Projects in the Pipeline: Canada surges as flake tops graphite wish list

By Simon Moores
Published: Tuesday, 28 August 2012

Canada is leading the world in the hunt for new graphite supply. The boom in the exploration-friendly province of Quebec has spearheaded the drive after investors became hooked on graphite’s anode role in electric vehicle batteries.

Canada is leading the world in the hunt for new graphite supply. The boom in the exploration-friendly province of Quebec has spearheaded the drive after investors became hooked on graphite’s anode role in electric vehicle batteries.

The timing coincided with the graphite supply squeeze of 2011, which effectively doubled prices, forcing high- quality +80 mesh, 94-97% carbon flake over $2,000/tonne. The story and industry dynamics were attractive to newcomers and independent and retail investors resulting in a flood of new companies.

The number of active companies in the sector has surged since mid-2011. The number of projects in mid-July stood at 110. All of these are flake graphite projects, except for one located in central-Ontario and operated by Zenyatta Ventures Ltd, which is the Albany vein graphite deposit, similar to that found in Sri Lanka.

A host of market parameters have contributed to an exploration boom in Quebec, Ontario and British Columbia in particular.

“Control of the market by China, opportunistic promoters, and retail investors looking for the next big thing all contributed to increases in graphite share prices,” Chris Berry of New York-based House Mountain Partners explained to IM.

“You need both retail and institutional buy-in to create a sustainable story. We don’t have that with graphite and there is a great deal of money on the sidelines. Until a clearer picture of global growth emerges, I expect this to continue except for a few select graphite exploration projects that can prove to the market that they have an economic deposit and the expertise to put it into production.”

Quebec has the highest concentration of graphite projects in Canada. The majority either cluster around the capital Ottawa, to the north of Timcal Ltd’s active graphite mine in Lac des Iles, or further north along the St Lawrence River around Baie Comeau.

The provinces’ most famous deposits are Lac Knife operated by Focus Graphite and Lac GuŽret, which resurfaced in July 2012 under the ownership of Mason Graphite.

Standard Graphite Corp. operates 12 projects in Quebec and Ontario, Lomiko Metals Inc. is progressing the Quatre Milles East property, and Amesco Exploration Ltd, a newer entrant to the industry, is developing the Cote Nord project.

Ontario is the second-most popular province for exploration, but only hosts a third the number of projects to Quebec.

Ontario Graphite Ltd is one of the leading developers looking at re-opening the Kearney mine. It is expected to be the first new supply out of Canada from the new wave of producers.

Northern Graphite’s Bissett Creek is one of the most famous projects. The deposit, located in central Ontario, was being developed for many years before the recent graphite boom and was formerly under the ownership of Industrial Minerals Inc.

Other notable active juniors in the province are Mega Graphite (Kenora and Kingston projects), Caribou King Resources (Mutrie, Savant Lake, Garden Lake projects) and Big North Graphite (Griffith and Brougham projects).

British Columbia and Saskatchewan are the third-most-active graphite provinces. First Graphite Corp. is the leading junior in British Columbia operating the Montpellier project close to Eagle Graphite, Canada’s other active mine to Timcal, near the city of Nelson.

In Saskatchewan, better known for world-leading potash production, Strike Graphite Corp. is developing two graphite projects, the Deep Bay East and Simon Lake projects near the town of Southend in the north-west. Furst Graphite Corp. is also active in the province with developing the Henry deposit.

Brazil

Home to the world’s number-one producer outside of China, Nacional de Grafite, Brazil has an abundance of high-quality flake graphite resources, which is giving rise of a handful of new projects.

Magnesita Refrat‡rios SA is developing a new mine in Minas Gerais state, with a planned capacity of 40,000 tpa. The privately-owned refractories producer has a strong mining presence in magnesia, dolomite and talc, but is yet to be involved in graphite.

The company imports the majority of its supply from China, but has become concerned over supply security in recent years. Magnesita has publicly stated its intention to be 90% self-sufficient in refractory raw materials, including graphite, within the next two years.

