Top 3 Graphite Miners With Value-Add Potential | Seeking Alpha

2022-01-15 09:34:47 By : Ms. Karen Xie

Dilok Klaisataporn/iStock via Getty Images

This article first appeared in Trend Investing on December 10, 2021; however, has been completely updated for this article.

As the electric vehicle boom accelerates, demand for EV metals is also accelerating. Naturally, lithium, cobalt, nickel, and NdPr get most of the attention, especially as they sell for high prices.

But let's not forget graphite, as it is used in all types of electric vehicle (EVs) batteries in the anode. Sure silicon use in the anode is increasing, but for now, it appears graphite will remain a key part of the anode.

A reminder of a 2016 Elon Musk quote:

Our cells should be called Nickel-Graphite, because primarily the cathode is nickel and the anode side is graphite with silicon oxide.

Generally, the challenge for the flake graphite miners has been low prices which means low or negative margins and lack of incentive to fund new projects. A surge in graphite demand can easily double or triple flake graphite prices from around their current level of ~US$1,010/t for graphite flake 94%C (+100 mesh). We saw this already in 2021 with lithium prices up almost 6x.

Graphite prices as of January 6, 2021

It should be noted that flake graphite prices vary depending on flake size and also if contract or spot prices.

For example, in November 2021 Syrah Resources reported:

Weighted average sales price increased to US$490 per tonne [CIF] and further price support evident post quarter end... Strong growth in sales order book with more than 50kt of natural graphite sales orders in the December 2021 quarter, demonstrating robust underlying demand conditions and forward contracting.

Furthermore, graphite miners and juniors that can sell 'value-add' products such as coated spherical graphite, anodes, or graphene stand to make even better margins and hence profits.

In an April 25, 2021 report from Leading Edge Materials they stated:

A recent price assessment produced by Benchmark Mineral Intelligence for the Company shows average pricing in 2020 for uncoated natural spherical graphite at around US$3,000 per tonne and for coated natural spherical graphite between US$7,000 per tonne (domestic China and non-EU) and US$12,000 per tonne (high-end applications), with an average price of around US9,500 per tonne for material used in cells for Western OEMs....

The charts below really need no explanation, except to say that such surging demand usually leads to price rises, especially when supply cannot keep up.

UBS's EV metals demand forecast (from Nov. 2020)

2021 IEA forecast growth in demand for selected minerals from clean energy technologies by scenario, 2040 relative to 2020 - Increases Of Lithium 13x to 42x, Graphite 8x to 25x, Cobalt 6x to 21x, Nickel 7x to 19x, Manganese 3x to 8x, Rare Earths 3x to 7x, And Copper 2x to 3x.

Source: International Energy Agency 2021 report

Graphite demand forecast to 2030 (by anode type)

Source: Talga Group (adapted from Benchmark Mineral Intelligence)

UBS forecasts year battery metals go into deficit

Source: UBS courtesy Carlos Vincens LinkedIn

In summary, the graphite miners with low costs, ability to rapidly scale production, and who produce "value-add" products should perform best.

With this in mind, I selected my top three graphite miners.

Syrah Resources Limited is an Australian company that 100% owns the massive, high-grade, low-cost, long-life Balama graphite mine in Mozambique. The mine has a >50 years expected mine life and high grades of 16% contained graphite.

The mine has had some issues the past two years with production halted at one point due to low graphite prices. It is back and running again and as of September 2021 was producing at a 15kt per month run rate with C1 cash costs (FOB Nacala) of US$430 per tonne. This is one of the lowest in the world. The short-term problem is they have been selling their flake graphite only at a September quarter weighted average sales price of only US$490 per tonne. The other main issue has been shipping costs and delays. However, demand for Syrah's graphite is now surging. Syrah state:

Strong growth in sales order book with more than 50kt of natural graphite sales orders in the December 2021 quarter, demonstrating robust underlying demand conditions and forward contracting.

Looking ahead things should get a lot better for Syrah. This is because graphite prices should rise with surging demand, Syrah's low contract prices can be potentially renegotiated higher, and Syrah is soon to be potentially selling a value-added product.

Syrah is working to become a vertically integrated producer of natural graphite Active Anode Material (“AAM”) at their Vidalia facility, Louisiana, USA. The facility has produced initial product samples that are being tested by potential off-takers. The first stage plan is to potentially ramp up to 10,000 tpa of AAM with discussions ongoing about a larger ramp. Regarding AAM, Syrah recently stated:

Interest from target customers driving consideration of accelerated expansion of Vidalia beyond 10kt per annum AAM production capacity...... Advancing to a final investment decision for Vidalia’s expansion to 10kt per annum AAM capacity in the December 2021 quarter, subject to customer and financing commitments.

