RE: Will NGC make it? Vertical integration will be key to graphite success
As with rare earths, so with graphite. The key to success will be vertical integration - and many of the projects will never make it to production. But - and here’s the upside - the successful players will land on their feet, providing a product the world needs (and will keep on needing in greater quantities as technology advances).
That’s the bottom line of a comprehensive report on the sector from Montreal-base Industrial Alliance Securities (IA).
But, again, as with rare earths, so with graphite in hoe this rush was all started by China, the company dominating production but keen to preserve its own resources and downstream processing. Chinese export regulations on graphite have triggered a price increase, providing ideal conditions for the graphite sector and attracting exploration companies.
“Our analysis of the entire sector confirms the supply shortage scenario highly speculated by the industry and suggests that a minimum of four new mines and as many as 23 will be needed to go into production outside of India and China between now and 2020 to cope with the growth in demand,” the report states.
IA points out that the last time a large number of graphite projects were being explored or developed was during the 1990s. Since then, the best deposits were either acquired by the two big European speciality metals groups - Paris-based Imerys or Germany’s GK Graphite - or by state-owned companies. Smaller deposits were abandoned due to falling prices and several mines mothballed - including the Uley mine in South Australia which is now on the verge of producing once again.
“The class of 2012 will face a similar destiny as we do not expect the majority of the junior exploration companies to take their deposits into production,” the IA report states. “Only the best deposits, if discovered in the beginning of the demand growth cycle, have the potential to get developed by the actual exploration company.”
Note that last phrase: “by the actual development company”. That is not saying that particular deposits won’t get developed, only that it could be someone else doing the developing. This is because - like rare earths - “the key to development will be vertical integration through graphite-upgrading although it will require a competent management team with the industry knowledge and experience”.
Otherwise, it will be left to the likes of Imerys and GK Graphite - or we may see major downstream producers such as Superior Graphite or Asbury Carbons return to mining.
Then there are the two big Asian giants. IA expects a push from companies in China and India as both those nations look to secure further supply. We have, of course, seen Chinese companies engage in buying projects abroad or taking stakes in foreign miners across a wide range of commodities; with India this is far more nascent, with much of the more advanced activity has been in the coal sector.
IA says the graphite sector should be partitioned into eight categories - of these, 69 projects are in the earliest-stage sector, target generation. This includes projects that are undergoing historic data compilation. Next is early stage exploration, and which includes 22 projects. Then we’re down to just two projects in Stage III, resources definition; one step up at advanced exploration are three companies covering four projects. One is left by the time we climb to the second-highest rung, pre-feasibility and bankable feasibility, while the pinnacle - development - is empty.
IA believes investor interest in early stage graphite projects reached a saturation point in April.