One of the areas that I write about a lot is investing. And within that large category, I tend to write a lot about metals and mining investments. I was interested in a bunch of different approaches, from looking at specific metals to areas of the world. For example, I did a lot of writing on mining in Manitoba for a while (when I lived there), and I’ve done a lot of writing about junior resource stocks.
One area of focus that was really hot for a while was graphite, and I built up a fairly popular graphite investing e-course at a site I used to own in 2012 (you can read more about that now-defunct project here). Of course the graphite industry, like a lot of metals, declined significantly so interest waned… subscriber interest AND my interest!
The information here is still relatively accurate (a couple years later) although investor interest (which tends to drive junior resource stock prices) has moved elsewhere so I think the fundamentals remain relatively compelling for the long-term but as a short-term play graphite is maybe not the right investment for a lot of junior resource investors.
But now that it’s been a couple of years, I have this really interesting (to me at least) graphite e-course that I did a bunch of writing for. I gave it away free to subscribers a few years ago and now I’m releasing it to anyone who wants it.
(Remember: This information is a couple of years old now and may no longer be relevant now. Not all the links will work. Always do your due diligence before making any investing decision. I do own a couple of the companies listed below but I am not making any buying or selling recommendations.)
THE GRAPHITE INVESTING E-COURSE
Graphite is so much more than the stuff in your pencil. It’s used in consumer products, industry, tech, energy, and the military.
You rely on graphite every day (without even realizing it). But supply can’t keep up with demand.
One expert says global graphite production will need to double.
Another expert calls graphite “the next big thing”.
Keep reading for the free graphite investing course to learn about the mineral that governments, military, and industry are clamoring to own.
You’ll learn why a bad economy is even better for graphite investors (hint: The demand for graphite isn’t dampened because the economy is down).
You’ll learn why some countries (including the US) might be willing to go to war over graphite.
You’ll learn why graphite is going to become even more critical in the future (hint: Someone just won a Nobel prize for their cutting-edge work on this future product that nearly everyone will own).
And, you’ll learn what it means that nearly every person in the US relies on graphite even though there aren’t any graphite producing mines in the US.
Ready to get started? Let’s go! The entire course is free and it’s posted on this page, no strings attached. (So why am I creating this course, you might ask? Well the reason is simple: I initially did a bunch of research for myself because I love junior resource investing and was particularly interested in the graphite space. Then other people started asking for the information so I posted it. At first I posted it as an email-based course but I’m not interested in making money from the site. It costs me nothing except a few bucks for the domain name so I’m happy to keep this for other people as well. I’ll add to this site from time to time as I do further research.
Metals and Investment Writer
INTRODUCTION: WELCOME TO THE GRAPHITE INVESTING ECOURSE
When most people hear of graphite, they think of the stuff in their standard yellow HB pencil.
Because most people think of that, they completely overlook graphite and don’t know that it is an essential metal used in more places than you might realize – it’s so important that the governments around the world consider it an essential metal, perhaps even one they are willing to go to war over!
In this e-course, I’ll explain what graphite is and why it’s so important to our lives, and I’ll show you why it could be the next big investment opportunity for smart investors to exploit.
This course is about graphite investing – not just about specific graphite stocks (which we will cover) but also about graphite investing in general. We’ll talk about the thinking behind graphite – as a commodity and as “product” explored and developed by miners.
The basis of all successful investing comes down to this: Understanding supply and demand. Low supply and high demand tend to drive prices upward. High supply and low demand tend to drive prices downward.
Graphite supply is low but graphite demand is high and growing. I’ll show you why and how you can potentially profit from it! But first, we need to know a bit more about graphite.
LESSON 1: WHAT IS GRAPHITE?
As a graphite investor, I want to understand graphite better – not only the market and the mineral itself but also how graphite fits into the larger picture.
I never really paid attention during science class in high school so I had to go back to the basics to learn. Here’s a simple “big picture” view that you might find helpful. I realize it might seem boring at first but keep reading to the end of this lesson because I’ll show you why we investors need to know this stuff.
Okay, so do you remember the periodic table? The last time you probably saw it was in high school.
The sixth element on the periodic table (nestled comfortably between boron and nitrogen) is Carbon.
The chemical element Carbon is one of the oldest known elements and one of the most abundant in the universe. The hardest known substance and one of the softest known substances are both Carbon.
