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No Flash In The Pan

May 4th, 2012

OPM’s Toronto Conference Outlines the Future of Graphite Mining

By Ted Niles

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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 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.”

OPM's Toronto Conference Outlines the Future of Graphite Mining

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.”

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