Lara Exploration Ltd is a Canada-based minerals explorer that acquired the CanindŽÊgraphite project in 2012. The company has signed an earn-out agreement with Focus Graphite, which would fund the first phase of drilling. In return for the $2.5m for a minimum of 2,000 metres of drilling over three years, Focus Graphite would earn 51%. This holding can be increase to 60% through a further investment of $4.5m.

The country’s two active producers - Nacional de Grafite and Grafite do Brasil - have no plans at present to increase their combined capacities of 90,000 tpa. In previous years ,Nacional de Grafite has struggled to reach maximum output of 72,000 tpa, but in 2011 capacity production was achieved. This is likely to be repeated in 2012.

Australia

Australia has historically been home to only one graphite project, the Uley Graphite Mine, which ceased operations in 1993. Located near the town of Uley, South Australia, the former mine is the country’s most promising new supply prospect and is a joint venture between Strategic Energy Resources Ltd and Canada’s Mega Graphite Inc.

The mine is not producing graphite, despite reports to the contrary. There is a stockpile equating to 20,000 tonnes of graphite concentrate left over from when the mine stopped. To turn this into a saleable product, a new processing plant must be installed to reprocess this material.

Archer Exploration Inc. has been developing the Sugarloaf Graphite Project since the end of 2011. The deposit is in the same area as the Uley graphite mine, but requires a mine to be established. This is one of many Archer Exploration projects, including other industrial minerals assets such as magnesite, phosphate and barytes.

From March 2012 onwards, more projects emerged in Australia led by Zimtu Capital Corp. buying many assets in a short space of time. Other companies include: Monax Mining Ltd, Pinestar Gold Inc., Lincoln Minerals Ltd, and Buxton Resources.

Europe

Europe welcomed its newest mine in 2012 after graphite processor, Grafit KropfmŸhl AG, re-started the Kropfmuhl mine in the south of the country. The company was concerned about over-reliance on countries such as China for the majority of its supply.

The mine will only produced a small portion of its graphite needs, 300 tonnes in 2012 ramping up to 1,800 tonnes in 2013.

This is compelling evidence that mines in Europe are becoming economic once again, buoying Europe’s other graphite developments including Flinders Resources Ltd, the company aiming to re-start the Kringel graphite mine in Sweden (formerly Woxna Graphite).

The Kringel mine ceased operations in 2001, but is looking to make a return by carving a niche as a high-quality graphite supplier to European industries such as steel, refractories and batteries. Upgrading the plant’s flotation and processing equipment will be necessary to reach the 13,000 tpa goal.

“There are 3 phases to restart the Kringel mine, evaluation, refurbishment and commissioning,” Martin McFarlane, President and CEO of Flinders told IM.

The company is “well advanced” on defining its resource to a 43-101 standard. Once complete it will embark on a refurbishment project to re-start the processing plant.

“[We need to] refurbish and upgrade the processing plant, implement tailings and water management improvements, recruit operators, and then start mining ore. This phase is expected to take 9-12 months,” McFarlane explained.

Operating costs remain a big question mark over many projects, particularly if China turn the tap back on and flood the market with graphite as was the case in the early 1990s. But McFarlane is confident that Flinders can compete with the top emerging graphite companies on a cost basis.

“China was the lowest cost producer over the past 20 years however all evidence indicates that it does not want to see a return to the low graphite prices of the past 15 years. Of the new projects outside of China there are only a two companies that have issued cost figures to the market. Based on these numbers Flinders’ Kringel mine will likely be well below the highest cost project which is proposed to be developed.”

Talga Gold Ltd is another company operating the Sweden, developing its Nunasvaara project in the north.

The company is developing a series of smaller deposits hosting various types of graphite giving it options many producers do not have.

“We plan to be a swing producer of both amorphous and flake graphite,” Mark Thompson, managing director of Talga Gold said in an interview with IM.