Carbon doesn’t just exist in one form. The atoms of Carbon bond together in different ways. These are called allotropes. When Carbon atoms bond together in one specific way, we get one allotrope of Carbon, and when the Carbon atoms bond together in a different specific way, we get another allotrope of Carbon. There are several known allotropes of Carbon right now, and it all depends on how the Carbon atoms are bonded together.
The best-known and most “mineable” forms are…
- Amorphous (this is where we get coal from)
There are other forms of graphite, as well, but they are not necessarily something you can pull from the ground (and some of them need to be produced in a laboratory).
- Buckministerfullerenes (sometimes called “Buckyballs”)
- Glassy Carbon
- Atomic Carbon/Diatomic Carbon
- Carbon Nanofoam
- Carbide-Derived Carbon
- Linear Acetylene Carbon
And even beyond these types of Carbon, there are proposed/theoretical forms of Carbon that scientists believe could exist. I’m still learning about these forms of Carbon. Honestly, I don’t know a lot about them until I started to research this topic but I need to know more about all forms of Carbon!
So why does it matter to us as investors? I think it’s important to know the “family” that graphite is part of. And, it can (and should) prompt questions like “can graphite turn into a diamond? Or, can a diamond turn into graphite?”
Read this great answer at Scientific American and this great answer at Technology Review.
And another great question: “What’s the difference between natural and synthetic graphite, and how much graphite is synthesized?” Read one answer in this PDF from the United States Geological Survey (PDF). (Note: This PDF from the year 2000 so the answer may be dated now).
Researching the answer to these kinds of questions gives investors a better idea of just how rare graphite is and whether or not it is likely to be replaced – either through increased resources in nature or replicated in the laboratory.
The short answer to some of those questions above: Allotropes don’t change from one to another, so you’re not going to see a big coal deposit turn into a big graphite resource any time soon. But it is worth knowing what the different allotropes are because scientists are always experimenting and may someday discover a better Carbon replacement for graphite or a way to augment graphite into something different (which they’ve already done with graphene). And on the topic of synthetic graphite, it does count for a large part of the graphite market and it is worth studying just how much of an impact that synthetic graphite has and how big of a risk this is to graphite miners.
LESSON 2: WHY GRAPHITE DEMAND IS HIGH, AND RISING
You might not realize it but you rely on graphite every single. Its use is almost “invisible” because of a simple case of mistaken identity.
Lithium Ion batteries are used in consumer electronics, electric vehicles, military applications and the aerospace industry. They are popular because they are long-lasting and rechargeable.
Here’s where the case of mistaken identity comes in: Those Lithium Ion batteries are actually made up of 10 times to 20 times MORE graphite than they are made of lithium! (Some people argue that those batteries should be called graphite-lithium batteries).
As an investor, this is exciting news: Graphite demand is rising because the use of graphite-heavy lithium batteries is on the rise with no chance of this demand slowing down in the near future. (Are we likely to see FEWER consumer electronics or electric vehicles on the road in the future? Are we likely to see the military choose to rely on shorter-lasting non-rechargeable batteries? Not likely!
Chances are, we’re going to see more… a lot more.
For this reason, I’m really excited about the graphite opportunity. But this isn’t the only reason! We see graphite at work somewhere else, as well! Watch your inbox for in a couple of days for another high-demand use of graphite.
You’ve read about how graphite is a huge component in Lithium Ion batteries, which are powering our devices and our electric vehicles. That’s only part of the demand-side of the story. There is yet more demand for graphite that you might not realize.
Let me ask you this: In the near future, what do you see as being the biggest trend in the energy industry?
The answer is simple: Clean power. Right now, we are reliant on coal and oil and natural gas but those resources have gained a bad name for the harm they potentially do to the environment. Clean power, even if it won’t power an entire city right now, is gaining the attention of power companies, politicians, and venture capitalists because of the promise it holds for the future.
Here’s the good news for graphite investors: Graphite plays a role in wind power, solar power, wave power, and nuclear power! It is used to conduct, shield, and store energy. So although your home might not be powered by these methods today, the question investors need to ask themselves is: Will these energy-generating methods increase in the near future? You bet they will!
So that’s yet another key reason why the demand of graphite is growing.
