As the graphite market bubble grows, so does investor interest and scrutiny of a mining sector bedeviled historically by supply/demand cycles, aided and abetted by China’s overwhelming market influence.
The United States, Europe and China regard graphite as a critical material – a necessity of life for future industrial growth and economic prosperity.
Global markets know this fact and the response has been an explosion of interest, investment and growth in new graphite mine development.
China, despite its productive capacity, remains and will continue to remain a net importer of graphite destined for industrial and technology applications including its new pebble bed nuclear reactors, lithium-ion battery manufacturing and of course, a source of graphene, the world’s new wonder material.
If there is any doubt about graphite’s importance as a commodity, one only has to look at the trebling of market prices for 97% graphite concentrate during the last decade.
Green, off-petroleum technologies are driving demand growth towards a market bubble that even a tsunami of new global production will be unable to deflate by 2020.
And planning for that day has become a reality for North America and European end-users whose civilian and military customers have read the numbers and see the potential for future supply shortages.
Demand today is approximately 1.2 million tons annually on a global basis. Should demand double by 2020, spawned by growth in the electric vehicle market alone, the competition for supply between East and West will create a bonanza for investors who bet on junior graphite developers today.
China supplies about 80% of the world’s graphite production today – half natural graphite for advanced and technology applications and half synthetic graphite.
China has moved, as it has with rare earth metals, to control exports in order to protect its domestic needs. Continuity of supplies is a risk factor for end-users in Asia, the United States and Europe.
And the markets are reacting.
Consolidation of supply through mergers and acquisitions, investing in new graphite exploration and mine development and the expansion of existing deposits are critical for the creation of a level playing field with China on the supply side.
Investing in a publicly traded junior mining developer now, with emphasis on now, might be a good starting point to provide additional development impetus to the resurgent junior graphite mining sector.
Industrial Minerals, the international source for commodity intelligence reports that graphite prices between mid-2011 and the end of January 2012 appear to have stabilized after dropping through the end of last year.
A current surplus of product in the world market and end-user depletion of stockpiles contributed to the downturn.
For example, the price for 100 mesh 97% graphite concentrate fell to a $1700 to $2,000 per ton range from it $2,400 highs earlier last year, Industrial Minerals said in its report.
Whether this trend continues during the course of this year is a matter of speculation, but it creates an opportunity to incorporate cyclical volatility into investment risk where China’s overwhelming productive capacity, if unleashed to its fullest, could financially flatten new entrants to the graphite supply market.
China now controls some 80% of the global graphite market. It has closed hundreds of producing mines during the last two years for reasons of its own, ostensibly because of environmental considerations.
A reasonable guess might lead one to conclude those closures were intended to protect, in part, China’s access to future supplies and/or the ability to influence market prices.
It was reported recently the largest graphite miner in China, Heilongjiang Aoyu Energy Technology Company, has formally asked the Chinese government to apply the same protectionist controls on graphite as it does on rare earths.
So what does that mean for emerging producers in Canada, Australia, Europe, Africa and South America and ultimately, how do investors de-risk their short and long-term positions in new, emerging producers?
The United States produces no graphite and is 100% dependent on imports to meet its industrial and technology needs.
As a continental neighbor, it makes sense to us to look south first, then Europe and Asia as we build our customer base.
Equally, U.S. investors would see the unique competitive advantages of a risk-averse, stable, reliable source of supply sitting on their doorstep.
Choosing a Graphite Investment
Focus Metals view, supported by the Canadian market, is based on three risk-mitigating criteria, namely:
- Grade of deposit
- Size of deposit
- Technology Innovation
Grade and Size
Graphite mining’s market competitive nature holds that the best grade of ore makes both the business and the investment case.
Our Lac Knife, Quebec natural flake deposit holds the highest grade of graphite in the world. Our 43-101 compliant resource estimate validated our 16% grading and our commercial bragging rights to that claim.
On February 23, Focus Metals entered into an agreement with Cormark Securities and Byron Capital for a bought deal private placement worth some $6.5 million with an option to acquire an additional $3.5 million in shares structured under Canada’s flow-through share investing rules.
Proceeds from the bought deal will be used to cover exploratory drilling costs this year in part, for nine potentially promising high-grade graphite targets on our Lac Knife property, in addition to our previously announced expanded drilling program for our 8 million ton deposit.
In May 2011, Cormark Securities led a syndicate of market makers in a $20 million bought deal private placement for Focus Metals shares. The market knows us. It knows what we have and where we’re heading.
By the end of 2012, Focus Metals should be in a position to revise and upwardly re-state its technology graphite holdings.
Currently, Lac Knife’s grade is without equal in the world.
In business terms, it means we’ll be producing technology and industrial-grade graphite at the lowest cost with highest revenues in the world.
There is no secret business formula for holding costs down. Our formula is based on simple mathematics and common sense.
