Graphite report sheds light on importance of flake size in ASX plays

Published: Friday, 15 August 2014

While there have been many articles surrounding the viability of graphite projects based on deposit size and grade, a new report urges investors to consider other factors such as flake size distribution and product off take.

By Andrew Scogings

 Image by Justin Otto
Analyst Jason Chesters of Patersons Securities Ltd has recently compared ASX-listed graphite plays and shed some light on important factors to consider before selecting an investment in a research note.

In the note, entitled Your Guide to the ASX Listed Graphite Sector Industry Report – Get Your Dose of Carbon, Chesters notes that “The graphite sector remains highly topical and the share prices of most of the listed stocks continue to react positively.” Factors such as Tesla Motors’ planned battery ‘ Gigafactory’ and talk of M&A interest continues to stoke the fire such that as at 20 July, Patersons’ Graphite Index had comfortably outperformed the ASX 300 Resources Index over the past 12 months.

The Patersons report highlights the window of opportunity for new supply to enter the market, but cautions that “the extent of new discoveries and planned production globally is well in excess of this opportunity and it is our opinion that many projects will fail to reach production.”

Although many graphite explorers seem to be fixated on ‘biggest is best’ and although tonnes and graphitic carbon content (‘grade’) are key metrics in evaluating mining projects, Chesters points out that “the evaluation of graphite projects is more complex. Key attributes (in addition to size of deposit and grade) are flake size distribution, purity of the graphite and the extent to which the company has signed binding sales agreements.”

Patersons presents an elegant matrix of six key factors considered important in evaluating the graphite sector opportunity set, these being: i) deposit size and quality; ii) location; iii) flake size; iv) product purity; v) product off take and vi) timeframe to production.

It is especially rewarding that key industrial marketing aspects such as flake size, purity and product off take are taken into account in the matrix, in line with a quote by Stephen Riddle, CEO of Asbury Graphite Mills Inc., who in a recent interview with The Mining Report, when asked about his ideal project to source graphite from replied “My ideal project is a graphite mine that would produce at a 94-96% purity level. It would have as much medium (plus-80 mesh) and large flake (plus-50 mesh) as possible. The lower the percentage of fine flake (minus-80 mesh), the better, since it is the most abundant material in the market and thus has the lowest selling price....”

As noted by Chesters, “The third factor scores the flake distribution, or suitability, of the graphite produced to be used in higher value applications. This is one of the more debated project factors as some stress its importance while others play it down (usually those that don’t have high proportions of larger flakes in their deposit). However, a number of facts about flake size are true, firstly, the larger the flake the higher the purity of the graphite and secondly, the larger the flake size the higher the price (all else equal). In addition, as certain end use applications require certain minimum specifications of graphite, the demand profile for different flake sizes (among other factors) is a key driver in project decisions. For that reason, projects with particularly large proportions of ultrafine flake graphite may not proceed into development as this is the segment of the market most at risk of over-supply.”

“The fourth factor scores the purity of the graphite after simple processing (i.e. before acid or thermal upgrading). The purity of the graphite is particularly important for the higher value end uses like lithium-ion batteries and is a key determinant in saleability of the product. It is also a key factor in the cost of production, as if further processing is required to make the product saleable this could dramatically increase the operating cost. There is also an environmental consideration in whether acid leaching or thermal treatment is required in the product beneficiation and whether this may impact the attractiveness of the product for certain end use applications.”

Given that an industrial mineral deposit without a market is merely a geological curiosity, Patersons has accounted for this with their ‘product off take’ factor. As stated by Chesters “The fifth factor scores the company’s success in signing binding off take agreements and Memoranda of Understanding (MoU) for substantial portions of their intended production. The graphite market is largely one of contracted sales agreements between buyers and sellers for product meeting the buyer’s specific requirements. For this reason a formal sales agreement with buyers for a substantial portion of the intended production is of particular importance (there have been cases of companies being forced to close because they could not sell a large enough portion of product produced). We have given greater weight in our scoring to binding off take agreements as opposed to MoU’s and have rewarded greater proportions of production covered by such agreements (although any agreement is better than none at all).”

The three most interesting stocks based on Jason’s initial quantitative analysis of 12 ASX stocks are Syrah Resources, Valence Industries and Kibaran Resources. However, given the recent spate of exploration updates, results and resource upgrades released to the markets since 20thJuly, e.g. Archer Exploration, Buxton Resources, Lamboo Resources, Kibaran Resources, Triton Minerals and Uranex it is possible that the rankings may change as projects evolve. The proposed consolidation of Chinese producers, especially in Heilongiang Province, should also be taken into account when ranking projects, as this structural change could cause upward price movement.