“This Makes Everything Obsolete

“50,000x thinner than a human hair…
“230x more powerful than silicon…
“200x stronger than steel…

“New ‘miracle material’ promises breakthroughs in everything from batteries and medical science… to oil exploration and defense systems…

“Here’s your chance to be first in line for 300% gains.

That’s how the ad from Nick Hodge gets everyone going this time around — the “thinner, more powerful” stuff is all a reference to graphene, which is a relatively new material (discovered in the 1960s, but only isolated in a stable form less than ten years ago — by researchers who won the Nobel Prize for their breakthrough). Graphene is a nanomaterial, effectively a sheet of graphite that is only one atom thick, and has remarkable properties for conductivity, heat transfer, strength, and flexibility.

Of course, the fact that it’s relatively new doesn’t mean we aren’t sick of it. We are. The royal “We,” that is, the we that has been sitting through the endless ads trumpeting graphene from Nick Hodge and Byron King and most of the other resource-focused newsletter guys. I’m pretty sure that the first ad I saw touting a graphite company and using the miraculous properties of graphene to sell the story was in the late Spring of last year, and it has not let up since.

(That was back when Byron King pitched Focus Metals as his pick by saying they were on the forefront of the “new silicon” — that particular stock, though a fine and compelling story, somewhat similar to the pick being hyped now by Nick Hodge, is up by only about 25% since last June. Not bad, but a bit short of the imminent gains of 4,510% that he expected … perhaps it’s just early days.)

I should also note that though I’m very skeptical of buying graphite mines as a play on graphene (largely because graphene is a hugely expensive nanomaterial, with most of the cost coming from the processing, and it is a nanomaterial … meaning that even large scale use — which is not here — might not consume it by the ton) … that doesn’t mean that graphite isn’t a worthwhile investment. Graphite is controlled by China, at least marginally (they produce perhaps 80% of the stuff, and they sunk global prices and stifled exploration 20+ years ago when they flooded the market with low-priced supply, much as they did with the rare earth metals), and consumption and pricing have risen quite dramatically in the last few years … not because of graphene, but because of increased steel demand and lithium batteries, among other current uses. Graphene, as an extreme value-added version of graphite, could probably be produced using far more expensive methods to generate synthetic graphene, but other uses, particularly in steelmaking, are probably more economically sensitive.

Graphite’s highest-volume use is in the steel industry, where graphite electrodes are critical for furnaces, and increasing steel production as China has built skyscrapers and railways means pricing increases. And graphite’s fastest growing application is in lithium ion batteries, which use far more graphite than they do lithium. So demand is real and growing, particularly for the highest quality graphite supplies, and there is a “strategic” nature to the graphite story even if it’s not quite as clear cut as the “strategic” aspect of the Chinese rare earth monopoly that, we were often teased during the rare earths runup of 2010, had them in a “panic at the Pentagon.”

Which is the long way of saying that graphite may well be the next hot thing in mining investment, and it is certainly in demand even if there’s concern that the demand might be cyclical, but that it’s the current uses of graphite that will drive pricing, not the next-generation nanomaterials. For the nano research angle, I’m much more comfortable with the semiconductor equipment companies that are focused on supplying equipment and supplies to graphene researchers and other nanomaterial labs and prototype producers … but for lithium batteries and arc furnaces, sure, graphite prices are high and may be going higher. And that means, we’re told, that graphite reserves and potential mines should become much more valuable …

… and, as you’ve guessed by now, that’s what Hodge is teasing. A new graphite miner.

I’ve already speculated on which one it might be in past emails, and loyal Gumshoe readers have done the same from time to time in our discussion section, but now that we’ve got an actual ad with a few real hints in it we can get much more certain about the identification of the stock.

Here’s Hodge’s basic background on “why pick a Graphite miner:”

“So how can you best position yourself to profit from this astonishing mega-trend?

“Surprisingly enough, it’s not with graphene producers or distributors…

“Don’t get me wrong; I believe investors who pick the right ones will do very well.

“But the truth is the money behind the money lies with the source.

“Because without graphite, there is no graphene.

“It’s that simple.

“Now, many people simply assume graphite is as common as the rock from which it’s mined. And that assumption was right for a long time…

“While commodities like copper gold, silver, and even corn and wheat have been surging higher for a decade, graphite was one of the last commodities to respond — and prices were actually in the tank from 1990 through 2005.

“There was plenty of spare capacity from China, which still dominates graphite mining to this day.

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“But gradually, growth in automobile and steel demand began to eat up that spare capacity and prices began to rise, growing steadily through 2008.

“The discovery of graphene has pushed demand even higher.

“Today, the startling truth is that it’s mined in only five countries.

“One of these countries is North Korea.

“Another is China, which produces 70%-80% of the world’s graphite.

“That puts graphite in a rare earth-type situation, in that China has a near stranglehold on the market — and is already adding export and Value Added Taxes (VAT) as graphite’s dominant future creeps closer and closer.

“Like with rare earths, China sold its abundant resources on the cheap when demand was low, and then when demand rose, the Chinese manipulated the market to sell what was left at much higher prices.

“That’s what set off the rare earth boom of 2009 and 2010, sending any company with access to rare earths outside of China soaring thousands of percent”

And then we get some clues about which specific project he’s teasing:

“Prices are up 300% in the last five years, giving a long-abandoned Canadian graphite mine the chance to be developed at a huge profit.

“Back in the 1980s, a mining company found a large graphite deposit a few hours northwest of Ottawa in the middle of thousands of acres of Crown Land.