But there’s still one more reason that graphite demand is growing.
If there’s one thing I’ve learned from Warren Buffett, it’s this:
Boring is good. Buffett loves boring because it’s predictable. He avoids the chaos of what he doesn’t know or understand.
Well, I’ve got a bunch of boring reasons that you will like graphite. These help to prove that graphite demand is hot (and likely going to rise).
Ready? Here they are in no particular order (plus scroll down to the bottom of the email for an important question)
Graphite is necessary for…
- Lithium Ion batteries (you knew that already)
- Fuel cells
- Antiknock gasoline additives
- Chemical compounds
- Drilling mud
- Industrial diamonds
- Magnetic tape
- Paints and polishes
- Brake linings
- Steelmaking (such as blast furnaces and implements)
- Seals and gaskets
- Antistatic plastics
- Electromagnetic interference shielding
- Electrostatic paint and powder coatings
- Electrostatic paint and powder coatings
- Fly wheels
- Polystyrene thermal insulation
- Silicon chip heat dissipation
So here’s the question: Do you see any of these needs going away?
Are we suddenly going to stop needing brake linings? Will we stop needing steelmaking instruments and blast furnaces? Will we stop needing flywheels or thermal insulation? You don’t need to be an expert in each of these industrial applications to know that they all aren’t likely to vanish any time soon.
There is still another reason why demand is going up.
Around the globe, governments invest a lot of time in researching something that most people never think about.
Governments ask themselves 3 important questions:
1. “Which metals are necessary for our country?”
2. “Where do we get those metals from?”
3. “What happens if that metal source is no longer available?”
The United States government calls it the Critical Materials Strategy and they publish their research findings regularly. A public version is available for anyone to download off of the internet.
In the Critical Materials Strategy, the US government looks at metals that might be important to energy, industry, military, and consumer use.
And guess what it identifies in that document.
Yes. Good old graphite.
The Critical Materials Strategy identifies the use and necessity of graphite. Not only that, it also points out that the European Union has labelled graphite a “strategic metal” (which means that it should be considered absolutely essential to the country).
As more and more countries pay attention to graphite and as governments realize their reliance on this metal, more and more of them will name graphite as an essential resource for their country, further driving up demand.
When we look at trends in computing, what are we seeing? Smaller, portable, mobile, always accessible.
Right now we clip our mobile devices onto our belts or put them into our pockets or purses. And they are slowly becoming hands-free and more durable… but it’s not perfect yet.
Imagine a day when your computer is even lighter, easier to use, and it won’t break when it falls. That’s just the cusp of tomorrow’s computer trends. Trend experts are seeing wearable computers as something in the not-too-distant-future. (We already wear those Bluetooth headphones and Google is experimenting with web-enabled glasses).
Believe it or not, graphite will play a role there, too.
Scientists have invented something made out of graphite called “graphene”. It’s so groundbreaking that people are calling it “the miracle metal” and its inventors (Geim and Novoselov) won the Nobel prize for it in 2010.
Graphene is stronger than steel, harder than diamonds, it’s invisible and nearly weightless. It’s incredibly thin so you can bend it without breaking it. Imagine an iPad… that is as thin as a sheet of paper and you can crumple it up like a piece of cloth to put it in your pocket. That can be possible because of graphene.
Of course, it’s not just personal devices. Imagine bigger, flatter televisions. Lighter airplanes. Clothes that change color. Military camouflage that can change with the environment. Graphene will change industry, commerce, and the military.
By now, you’re probably sick of me asking this question: If graphene can be developed into these devices, do you see the need for graphite going up? You better believe it!
LESSON 3: WHY GRAPHITE SUPPLY IS SMALL, AND DECREASING
I’ve showed you the demand side of the graphite business. I showed you why I believe demand for graphite is big and it’s going to get bigger.
But savvy investors know one important lesson that unsuccessful investors do not know: Demand only turns into profitable investing if there is an imbalance in the supply/demand equation.
If supply CAN keep up with demand, prices are driven down and profits are low.
If supply CAN’T keep up with demand, there’s opportunity for investors to profit.
But here’s a hint for you: In 2012, the US Department of the Interior and the US Geological Survey co-published a report about graphite. In their report, they quote a metals expert who said: “Current graphite capacity may not be adequate for the increasing demands of these new energy applications, which may require double the current graphite supply when fully implemented”.
