The black parade: Graphite companies continue to put on a show

By Laura Syrett
Published: Monday, 30 November 2015

Tanking stock values, falling prices and exasperation with the slow growth of new markets are just some of the litany of difficulties facing the graphite sector, whose junior companies were once the pick of the small cap investment world. Laura Syrett, Acting Editor, takes a look at the industry and examines what schools of thought are informing its decisions.

In the grand scheme of things, graphite hasn’t been in the public eye for very long. Although the carbon mineral has been mined for centuries as an essential industrial material for everything from pencils to refractories, graphite and the investment community are still relative strangers.

The 2010-2011 spike in graphite prices and the accompanying exploration boom created something of a speed dating frenzy between junior graphite companies and investors, with the former titillating the latter with corporate presentations predicting stratospheric demand growth driven by emerging applications. Back then, all eyes were on lithium-ion (Li-ion) batteries, the enablers of the electric vehicle (EV) revolution, which require high purity flake graphite in their anode material, and graphene, the invisible, bullet-proof, cancer curing, atomic carbon material that can be, but isn’t always, made from graphite.

Four years on, and many of the relationships formed in the heady days of rising prices and confidence that the good times would last forever are on the rocks. Investors have become impatient with the graphite market, which has been on a downward trend since 2012 and graphite businesses are beginning to realise that perhaps their financial backers never really understood them after all.

"Investors want the next Apple or Google and that isn’t going to happen in graphite," says Stephen Riddle, CEO of privately-owned US-based graphite materials company, Asbury Graphite Mills. Riddle is a long-standing critic of efforts to shackle graphite investment to stock markets. "I don’t really believe that graphite mining is an industry the public belongs in. Once they realise there isn’t going to be the next Google in graphite, investors will lose interest and I believe the juniors are just starting to comprehend this." Riddle admits that his caustic brand of what many class as unwarranted scepticism, but which he insists is merely hard line realism, has caused many publicly listed graphite juniors to stop listening.

"A lot of the junior companies are still quoting what I would call 'fantasy land’ prices for graphite. The only people they’re fooling are themselves and maybe a few bankers and some shareholders," he says.

The decline in graphite prices has been one of the chief deterrents preventing investors from putting money into graphite companies. Most exploration businesses have had to face up to the fact that public funding for projects has more or less dried up and institutional lending is also hard to come by. They note, however, that this state of affairs is not confined to graphite but is part of the wider malaise affecting the mining industry.

Riddle thinks that the macro commodities situation, while alluded to by many, is understood by few. "A lot of juniors don’t realise how bad the commodities industry is and what this means for graphite pricing and demand. The steel market is closely coupled with refractories and this is still the biggest single end use for graphite. Right now, there is surplus capacity in steel and in refractories, so until this improves, graphite demand isn’t going to increase substantially – even if you get growth in the battery market."

 "A lot of companies have already gone very quiet. If they can’t get public funding to keep going they might delist, or be forced to delist," he warns.

Despite Riddle’s ominous turn of phrase, he doesn’t think that sacrificing an exchange listing is necessarily a bad thing. Taking a company out of the public eye allows it to concentrate on its business without worrying about its share price, or about adhering to the time-consuming rules pertaining to public disclosures.

Rajiv Mediratta, a former graphite mining executive based in India – a country where business is still largely in the hands of private or state owners and is largely divorced from the culture of small cap stock trading – suggests that public listings have been responsible for what he considers to be a distortion of the graphite sector.

"The corporates are under tremendous pressure to satisfy their investors," he says. "I feel that investors are escalating the situation we have now and it has become a very strange industry. I am a little disappointed with the system and how it’s happening and how people keep falling into the trap."

Graphite1  

Dirty business: Western graphite companies are looking to
develop mines that meet high environmental and social
standards in order to withstand supply chain scrutiny. 

Public face

A mass exodus of graphite companies from stock exchanges has not happened yet. Some companies have sold off graphite assets or relinquished options, but broadly speaking, most have been quietly carrying on. The last year has even seen two new listings of pure play graphite companies. 

