It hasn’t exactly been the sexiest thing in the commodities universe.
But analysts say a combination of factors is sparking renewed interest in graphite, an industrial mineral that is normally associated with steel production, lead pencils and golf clubs.
Investor interest is driven by export restrictions in China, (the producer of roughly 70% of the world’s graphite) and speculation that an already growing market will be spurred on by demand from new applications, including lithium-ion batteries, fuel cells and nuclear reactors.
Those demand and supply-side factors have helped to drive up the price of high quality flake graphite from a floor of $600 per ton in the 1990s to $2,500 per ton in 2011, setting the stage for a trio of Canadian companies to raise $47 million for graphite projects last year.
In April,2011, Northern Graphite Corp. (TSX: V.NGC, Stock Forum), raised $4 million from an initial public offering of eight million shares priced at 50 cents each.
In May, 2011, Focus Metals Inc. (TSX: V.FMS, Stock Forum) raised $20 million by issuing 20 million units at $1 each in a bought deal private placement.
In May, 2011, privately-owned Ontario Graphite Ltd. raised $23 million for its Kearney mine near Huntsville, Ont.
While this flurry of activity went largely unnoticed in investment circles, it didn’t escape the attention of Ryan Fletcher, a director, and corporate development official at Vancouver investment firm Zimtu Capital Corp. (TSX: V.ZC, Stock Forum).
Fletcher had already been researching the graphite market and when he saw that so much money was being raised in the sector, it proved to be the “tipping point” that prompted Zimtu to acquire a portfolio of early stage graphite properties.
It then turned around and optioned properties in Quebec, Ontario and Saskatchewan to Lomiko Metals Inc. (TSX: V.LMR, Stock Forum), Orocan Resources Corp. (TSX: V.OR, Stock Forum), and Strike Gold Corp. (TSX: V.SRK, Stock Forum) in return for shares, work commitments and royalties.
In an interview, Fletcher said “there is always a risk” when investors are making a bet on any single commodity. “Maybe you make the wrong call,’’ he said.
However, he said his confidence in the sector was reinforced by a recent industrial minerals conference in London, England where the outlook for graphite was discussed.
While heat-resistant refractories used in linings of furnaces and kilns remain the largest end user for graphite, (accounting for 35% of global usage), analysts are looking to new applications to boost demand in the future.
“Our industry research indicates that the growth rate for graphite demand could accelerate to 11% per year, up from 4% per year, driven by electric vehicles powered by lithium-ion batteries,” said Matt Gowing, a strategic metals analyst with Mackie Research Capital Corp. in a report.
That’s because high value graphite flake is used to make anodes for lithium-ion batteries, which require 10 times as much graphite for battery anodes as the lithium used in cathodes
The wild card in the graphite equation is the future impact of Graphene, a new “wonder material,’’ that was discovered in 2004 when researchers at Manchester University in England managed to extract graphene from bulk graphite, a move that eventually won them the 2010 Nobel Prize in Physics.
“The strength, flexibility and electric conductivity of graphene have made it the subject of significant research for use in new, as well as old, applications,’’ said Gowing in his report.
After researchers at Samsung and Sungkyunkwan University in Korea produced a large and continuous layer of pure graphene in 2010, it was described as the first step towards manufacturing transparent electronics that are stronger cheaper and more flexible.
“You could theoretically roll up your iPhone and stick it behind your ear like a pencil,’’ said James Tour, a chemistry professor at Rice University in a published report.
However, analysts say any impact from graphene is likely a few years away.
For the time being, would-be producers are pinning their hopes on known applications, including steel production, and doing deals with end users.
Companies attempting to achieve that goal include Northern Graphite Corp. (TSX: V.NGC, Stock Forum), which is developing the Bissett Creek graphite project about 120 kilometres east of North Bay, Ontario.
The Ottawa junior recently said it plans to incorporate pilot test results into a bankable feasibility study that it is working to complete. Northern Graphite said pilot tests have shown that Bissett Creek has the potential to produce high purity, large flake graphite.
It is why Gowing has a speculative buy rating on Northern Graphite, with a $2.10 target on the stock.
Focus Metals Inc. (TSX: V.FMS, Stock Forum) is also working to develop a large flake crystalline graphite project at Lac Knife, Quebec, which is expected to produce at rate of 25,000 tonnes per year over a mine life up of to 40 years.
Lomiko Metals Inc. (TSX: V.LMR, Stock Forum) recently signed an option deal to acquire a 100% interest in the Quatre Milles graphite property in southwestern Quebec from Zimtu and one of Zimtu’s prospecting partners.
In another development, privately-owned Mega Graphite Inc. of Oakville, Ont., has retained Union Securities Ltd. to lead an IPO that aims to raise up to $10 million for graphite projects in Canada, Australia and India.
Analysts say these potential suppliers must focus on producing graphite in sufficient quantities and of a quality that is likely to attract end users in the industrial sector who are willing not only to purchase the product, but also to participate in financing new mines.