK meaning they have a competent technical consultant but the share structure is already damaged with this company and SRK will always have to churn trough shares. The company also dragged their feet on basic exploration procedures which should have been done as diligence. The brokers are in SRK really heavy so it is churning at
.30 not gaining any momentum because the brokers are selling their warrants at a profit.
SRK also announced the acquisition of the Wagon Graphite Project which is already a better project than Deep Bay East because of the camp and style of mineralization. It is located15km east of Timcal. 15 samples ranged from 0.57% to 18.13% Cgr with flake sizes recorded up to 3mm in diameter. The property has tons of potential being another Graphicor project back in the day and covers 18km of strike length of formations. Until there are some holes plugged into Simon Lake and mag surveys run, Simon Lake remains a wild card. No one in their right mind is going to build a mine on someone’s visual estimates from the 70’s.
Standard Graphite SGH-V
.59 / $10M market cap
January 1st 2012…
.29 +
.30 / 103%
Standard Graphite has gone about methodically doing their business staking land and running EM surveys right out of the gate. Something SRK should have been doing 4 months ago. With the latest information coming back from the little Bryan Property it looks like it might yield up some good exploration results. The EM survey yielded two conductors several kilometers long with the second conductor 1km north of the Little Bryan mine that appears very continuous. Considering high grade material was mined on this site, the discovery of a graphitic trend in silicates/marble rocks bodes well for exploration on the project.
Solace Resources SOR-V
.28 / $3.7M market cap
January 1st 2012…
.10 +
.18 / 180%
Solace finally announced acquisition of the Monpellier graphite project in Quebec. The exposed outcrop was sampled over a 7 meter width with individual grades ranging from 0.84% to 14.4% Cgr. I am told SOR is following the Standard Graphite model and Monpellier is the first of 4 acquisitions. Solace is now the cheapest of the bunch and is a company that will trade up very fast with a low float and quality graphite projects being vended into the company.
Lomiko Metals LMR-V
.115 / $6.4M
January 1st 2012…
.04 +
.075 / 188%
Lomiko has finished correcting and is about to close the financing and start the next leg up. The company has the highest value project of any of the juniors and is still one of the cheapest. This company should have a similar valuation to SRK or SGH and has the inside track to have a FMS/NGC type project. It has by far the most historical work on any project. LMR recently announced they will be completing a 43-101 with the historical work which will give investors a good idea of what Quatre Milles is all about. I would not expect a resource in the 43-101, but the historical work will be used in the resource report once the work is confirmed accurate. This will give LMR a good base to work off and a head start putting a resource together on their property in a cost effective manner. Technically Lomiko looks like it is ready to breakout after hitting a
.13 and consolidating for a two weeks.
Lomiko has tons of news drivers including…
- 43-101 report
- Drilling announcement
- Closing of the financing
- Expanding the technical team
On top of the news drivers there are two other important fundamentals… our big insider is almost done selling and is getting more insignificant by the day and PDAC is 10 days away! Technically LMR is primed to break out and run right into PDAC and out the other side. All graphite stocks look like they will continue to run at least until the end of March/April period.
*Please note that market caps do not take in to account recent financings or any outstanding warrants.
In other events…
Energizer Resources EGZ-T
.295 makes a very big discovery in Madagascar at Green Giant. Early indications are that they are on to a very large graphite camp. 118.6m @ 6.24% Cgr in drill core and 106m@ 7.11% in trench sampling show a very large high grading deposit. Energizer also signed a deal with DRA Mineral Projects to develop Green Giant. This is one that will be a mine in the next 3 to 5 years.
Cedar Mountain Exploration CED-V
.23 acquires the Graphite Creek Project in Alaska. This project has 80% large flake distribution and grades between 5% and 10%. It has the potential for a 200Mt graphite deposit. Cedar Mountain is another early contender that is ideally located close to tidewater and easily shipped to Japan or even China.
Soldi Ventures SOV-V
.155 acquired the Lochaber Graphite project in Quebec that has thin widths but was visually estimated to grade very high. They recently made another acquisition acquiring the Cameron Graphite Project in Quebec which appears a little better at 8 meter widths and grades of up to 15%. A bulk sample was conducted in 1965 with final test runs producing a 97.4% Carbon purity with 990.15% recoveries. On top of that +48 mesh recovery was greater than 50% in different crushing scenarios. The Cameron Graphite project could be a real winner in Quebec.
Graphene is exciting… but it’s Lithium Ion Battery Demand that Will Drive the Next 3-5 years.
