Will “Elastic Metal” Change Everything?

by Travis Johnson, Stock Gumshoe | October 24, 2017 1:59 pm

What's the secret mining stock being teased by David Fessler for the Oxford Club?

It’s been a while since we saw a graphene[1] pitch, so this one caught my eye — it’s from David Fessler[2], in an ad for his Oxford Resource Explorer[3] ($995/year), and he refers to graphene as “elastic metal” to make it seem even more secret and mysterious. Here’s how one of his emails got us started:

“I call it…

‘Elastic Metal.’

“It’s unlike any material you’ve ever seen.

“Stronger than steel, aluminum and titanium COMBINED.

“Time calls it ‘the miracle material that will change everything!’

“Lightning-speed computers… ultra-powerful batteries… drinkable seawater…

“This could completely reshape our modern society.

“And you’re going to be one of the first people to see the potential of this Elastic Metal.”

And then he gets more into it in the actual ad once you click through…

“Mankind has gone through the Stone Age… the Bronze Age… the industrial age. Now the Elastic Metal Age is here… and it could hand folks an $88,000 windfall…..

“Unbreakable New “Elastic Metal” Is 10,400% Stronger Than Steel, Aluminum and Titanium Combined

“Investors in one key 25-cent company could turn a small stake into as much as $88,000”

If you’re new to the world of investment teaser pitches, this might sound extra exciting, but essentially the same ads ran hot and heavy back in 2011-2012 or so, when the world was first becoming aware of the potential of graphene as a fantastic nanomaterial (and shortly after the Nobel Prize in Physics had been awarded to some early graphene scientists in 2010). Remember the ads about how a thin sheet of the stuff across the top of a coffee[4] cup could support a pencil point, and a school bus could be resting on that pencil and it wouldn’t break the graphene layer?

It’s cool stuff, to be sure. Here’s more from Fessler’s ad…

“The potential applications of what I’m calling ‘Elastic Metal,’ or ‘EMe’ for short, are mind-boggling.

“Dams that never fail…

“Roads that never crack…

“Bridges that never crumble…”

OK, so it’s a stretch to go from an experimental material that was only just isolated less than 15 years ago and still can’t really be commercially produced in volume, to wrapping your dams and bridges with it. But yes, graphene has thousands of theoretical uses. More from the ad…

“Business magnate Richard Branson wants to start building planes out of it.

“And legendary investor Jim Rogers proclaims…

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‘Scientists say [this material] is going to bring bigger changes to the world than transistors and the internet.’

“A material this revolutionary could make investors enormously wealthy.

“You can claim a stake in the potentially massive profits of this revolutionary material… for as little as $0.25.”

OK, so I know you’re all skeptical at this point. Or at least, I hope you are. How does a little company get an important “stake” in something like graphene? After all, hundreds (maybe thousands) of researchers around the world are actively investigating as our understanding improves and different techniques for graphene production and different applications are considered.

For those who are new to this topic, graphene is just a layer of graphite[5] — carbon atoms — that’s one atom thick… a two-dimensional nanomaterial, sort of the next wave of excitement beyond carbon nanotubes (which were also supposed to make us magically wealthy about ten years before, if memory serves). It was isolated by the Nobel Prize winners using scotch tape to remove a single layer of graphene from a graphite sample, and it is indeed a wondrous material in many ways — it’s much more conductive than gold[6], it’s flexible and transparent, it’s super-strong. Lots of applications, to be sure, from airframes wrapped with sensors that sense stress[7] to lighter, thinner touch screens for electronics.

But you can’t go down to the local Home Depot and buy a roll of it just yet. Graphene is generally being used as a layer on other products, added to things like copper[8] to enhance the properties of that substrate, and it seems like most of the attempts to create graphene sheets or layers use chemical vapor deposition (CVD), which is done at very high heat in those big “clean room” machines in a semiconductor fabrication facility and allows for the smooth deposition of a single layer of graphite atoms to form graphene. (And also means that the raw material is probably not the primary price driver — no more than sand is the primary price driver for semiconductor wafers or microchips… more on that in a moment).

So what does this have to do with the company we’re being teased about by Fessler? More from the ad:

“But you have to claim a share in the most promising company mining raw EMe NOW if you want to be one of them.

“A rapidly developing situation should prompt a COLOSSAL spike in demand for this substance.

“… when… vital industries initiate the global adoption of EMe…

“ONE $0.25 company is uniquely positioned to provide the EMe these massive businesses will need.

“And as it makes these lucrative transactions, its share price could skyrocket as much as 8,775%…

“Potentially turning every $1,000 stake into $88,000 over time.”

