Graphite: Is This A Rare Earth Syndrome Once Again?(By Chris Berry)
If a picture is indeed worth a thousand words, then the chart below says a great deal about graphite’s acceptance by the market.
This chart is a proprietary, equally weighted index that shows the price performance of ten publicly traded Canadian and Australian graphite junior explorers since September 2011. Clearly graphite has been discovered by the investorate and appears to have “gone parabolic”. Given this near vertical price rise in such a relatively brief time, we think it’s prudent to pause and look at other metals / materials which have followed similar paths to gain some perspective and derive a way forward for graphite investing. To us, the most obvious comparison would be the history of the market’s take on rare earths elements.
But two events recently have occurred to place rare earths back on the radar of investors. First, last week’s announcement of the Molycorp/Neo Materials tie up has many thinking this is a game changer in the space. We don’t dispute its enormous significance, but given market skepticism of Molycorp’s moves in the last 12 months, we’ll reserve judgment to see how well this marriage is implemented and just how transformational it is for the REE space.
The second issue is the talk of consolidation amongst rare earth companies inside China. Consolidation in the rare earth sector in China has been rumored for some time but it is clearly underway now which means that on the surface at least, China seems intent upon cleaning up her environment and adhering to WTO rules surrounding rare earth extraction and production.
While consolidation has begun, there is certainly more to come and as REE supply chains inside China become more efficient, we think continued dominance by China in rare earths is likely. In short, it’s a wake-up call to stakeholders involved in rare earth policy, supply chains and junior markets (government officials, magnet makers and junior explorers). It remains to be seen who will be the good listeners.
But back to the main point of this Morning Note which is whether or not the exuberant move in graphite companies of late is rare earths redux or something more sustainable. Having given three interviews last week on graphite, the voracious appetite for an understanding of graphite is undeniable. It is in many ways reminiscent of the rare earth frenzy of 2009 through 2011.
For awhile, you could invest in any rare earth junior explorer and reap triple digit returns. This may not be the case with graphite. While we like graphite and its potential for transformative change in the materials science realm (with graphene, for instance), we are extremely choosy when evaluating emerging graphite investments. We caution our readers to approach the sector with the same vigilance.
However there are two factors which provide us with a degree of comfort when we look at the graphite space globally today. First, this is a much larger market than most of the other critical or strategic energy metals. Approximately 1.2 million tonnes of graphite was produced last year, ten times the size of rare earth market and approximately 20 times larger than the vanadium market. We understand that there are different types of graphite just as there are different end products for other metals/materials (for example vanadium is sold as electrolyte, pentoxide, and ferrovanadium).
However, given the much larger graphite market than most other energy and critical metals this makes the graphite market easier to forecast potential for additional supply off take from juniors. We believe there is substantial demand based on forecasts for lithium-ion battery demand. For graphite juniors hoping to get into production, we look for de-risked projects located in stable jurisdictions, those with exposure to large flake high grade graphite deposits, and management experience in the graphite and industrial materials space.
We don’t believe that 300 companies will flock to graphite as has occurred in the rare earth sector (nor do we wish to see this). However price is everything and if graphite prices continue their recent climb, you’re sure to see more junior mining companies enter the fray.
One reason we were attracted to graphite has to do with its associated intellectual property. One of the main catalysts that ignited the boom in rare earths was that China owned the intellectual property, or “know how” surrounding rare earths. The US abdicated and dismantled her supply chains in the name of China’s lowest cost of production globally. So even if rare earth mines outside of China do come on-stream in the next couple of years, China will figure prominently in the IP of metallurgical expertise required to separate and purify rare earths and to process them into finished products. This is not the case with graphite and can help to tip the balance of graphite production (70 to 80% in China) Westward. While we are excited to learn more about graphene and its potential to transform entire industries, most of these innovations are in lab results that have yet to be scaled up to commercial viability. There is potential for this to occur, but we remain unconvinced that graphene is ready for “prime time”.
Overall, we do not think that the graphite story is a carbon copy (pardon the pun) of how the rare earth sector has evolved (and continues to evolve). This is a good thing as it means that there is still selective upside in graphite junior Discovery names. We are convinced of the critical nature of rare earths and believe in their importance in hi-tech goods. We use rare earths in this Note as a comparison with graphite as we think there are many similarities which can help formulate a sound investment strategy and avoid pitfalls and mistakes. We said at the start of 2012 that this is a “make or break” year for rare earth junior mining companies and continue to believe that. Graphite is hot right now, but will have a reckoning one day as investment themes all do eventually. We caution our subscribers to be extremely choosy when considering investing in this space.
We will be writing more shortly on the junior graphite companies we think will withstand the test of time once our due diligence process is completed.