What makes this even more exciting is graphite demand is clearly tied to peak oil and gasoline prices over the next decade. The drive to alternative energy vehicles is the key link to many of these companies and their hopes to mine or be bought out or secure off take deals. Without this incremental demand coming online the next 2- 5 years… this theme is dead. As gasoline prices continue to edge higher in this age of inflation, consumers will be forced to adopt affordable alternative fuel vehicles and much faster rates than anticipated. Adoption rates are the wild card in the demand equation and choke supply because of not enough of the right type of graphite available.
Graphene will play a more important role in graphite demand from 5 to 15 years from now while getting mines into production to support electric/hybrid vehicle mass production rollout over the next 3 years is the priority. Just from Tesla’s Model X and S they could be selling 30,000 to 40,000 cars per year by 2014 which is a quarter of the total output of Northern Graphite. Hyundai’s hybrids use the li ion battery. Every auto manufacturer is forced with the same choice and is going down the road of electric and hybrid vehicles. If gas prices go to $5 a gallon in the US over the next 18 months, you will see much faster adoption rates than anyone anticipated.
This is just the start of a major bull market in a sector that didn’t exist 18 months ago. At the end of this run 5 years from now some of these stocks will have gone up 1,000% to 10,000%. Some say this is like the beginning of the Uranium boom while others say it is like the Lithium boom. I say it is better than both because this is a sector that needs mines constructed. This is a sector where building a mine isn’t impossible. This is a sector where there is real incremental demand from several angles and is a sector that has no companies and no major mines outside of China. This is a sector where the returns are off the chart for the minimal dollars required and has generated a lot of excitement about chasing pencil lead. The fundamentals in this sector from mine to pencil suggested that the perfect storm is brewing in graphite and the early birds in this sector will get the worms.
Note… early birds and worms are plural.
Out of the 14 companies listed above… half may be mines in ten years. Those are odds that just don’t happen very often in mining. So are these prices rises justified? Every single penny is justified and my gut tells me graphite stocks will be in high demand all year for several years. Themes just don’t come around lie this very often. The last one was Uranium 8 or 9 years ago. There might not be another hot theme like this for another ten years. Don’t hum and haw about graphite and watch these stocks go up. Join the party and make some money!
Christopher Skidmore
Beat the Market Stock Picks
Today’s Notes:
1. Update from the Graphite Front Lines: Chris Berry MBA
1) Takeaways from the Graphite Express Conference
2) Our Thoughts On The Evolution Of The Graphite Market
Last Thursday, I was pleased to deliver the keynote address at the Graphite Express conference in
Vancouver. This conference was the brainchild of Mr. Robert Bick of Resourceclips.com and Mr.
Dave Hodge of Zimtu Capital. Their teams deserve a great deal of credit for planning and executing
a first-rate conference featuring eight emerging graphite junior mining discovery companies in
Canada while providing perspective on this important material to an audience of over 400 attendees.
It was a pleasure to participate and great to see so many familiar faces. Presenting and represented
companies were:
Northern Graphite (NGC: TSX),
Focus Metals (FMS: TSX),
Standard Graphite (SGH: TSXV),
Cedar Mountain (CED: TSXV),
Lomiko Metals (LMR: TSXV),
Strike Graphite (SRK: TSXV),
Solace Resources (SOR: TSXV) Solace will soon change its name to First Graphite.
Zimtu Capital (ZC: TSXV)
The first and most obvious conclusion is that the graphite sector is hot – white hot. Below is an index
I have constructed of nine junior mining graphite explorers in Canada and Australia. It is equalweighted, and demonstrates the old trading truism that “the trend is your friend.” This new trend
appears to have been discovered by investors. Our Discovery Investing Scoreboard (DiS) is
producing output indicating an increased interest in graphite juniors with a portfolio Crowd Score of
5.26 (out of10). Most important, this is a rank score that has increased concurrently with interest in
the graphite space.
MORNING NOTES Monday February 27, 2012
Michael A. Berry, Ph.D.MORNING NOTES 2 OF 6 2/27/2012
Source: Bloomberg
We believe that the graphite Discovery story is evolving differently and more positively than other
stories of recent years (rare earths, lithium and uranium for example). This was the focus of my
keynote which I summarize below and which was recorded and will be available on YouTube shortly.
A large part of the Discovery Investing thesis involves establishing a solid long-term macro
perspective which aids in determining if a given investment theme (in this case graphite) is
sustainable or simply another overreaction, a flash in the pan. One thing we are always cautious
about when we see huge short-term price gains in Discovery companies is whether this is due to initial
speculation or there is a truly transformative process in place vis a vis Schumpeter
i
. Indeed this is
factor three of our ten factor discovery model.