OK, so we are again talking about a mining stock — almost certainly a graphite mine developer or explorer. Natural graphite is commonly used for the carbon atoms that become graphene, though there are lots of different grades of mined graphite and you can also make graphene using other materials, so almost all graphite miners over the past five or ten years have pitched themselves as “graphene” companies at one point or another (that’s much more exciting than their historical and cyclical core businesses of making graphite anodes for steelmaking furnaces, and graphite for industrial lubricants).

Lately, graphite has gotten a non-graphene lease on life from batteries as well, since there’s much more graphite in a lithium[9]-ion battery[10] than there is lithium… so the more realistic graphite miners are pitching the electric vehicle story instead of the graphene story.

What else do we get from Fessler about why his particular miner stands out?

“Although scientists have been raving about the revolutionary potential of EMe for a while now…

“It hasn’t been implemented on a mass scale yet for one very important reason.

“While it’s made out of a cheap, widely available material… the actual process of mass-producing it is expensive.

“This has made it difficult to implement EMe on a global scale.

“Usually, this material is produced through a process known as chemical vapor deposition.

“This process uses a special copper surface to transform gases into a thin film of EMe.

“The problem is that this copper base is very expensive.

“Just one square meter costs $115….

“Researchers at the University of Glasgow have discovered a way to mass-produce large sheets of EMe…

“At a fraction of the price.

“They discovered this by tweaking the chemical process I just told you about.

“Instead of using a costly copper base to create EMe…

“These scientists came up with the novel idea of replacing this base with commercial copper foil.

“This is the same copper found in lithium-ion batteries.

“And it is FAR cheaper than the special copper scientists were using before.

“One square meter of special copper will set you back $115.

“But with this copper foil, a square meter is only $1.”

Huh, OK. So that has something to do with this particular miner?

Not really, Fessler seemingly just uses it as his rationale for why volume production of graphene is going to take off, driving up prices. That “breakthrough” in using copper foil, incidentally, happened about two years ago — you can see the note on it here from the University[11].

So what do we learn that’s specific to this company? Any actual clues?

“Near the banks of the Ottawa River, a team of explorers has unearthed a stunning EMe discovery.

“The value of this discovery could grow to $1.2 billion, making investors rich beyond their wildest dreams.

“But time is running out to get a piece of the super small miner that has claimed the right to harvest these riches!”

OK, so that narrows it down for us. More clues, after Fessler does get to the more relevant point that battery demand will also drive graphite demand for the near future…

“… to build all the electric vehicles these automakers have in the pipeline, they’re going to need at least 22 billion pounds of raw EMe.

“And when those rush orders come pouring in, this miner will be ready to fill them.

“Its Land Could Help Make This Company Worth $1.2 Billion!

“Right now, this miner is MICROSCOPIC.

“Its market cap is around $11 million, and it trades for nearly a quarter.

“But it’s sitting on the mother lode of the material needed to create EMe…

“Approximately 28 million metric tons….

“… if you want the biggest possible profit, you need to get a piece of the action now.

“This company has its permits, and it’s starting construction as early as January 3, 2018.”

OK, so we’re being teased about a graphite mine that’s close to being built. That’s pretty similar to the last wave of graphene teasers, which all tried to convince us that mining raw graphite was going to become far more lucrative once the wonder world of graphene came into existence (which, they implied, was right around the corner). I’ve always had a hard time with that argument, since it has never seemed that the raw material was the big “value creation” part of the graphene story — it should be the creation and integration of graphene layers that will be valuable, not the raw material.

Little hiccups can certainly appear in the cycle of product development when raw materials are harder to come by, like with high-quality polysilicon when solar[12] panels started to be produced in high volume and the semiconductor supply chain had to be revamped, but even then my recollection is that it was the chemical companies who had plants being expanded to produce more polysilicon ingots and wafers who got most of the value of that demand increase, not the silica miners who sold them the highest quality sand.

I could be wrong on that, but that’s where my skepticism is rooted in these graphene stories — whether you call it graphene or “elastic metal” (or even “EMe”), it’s not just something you dig up and purify… it’s a high-tech material that has to be created by complex and evolving scientific processes, I’d much rather own those processes than own one of the raw materials.

Graphite might be interesting even if you discount the graphene or “elastic metal” story, of course, mostly because of burgeoning demand for graphite for lithium ion batteries for electric vehicles… though the biggest near-term impact on graphite prices would probably still be another surge in Chinese steel production, so perhaps that’s the best outcome to hope for (and you can watch iron ore[13] prices for clues about that).

But I’ve gotten ahead of myself and thrown in the skepticism before I even ID’d the company… don’t worry, we’ll get there. We’ve got a couple more clues:

“You see, the men running this company have rewarded investors with 20-baggers… (Galaxy Resources)

“30-baggers… (Methanex)

“And even 100-baggers… (Barrick Gold Corp.)….