In Canada, Toronto-headquartered Eagle Graphite Inc., which has an operating flake graphite mine in British Columbia, began trading on the Toronto Venture Exchange (TSX-V) in January. In Australia, Brisbane-based Graphitecorp., which owns a deposit in Queensland, has just successfully floated on the Australian Stock Exchange (ASX) following an Australian dollar A$3.3m ($2.39m*) funding drive.

Those who disagree with Riddle that graphite should be out of bounds to the public do so vociferously. Jon Belliss, head of corporate broking at London-based Beaufort Securities Ltd, which brokers for UK AIM-listed Madagascan graphite miner, StratMin Global Resources Plc, insists that graphite is still a perfectly viable investment proposition.

"I’m confused why the industry should be labelled unsuitable for retail investors," he says. "It’s a worldwide needed commodity." He concedes that the lack of spot prices for graphite make the sector "a little opaque", but denies that it has fuelled misinformed investments. "Some people invest on a short-term basis while others go in for the longer-term," he said, explaining the investors regard shares in graphite companies as they would any other listed entity – as opportunities with a certain amount of risk.

One of the problems facing graphite companies trying to coax investors to put their hands in their pockets is the fact the funding criteria are often ephemeral. "Investors want everything and nothing from a graphite company," one London-based fund manager recently said. "They want to see that a company can tick all the boxes but also that can think outside these boxes and do something different. They also want niche markets to be worth billions. I don’t envy anybody trying to raise money in that business right now." 

Qualifying a graphite project for the major graphite markets – refractories, batteries and even graphene – is regarded as a must by many, but this costs money and can make juniors look unfocused and opportunistic if mishandled. 

"I’ve seen a lot of companies write their strategies retrospectively," the fund manager said. "They lurched from one press release to another in the hope of gaining some traction, then tried to pretend that it was all part of the plan."

Graphite2  

Madagascar has been a source of highly-prized graphite for
decades and could become an increasingly important global
supplier, if projects underway in the country are fully developed.
(Energizer Resources Inc.)

Schools of thought

However easy it is to criticise the promotional swagger of many listed graphite companies, it is hard not to admire the remarkable resilience of the industry’s small cap players. Although many seem to be running on fumes, the sector remains as crowded as ever and evidences a startling array of development strategies.

The star of the share price show has for the last two years been Syrah Resources Ltd, an ASX-listed exploration company run from Melbourne with its flagship 81.4m tonne Balama graphite project in Mozambique. At the end of November, shares in Syrah were trading at around $A3.60/share, valuing the company at more than A$825m ($596.2m) and making it the most valuable junior graphite business in the world.

Based on the outcome of the feasibility study on Balama released in May this year, the project’s processing plant will produce 380,000 tpa graphite concentrate from a feed rate of 2m tpa ore. Despite repeated warnings that bigger is not necessarily better when it comes to a niche speciality mineral like graphite, investors have been lapping up Syrah’s story.

Aside from its mining plans, the company also has ambitions to build a 25,000 tpa spherical graphite plant in the US and recently scooped a sales and marketing agreement with Morgan AM&T Hairong Co. Ltd, a Chinese spherical graphite producer, to supply 9,000 tpa graphite for three years. 

The company’s managing director, Tolga Kumova, dismisses accusations from critics that Balama will flood or maybe even destroy the graphite market, which is already facing significant overcapacity, when it comes online, arguing that the market will expand. "We believe that whilst larger flake graphite used in traditional industrial purposes will have modest growth in line with global GDP, smaller flake graphite (-100 mesh) will experience significant growth as a result of increased battery demand," he says. 

His perspective hints at a "blow you, Jack" approach, however. "Based on our feasibility study, Balama will be a first quartile producer and hence we are confident that the company can remain highly competitive throughout the peaks and troughs of the graphite price cycle."

Others are less sanguine about the state of the industry. The pullback in available funding for graphite projects has had the effect of stopping the sector’s frontrunners in their tracks, while many of those that were behind have decided to use what cash they have left to bring themselves up to speed.