Junior companies exploring for and developing graphite resources appear to be benefitting from both
possibilities. The themes we see bringing graphite onto the investor’s radar screen include the need
for cheap and reliable electricity, battery technology, the rising quality of life in the emerging world,
resource nationalism, “game changing” research from R&D labs on graphene, and security of supply.
We have discussed the first four themes in recent years in Morning Notes and won’t belabor them
here. However, the theme of security of supply is one which I think bears repeating in the case of
graphite. It is more important in the graphite sector than the first four.
Supply and Demand Dynamics
Graphite is a material different from most others in that its purity and size is of paramount
importance to end users. These users have specific requirements for the graphite they use to
manufacture end products such as refractories and lithium-ion batteries. Simply mining graphite and
shipping it to a battery maker is a non-starter. This end use demands a level of technical and
metallurgical expertise similar to that evident in the rare earth space. Therefore an end user of
graphite such as Toyota or LG Chem cannot be reliant on a single provider of the material as this puts
its entire value chain at risk.
Using Chris Berry’s
equally-weighted graphite
index (consisting of 9
Incubator companies)
constructed from
Bloomberg data, you can
observe the explosive
interest, and price
increases in this space
since mid-December 2011.MORNING NOTES 3 OF 6 2/27/2012
It is well known that China controls over 70% of global graphite production (a market of roughly 1.2
million tonnes in 2011) and is instituting a system of export quotas and a value added tax of 17% to
discourage export of this “strategic” material and instead use it to build out their nascent value chains.
With no spot or forward market for graphite, graphite explorers / producers and end users must work
in tandem and off- take agreements are the rule of the day. This is a major differentiator between
graphite and other extractive resources such as copper for example. Investors should bear this risk in
mind when choosing where to allocate their investment capital.
We like the fact that graphite maintains what I call “twin avenues of demand” - essentially “today’s”
uses and then those of “tomorrow.” These comprise two of several powerful demand legs to the
graphite “stool.”
Today’s uses include crucibles/refractories (33% of current demand), steelmaking (26%), brake
linings (7%), batteries (5%) and other uses (29%). If we assume that graphite demand grows in line
with global GDP growth (World Bank estimates approximately 5%) to 2020, the graphite market will
grow to 1.86 million tonnes. This assumes 5% growth in the global market but does not assume
expected larger growth rates in “tomorrow’s” uses for graphite including batteries, hydrogen fuel cells,
solar cells, and pebble bed nuclear reactors as well as many new applications using graphene in the
2030 to 2050 timeframe.
In our research we have read of growth expectations for the lithium-ion battery market going forward
of as much as 25% per year. Personally, I think these may be aggressive growth rate assumptions, but
I am willing to accept them as feasible for now. Considering the amount of high purity, large flake
graphite that is used in batteries today and compounding that amount annually by 25% to 2020
would require 327,000 tonnes of this material by 2020 – for lithium-ion batteries alone.
Regarding battery production capacity, there are many battery manufacturers worldwide. Recently,
GS Yuasa, LG Chem, and Liotech have committed to spend US $350 million, US $303 million, and US
$420 million respectively on increasing battery manufacturing capacity and building out initial
capacity (in the case of Liotech). Clearly the battery industry is making a bullish bet on an electrified
future – one that puts graphite supply and demand squarely in its crosshairs.
We have seen estimates that the hydrogen fuel cell market could consume all of today’s graphite
supply in coming years if fuel cell technology is eventually commercialized. We think this is unlikely
due to the energy density issues associated with fuel cells. Nevertheless future fuel cell demand must
be considered when factoring in future graphite demand.
Regarding small modular pebble bed nuclear reactors (PBNRs), they require a significant graphite
component graphite in their construction and in the pebbles (which are actually the size of tennis
balls – see the picture below) which must be replaced on an ongoing basis. China is leading the way in
research and development of these reactors and plans to build 30 PBNR reactors by 2020.
A single PBNR will consume 300 tonnes of graphite at commissioning and up to 100 tonnes per year
to continue to operate. MORNING NOTES 4 OF 6 2/27/2012
Source: NY Times
There are additional many applications which use graphite such as the vanadium redox battery and
solar panels. So taking into account increases in forecast demand for graphite from “tomorrow’s”
uses, should they come to fruition, a likely shortage of graphite looms in the future as the world’s
largest supplier, China, curtails exports to feed her own industries. This is compounded by a lack of
capacity that currently exists in North America. Under these circumstances it is no wonder that the
graphite Discovery space is sprouting new Junior mining entrants like the early Spring flowers here in
New York.