“We have multiple flake and amorphous graphite deposits in the same area. Its great having one huge deposit of one type of graphite but it means you can only produce one product. Having the ability to produce flake and amorphous products gives us a unique potential for riding market fluctuations over time,” Thompson continued.

With the world focusing on flake graphite, the inclusion of amorphous into Talga’s plans will surprised some, but as Thompson explained amorphous offers a revenue stream which could become vital to the company.

“We plan to underpin our growth using amorphous graphite production. The metrics on the amorphous deposits are seriously impressive. We have taken a significantly lower price to today’s - $350/tonne - and extraction costs that are 20% above the normal rate. This project looks highly profitable in these scenarios.”

Norwegian Graphite AS is a private company developing new graphite sources in the north of Norway with a specific focus on producing graphene-based products. It is looking to leverage from the country’s rich history of flake graphite production through Skaland Graphite.

The company has continuously produced high-quality flake from underground mines for nearly 100 years, but has battled profitability problems more recently.

Turkey has a small number of companies looking at new graphite projects. The country only hosts low-quality amorphous graphite deposits and has one company claiming production from an old mine in Kutayah, east-Turkey. Turkey, however, is unlikely to provide any new supply in the near term.

Africa

African exploration of graphite has risen significantly in 2012 in a race to become the continent’s third graphite mine adding to two small mines in Zimbabwe and Madagascar. Previously limited to Jonkelkoza Minerals’ Steamboat Graphite deposit in Limpopo, South Africa’s new projects have emerged across the whole of sub-Sahara region.

New projects have appeared in Mozambique (Syrah Resources Ltd), Malawi (Globes Metals and Mining), and Ghana (Castle Minerals Ltd).

Madagascar is home to a major exploration project. The Molo deposit, part of the Green Giant resource, is being developed by Canada-based Energizer Resources Inc.

The company started work in the area in 2007 looking for vanadium when significant quantities of flake graphite were discovered at surface. The company expects the deposit to the largest in the world once drilling is complete.

Energizer has garnered significant support in the area and struck partnerships with Malagasy Minerals, which owns 25% of the property and South Africa’s DRA Mineral Projects as a technical partner.

A review of the project was published in IM, August 2012 issue.

Graphmada Equity Pte Ltd is also operating in Madagascar. The company recently received a 15%-investment from resources investor StratMin Global Resources Plc. It has developed a plan for a processing plant with 12,000 tpa capacity and says construction has begun.

Madagascar has only one active graphite mine at present, producing 4,000 tpa.

China, India, Sri Lanka

There is little official exploration occurring in China and India.

Production from the world’s first- and third-largest producers respectively has been consistent and uninterrupted giving little incentive to look for new resources and develop new mines.

The richest flake graphite resources in China are located in Heilongjiang and Shandong provinces. The richest amorphous graphite resources are from the Lutan mining region in the southern Hunan province, where nearly all of the world’s supply is produced.

New Indian supply will likely come from the country’s east, particularly from Jharkhand. Tamil Nadu is another state in the south that has rich graphite resources.

Sri Lanka is noted for vein graphite, the only place in the world where it is commercially produced. Mined from underground deposits, graphite can be found in-situ with up to 90% C compared with flake which can range from 2-20%.

The country’s second-largest producer, Kahatagaha Graphite Lanka Ltd, revealed to IM its intentions to expand capacity by 50% to 150 tpm to meeting growing global demand.

