This “Pure Carbon” pitch from the Angel Investing folks has driven quite a few questions our way, so it’s time for some answers — let’s pull the Thinkolator out of the garage and see what it can find.
The as is for Gerardo Del Real’s Resource Stock Digest Premium, and the spiel is mostly about how there’s a rare material with “0% production” in the US, and with huge demand — and that a “brand-new source is about to open for business.”
And, of course, the key claim:
“If you act now, one flip of the switch could make you wealthy.”
Which is the main problem, of course — how on earth are you supposed to rationally consider an investment once you’ve got that “make you wealthy” idea planted in your brain?
So first, let’s all just clear our heads. Get rid of the “make you wealthy” bit.
OK, so what’s this “one of the rarest materials in the entire world” thing about? Let’s pull a few clues from the ad for our edutainment:
“You’ve probably already heard on the news about global shortages of uranium, lithium, and precious metals.
“And it’s true… those resources are in high demand… investors who buy stock in the right resource companies can make millions.Are you getting our free Daily Update
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“There are thousands of success stories of investors who have earned returns like 75%… 125%… even 291% and higher.”
“I want to show you how to make money by supplying the one rare element that the U.S. military, Apple, and Tesla MUST HAVE for almost every technological device they build.
“I’m not talking about silicone or copper — this resource is even more rare and essential.
“You see, this resource is the primary ingredient in the lithium-ion batteries that power your cell phone and laptop…
“These lithium-ion batteries power electric cars, fork lifts, trains, submarines, battleships… even entire power grids.
“As the Washington Post reports, ‘the demand keeps on increasing…'”
And he makes the point that yes, there’s a lot more of “other ingredients” in a lithium-ion battery than there is lithium… and he says that 80% of what goes into these in-demand batteries is “Pure Carbon.”
So what the heck is that? Are we going to run out? As with all battery pitches, the focus is on Tesla’s Gigafactory…
“When it comes fully online, Tesla’s Gigafactory will produce more batteries in a year than were produced in the entire world just five years earlier.
“These batteries already power the 1,235,000 electric cars on the road today…
“And they’ll power the millions more vehicles expected to be on the road by 2020.
“Currently there are only 85,000 tonnes of Pure Carbon produced in a year — and the Gigafactory is expected to consume 115,000 tons a year all by itself.”
OK, so that conjures up some enticing notions about resource scarcity and higher prices… what exactly is this stuff?
It is, broadly speaking, graphite. Graphite is a crystalline form of carbon, and it is both mined directly in fairly high-purity flake form and created synthetically from other forms of carbon (like coal). And it is used in most lithium-ion batteries as an anode material.
The larger user for graphite is still steelmaking — graphite is used in refractories and as a carbon-raiser for molten steel, in addition to other industrial demand for lubricants, brake linings and, yes, pencils. And yes, like with some other strategic metals, China is the major producer and refiner of graphite — partly for strategic reasons, partly because steelmaking is concentrated in China, and partly because no one much wants to have a graphite processing plant in their backyard.
And, apparently, there’s an exciting new graphite project just starting up in Sweden…
“The UK, Europe, Japan, and South Korea are all in the same boat.
“The entire world is forced to buy from China.
“That is, until now.
“One Flip of the Switch Is About to Change It All…
“Up in the forests of rural Sweden, a brand-new mining operation is about to open for business.
“Mining bulldozers are already moving the earth away to reveal one of the highest-quality lodes of Pure Carbon on the planet.
“And it’s about time…
“Up until two years ago, there hadn’t been a new non-Chinese mine since the 1980s!”
And it’s not enough to make up a name (“pure carbon”) for this highly refined graphite, we also have to make up a name for the little company who owns the mine…
“This mine is owned by a small raw materials company I sometimes call ‘Rare Inc.,’ because it specializes in supplying the world’s rarest and most valuable raw materials that are absolutely essential to today’s technologies.
“These raw materials are literally what make all modern technology possible.
“Rare Inc. opened this mine in 2014 and it’s spent the last few years streamlining its production.”
Most of the rest of the spiel is an argument that the billions being poured into lithium-ion batteries and electric vehicles will bring a windfall for graphite… and, as these ads so often do, he quotes some reputable sources:
“‘Now the rise of the electric-car industry promises a huge surge in the [Pure Carbon] business. Making batteries big enough to power cars will cause a daunting leap in demand.’ —The Washington Post“
That’s from an article about the environmental impact of China’s graphite factories, in case you’re curious.
And he implies that Buffett is investing in this big growth story, too…
“All of this demand has attracted even the most conservative investors…
“Including Warren Buffett.
“His current investment includes heavy ownership in lithium-ion batteries, electric buses, and industrial equipment.
“Buffett has reviewed the same numbers that I have, and that’s why he’s comfortable making big bets in strategic companies.
“But here’s the unfortunate part: you don’t have access to the same opportunities that Buffett does.
“Even if you wanted in on his electric battery business, you’re completely shut out as an individual investor.