“Before he started mining EMe, one of the directors of this tiny company managed a successful potash[14] miner…

“And helped to drive an eventual 2,650% surge in the share price.

“He’s also the vice president of an upstream lithium company…

“That recently rewarded shareholders with a 3,500% gain. And for 30 years, he’s been a major player at a leading mining group…

“That could have treated you to a 1,742% windfall.

“And he’s not the only executive on this team with a world-class track record.

“A second director was a business analyst for a little-known methanol company…

“And chartered the path to a 3,678% profit.

“He was also pivotal in the operation of Barrick Gold, the largest gold-mining company in the world.”

So who is this? Thinkolator sez (and you need only look at the share price performance since the stock was teased over the weekend to confirm) that this is Northern Graphite (NGC.V, NGPHF).

This was a relatively “hot” teaser stock about five years ago, during the last big bubble in graphite stocks (largely driven, like this teaser is, by the “someday” promise of graphene”) — it was pretty heavily touted by Nick Hodge[15], for example, in the Spring of 2012 when the stock was soaring to about $3 a share, with a $100 million market cap.

Here’s what I wrote about Northern Graphite back then, when Hodge was teasing that “this makes everything obsolete”[16]:

“Northern Graphite’s proposed mine, Bissett Creek in Ontario, is in a good location — close to infrastructure, and in a mining-friendly country — and it has been pretty well studied, with feasibility studies done 15 years ago or so before the Chinese crushed the market with their low prices. It’s not necessarily going to be a cheap mine, though — they believe that the vast majority of their graphite will get premium pricing as “large flake” graphite, in the neighborhood of $2,000/ton these days (though pricing has apparently come down a bit over the last six months), and they’re projecting their cash costs to be around $850/ton. If you look at the spike in graphite prices from 2008-2011, you can see why Bissett Creek wasn’t developed — if prices fall back to where they were in 2008, this mine wouldn’t make any money by their calculations.

“They are fairly close to possible production, though, so this isn’t a company that’s just defining a resource, they are actively trying to build a mine. They just released a bankable feasibility study about two weeks ago, which caused the shares to lose about 30% of their value in a matter of a day or two — largely, I guess, because the internal rate of return and the net present value calculations. The low-end pricing for graphite that they use as an example gives them an after-tax net present value for the mine of only $46 million, which is below the company’s current market cap of about $56 million — higher graphite prices give them a much higher present value, of course, up to a net present value after tax of $125 million if graphite prices are $2,800/ton. They expect premium pricing for their relatively high-grade products.

“It’s probably worth your time to read through the feasibility study details[17] if you’re interested in the stock — the company will need to raise money soon to start construction if they’re going to get the mine built and operational within the next 18 months as they’re hoping, and according to the study they’re going to need almost $100 million to build the mine. If they do get permitting and approvals to start construction this quarter, as they project in their July 2012 investor presentation[18], that probably means they’d have to do some combination of pre-sales to a customer, additional stock sales, or other outside partnerships for financing the project, they currently have only about $10 million or so in cash.

“Graphite certainly has a chance to be the ‘flavor of the month’ for a while among commodities, which can easily cause pricing for these junior miners and explorers to explode, as we saw when Northern Graphite’s stock was driven over $3 by the attentions of Nick Hodge and others back in March before it fell back down to about a buck, but I think it’s really important to underscore that this is an industrial commodity, and while production has been low in the West because of low prices, it’s not necessarily all that rare. If steelmaking falls, or if lithium ion batteries do not enter a supercycle from booming electric car production, then my very preliminary understanding fo the economics of this commodity is that there aren’t a lot of other large end markets for high quality graphite that could be expected to keep pricing elevated. That’s not to say it can’t work, of course, but it seems to me that unless you see the steel market returning to glory (overcapacity of steel production is a huge problem right now, particularly in China[19]) a lot of the argument for real performance from Northern Graphite or any of the other potential emerging producers has to be based on high demand for heavy lithium ion batteries, which pretty much means lots of electric cars.”

Back to the present now.

So keep in mind that although they’re now talking up starting development next year, back in 2012 they were also on the verge of getting financing, and were talking up “next year” with an expected 2013 start date for construction. And the story was of a revolutionary resource and incredible potential back then… and just like today, the mine was fairly cheap to build, under $100 million for capital costs to get the mine built and producing, and yet no one financed it or pushed the development forward. Why not?

Well, mostly, I expect, because graphite prices collapsed as Chinese steel production collapsed. The feasibility study was talking up $2,800/tonne prices, and by early 2013 prices had already fallen to $1,300 or so, on their way to falling below $750/tonne last winter (they’ve bounced back a bit to get over $1,000 again, according to Northern Graphite’s latest update[20] — there’s no real exchange for graphite prices so pricing, as in the uranium[21] market, is not all that fluid or transparent for graphite, and it is often sold using long-term contracts).