The world's leading graphite projects
Company Graphite type Project  Project Location  Market Capitilsation*
Africa 
Energizer Resources Ltd  Flake  Molo  Madagascar  C$46.38m.
Syrah Resources Ltd  Flake  Balama  Mozambique A$297.77m.**
Jonkelkoza Minerals Flake  Steamboat South Africa  Private 
Australia         
Mega Graphite/SER Flake  Uley mine  South Australia  Private 
Archer Exploration  Flake  Campoona South Australia  A$12.76m.**
Brazil         
Magnesita Refractarios SA Flake  Almenara Minas Gerais  Private
         
Canada 
Focus Graphite Inc.  Flake Lac Knife  Quebec C$61m.
Northern Graphite Corp.  Flake Bissett Creek  Ontario C$57m. 
Ontario Graphite Ltd  Flake Kearney  Ontario Private
Mega Graphite Inc.  Flake 4 Projects Ontario /India/Australia Private
Zimtu Capital Corp.  Flake Multiple Projects Canada/Australia  C$9m.
Zenyatta Ventures Ltd  Vein  Albany  Ontario  C$5.74m.
Lomiko Metals Inc.  Flake  Quatre Milles East Quebec $4.32m.**
Standard Graphite Corp Flake 12 Projects  Ontario/ Quebec C$3.8m.
Strike Graphite Corp.  Flake 2 Projects  Sasketchewan/Quebec Private 
First Graphite Corp.  Flake 3 Projects Sasketchewan/British Columbia C$1.3m.
Amesco Exploration Ltd Flake  Cote Nord Quebec C$1.22m. 
Canada Graphite Corp.  Flake High North  Nova Scotia Private
Mason Graphite Corp.  Flake  Lac Gueret Quebec  Private 
Europe         
Grafit Kropfmühl AG Flake Krophmuhl mine Germany  Private 
Flinders Resources Ltd  Flake Kringle mine Sweden C$63.78m.
Sri Lanka         
Kahatagaha Graphite Lanka Ltd Vein  Kahatagaha/ Kolangaha Kurunegala District Private 
*26 July 2012 
** Not a pure graphite company
 

How do investors evaluate a graphite project?

Graphite-investment expert, Chris Berry, explains how investors of all sizes evaluate a graphite project

Geopolitical risks are particularly acute when you start talking about strategic or critical metals. Graphite is no exception. Fortunately, there are numerous graphite deposits throughout the world outside of China in reliable geopolitical jurisdictions.

Canada hosts numerous deposits in several provinces and so the question then becomes one of economics and determining whether not a mine is feasible. It is also important to remember that there are deposits in Australia, Europe, and Africa of note.

The merits of the graphite project differ somewhat from gold or other commodities. Many in the mining business maintain that grade is king and while I don’t disagree with this, I do not think it’s the single most important factor when analysing a graphite deposit.

I look for management experience in graphite because I want to know that the company understands how to mine this mineral and then sell it to off-take partners or end-users. Relationships are key when you deal with industrial minerals.

Obviously purity and flake size and distribution of a deposit are important. I have heard this concept called ‘the footprint’. With different types of graphite (flake, amorphous, and lump) as well as different flake sizes, you essentially have different supply and demand dynamics for each and as such different prices that the market will bear.

A company must understand its footprint to develop an idea of the economics of the deposit in question. As investors become more educated about graphite, a junior mining company must be able to tell you what the composition of the deposit actually is and how they anticipate bringing it to market.

One of the biggest challenges facing mining projects today is spiralling cost inflation. This is not specific to graphite but investors in this space must watch this. Generally speaking, I believe that the lowest-cost producer always wins. While low-cost is never a guarantee of success, it allows a mining company opportunities to optimise their mining process should prices for their commodity fall compressing margins.

House Mountain Partners have created a Graphite Index based on the performance of the graphite junior space.

The index consists of 56 publicly traded junior mining companies listed in Canada and Australia. These companies manage a total of 109 different projects. I am also watching 7 private graphite plays and will add them to the index if and when they list publicly.

Between July 29, 2011 and July 30, 2012, the equal-weighted index has a return of -21%. However, since January 1, 2012 the index has a positive return of 22.5%. Both the year-over-year and year-to-date returns significantly outperform the TSXV index. (The price weighted and market-cap weighted returns aren’t significantly different).

Chris Berry, President and Founder of House Mountain Partners LLC, New York, US