The Graphite Hustle

by Debra Fiakas CFA

The Klondike Gold Rush of the 1800s has given way to the Canada Graphite Hustle of the 21st Century.  In what may seem to many an interminable series on graphite resources developers we have made note of over a half dozen companies in Canada attempting to bring new supplies of graphite ore out of the earth.  The action is not limited to Canada.  There are at least a dozen other aspirants with plots in Canada and the rest of North America as well as in Australia and Africa.

Piecing together disclosures by the North America group alone there is at least 250 million metric tons of inferred resources under development.   Planned graphite production in North America is estimated at as much as 214,000 metric tons per year  –  all of it natural flake graphite  –   that could come online over the next few years.  Is the additional capacity needed?

According to the U.S. Geological Survey in 2014, natural flake graphite production was approximately 1.2 million metric tons.  Approximately 67% originated from producers in China with the balance coming from a mix of resource companies in India, Brazil, Canada, North Korea and Sri Lanka.  Planned North American production would increase total production by 18%, bringing total annual production to 1.4 million metric tons.  More importantly, the successful start-up of all the currently planned production in North America would propel the region into the number two spot among leading producing regions.

As noted in the first article in this series, the widespread adoption of electric vehicles for both commercial and personal use is driving demand for lithium ion batteries that need graphite for make the anode component.  According, to Avicenne Energy, a consulting firm focused on supply chain economics, the battery sector  –  transportation as well as storage batteries  –  is expected to require as much as 290,000 metric tons of flake graphite by the year 2025.  This compares 118,000 metric tons of graphite used in 2014 for batteries.

It may appear to be a significant increase in production capacity, but given the additional graphite supply needed to satisfy hungry battery manufacturers, the planned North American production may be needed.  However, when the other resource developers around the world are considered the math could be different.  Unfortunately, the data points are not as reliable for resources developers with patches in Australia, South America and Africa.  For five that have revealed details, estimated indicated resources and planned annual production are 138.9 million metric tons and 162,000 metric tons per year, respectively. 

Some of the existing graphite producers have had difficulty keeping bills paid and several have shut down production due to low graphite selling prices.  Statistica reports that flake graphite prices declined approximately 49% from 2011 to 2014, predicted a further decline of 10% through the current year 2016.  Bringing on new production in the current price dynamic may sound the death knell for companies that are not able to produce at a low price.  Any investor looking at the graphite market should look carefully at the business model and proposed operating structure before taking a long position.

This may be one reason the stocks of the companies listed above are trading more like options on management’s ability to execute on strategic plans than on the present value of future cash flows from the sale of graphite.  That said, some might consider the current share prices as  modest premiums to play the sector’s future.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.