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Canada: No flash in the pan — OPM’s Toronto conference outlines the future of graphite mining

Presented in association with the Financial Post, OnPage Media’s May 2 Graphite Express-Conference at the Sheraton Hotel in Toronto played to a crowd of over 300 attendees, including investors, brokers, analysts and media. The event posed the question: After the initial flush of enthusiasm for graphite, does the mineral still have a bright future?

The first of the conference’s two keynote speakers, Chris Berry — co-author of Morning Notes and founder of House Mountain Partners — notes that the graphite market went “parabolic” between December 2011 and March 2012 and that since then it has flattened out. His explanation? “What I’m proposing is that Phase One of this graphite boom is completed. But the trends that put graphite on the map are still intact. I think we’ve entered a new phase in graphite and graphite investing. By no means do I think that this bull run is over. The question is where do we go from here, and how do we interpret this space.”

Wary investors are inclined to compare graphite with such and flash-in-the-pan commodities as rare earths and lithium. But the conference’s second keynote speaker, Simon Moores, calls this a flawed argument. The graphite market specialist for Industrial Minerals explains that graphite doesn’t have the infrastructural and technological challenges that rare earths do, and unlike lithium, “There are already very strong existing markets available for graphite.”

Graphite is primarily used in the steel industry, both for its refractory qualities in the manufacture of the alloy, as well as a steel strengthener. Indeed, it is unlikely that the average person doesn’t own something containing graphite, be it a set of golf clubs, the brake linings in one’s car or, of course, a pencil. The US Geological Survey put 2011 world graphite production at 1.1 million tonnes, which is expected to drop in 2012. “Putting aside graphite’s next-generation uses,” Berry explains, “and assuming global GDP growth of 5% over the next eight or nine years, you’re looking at about a 1.8-million- or 1.9-million-tonne market. So even without those next-generation uses for graphite, there is growth in this industry and a need for additional supply.”

But it is those next-generation uses that have excited so much interest. Pebble-bed nuclear reactors and hydrogen fuel-cell technology, each by themselves, could potentially consume all current graphite production. And it is the battery market that offers the greatest near-term promise. Conservatively, lithium-ion batteries use 10 times more graphite than lithium. Should li-ion batteries become standard for the innumerable variety of handheld devices in use today, demand for the technology is anticipated to grow by 25% per year. Berry observes, “The top batteries are roughly 5% of world graphite demand, but that’s growing at 20%. That’s why you’re seeing people rush to find those flake deposits; that’s what’s used in li-ion batteries.”

Giving the examples of GS Yuasa Corporation, LG Chem Ltd and Liotech, Berry says that there are clear indications that battery makers are enamoured with the technology. “Just these three companies have committed to spend over $1 billion on expanding capacity. You can see that these major producers are making a bet that the need for cheap and reliable electricity is a reality.”

So where do we go from here, and how do we interpret this space? “Broadly speaking,” Berry declares, “your take on graphite moving forward relies on your take on China. What you think they’re going to be doing in terms of economic growth and resource nationalism.” China produces 80% of world graphite supply. Recent mine closures there as well as export restrictions have caused a number of countries (including the US) to designate the mineral economically critical. “Politically,” Moores declares, “China is the deal-maker or deal-breaker. China caused the boom in the early 1980s — a similar situation to today — then it flooded the market and caused the bust in 1993. Ironically, China’s now the reason for the boom again because it’s looking inward with its raw-material policy, and graphite’s very high on the agenda.”

Does Moores think there’s a risk of a repeat of the 1993 bust? “There is the possibility that China’s going to increase production because they’ve got the capacity. But I think they’ll increase it for their own domestic needs, and I don’t think they will want to export graphite raw material. It’s not an issue of raw materials any more. They want to move to making the higher-value products. So I don’t see that as any real risk.”

The only technological factor creating uncertainty in the graphite sector, Moores argues, is the uptake rate of electric vehicles. “You’ve got strong battery growth anyway, but the huge demand leaps are going to come from electric vehicles. That’s going to be a limiting factor, if it’s slower than expected.”

Fifteen companies exhibited at the Graphite Express-Conference — an outline of each can be found here — 12 of which delivered presentations. OnPage Media Principal Robert Bick comments, “We’ve expanded on the success we saw last February in Vancouver. There was a great turnout at the conference’s Toronto debut. Brokers and investors were given an invaluable opportunity to become acquainted with a number of up-and-coming graphite juniors, as well as hearing from two of the sector’s foremost authorities.”

As the graphite boom enters its next phase, Berry emphasizes that the key to understanding a graphite company’s potential is “knowing the footprint.” He explains, “My personal opinion is that a balanced footprint is the way to go. [A project] shouldn’t be too slanted toward a given end use, say batteries. A balanced footprint is the best bet because it insulates a company from demand shocks. What you need to remember is with a graphite deposit it is not one size fits all. Mesh size and carbon content can vary. It’s great to be able to say we have a certain percentage that is perfect for the battery industry, based on flake and carbon content. But if that’s only 20% of a given deposit, you need to be thinking about what’s going to happen with the other 80%. How is the company ultimately going to be able to sell that? That affects the potential economics of the deposit.”

Asked about the prospects for graphite juniors, Moores replies, “Very strong. There’s a handful of companies that you saw today that are quite advanced, probably more advanced than people realize. You look at Northern Graphite (TSXV:NGC), Focus Metals (TSXV:FMS), Energizer Resources (TSX:EGZ); companies like that are very serious about a single project. Those companies have got a very good chance of succeeding.”

He concludes, “Graphite’s security is in its diversity. It’s used in so many end markets that when one drops, the other market is steady. So the miners continually grow. If you look at graphite production over the last 100 years, it goes in steps and is continually growing. Sure you have blips — three- to five-year blips — the production drops down. But then it rebounds higher. The reason is that it’s essential to old and new technologies. All the existing technologies which use steelmaking — it’s central to it. All the new high-tech stuff — central to it. No other mineral can say that. Therefore, graphite has a very bright future.”

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