Given that the graphite market is a large market relative to the other metals and materials it is
associated with, we are convinced that there is room in this market for more than a few junior
explorers that host sizable, scalable resources of large flake graphite and those with experienced
management and simple metallurgy.
We believe that our “back-of-the-envelope” mathematics concerning increasing global demand
confirms our thesis. Additionally, of the graphite juniors today, we are only aware of Northern
Graphite (19,000 tons / year graphite production estimated by 2013-2014), Focus Metals (20,000 tpy
by 2013-2014), Flinders Resources (13,000 tpy capacity but no explicit production plans), and Mega
Graphite (projection of 27,000 tpy from the Uley mine in coming years) with definitive and near term
plans to bring additional supply to the marketplace in the near term. The graphite production from
these companies comprises all types, not only the highly desired large flake, high purity graphite.
This fact indicates that a shortage in graphite supply looms assuming that our growth projections are
accurate.
We remain bullish on the graphite sector and so it seems does our investorate. We are as always
cautious of initial explosives price appreciations and we encourage you to be cautious and perform
your due diligence. We observed similar price dynamics in uranium, lithium and rare earths elements
in the past decade. Nevertheless the graphite space is most interesting and Discovery Investors must
take note.MORNING NOTES 5 OF 6 2/27/2012
2011 Production (est.)
Graphite 1.2 M t
Copper 16.2 M t
Manganese 14 M t
Rare Earth Oxides 120,000 t
Cobalt 98,000 t
Vanadium 60,000 t
Lithium 34,000 t
Silver 23,800 t
Inside China, the need for graphite is clear. When China’s 12th Five Year Plan was released in 2011, it
was widely considered to be the “greenest” plan in Chinese history with commitments to spend
approximately US$634 billion in seven strategic industries involving energy generation and
efficiency. These industries and the associated research and development will require graphite
amongst other materials going forward. This paints an optimistic picture of future demand. As China
grows more focused on building out her industrial, consumer, and social base, we expect to see higher
metals and materials prices absent plentiful supply outside the Middle Kingdom.
Finally, I am a believer that innovation and discovery in materials science will drive even higher
demand for graphite. During my speech in Vancouver I made a special mention of graphene, an
allotrope of carbon which is one atom thick and an example of materials science research that will
have explosive consequences for demand in various current-day and new applications.
Graphene has been extensively tested in labs but has not yet been adopted widely on a commercial
basis. This material is 200 to 300 times stronger than steel and is also one of the lightest materials
known to man. You can bet that any manufacturer or industrial conglomerate has their eyes on R&D
labs producing graphene research as this wonder material could revolutionize manufacturing and
associated costs.
As examples, graphene could replace silicon in the manufacture of microchips. It conducts electricity
and can bypass the challenges of making smaller and faster chips. Graphene could replace silver inks
for use in solar panels as graphene ink can be sprayed on the panels to make transparent electrodes.
Because graphene can conduct electricity extremely efficiently and generate less heat, the potential
also exists for the material to replace copper in some applications.
I’m not predicting any of these changes as certainties. It is early days for graphene and associated
research, but this is the essence of Discovery Investing and knowledge of these developments can help
formulate your longer-term investment strategy. It may well be a decade before we see widespread
uses of graphene, but it is definitely coming.
We are believers that macro themes such as resource nationalism, a growing global middle class, the
need for reliable and affordable electricity, investment into intellectual property discovery, and
security of supply will be the drivers of demand for materials such as graphite.
The size of the graphite market relative to other
base, specialty, and precious/industrial metalsMORNING NOTES 6 OF 6 2/27/2012
The current supply and demand fundamentals support our thesis and we will keep a close eye on this
sector going forward. Please stay tuned to our Discovery Investing Scoreboard revisions to the
graphite space as this sector picks up steam.
The material herein is for informational purposes only and is not intended to and does not constitute the rendering of investment advice or the
solicitation of an offer to buy securities. The foregoing discussion contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 (The Act). In particular when used in the preceding discussion the words “plan,” confident that,
believe, scheduled, expect, or intend to, and similar conditional expressions are intended to identify forward-looking statements subject to the
safe harbor created by the ACT. Such statements are subject to certain risks and uncertainties and actual results could differ materially from
those expressed in any of the forward looking statements. Such risks and uncertainties include, but are not limited to future events and
financial performance of the company which are inherently uncertain and actual events and / or results may differ materially. In addition we
may review investments that are not registered in the U.S. We own shares in Northern Graphite, Strike Graphite and Standard Graphite. We