“That’s what makes this mine in Sweden such a rare opportunity.”
That’s not really true. Buffett’s Berkshire Hathaway does have a substantial (though still fairly irrelevant in the vast scheme of things for Berkshire) investment in BYD, which is a lithium-ion battery maker that has gradually turned itself into an electric car and bus company over the past decade. And you could buy shares if you wanted to, they’re listed in Hong Kong with ticker 1211 but also trade with some liquidity OTC in the US at BYDDF and BYDDY. Not that it’s really a play on this “pure carbon” or even on pricing of other battery raw materials, since the price of lithium or carbon or cobalt is not a major component of the cost of a new electric car or bus.
But anyway, back to this “Rare, Inc.” pitch — how about some more info about the company being teased?
“I got the CEO of this mine in Sweden on the phone to discuss the breathtaking potential of this mining property.
“He confirmed that demand has been growing by leaps and bounds, and that its Pure Carbon refinement facility has never been more needed than right now.
“‘We’re in a unique position with our facility in Sweden, which is fully permitted and operational ready… we’re able to supply this growing demand.’ —CEO of Rare Inc.”
And apparently this mining company is also planning to produce some other valuable minerals:
“Rare Inc. knows that once Apple, Tesla, and the U.S. military have locked in contracts, it will be easy to sell them hard-to-find commodities with even fatter margins.
“That’s why Rare Inc. has secured mines and sources for lithium and tungsten.
“But best of all is its unique plan to sell rare earth elements (REE)…
“It has another mine in Sweden, just a few hours away from its Pure Carbon mine.
“It’s the most significant rare earths source in all of Europe, and it contains some of the most valuable of all the rare earths.”
Rare earth minerals have created a couple stock market bubbles in the recent past, also partly because of the strategic importance of building supply outside of China, though it hasn’t worked out very well for any of the actual mine-builders over the longer term just yet (Avalon Advanced Materials was one of the huge stories in rare earth stocks and is down from a $7 high to about 20 cents in six years… Molycorp was the hope for the industry with its strategic US mine but fell into bankruptcy because of declining prices, etc.).
So yes, we get it — there’s a graphite mine and processing facility in Sweden. Gerardo Del Real thinks it’s going to be hugely valuable. What is it?
Thinkolator sez: Leading Edge Materials (LEM on the Venture Exchange in Canada, LEMIF OTC in the US)
Leading Edge used to be called Flinders Resources, and was teased and pitched a few times in the six or so years since they bought the past-producing Woxna mine in Sweden — most aggressively by Frank Curzio back in 2012 and 2014 when he was putting out the Phase 1 letter for Stansberry, but it was also teased right as the company was getting private placement money and changing its name by Michael Robinson, right on the tail end of the rare earth metals bull market when everyone was hoping to drive those old rare earths investors into graphene speculation.
And yes, the earlier pitches for Leading Edge/Flinders were mostly selling the “graphene” story, not graphite — graphene is the high-tech single-atom-thick engineered material that is widely expected to make miracles possible, but is not yet really commercially available (or viable)… its expected that graphene will be made using high-quality graphite as a raw material, but it’s going to be quite a while before that’s a meaningful business and there’s a good chance that the price of the raw material will be somewhat irrelevant. After all, graphite is priced by the tonne, and graphene is, literally, a single atom in thickness, which means that having more expensive or synthetic raw materials probably wouldn’t make much difference to eventual graphene prices.
But yes, graphite is also a key part of batteries, and I’ve seen plenty of estimates that lithium-ion batteries will be a larger part of the graphite end market than steelmaking by 2020 or so… so even if steel production doesn’t grow again, the demand for graphite will probably grow.
What will that mean for Leading Edge Materials? They are thinking about growth with exploration projects for lithium and rare earth elements in Sweden (they changed their name just last Summer, when they merged with Tasman, which had been working on exploring and defining the Norra Carr rare earth deposit in the south of Sweden for seven years), but the meaningful operations for the company right now are all focused on the Woxna mine, which for a while was also called Kringel.
Woxna has generated some news with the testing of their purified graphite being qualified for battery use, which has helped the shares to get some traction in recent months, though things have apparently not gone as was originally planned. Back when Flinders was first teased, they were saying that they aimed to be in production by 2014 and to take 10-20% of the European market for graphite, but production never started — I don’t know if that’s because pricing wasn’t good enough, or they wanted more capital, or what, I haven’t looked at the details.