"The main thing that’s changed is the market – everything has slowed down," says Greg Bowes, CEO of Canada-based Northern Graphite Corp, a TSX-V-listed company which is developing the 69.8m tonne Bissett Creek flake graphite project in Ontario.

"All the juniors who have jumped into the sector have created a lot of confusion among potential partners. Northern was the first company to produce a feasibility study [in 2012] and now there are six in this category. This is a pretty good sample size and allows meaningful comparisons to be made. It also gives a good indication of where the other juniors that follow will end up," Bowes adds.

Although many juniors are on the face of things still confident they will "end up" in profitable production, most are honest about the challenges they face. "In the current depressed market, nobody wants to put money into graphite," laments Chester Burtt, director at TSX-V-listed Focus Graphite Inc. 

With its Lac Knife graphite project in Quebec, Focus was one of the early champions of clean- and high-tech markets for graphite and graphene, along with its strategic partner business, Grafoid Inc. The company has however seen its share price slide bumpily from a peak of Canadian dollar (C$) 1.55/share ($1.16/share) in early 2011 to C$0.09/share today.

Burtt however remains optimistic that a battery-bearing tide will arrive sooner or later to lift all boats in the junior graphite space. "At the moment, we’re just sitting and waiting, getting our house in order," he says. "We’re concentrating on getting all the necessary permitting for Lac Knife and getting our financing. We are also in discussions for a couple of offtakes."

Focus was criticised in pockets of the investor and Canadian press earlier this year for announcing two offtake agreements with Grafoid, which together committed Grafoid to taking up to 35,000 tpa Lac Knife concentrate.

"Some people see this as window dressing, but it’s really not," insists Burtt. "We’ve developed some really interesting materials using our graphite and graphene to produce light, stronger, more affordable polymers for the automotive sector, which we’ve got out to some 20 potential customers right now. Any one significant order would mitigate the financing risks for the market."

Although Focus points to its diversity as the key to its business model, the company’s approach isn’t for everyone. Just before the Grafoid offtakes were announced, it parted company with its CEO, Don Baxter, owing to what Focus described as "a significant divergence of vision".

Baxter, who previously served as president of Northern Graphite, has since been installed as co-CEO of Alabama Graphite Corp., another TSX-V-listed exploration company but one of only a handful with projects in the US.

Alabama’s primary focus is its flagship Coosa project, located in east-central Alabama. Despite making some slightly bizarre claims to have found "naturally occurring flake graphene" at Coosa earlier this year, since Baxter has been at the helm, the company’s emphasis has been rather more conceivable.  

The premise of the company’s preliminary economic assessment (PEA), due for release 27 November, is to produce solely speciality, value-added graphite, rather than run-of-mine concentrate. "Our plan is to split production into two fractions – the larger flake will be used to produce coated spherical graphite, or CSPG, and the rest of our material will be used to produce micronised purified flake for composites and powder metallurgy. The disposition of production is intended to be 75% CSPG and 25% micronised purified flake," Baxter explains.

He is also keen to point out that Alabama intends to start out small at Coosa. "We are not going to produce 50,000 tpa and flood the market. That conventional business model employed by other graphite development companies is unrealistic and unsustainable. Instead, AGC will produce approximately 5,000 tpa – an amount the market can easily absorb – as well as being a manageable rate, which will be easily scalable as demand for our product increases," says Baxter.

One company with big ambitions but which believes its entry to the graphite market is likely to be incremental is Energizer Resources Inc. The Toronto-based company, which has a main board listing on the TSX, is developing the Molo flake graphite project in southern Madagascar, which has a total measured and indicated resource of 100m tonnes.

Madagascar has for decades been a recognised producer of high quality graphite, with loyal customers in North America and Europe preferring the material to that sourced from China. "Madagascar could be the world’s largest graphite producer – that’s a great opportunity, but it has to be done in a sensible manner," says Brent Nykoliation, senior vice president for corporate development at Energizer.

