The talk of trade war with China is bringing the idea of Chinese mineral dominance back to the pages of investment teaser ads… we’ve seen several in the last week or two that focus on rare earths, where China remains dominant and might have some extra negotiating leverage in trade disputes, and this latest pitch from Gerardo Del Real also hits on some of those ideas… partly because, yes, graphite is also a commodity where supply (and demand, frankly) is dominated by China.
The graphite story gets teased with some regularity, and mostly it’s because of lithium-ion batteries these days… which means that, like the lithium stories (and the cobalt stories), it’s all based on projections of much higher penetration for electric vehicles, which require large batteries and therefore increase demand dramatically for their major components (depending on the design and the size of the battery, a single electric car could easily “consume” 20 pounds of lithium and 100 pounds of graphite… along with 40 pounds of cobalt in many cases, though there are some lithium battery chemistries that use little to no cobalt).
So what is it that Del Real is pitching this time? A shortage of graphite, particularly…
“Just a year ago the world’s graphite mines produced a combined total of 80,000 tons — but Tesla’s Gigafactory is able to consume 115,000 tons a year all by itself.”
That’s not true. The world produced well over a million tonnes of graphite last year, more or less the same amount it produced the year before and similar to the levels of much of the past decade. Maybe he’s using some assessment of the quality of that graphite, or asserting that the total production of the highest-quality graphite was 80,000 tonnes last year… but that’s a pretty squishy bit of data.
The story of graphite’s impending supply shortage and huge spikes in demand is one that has been around the investing world for a long time — initially the hook that newsletters used was graphene, which is a sexy and exciting nanomaterial made from graphite, but more recently the lithium ion batteries have been the headline. Which is fair, because most designs of those batteries use more graphite than they do lithium (graphite is the anode, cobalt or some similar alloy (nickel-cobalt, etc.) is often the cathode, lithium salts are the electrolyte)… though lithium is also far more expensive, spiking to $15,000/tonne or so (medium flake graphite is around $1,000/tonne).
Part of the challenge in understanding all of this is that there’s no central graphite market, and no exchange that sets a graphite price — graphite is sold in lots of different purities and different flake sizes, and different customers will pay different prices for variations of one sort or another… and unlike a lot of other commodities, there’s also a synthetic source for graphite (generally more expensive, depending on the application, but high-tech end users like high-end battery manufacturers have often used synthetic graphite because of its purity and consistency, though from what I read natural graphite processing has caught up with that over the years).
Anyway, I’m getting off track — let’s get back to the ad before I do any more nit-picking… here’s more of the pitch:
“Two Executives Leave Tesla to Build ‘Perfect’ $4 Billion Gigafactory…
“Their Plan? Buy All Graphite, Lithium, and Cobalt from One Small Mining Company — Shares of This ‘One-Stop Mine Shop’ Could Earn You 826%….Are you getting our free Daily Update
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“The world is desperate for more graphite, more lithium, and more cobalt…
“And you can make a fortune on a new mine that’s about to open for business.
“But with an unexpected twist…
“I’d like to tell you about a small mining company that’s doing something nobody else in the world is doing…
“Supplying all of these must-have materials at the same time, from a tight network of mines.”
Sheesh, OK — so it’s not just graphite… it’s everything your modern battery maker needs. What is this “tight network of mines?” More clues…
“This mining company just signed a partnership to be the strategic supplier of a completely unique, never-before-seen gigafactory created by two ex-Tesla executives….
“They’re going to build their gigafactory just miles away from this “one-stop mine shop,” and they’re willing to pay generous prices for the opportunity….”
And he does start with graphite…
“According to Bloomberg, six new graphite mines are needed right this minute.
“But there’s only one…
“A new graphite mine in Sweden that’s opening for business as a “one-stop mine shop.”
“This new mine will supply the purest graphite the world has ever seen….
“Better still, this mine is building an advanced graphite refinery, which will put the graphite through a special process that makes it ideal for electronics….
“It’s built a state-of-the-art refining facility that will process these carbon flakes into microscopic spheres of almost perfect purity…
“… its graphite refining facility is the only one in the entire world that’s outside of China.”
And this company apparently also has a lithium mine, also in Sweden… and has “staked out several sources of cobalt in nearby Finland,” which is where Del Real gets that “one stop shop” part of the pitch (though, of course, neither the lithium nor the cobalt is anywhere near being mined at this point).
And, to throw one more clue on the pile, this Swedish miner also has some sort of contract to supply graphite to a graphene producer.
