INDUSTRY REPORT //Graphite INITIATING SECTOR COVERAGE A Stress Test on Future Graphite Pricing S T O R M C R O W JUNE 9, 2014 Jon Hykawy, PhD President [email protected]Tom Chudnovsky Managing Partner [email protected]Why This Analysis Should be Regarded as Pessimistic While this report contains some of the elements of a sector primer, it is not intended as such. Numerous other organizations and individuals have produced “Graphite 101” style primers, and we have decided that the market no longer requires this sort of instructional document. While we have included some graphite basics herein, the core message in this report is to establish a common and pessimistic price deck for graphite, so that both fund managers and individuals can compare graphite companies on an apples-to-apples basis, while being confident that the worst-case scenario has been incorporated. In order to arrive at this pessimistic price deck, we have determined the economic limit of the market. That is, we have derived pricing on the basis of adding sufficient supply, based on our latent demand projections, such that if any additional suppliers enter the market, then it is very likely that prices will fall to the point where some of the suppliers will be forced out. This should provide comfort to the investor that a realistic, worst-case scenario (with the unrealistic worst-case scenario being that flake graphite demand disappears) has been taken into account. We believe, too, that our latent demand projections are realistic and conservative. The result is a price deck that provides a stress test for junior graphite companies, and that a junior that can survive, or even prosper, under this price deck will stand the greatest chance of being successful in whatever conditions the market eventually finds itself. -Stormcrow See the end of report for important disclosures
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Graphite is a very old and very common material that has acquired a new sheen due to its
use in various high technology applications, chief among these being rechargeable lithium
batteries. We see a pending opportunity for a number of juniors to enter the market.
However, we also see that the current understanding of the graphite sector by the financial
industry is missing some key points.
We have taken a slightly novel tack on analysis of the industry, and have derived what we
believe is a defensible, pessimistic assessment of graphite prices through to 2020. Indeed,
we believe this deck is conservative enough that if a company can demonstrate profitability
using this deck and realistic costs, then that company will be financially successful. In
simple form, we believe that while larger flake graphite will be in increasingly tight supply,
with future prices reflecting this shortage, many of the smaller flake size ranges of natural
graphite are likely to see falling prices due to oversupply in the market.
Background — Graphite Basics
Graphite is a simple allotrope, or form, of carbon. Pure coal and diamonds are others. Graphite is a series of (relatively) loosely coupled sheets of carbon atoms, the atoms within the sheets arranged in a hexagonal array. A single-atom thick layer of these same carbon atoms is known as graphene, and has been causing no end of what we would consider, at this time, to be irrationally exuberant interest in the financial community.
Graphite can be obtained from two sources, and we could fill many pages with the details of this but do not feel it is overly relevant save for a few salient points. Graphite can be made from various carbon-rich feedstocks, including petroleum coke. The process is very energy intensive and expensive, with the feedstock being left at very high temperature for a very long time in order to allow the initial random ordering of carbon atoms to shift into the structure of graphite. The resulting synthetic graphite is chemically very pure, and depending on the chosen feedstock may have physical properties that make it of unique interest. For example, synthetic graphite is, at this point in time, the ONLY possible choice for making high-power electrodes, and is the ONLY possible choice for making carbon fiber materials.
Natural graphite can be found in various deposits, and mined. Graphite is always crystalline, but due to use we somewhat arbitrarily classify it as “jumbo” flake (+35 mesh), “large” flake (-35+48 mesh), “medium” flake (-50+100 mesh), “small” flake (-100+200 mesh), “very fine” flake (-200 mesh), amorphous (which also carries the far more technically accurate name “microcrystalline, since graphite is a crystalline material and not actually amorphous) and a final form known variously as “lump”, “vein”, “hydrothermal” or “Sri Lankan”. Amorphous graphite comes almost exclusively from China, and vein graphite’s sole point of production today is in Sri Lanka. Flake graphite deposits can be found worldwide, and vary in both grade and the distribution of flake sizes within the deposit. In general terms, the higher the in situ grade of graphite, the smaller the average flake size within the deposit. Also in general terms, the larger the flake size and the closer to 100% carbon the graphite contains, the higher the price paid.
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Exhibit 1 – Uses for Natural Graphite (2011)
Source: Industrial Minerals
The primary use of natural graphite is in refractory parts. Graphite is able to resist very high temperatures for a very long time because, although this is not obvious when one considers it being a solid lump of carbon atoms, it is able to conduct heat rapidly enough that the heat must effectively peel away the outer layer of carbon atoms, one at a time. Synthetic graphite can be used in this application, as well, but is far more expensive. And in spite of what we have written above with respect to graphite flake costs, most refractory parts are made from a mixture of large and medium flake graphite, as this lowers the quantity of expensive binders that must be used to form the final part and also reduces the amount of time and energy required to convert the part to solid graphite in a furnace. However, if a refractory component requires the highest levels of performance, then the part is made from very fine, very pure flake and a large amount of binder. The use of very fine flake reduces the potential for microscopic voids to form in the part.
Graphite has been known to humans for a very long time, but does deserve renewed interest by investors at present. The least expensive, longest lived and highest performing battery anode known today happens to be graphite. This has been leading many to predict a huge boom in graphite demand in the future, and perhaps this will occur although natural graphite is in competition with synthetic graphite and various inorganic materials for the same application. Even so, with production of graphite being dominated by China, the growing concern regarding supply chain security by end-users and the lack of new graphite mines opened in the last 10-20 years creates the potential for good new graphite mines to make money.
Exhibit 2 – Natural Graphite Production, by Country (2012)
Source: Industrial Minerals
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Of course, a major question that then immediately arises is “but how MUCH money?” And the only way to properly answer that question is to complete an analysis on the markets and to determine just where the prices for various grades of graphite may go.
The Market — How Big and How Soon
The bottleneck in the synthetic graphite industry is not a lack of feedstock, but a lack of manufacturing capacity. Turning petroleum coke feedstock into synthetic graphite can take weeks of high temperature treatment in sealed furnaces. Because of the large energy consumption, and the lack of processing capacity, synthetic graphite is expensive, with various sources conjecturing that, dependent on purity and other physical parameters, the price can range from $7,000-$20,000 per tonne.
Natural graphite comes as flakes of various sizes, down to the microscopic. As mentioned above, the larger the flake size and the higher the purity, the more expensive the graphite. A rule of thumb is that the reason that flake graphite breaks down into smaller flakes is that it is contaminated with some material other than carbon. These contaminants thus are carried at the periphery of smaller flakes, so larger flake sizes tend to have a higher graphite grade. There are both chemical and thermal techniques for purifying natural graphite to arbitrarily high levels, but these also have high associated costs.
The market for graphite powders, which includes all flake sizes down to the microcrystalline, sees competition between natural and synthetic products. According to Asbury, and with both good commercial data and physical reasons for these divisions, the markets for each are as shown in Exhibit 1. Note that “microcrystalline” is also referred to as amorphous graphite (microcrystalline being the technically accurate term). Primary synthetic is the material made within a furnace, while secondary synthetic is what is left over following the machining and processing of primary synthetic into final form.
Exhibit 3 – Suitability of Various Graphite Types for Applications