So current graphite supply will meet only half of the anticipated American demand. Wow.
Graphite is so critical to every country that…
- has citizens who rely on mobile devices
- has citizens who drive vehicles that use brake linings
- has a steelmaking industry
- has industry that uses industrial diamonds
- has a military
… in other words, MOST countries rely on graphite.
The problem is, graphite production is limited. In 2010, there was NO mining of graphite in the US!
Adding to the inadequate supply, graphite deposits are found in limited places around the world:
The lowest-value graphite (called “amorphous” graphite) is found in China, Europe, Mexico, and the United States.
Middle-grade graphite (called “flake” graphite, which is worth up to 4 times the amount of amorphous graphite) is found in Austria, Brazil, Canada, China, Germany, and Madagascar.
The highest-value graphite (called “lump graphite” or “vein graphite”) is only commercially mined in Sri Lanka, as of 2010.
That’s not all. There’s more to this supply story.
We’ve been examining the supply-side of the graphite supply/demand imbalance. We’ve seen that countries are realizing their dependence on graphite by studying it and even adding it to their list of critical strategic metals.
When countries realize their dependence on a strategic metal, they tend to tighten up their exporting policies. This reduces the available metal on the global market as countries make sure their interests are served first (and they even stockpile some metals just in case. The National Defense Stockpile is the program run by the Defense Logistics Agency).
One of the most recent examples of export tightening was in 2010 with rare earths. China is a huge producer of rare earths for many countries and China tightened up their export policies and caused a bit of a panic in the rare earths market. (Note: In 2012, the World Trade Organization found China had violated free trade policies on reducing exports… but that was a couple years after the fact).
It also happens with other metals, too: Export-tightening has occurred in bauxite, zinc and coal. And that’s just exports from China. There are many other countries (including the US) who watch their exports very closely and are always balancing the revenues from exports against the availability of metals.
Since the US doesn’t mine graphite, exports from other countries could prove even more detrimental to the US.
One thing to consider when investing in any material is: Will this material be replaced by a cheaper material that is just as sufficient? Obviously, this will have an impact on the supply/demand imbalance by increasing the supply of graphite and decreasing the demand.
I don’t think this will happen any time soon:
Graphite has many uses and my research hasn’t revealed any significant alternates that might suitably replace graphite. Even if another metal is found to be better for some applications, it’s not likely that there will be a significant sweeping, overnight switchover from graphite to its replacement across all applications.
Safety standards will require that these metals are tested for suitability (i.e., no one is going to switch the metal on brake linings without first making sure that it does as good of a job as graphite!)
Some applications will be easier and faster to switch over than others. (Steelmakers aren’t likely to replace their blast furnaces right away).
In other words, IF there is a switch away from graphite, the timeline will be in years (or even decades). And that is only IF a superior replacement metal is found.
So I see graphite being a high-demand/low-supply metal for quite some time.
In the examination of the supply/demand imbalance of graphite, many investors see the opportunity and they consider investing in the metal. But they ask a very good question as part of their due diligence:
“What if a big number of graphite companies come on stream right now and supply the world with graphite? Won’t that solve the supply/demand imbalance and drive prices lower?”
That is a very good question! But here is the answer to remember when investing in resource companies:
Assuming you already know where a resource is in the ground, you still have to raise money and get permitting and set up a mine.
Assuming everything goes according to plan, you’re still looking at a minimum of approximately 2 years from discovery through exploration and 43-101 reporting and permitting and mine development.
So companies who are starting today to address the graphite demand won’t be mining graphite for at least 2 years.
That’s a huge and growing demand, with an increasingly restricted supply, and not enough companies coming on stream fast enough to meet the remaining demand.
There’s one final piece to the supply/demand puzzle that you absolutely need to know about.
The news is almost too depressing to watch. Every time I open a web browser or turn on the TV, I’m bombarded with bad news everywhere.
But bad news is good news for savvy investors. This puts added pressure on the supply/demand imbalance because it means new companies are less likely to go to market to get funding. (Some will, but many will wait for better times). So there is an even greater strain on supply since those waiting companies will still have 2 years to production when they finally do go to market for funding.