So with that collapse in the price of graphite, and the fact that the mine is still on a “next year” schedule for construction to begin, it shouldn’t be all that surprising that the stock is down about 90% from the first graphene peak (at least, before the pitch from Fessler drove a huge surge in the share price over the past two days).

The company is hopeful that they are becoming more “real” now as they look for financing, though that includes the need to raise $35 million in equity according to their investor presentation (and another $35 million in a debt/offtake agreement, so they need a good industry partner/customer). If they get the money and permitting continues to go well, as they say it does, they can think about actually starting construction next year… though it might be worthwhile to spend a few minutes looking at their 2012 investor presentation[22] and their 2017 investor presentation[23] side-by-side if you’re looking for reasons to “cool your jets” and think more slowly about the prospects.

Their feasibility study is indeed based on 28 million tonnes of probable reserves at Bissett Creek, per the tease, and about 20,800 tonnes per year of production — so this is not going to be a dominant graphite mine (world production of graphite is well over a million tonnes/year), but they believe their higher grade flake graphite will continue to command premium prices, and say they have a proprietary technology for processing it into high-purity spherical graphite like that required for lithium ion batteries (which often use synthetic graphite, even though it’s more expensive, presumably because it’s higher quality)… though that’s not even something they’ve tried to produce yet with a pilot plant (which would require more capital), so that’s not going to have any immediate impact even if it does turn out to be valuable.

It’s hard to make assumptions about market prices for graphite because of the various levels of purity and the size of the flakes, which are important for some applications… but also because both mining and processing of graphite are dominated by China, so changes in Chinese priorities or taxes have a big impact (part of the reason prices dropped this year, for example, was the reduction of the export tariff on Chinese graphite). There’s also a lot of possible production from mines that were identified either in the 1980s, like Northern Graphite, or five or six years ago during the last graphite price spike, and some of those could begin production if prices get high enough, which would add more supply and perhaps impact prices as well — the biggest impact in the near term might be from Syrah Resources, which is just about to begin producing at their Madagascar[24] mine and will produce more than 10X as much graphite per year as Northern Graphite proposes. What does that do to the price? Uh, I dunno… but it strikes me that the anticipated demand from lithium ion batteries better come through.

And it probably will, demand seems likely to remain very strong… but Northern Graphite is still a small player, so the impact of things like offtake agreements (and the pricing they might agree to), and what pricing actually is for their larger-flake graphite in the end will have a big impact on the value of the mine. Right now, using their old numbers from the bankable feasibility study from 2012/2013, the after-tax net present value, using an 85 discount rate, is only $36 million at a graphite price of $1,500/tonne. The company has a market cap of about $20 million today, close to double what it was a week ago thanks to the Oxford Club[25] attention, so they really, really need higher graphite prices to make that $35 million capital raise viable… at $1,800 graphite, their updated feasibility study from 2013 puts the after tax net present value, using that same 8% discount rate, at $89 million.

(Incidentally, it seems that it’s not all that prohibitively expensive to start up a new graphite mine, even a large one, so I don’t know how fast new production from other sources could hit the market if prices do really recover, or how financiers will view Bissett Creek compared to larger projects… Syrah Resources’ Balama project is a freak of nature compared to Bissett Creek, to be fair, but its initial capex, according to their feasibility study, was $144 million for a mine that was to produce 313,000 tonnes per year, so $80 million for a mine that is expected to produce 20,000 tonnes per year sounds less exciting for the financiers, and less likely to have any margin for error… or ability to absorb lower graphite prices. Though it is in Ontario, not Madagascar, so that might provide some political comfort.)

If it were me, and I started with the base assumption that I love the project (that’s a hypothetical, I don’t have any romantic feelings regarding Bissett Creek), I’d wait until they do their big stock offering and see where the valuation sits then — unless graphite prices really explode higher again and there’s another wave of graphite mania thanks to the lithium ion batteries (or even graphene hype), it seems likely that the financing is not going to be on super-friendly terms and the price would likely come down.

But, as I said, I’m trying to be skeptical — sometimes that’s what you need to offset hype, so I try to err on the side of being a grouchy old man yelling at the people walking by on the sidewalk. Maybe you’ll feel differently… battery demand is real and growing, and steel production could come back if cycles turn, just don’t convince yourself that graphene (or “elastic metal”) is going to have a commercial impact on the graphite mining business anytime soon.

And, of course, I’d be delighted to hear what you think — ready for another wave of graphite excitement? Convinced that Tesla will buy lots of flake graphite and spur prices ever higher? See some great value in Northern Graphite, or think it’s junk? Let us know with a comment below. Thanks!

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