From the above link Syrah states:

Syrah’s wholly-owned and integrated spherical, purification and furnace operation at Vidalia, which uses natural graphite from Balama Graphite Operation, is the only vertically integrated and commercial scale AAM supply source outside China.

Then on December 23, Syrah announced:

Binding Active Anode Material offtake agreement with Tesla. Tesla will offtake the majority of the proposed initial expansion of AAM production capacity at Vidalia at a fixed price for an initial term of four years commencing from the achievement of a commercial production rate, subject to final qualification. Tesla also has an option to offtake additional volume from Vidalia subject to Syrah expanding its capacity beyond 10kt per annum AAM. The Agreement provides a compelling foundation to proceed with the initial expansion of Vidalia’s production capacity and Syrah plans to make a final investment decision for construction of this expanded facility in January 2022, subject to financing commitments. Syrah is advancing commercial and technical engagement with other target customers to develop Vidalia AAM for mass production and secure additional long-term purchase commitments for Vidalia.

Note: Bold emphasis above done by me.

Syrah aims to be producing large quantities of value-add active anode material in the USA (potentially by 2023)

Syrah Resources trades on a market cap of A$913m and had ~A$50m in net debt in 2021. 2021 net earnings are forecast to be negative, so the 2021 forecast PE is negative 13.4. 2022 PE is negative 44.1, and 2023 PE is positive 29.4.

Analyst's consensus rating is a hold and average target price is A$1.25, representing 31% downside.

I rate Syrah Resources as an accumulate for investors with a five-year plus timeframe. My rating is based on my view that flake graphite prices should start to rise soon and that once Vidalia is up and producing AAMs at commercial scale of 10,000 tpa (probably starting in 2023) Syrah will be increasingly profitable. My price target for end 2023 and end 2025 are in my latest Trend Investing article:

Syrah Resources financials and forecast financials

NextSource Materials Inc. is a development stage Canadian company that is developing its 100% owned Molo Graphite Project in Madagascar.

Following a large capital injection from new Chairman Sir Mick Davis the Molo Graphite Project is fully funded to stage 1 production. First stage production target is 17,000 tpa of flake graphite. Stage 1 construction is well underway with the processing plant fabrication and assembly recently completed and mine commissioning expected in Q2 2022. Stage 1 binding off-take and some of Stage 2 is partially complete following a 10 year 35,000tpa binding-offtake deal with Thyssenkrupp Materials Trading. NextSource plans a modular approach to expand the Project as demand requires.

Stage 2 expansion is undergoing a Technical study to assess a production capacity of at least 150,000tpa.

Source: NextSource Materials company presentation

NextSource also plans a Battery Anode Facility ("BAF") three-way collaboration. The partners consist of NextSource's Japanese offtake partner ("Japanese Partner") and the Japanese Partner's Chinese SPG processing partner ("Chinese Partner"). More details on the partners here including: "NextSource will be responsible for the sourcing of all funds needed to construct the BAF and will wholly own and operate the facility."

Commissioning of the battery anode facility is targeted for Q4 2022. Volumes are not yet finalized. On November 15, 2021, NextSource stated: "Once the Company makes a production decision, the battery anode facility with coating capabilities is expected to take less than 12 months to construct."

The Partnership is exclusive to NextSource and pairs the Company with two well-established and leading companies that process and supply SPG to leading Japanese anode and battery makers, who in turn supply the Tesla supply chain and other major automotive companies ("OEMs").

This three-way Partnership will provide NextSource with a complete, turn-key anode facility that is an exact duplicate of the facility that is currently processing value-added spheronized and purified graphite for lithium-ion batteries by one of current suppliers to Tesla and other international OEMs.

Commissioning of the BAF is targeted for Q4 2022 and will be located proximal to key demand markets for graphite anode material. South Africa, Europe and North America are the jurisdictions currently being considered for the location of the facility.

NextSource's three-way partnership Battery Anode Facility is being set up as a potential supplier to Tesla

Source: NextSource Materials new release April 12, 2021

NextSource Materials trades on a market cap of C$369m and zero net debt. Being in the development stage there are no earnings or PE yet. Revenues are expected to begin in 2024 (see chart below).

Analysts' consensus rating is an outperform and the average target price is C$6.60, representing 77% upside.