If you want to be a worrier, which is always a good idea for investors in early-stage resources companies, here’s part of the risk assessment from one of Leading Edge’s press releases from last Fall:
“The Woxna project has never defined a mineral reserve and the previous preliminary economic assessment on Woxna dated October 29, 2013, has been superseded by the Company’s current technical report dated May 11, 2015. As the Woxna facility is not in production but remains on a production ready status, any future decision to recommence mining at Woxna will not be based on a preliminary economic assessment demonstrating the potential viability of mineral resources or feasibility study of mineral reserves demonstrating economic and technical viability. Under these circumstances, there is increased risk of technical and economic failure for the Woxna project, and the Company discloses additional risk factors relating thereto. The Company advises that it has not based its production decision on a feasibility study of mineral reserves, demonstrating economic and technical viability, and, as a result, there may be an increased uncertainty of achieving any particular level of recovery of minerals or the cost of such recovery, including increased risks associated with developing a commercially mineable deposit. Historically, such projects have a much higher risk of economic and technical failure. There is no guarantee that production will begin as anticipated or at all or that anticipated production costs will be achieved. Failure to commence production would have a material adverse impact on the Company’s ability to generate revenue and cash flow to fund operations. Failure to achieve any anticipated production costs would have a material adverse impact on the Company’s cash flow and future profitability. Mineral resources that are not mineral reserves do not have demonstrated economic viability.”
The company also consistently refers to the Woxna project as “100% permitted,” but more recent press releases also refer to their commitment to “re-permitting” the site to allow for increased production and high-purity processing, and I don’t think they’ve talked about the timeline or costs of the re-permitting or the expansion potential beyond that 2015 technical report.
So if this is something you’re interested in, there’s certainly some potential that it will either turn itself into a more valuable company (it’s currently got a market cap of about C$70 million) or go on a crazy stock market run if people get excited about graphite or rare earth metals again… but as a financial operating business, it’s awfully hard to make any guesses based on a mine that has been fully permitted for two years but has never produced any revenue… presumably that means they need something else to make the restart of the mine economically viable. There are plenty of graphite projects that have been worthy of a sales pitch but haven’t actually ever been built or generated any revenue, and maybe all of those high-purity graphite projects (Lac Knife, Lac Gueret Albany and Bissett Creek in Canada, Graphite Creek in Alaska, Coosa in Alabama to name just a few) were just “early” or overpromised or got ahead of themselves during the years of falling graphite prices… or maybe they won’t ever be built, I have no idea.
Some are being built, like Syrah’s Balama in Mozambique, and there are stories about increasing Russian production as well… I don’t know how to get a handle on the whole market with any precision, other than to note that prices fell for graphite for many years because of the drop in demand from the steel industry, so probably crossing your fingers for a big increase in steel demand would be as effective as betting on increased battery demand (demand for graphite from the battery market is certainly growing much faster, but steel demand is a much larger part of the business and is expected to remain so for at least a few more years. And a surge in steel demand combined with a surge in electric vehicles would be the ideal result for graphite producers… but, given the potential for synthetic graphite, this isn’t a case where natural flake graphite is a “has to have” material at any price, there will be price constraints from that competition.
And I wouldn’t put much stake in the lithium project in Sweden, for sure — it’s almost unimaginable that a hard rock lithium project in an expensive country will be able to compete with the lithium brine producers on cost, and there’s no shortage of economically viable lithium reserves elsewhere. It’s also hard, frankly, to see them actually building the Norra Karr mine for rare earths in Sweden, though it is a large deposit and it’s certainly possible eventually — you’d need a lot of money and a lot of high-tech processing of rare earth ores, which is complex and difficult and expensive… though the fact that this particular deposit is not particularly radioactive compared to others is probably a positive for eventual permitting prospects.
So I find myself not terribly tempted by this one, but that does not mean it won’t go up — it just means I don’t have any visibility on the potential economics of the Woxna mine restart so it’s hard to know whether a $50 million valuation is reasonable for the company or it should be half that or ten times that… there are plenty of sources that predict a spike in demand for graphite, like the Benchmark report that Del Real cites in the ad, but I also keep reading that synthetic graphite, manufactured using petroleum coke, is perhaps only twice as expensive as natural flake graphite… which would keep a natural ceiling on prices.
I haven’t gotten comfortable enough with my understanding of the industry, the pricing, or the real demand to jump aboard any graphite producers — probably because I’m hobbled with the knowledge that there are lots of logical “supply crunch” stories from the past that never really played out because the story is always far more complex than we imagine (just refer to uranium from 2014-2016, for example, when the price “obviously” had to rise but still, in the end, fell by more than 50%… though it is coming back up again a little bit lately). If you do decide to trade this one, keep an eye on that Woxna mine and don’t get too excited about the other stuff… and pay attention to what the actual economics of that mine might be as it goes through “re-permitting”.
Or, of course, you might get lucky and see another bubble for graphite or rare earths stocks… in which case, you could just hold on to the hype machine with both hands and hope for the best.
Regardless, it’s your money — so it’s your call, and I’d be curious to know what you think. Interested in speculating on graphite, or rare earths, or lithium? Have a fondness for Leading Edge Materials or for others in the space? I often think my role is to give you some fodder for skepticism in the wake of the hype machines that fly by at high speed and threaten to swamp our little kayaks… but that doesn’t mean the hyped-up little stocks will necessarily go down, we’re just trying to look at them as seriously as we can and counter the daydreams of wealth with another (sometimes grumpier) perspective. Let us know what you think with a comment below.
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