Graphite3 The company published its feasibility study, completed by Africa-focused mining services specialist DRA Group, in February this year. The study, which is presently being optimised, indicated an operating cost of $353/tonne based on an annual average production rate of 53,000 tpa concentrate – however Nykoliation says that Molo has the advantage of tractability on its side.

"Molo has the flexibility to build big or small, as the market dictates, at costs competitive with Chinese producers," says Nykoliation. Energizer estimates that Chinese operating costs range from $350/tonne to $900/tonne, meaning that Molo is at the bottom end of the production cost curve. 

The project is designed on a modular basis, allowing Energizer to tailor it to fluctuations in demand. "We can build it big, but we don’t think that’s realistic. We’re not going to go out there and try to make a market that doesn’t exist," says Nykoliation.

He admits that non-Chinese producers of graphite have a tough job to establish themselves in the graphite market, with the added onus of demonstrating "clean" supply chains, while competing with China on cost.

"Price is king. If China can still produce graphite at these amazing prices to environmental standards acceptable to end users aligned with Western regulations, there’s no reason you wouldn’t buy from China."

"But a lot of potential offtake partners, especially on the battery side, are extremely sensitive to where their graphite is coming from. They’re going to be looking for the highest environmental standards in the world for mining."

Graphite markets

Batteries and refractories

Refractories, used to make steel, cement and glass, continue to be the largest end market for natural graphite, although the proportion of consumption accounted for by this sector looks set to shrink as demand for industrial materials ebbs and Li-ion battery usage grows.

According to IM’s "Natural Graphite Report – Strategic Outlook to 2020", refractories, foundry and crucibles accounted for 36%, or 400,000 tonnes, natural graphite consumption in 2014. Metallurgy applications made up 25% of the market, while batteries held an 11% share, with lubricants, parts and components making up the rest.

The growth in battery consumption is expected to be facilitated by the emergence of new mass Li-ion manufacturing facilities, including Tesla Motors Inc.’s 500,000 unit capacity Gigafactory in Nevada and similar Asian plants planned by the likes of LG Chem, Foxconn, Samsung and Panasonic.

Graphite4  

The high price and limited range of many EVs, including Tesla’s 
electric models, have been partially blamed for slower than 
anticipated adoption of cleaner cars. (Source:Don McCullough)

According to statistics compiled by industry reports agency, Reportbuyer, worldwide shipments of Li-ion powered hybrid and EVs stood at 792,800 units in 2014 and will maintain a robust CAGR of 36.9% between 2014 and 2020. Consumption of Li-ion cells was 299.3m in 2014 and is expected to register a CAGR of 33.1% to 2020 to reach a projected 1.7bn cells. Global revenues derived from Li-ion battery sales is anticipated to post a CAGR of 43.1% over the next five years to be worth $36.5bn by the end of the decade.

Other markets

While some believe that an upturn in graphite demand will be the reward of a waiting game, others think that they can make the pie bigger for themselves.

Syrah’s assertion that it can convert all of its residual -100 mesh flake graphite that it fails to sell elsewhere into recarburisers for the steel industry seems to have been accepted by the company’s investors, however efforts by other companies to penetrate new markets elsewhere have met with tepid appreciation. 

The question facing would-be producers of graphite for speciality applications, such as in the nuclear industry, soil conditioners and graphite foils, is whether they can make a business out of supplying these markets. Small volume businesses are unlikely to support mining operations at current or even future price projections.

One notable trend in the last 12 months has been the increasing attention given to graphite foils, flame retardant and insulation applications, with proponents including Syrah’s neighbour in Mozambique, Triton Minerals Ltd.

Although nowhere near as frenzied as the battery or graphene sectors, this area of the downstream graphite market is a dynamic one. Germany-headquartered chemicals company BASF produces a range of graphite-enhanced polystyrene (GPS) rigid foam insulation through its US-based Neopor insulation subsidiary and recently engineered a new range of GPS, Neopor Plus, for the North American market.

Neopor GPS comprises of many small pockets of air within a polymer matrix containing graphite. The graphite reflects radiant heat energy like a mirror, increasing the material’s thermal resistance, or R-value, thereby improving energy and cost efficiencies for buildings using this type of insulation.