Enough? Indeed… so what’s the stock? Well, that “Swedish Gigafactory” is the project being planned as the “world’s greenest battery factory” by Northvolt, which was indeed created by a couple of Tesla executives (it’s funded by several big Swedish industrial and energy groups, and has partnered with VW and others), and the Thinkolator sez that Junior Mining Monthly is pitching: Leading Edge Materials (LEM.V, LEMIF)
Which might sound familiar — Leading Edge used to be Flinders Resources and has been teased by a bunch of different newsletters over the years because of the potential of its Woxna graphite mine in Sweden. The company merged with Tasman Metals several years ago, bringing Tasman’s Norra Karr rare earths project to the party, and the combined firm became Leading Edge Materials (they called it “Kinetic” for a while leading up to the merger, too, but settled on Leading Edge by the time the merger closed in August, 2016).
And, to further that familiarity, this same newsletter had a different spiel pitching this same stock a little over a year ago, in January of 2017 (and if you go back to the Flinders days, Frank Curzio and others pitched it as well).
It is an exciting-sounding story, but it has also been a very slow-moving one (at least, for those of us who watch the hyper-promoted world of junior mining stocks)… they have the Woxna mine, and it’s apparently ready to produce, but they have not really started running it. They have the well-drilled and well-explored Norra Karr rare earths deposit, but haven’t done much to push development forward on that, either, since the pre-feasibility study was completed more than three years ago.
So why are they not actually operating the Woxna mine? I don’t know. Presumably because they don’t have customers who want their production at a price that makes sense, which would be, perhaps, why they’ve been working on developing refining capacity and more value-added uses for their high-purity graphite, in partnership with some Swedish researchers… and why they’ve signed on with Northvolt, though that “Euro Gigafactory” is not yet under construction and won’t be producing batteries until probably 2023, they guess.
Which makes me think that this remains an intriguing story, but not one that seems laced with any urgency — they have a “ready to go” mine that they’ve been tinkering with for several years as they think about perfecting products for various customers in Europe, they have some mineral exploration projects, and they haven’t been spending much cash in these development efforts. I don’t know when that changes, or if these projects just aren’t as economical as the feasibility studies indicated they should be — so much of the graphite market, at least, is company-specific, so if they work with a battery manufacturer they have to provide a specific formulation of graphite that matches that manufacturer’s needs — and, one hopes, at a price that can be competitive with the dominant Chinese suppliers. The story is exciting, but there are a lot of moving parts once you dig into the details.
The mining industry is slow, in addition to being capital-intensive and dirty… they react to rising prices by expanding production, but it takes long enough to expand production that they are often left with gluts of supply as new mines come online to meet demand that was anticipated a few years earlier but didn’t materialize. That was the case with graphite in a lot of cases, as new production was pushed forward because of high graphite prices, which then collapsed when steel production was cut way back in China (steel remains the primary driver of graphite demand, though lithium ion batteries have come a long way in catching up).
If you find yourself being someone who’s easily excitable around these little junior mining ideas that sound so compelling, it’s worth looking back at where those stocks have been, and what was being predicted for them earlier. For example, check out this eminently reasonable and rational interview with a graphite-focused analyst from about four years ago, it’s a good overview of the industry and makes about as much sense as it did then — and the companies are in many cases in similar situations, still looking for development funding or sitting through delays in project development, with prices similar to where they were in March 2014. Here’s a chart showing the price of most of the graphite stocks mentioned (they weren’t specifically recommendations, though I’m sure most of them were actively promoted by one newsletter or another at the time):
So you can see that despite the appeal of the industry, and the consensus need for more supply, and the big ramp-up in electric vehicles that was expected from 2012 to 2018 (and did happen, though not to the degree some predicted)…. only one of those companies did very well, beating the market return, and most of them lost quite a bit of money (I also threw the Canadian small cap index and the S&P 500 in there for comparison’s sake). And the one that did have a nice run, Mason, is still a small company ($168 million) trying to move forward with permitting and mine development.
I’m sure we’ll be hearing more about Leading Edge as the Northvolt factory comes closer to being a real thing, just like we heard about American lithium explorers while the Tesla Gigafactory was first under construction… and it might be that they’ll turn out to be a strong supplier to the next generation of European battery factories (of which several others are also planned), but I don’t know how the timing will work or when they might be able to stop twiddling their thumbs and become a profit-seeking enterprise.
Do I sound a bit skeptical on this one? That’s fair. Maybe reading through their latest investor presentation will excite you, and perhaps I’m just a little gun-shy after seeing similar promotions for the next graphite and lithium producers so many times over the past decade, so I will try to open my mind to more bullish opinions — have one of those for me? Do you anticipate fast development from Northvolt, and see great riches for Leading Edge? Think their graphite will be competitive, or their rare earths in huge demand someday soon? Will China cut off supplies to the West and force development of more graphite and rare earth mines and refining facilities outside the Middle Kingdom? I await your wisdom… just use the happy little comment box below.