With a 16% graphite grade, Focus Metals will produce a ton of 96-98% graphite concentrate from six tons of ore.
A producer with a 2.5% graphite grade, for example, would produce one ton of graphite from 48-50 tons or ore.
With rising fuel costs, or unanticipated additional supply coming onto the market as it did during the 1990s, the impact on emerging, marginal producers could be crippling.
With an industry average processing cost of $40-$60 per ton of ore, our six-to-one ore-to-graphite ratio is unmatched globally and virtually immune from input cost shocks.
At the end of the day, the numbers have it.
As an investment, global markets are just now beginning to understand graphite’s rising prominence as a critical commodity and investment momentum is building based on both short and long-term realities a bubble is coming because demand will outpace supply.
With an 8 million ton graphite deposit, indications are that our Lac Knife property may hold double or triple that resource estimate. An aggressive expansion drilling program will start this spring to confirm scalability.
At 8 million tons, however, we project a 40-year mine life as our productive starting point.
During the last six months, Focus Metals has acquired some 265 graphite mining claims and properties in the province of Quebec, perhaps one of the best mining jurisdictions in the world.
Those claims and property acquisitions were the first steps towards consolidating a leading position in the graphite mining sector. We expect to announce additional acquisitions this year.
Focus Metals holds a unique and distinct advantage in that most, if not all of our production is destined for those niche, high demand, technology applications and in particular, we hold fine-mesh graphite destined for the lithium-ion battery manufacturers.
We also anticipate demand for our particular graphite from the international scientific and industrial development communities engaged in graphene research.
We shall be setting aside a portion of our graphite production exclusively for graphene extraction. The international graphene research community has taken a keen interest in our mass production progress and advances in our application and patenting developments.
In our case, the hand that rocks the graphite technology cradle rules the world’s price in our market. And we have a firm grip.
Focus Metals holds a 40% interest in Grafoid Inc., a graphene investment, research and development and patenting joint venture.
As graphene developments and applications continue to grow, Focus Metals is positioned to exploit the wealth explosion we see coming. And our investors know this.
After grade and volume, quality commands the interest of end-users.
Each buyer’s manufacturing customer has a unique requirement. Producers of military, aviation and space-grade graphite have different production needs compared to a manufacturer of graphite pellets used to moderate reaction in a nuclear power plant.
Our graphene research associates at Rutgers University qualified our graphite as having structures and purity born of natural perfection.
It stands that the quality of Grafoid’s graphene will mirror, or surpass that of our graphite.
The application of proprietary technologies for processing graphite is essential in mitigating costs by increasing production yields at both the primary and secondary refining stages.
And investing in a value-added, technology-leading business joint venture adds an element of enhanced financial security for shareholders.
In today’s and tomorrow’s markets, junior mining companies must find ways to lead change to attract capital; to solidify their relationships with their customers, and; to satisfy their financial backers a business vision is backed by actions that leave no doubt as to management’s ability to provide the deliverables it promised.
Innovation, for us, for example, is a graphene extraction and production process we’ve developed that is unique, using raw graphite ore from our Lac Knife deposit.
Without going into detail, our aim is to perfect a process that mass-produces graphene without destroying its electrically conductive properties on an economically scalable basis.
At $40 million per ton, graphene is one of the most expensive non-commercialized materials in the world. Our process should dramatically reduce those costs.
This type of innovation opens new doors to product development because its material source is affordable.
Our patent application is pending and we expect the royalties that accrue from this process will compensate our shareholders for their support during our corporate teething period.
A junior mining company’s survival in a competitive, international market is based on it ability to sell its product into that market at a profit.
As each graphite customer has its own customers with diverse needs – an aircraft wing manufacturer would have a different requirement than a lithium-ion battery manufacturer, for example – the offtake sales process includes detailed metallurgical testing prior to execution of a sales/purchase agreement.
We anticipate completion of discussions with potential offtake partners by the end of 2012.
Looking forward, Focus Metals has positioned its business activities to maximize revenues by consolidating and then dominating the technology-grade graphite mining space.
Moreover, we see Focus Metals asserting itself as a supply counterbalance to China’s market dominance.
Building out our 43-101 confirmed deposit combined with new exploration drilling at Lac Knife, and at prime graphite targets among our 265 Quebec mining claims and properties will enhance our physical holdings.
And turning the page by engineering a formula for economically scalable graphene provides investors with both an industrial and technology snapshot of our corporate vision.
And having the market behind you creates the impetus for a sustainable, long-term and profitable enterprise.
We see no foreseeable end in sight for growth in the graphite mining sector and our research is leading us towards a patenting breakthrough for commercialized, low-cost, mass-produced graphene sourced from our Lac Knife graphite deposit.
Guest Post by Gary Economo (President and CEO Focus Metals).