The dampened economy also makes everything cheap right now… even high-quality companies operating in a sector with a favorable supply/demand imbalance. So investors can buy good companies inexpensively, and potentially enjoy a rise in prices as the supply/demand imbalance becomes more acute AND as the economy improves.
LESSON 4: WHICH GRAPHITE COMPANIES SHOULD YOU INVEST IN?
Some of my readers have been asking me to recommend some graphite companies to invest in. I just want to let you know that I legally can’t recommend anything — I’m not a licensed investment advisor and the regulatory agencies are very strict about that kind of thing (for good reason!).
Also, I don’t want to recommend anything to you anyway because I don’t know you personally and I don’t know what your own portfolio is like. We all have our own portfolio goals, risk tolerances, and time horizons (plus a million other factors) so I would be doing you a disservice to just tell you what to invest in.
With that said, I will tell you the kinds of companies that capture my attention:
I really like companies that…
- Have already made some exciting discoveries in graphite.
- Are located in predictable, mining-friendly jurisdictions.
- Have a share structure that is nice and neat and not too diluted.
- Have money in the bank, joint venture partnerships, or cash flow from operations.
- Have a management team with experience.
- Are close to production. The closer to production the better! (i.e. If I have a choice between a company with an early-stage discovery that isn’t yet NI 43-101 compliant OR a company that has a producing graphite mine, I prefer the latter… that’s not to say I won’t invest in the first one but the second one is likely going to be making money sooner to fund future expansion).
There are other things to look at, of course, but those are the big ones for me. Not every company is going to achieve each of those points but the more points that a company achieves, the more I like that company!
LESSON 5: WHICH GRAPITE COMPANIES SHOULDN’T YOU INVEST IN?
I’ve given you the list of qualities I look for in a graphite company. I also promised you a list of qualities I don’t like graphite companies to have. When I see these things, I might still invest but I am VERY cautious about it.
- No cash and no income. This tells me that the company will have to raise money soon (either by borrowing money or by diluting their shares… neither of those options are ideal).
- Bandwagon-jumpers. This is a tricky one and people who are smarter than me will pick holes in my logic but here’s what I think: Some companies are in graphite for the long haul. I like those companies. But other companies have recently switched to graphite because it’s popular. MAYBE that’s okay because there happens to be graphite where they were exploring anyway but I feel like a lot of companies that have recently added graphite to their business model are just doing it because graphite is hot. Yes, there are companies who have successfully switched from one metal to another but I’m wary when I see a struggling company switch to the flavor of the month. I want to know why they switched and whether this is truly a good fit for the company.
Those are the big ones for me. If either of those two situations occur, I take a longer look at the company to decide whether or not it’s one I want to invest in.
Hope you find that helpful!
LESSON 6: WHAT I LOOK FOR IN A GRAPHITE INVESTMENT
I’ve told you what I look for in a graphite company and what I run away from when I see it in a graphite company. Now
I want to tell you about the thing I absolutely love to see in any junior exploration company (not just graphite), I have a HUGE WEAKNESS for that company. It’s like my investing Kryptonite!
I like to see ongoing cash flow.
I almost drool when I see companies with ongoing cash flow because it means they aren’t likely going to borrow and or dilute their shares further.
Some explorers find a deposit and try to bring it into a production. That is very expensive and time consuming and it takes a completely different set of skills. So I don’t get very excited when I see a junior explorer with that as their plan.
Some companies look for deposits and then do a deal with a larger company (some kind of merger or property sale or something). That’s okay but it tends to put big spikes into a company’s income creating a feast or famine mentality.
I don’t think that’s very efficient.
I like companies that can make money — either through a joint venture that provides ongoing cash flow or because they are selling their minerals or because they are producing a marketable product themselves. Those activities provide ongoing cash flow, which can provide some consistency and stability to the business’ finances, and (more importantly) fund future expansion.
Cash flow in the junior resource market is frankly very rare (when compared to other industries)… and cash flow in the graphite space is even rarer. If you find it, make sure the company is doing everything right (obviously you’re looking for more than just cash flow) but that’s something you should pay attention to.
LESSON 7: ONE GRAPHITE COMPANY YOU CAN’T INVEST IN
It might surprise you to learn that I’ve been watching a graphite company that you can’t actually hold in your investment portfolio.