An increased uptake of natural graphite in this sector certainly has the potential to boost demand, but given the fragile state of the construction industry at present, which is already punishing graphite via weak demand for steel refractories, it seems unlikely that this application area will see a surge anytime soon.

Graphite foils, meanwhile, are used for sealing in the chemical and petrochemical industries, as well as in the energy, engineering and automotive industries. 

Chris Richmond, managing director of UK-based Gee Graphite Ltd, says that his company uses flake graphite sourced from Germany and China, which is exfoliated and then calendared to make graphite foils.

"The advantages [of using this type of material] are many, but the key ones are flexibility, chemical and temperature resistance, thermal conductivity, conformability and availability," he notes, adding that natural graphite is also generally accepted across many industries.

Richmond says that the main markets for Gee’s foils are industrial gasketing and thermal management applications, but notes that demand is not growing in "traditional" applications.

Mersen, a France-based carbon materials company, is particular about the quality of its natural graphite. Mersen produces its own range of flexible graphite foils called Papyex. These are self-lubricating products that can resist high temperatures, high pressures and chemical agents and are therefore used to make screens, thermal insulation and sealing materials for furnaces and as a protective interface in metal casting, glass manufacturing and electronics.

"Flexible graphite is manufactured from purified natural graphite crystallites. In order to obtain good quality flexible graphite, it is necessary to select ores having crystallites with dimensions greater than 180μm," explains Lawrence Lamy, head of group communications at Mersen, adding that the best graphite ores are mainly extracted in China, Canada, India and Madagascar.

In other markets, such as the nuclear industry, the emergence of Generation IV pebble bed reactors is seen by some as an opening for those who can supply high purity graphite that can compete with the incumbent synthetic graphite on quality.

As IM’s "Natural Graphite Report" notes, the amount of graphite pebble bed reactors will actually consume is still theoretical at present. There will be initial start-up tonnages of graphite required to charge the nuclear plants with enough pebbles/fuel and this fuel will continuously be replenished with graphite, silicon carbide and uranium. Estimates have ranged from 2,000 to 3,000 tonnes of total graphite for every 440MW plant, equating to 1,400-2,100 tonnes of natural graphite, however this sector remains a distant beacon for the natural graphite industry at present.

Cleaning up

One common factor that has run right through the rise and fall of the graphite industry as an investment proposition is the notion that end users want to move away from their reliance on Chinese material in favour of cleaner and more transparent supply chains.

Asbury’s Riddle doubts whether this narrative will prove a winner for those at the junior end of the market, however.

"Bashing China is not the answer. I’m no supporter of China’s environmental practices, but I don’t think this approach will help juniors," he says.

He also thinks that the story told by Western companies is oversimplified and misrepresents the Chinese question. "In China, the mining side is not really the issue – it’s the chemical purification involved in making spherical graphite that has most of the environmental issues. Here, they are dealing with acids that must be handled and recycled safely. Chemical purification and making purified spherical natural graphite is a separate business from the mining industry and it is misleading to suggest it’s all the same business."

He also questions whether the claim made by many graphite companies that Western battery companies will be prepared to pay more for non-Chinese graphite will prove to be true.

"Battery makers expect new suppliers to be competitive on price – not necessarily to have the lowest price, but to at least be competitive. The anode is not a big percentage of the battery cost, so maybe they will be willing to pay a bit more, but not the extra costs needed to make some of these new graphite mines profitable," he notes.

Despite these reprimands, Riddle says he hopes the junior sector will remain well populated. 

"We in the private sector are grateful to the public companies for their investment in discovering so much graphite ore because without them, the private sector would not have put our resources in to discover it."

Riddle doesn’t want junior graphite companies disappear. It is in the interests of companies like Asbury to have these businesses around for the future, as graphite reserves and supply sources will gradually start to run out and shift to new regions. However, most in the junior sector know that not all of them can make it and many may face tough decisions sooner or later about what to do with their assets, boards and shareholders.

*Conversions made November 2015