Industry Analysis: “Graphite in upward movement” – Streetwise report

Grafite da Syrah Resources
Graphite sample

Lithium, graphite, vanadium, cobalt and other metals have been or are all starting to move higher. The graphite market has shown its first sign of life in a few years with some upward price pressure.

Lithium and Cobalt:

Lithium Price
Lithium Price

Cobalt Price

The lithium price started taking off in 2014 and cobalt in 2017; graphite headed down in 2014 and has been trading flat since, but we are just now seeing some upward movement as noted by Northern Graphite, about a 30% rise in large flake graphite. Industrial Mineral Magazine noted that the supply of large and XL flake graphite is tight and some speculative investment is taking place.

However, much has changed and can be learned from the last up cycle in graphite.

First, a look at a long-term price chart to give some current perspective. I got this from Syrah Resources Ltd.’s (SYR:ASX) website and like how it highlights the key drivers during the cycles. We know for certain now that the lithium battery cycle has already had a big effect on lithium and cobalt prices and the same will happen with graphite, only the extent or magnitude is not known and Syrah shows this with a predicted range and question mark.

Graphite Price

Graphite 101

Since the last up cycle starting around 2010, despite all the time and money spent, there are no mine start ups in North America. I see two main reasons for this. First, they can’t compete with the lower cost operations of current graphite mines, so much higher prices are needed for any chance of a North American startup.

Second, and probably the investor’s most fatal error, is they think graphite juniors are like other mining juniors drilling, 43-101 resource, PEA, mine permitting and financing, etc. This does not work for a few reasons.

First off, there is no market for graphite as there is for other metals and commodities. A graphite miner must make relations with end users or customers, such as offtake agreements. This is a major stumbling block because most North American juniors have not modeled their companies properly for this. They face a big hurdle because their PEA says they must produce say 40,000 tonnes per year or more of graphite for the economics to work, but few if any end users will agree to this much tonnage.

End users will require bulk samples to test and make sure it meets their needs. There are many uses and applications for graphite so depending what the user is producing their requirements will differ. They will also want large samples, in tons to verify their processes. Imagine how a junior is going to secure an offtake agreement when it cannot even predict when it will be producing, receive permits, get needed financing etc. Few if any end user are going to agree to buy your graphite at uncertain dates years down the road.

This is a very difficult scenario to overcome, matching your PEA production requirements with end users. Many juniors instead have focused on testing their graphite for battery use or this use or that to prove it will work. This is fine and dandy but may not necessarily help land offtake agreements.

The best solution is to start off mining smaller amounts, perhaps a few thousand tons per year to, say, maybe 10,000 tons and have an offtake agreement for that. Then ramp up production to higher amounts as you secure more end users. This also provides a method for end users to try bulk samples of your graphite and a miner may have to tailor production as users may want large flake or maybe fine graphite or any combination.

Syrah Resources has managed to do this with a lot of work on three or more end user agreements that will start at a low tonnage of 10,000 to 20,000 tons per year for each offtake and increase in future years.

To have an efficient mine that can make money at low tonnage and ramp up production as new users come on board requires some unique properties. I have made up a point system about these qualities to perhaps help you in evaluating junior graphite companies.

Most important and #1 is the deposit must be on or near surface and I mean within 5 to 10 meters of surface at most and on surface ideal. If it is not, avoid the stock like the plague. There are two main reasons: on surface means low mining costs and it is much easier to increase production by expanding outwards rather than having to worry about a pit design going down. I give 3 points for being on surface

#2, if the graphite is in saprolite or a soft material, it makes for easier and cheaper mining and processing so I give another 2 points for this.

#3, is customer relationships and offtake agreements, without these a junior is just treading water. I give this 3 points, but only 1 point if the offtake only covers part of the PEA’s annual production.

These are the three most important factors; there are a few others that can make a difference, but are a little less important on the point scale:

#4, Flake size distribution: many types of graphite can be sold profitably, but larger flake does command higher prices so it can help economics of a mine. If a miner is processing its graphite further to perhaps battery grade this might be a moot point, nevertheless, I think one point for 30% to 50% large and jumbo flake and 2 points if the deposit is over 50% large flake.

#5, Grade: more important is the ease of mining the material but all else equal, higher grade means less mining to produce a ton of graphite so it can help lower costs. I am going with one point if the grade is over 12%.

#6 is near port or end users: graphite is sold in I ton sacks in 20 ton containers, so a 10,000 ton per year user would be getting about one container per week. Being near a port or end user can reduce shipping costs. I am giving one point here. Currently all North America companies get one point because all graphite is shipped here from overseas, which makes them closer to end users.

#7 is financing: is always required so I am going with a point to one point if they have $0.5 to $5 million and two points over $5 million.

#8 location: I am going to subtract one or two points if the project has poor infrastructure in a non miner friendly location or some other disadvantage where it is located.

I eventually plan to do a table with many of the junior graphite miners on it but for now I will use three on our list, Syrah, Northern Graphite Corporation (NGC:TSX.V; NGPHF:OTCQX) and Alabama Graphite Corp. (CSPG:TSX.V; CSPGF:OTCQB).

Elcora Resources Corp. (ERA:TSX.V) does not really fit here because it is more of a processing company than a miner so is looked at differently.

Syrah Resources is the most advanced and nearing production. Its Balama Project in Mozambique is high grade at 16.2% and on surface but a long distance to the Port of Nacala, some 490km south east of the project. It is mostly fine graphite with only 20% large flake or better, but the mining costs are very low with bulk tonnage of 140,000 to 160,000 tons in the first year and practically no stripping. The company has offtake agreements and is fully financed to go to production.

Alabama Graphite has the Cossa project in Alabama, which is a great location, and the resource is on surface in soft weathered rock. The company has just over 30% large flake and it is low grade just under 3%. Alabama has demonstrated in a PEA that it can produce battery-grade graphite. The company has no offtake agreement.

Northern Graphite’s Bisset Creek is the only North American project with a bankable feasibility study. The project is near good infrastructure and has a lot of large and jumbo flake with a relative low grade at 1.65%. It has demonstrated it can produce battery-grade graphite and have no offtake agreements.

Evaluating Graphite Companies

This point evaluation system is more about the graphite deposit as there are other factors that can affect an investment. Obviously, Syrah is totally different because it is near production. Some stocks will be priced too high, others too low. How advanced is the project, the size, management and do they have enough cash to go to next level? There are so many factors to consider.

However, having a very good project is the best place and way to start.(Source: Ron Struthers for Streetwise Reports)

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