I rate NextSource Materials as a good speculative buy for investors with a five-year-plus timeframe.

NextSource Materials financials and forecast financials

Talga Group ("Talga") is an Australian vertically-integrated advanced materials company focusing on battery 'anode' and 'graphene additive' products. Talga initially developed their premium coated natural graphite anode product (Talnode®-C) and has also developed a graphene silicon composite electrode additive (Talnode®-S).

Talga plans a vertically integrated mine-to-anode production operation

Talga has a number of wholly-owned graphite projects, comprising multiple deposits located in northern Sweden. There are three advanced projects: Vittangi, Jalkunen and Raitajärvi. Combined they contain JORC resources totaling 55.3Mt @ 17.5% Cg for 9.7Mt total contained natural graphite.

Initial production is expected to start at the Viattangi Project, where permitting is currently underway.

Talga plans to build a JV mine-to-anode production operation with the addition of a Swedish Battery Anode Project to be fed initially by Vittangi graphite.

LKAB and Mitsui had signed a non-binding LOI for potential joint venture and development partnership in the mine-to-anode production operation. Since then LKAB has chosen to not go ahead; however, in December 2021, Talga announced:

"Mitsui e xtends and expands MOU with Talga for Swedish Battery Anode 31 August 2022......Mitsui, at their discretion, will have the non-exclusive right to negotiate and enter into relevant binding agreements prior to the MoU expiry date on 31 August 2022."

Source: Talga Group company presentation

The Vittangi Anode Project ("mine to anode" concept) DFS outlines a 19,500 tpa coated anode (Talnode®-C) production facility planned in Sweden (fed from 100,000 tpa of graphite from the Vittangi Graphite Project), over a 24-year mine life. Below is the 2021 DFS results which show a solid pre-tax NPV of US$1,054m, pre-tax IRR of 30%. Capex is estimated at US$484m.

Vittangi graphite-anode Project 2021 DFS summary

Source: Talga Group news 1 July 2021

Customer testing and piloting are underway. Talga’s Electric Vehicle Anode [EVA] "qualification" plant, Europe’s first Li-ion battery anode production facility, is on track for full commissioning in Q1 2022. More details here.

Next steps will be to secure off-take agreements and project funding. It may be that the Mitsui LOI (discussed above) for a JV will assist to provide a combined off-take and funding solution for Talga.

Talga is targeting commencement of mining planned for 2023 with commercial anode production in 2024.

Talga Group trades on a market cap of A$492m and zero net debt. Being in the development stage there are no earnings or PE yet.

I was unable to find any analyst's price target.

I rate Talga Group as a watch and see. Vertical integration makes for a very good NPV in the DFS (boosted by the US$11,250/t selling price used for their Talnode®-C anode), all with a reasonable capex. Valuation looks fully valued for now for the stage of development; however, their strategy to produce battery anodes in Europe would be meeting a huge need with numerous new battery gigafactories coming to Europe in the years ahead. Plenty of potential and worth considering (Mitsui agrees and we will need to watch and see if Mitsui goes forward with Talga).

The graphite market is a tough market as graphite is not rare and pricing power has traditionally been with the buyers not the producers. Also, China has dominated the anode market. However, in the new era of exponentially rising EV sales, demand for graphite, coated spherical graphite, and anodes look set to skyrocket.

The graphite miners with low costs, ability to rapidly scale production, and ideally offer value-added products should perform best.

Other opportunities exist in the companies producing silicon-graphite anodes, synthetic graphite and graphene.

My top three graphite miners with value add potential are:

Please read the risks section and understand these investments are best suited to long-term investors with a five-year-plus time frame.

I fully understand it is much harder to get excited about the graphite sector given the past few years of depressed graphite prices and the struggle many graphite miners have faced. However looking forward it's quite possible we can see severe flake graphite, coated spherical graphite, and/or anode shortages due to surging demand from the EV sector. This can lead to a potential tripling or quadrupling of graphite prices as we have seen with lithium. Will 2022 be graphite's year? I think it may be so.

As usual, all comments are welcome.

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Disclosure: I/we have a beneficial long position in the shares of SYRAH RESOURCES [ASX:SYR], TRITON MINERALS [ASX:TON], AMG ADVANCED METALLURGICAL GROUP NV [AMS:AMG], MAGNIS ENERGY TECHNOLOGIES [ASX:MNS], ZENTEK LTD [TSXV:ZEN], LEADING EDGE MATERIALS [TSXV:LEM] either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information in this article is general in nature and should not be relied upon as personal financial advice.