“It ordered a full study on the property, known as a 43-101, and the engineering firm confirmed it was one of the largest graphite deposits the world had ever seen.

“Unfortunately for that mining company (but very fortunately for you and the rest of the world), the price of graphite fell off a cliff.

“The company built a processing facility and blasted for about a month, but it was soon out of business. And the entire operation — over a million tonnes of graphite — has been left idle…

“Until now.

“But with graphene’s endless potential and Chinese manipulation pushing graphite prices higher and higher, one man has decided to bring this mine back to life….

“University testing has confirmed the graphite at this site is superior to China’s in terms of flake size, higher conductivity, and greater transparency….

“And with an extremely high carbon content of 98%, the 1.37 million tonnes of graphite this mine contains are ideal for producing unfathomable amounts of graphene for generations to come.

“The bottom line: With carbon-rich graphite now at $2,500 to $3,000 per ton, this little miner is sitting on a $3.37 billion fortune!”

And as a final few clues, he tosses out that the stock has a market capitalization of around $100 million, and trades for less than three dollars per share.

So yes, we toss that info straight into the Thinkolator for confirmation and the answer comes out nice and clean: this is indeed Northern Graphite (NGC in Toronto, NGPHF on the pink sheets)

Which has indeed been running up over the last few months of teaseriffic touting from Hodge and others, and is at about $2.50 per share with a market cap of just over $100 million. The shares have been getting a big boost from Hodge and his “special seminar” on graphene over the last couple weeks so are substantially higher than they were in January when Northern Graphite went public as a sort of reverse merger IPO, but they are off slightly from the euphoric highs (almost $3.50) of a week or so ago.

The company knows exactly how to market themselves, this is how they describe their asset and their potential in press releases:

“Northern Graphite Corporation is a Canadian company that has a 100% interest in the Bissett Creek graphite project which is located 17kms from the Trans Canada highway between Ottawa and North Bay, Ontario. The Company has completed a preliminary assessment on the project and is in the process of completing a pre-feasibility study and permitting with the objective of initiating construction, subject to the results of the study and the availability of financing, in the first part of 2012.

“Graphite prices have increased substantially due to the ongoing modernization of China and other emerging economies which has resulted in strong demand from traditional steel and automotive markets. In addition, new applications such as lithium ion batteries, vanadium redox batteries, fuel cells and nuclear power have the potential to create significant incremental demand growth. However, production and exports from China, which produces 70% of the world’s graphite, are expected to decline and an export tax and a licensing system have been instituted. Both the European Union and the United States have declared graphite a supply critical mineral. With limited worldwide exploration and few potential development projects on the horizon, the Company is well positioned to benefit from the continued improvement in graphite demand and prices. High growth, high value graphite applications require large flake and/or high purity graphite which will represent 100% of Bissett Creek production.”

And yes, the deposit is real, and the graphite prices are real — I do fear that economic slowdown might hurt graphite pricing at some point, which can make projects like this hit snags, but I don’t really know the graphite business particularly well and I would have also been skeptical a few months ago before the stock had a 200% run, so being an old fuddy duddy sometimes slows me down when it comes to niche mining stocks (yes, I have often had qualms about rare earths miners too, and personally missed the big runs in those stocks even as I covered many of them). So I don’t know if it will do you much good to listen to skepticism from me, particularly if the graphite sector gets into the same kind of extended run that benefitted the teensy rare earths juniors a couple years ago. It is, at least, encouraging that this is a well-known deposit, in a friendly country, near infrastructure, and with some experienced folks at the helm, so if graphite prices remain high I expect they’ll probably do just fine.

Speaking of rare earths, the guy who I often turn to for opinions on “strategic metals” and who has done a great job of following many of these stocks is Jack Lifton — and he’s also singling out Northern Graphite, you can see his opinion in an interview from early February here. Northern Graphite also does a pretty good job, as befits a junior resource company that has to pitch investors, of explaining the market for graphite in its factsheet.

Oh, and if you’re looking around for other graphite-focused picks, the “big three” juniors that I see mentioned frequently, and that I bet we’ll continue to see teased by well-known newsletters, are Northern Graphite, Focus Metals, and Flinders Resources (FDR in Canada, FLNXF on the pinks — Flinders was teased even before it was public, if you recall) — all are tiny, in the neighborhood of $50-$100 million valuations, and with actual deposits identified of different types (ie, they’re not just “exploring” in “prospective areas”), and all seem, to this uninformed observer, to have reasonable prospects for producing graphite within a few years.

Will they make you rich? Well, that I don’t know — if it’s anything like the rare earths story for junior resource investors, you’d be wise to be nimble, and to remember that if a newsletter with a few thousand subscribers sends out a recommendation about a stock that might trade less (far less, in some cases) than a million dollars worth of shares in a day, well, the company’s business and immediate prospects might be a lot less important than the fact that there are a lot of investors enticed by the story right this minute. One thousand investors who each want to buy $10,000 worth of Northern Graphite shares in a day, for example, would bring in orders for six times as many shares as typically change hands in a day, which can swamp any rational market for the stock and send it flying — and if those same investors are disappointed in a month, look out below.

Heck, even the mention of these kinds of tiny stocks here at Stock Gumshoe can bump the shares around, humbled as we are by our massive (and unusually handsome and erudite) readership, so do your research into these stocks if you’re interested, be wary of the wild trading swings you might see, and let us know what you think with a comment below. Enjoy!