Let me tell you a bit more about them and then I’ll tell you why I’m watching them…
Timcal is a graphite company that mines its own large flake graphite in a mine in Quebec and then turns it into products that it has branded as Timrex(R) graphite. You can learn more about those products and where they come from here.
The company was founded way back in 1908 and it started producing graphite products in 1917.
You can’t actually hold Timcal in your portfolio because Timcal isn’t a publicly traded company. They are owned by a company called Imerys and THAT company IS publicly traded (under the symbol NK on the Paris exchange). I haven’t looked into Imerys itself as a potential investment but they have broad holdings in a variety of minerals and products and processes.
So why am I paying attention to Timcal? Here are the reasons:
1. Timcal has been around for over a hundred years and have been in the graphite biz for almost the entire time, so they clearly know how to function profitably in this business.
2. Timcal demonstrates a very rare “mine-to-market” model where they take the graphite out of the ground and turn it into a saleable product that can be sold. That is almost unheard-of in the world of publicly traded graphite companies so I’m paying attention to what they’re doing and how they’re doing it.
3. Timcal has mines and facilities all over the world. I want to know where and who they’re dealing with and I’m keeping my eye out for other companies that are operating in the area.
Although I don’t expect other companies to achieve the exact same results as Timcal, I use them as a type of “benchmark” for a company that I think has been very successful.
LESSON 8: WHERE ARE THE BIG GRAPHITE DEPOSITS IN THE WORLD?
One reader asked, “Where are the big graphite deposits in the world?”
I went to the United States Geological Survey (USGS), which produces annual assessments of different metals. Here is a PDF report of their graphite analysis.
They found that the world’s resources of inferred graphite is estimated at over 800 million tons of recoverable graphite. (That might worry you about overwhelming the supply-side of the graphite investing equation but remember that this stuff still has to be mined, milled, and turned into a marketable product!
Here are the world’s top producers in order of tonnage (according to 2011 numbers, which were the last ones they provided)
- China 600
- India 140
- Brazil 76
- North Korea 30
- Romania 20
- Canada 25
- Sri Lanka 8
- Mexico 7
- Ukraine 6
- Madagascar 5
- Norway 2
Note: Other deposits that have been discovered more recently than this might change these numbers but I wanted to give you the published USGS numbers, which I think give a generally decent overview. As you hear about new deposits being discovered, you can fit them into this framework.
This map is also helpful. It looks like it might have slightly different numbers than the USGS report above. I’m not sure why although I wonder if the USGS made some changes to the PDF I downloaded because it looks like they have updated the numbers. But you have some pretty good information to build from.
By now, we all know how graphite is being used in various industrial applications, automotive applications, military applications, and cleantech/greentech applications today. These are the applications I consider to be foundational to the demand side of graphite right now.
And some of you have asked that I talk about the future uses of graphite — the stuff on the horizon that might further increase the demand of graphite or further decrease supply.
So let’s get into our time machine and visit the future and see how graphite is being used. Notice that many of the current uses of graphite are increased or are more widely adopted:
- As the middle-class grows throughout the world (especially in India and China and Brazil), there will be more cars on the road, driving up the requirement for graphite in the brake lining.
- As awareness of ecological problems grow, we should see an increase in cleantech/greentech, and many of those technologies rely on graphite as a key part of the equation.
- Electric cars will become more widely adopted (since prices will fall and the travel range and performance will increase), which will increase the need for Lithium-Ion batteries to power them. According to The Street,there was an estimated 600% increase in the electric car market between 2011 and 2012. I don’t have the most recent numbers but if it continues to grow at even half that adoption rate, we’ll see more electric cars on the roads and, subsequently, more need for graphite to power those batteries.
- And personal devices that run on Lithium-Ion batteries should grow, too: Right now, the ubiquitous cellphone/smartphone/mobile device comes to mind. Laptops are still in widespread use. iPods and other media devices continue to be hot. The tablet market has been reinvigorated (which includes iPads but also includes dedicated readers like the Kindle). There continue to be new consumer electronics products coming onto the market (like the iPad mini) and although not all of them will catch on, the importance of portable connectivity will continue to be widely adopted.
LESSON 9: ONE BUSINESS MODEL I WOULD LIKE TO SEE IN THE GRAPHITE INDUSTRY
I see this business model in many different metals but I haven’t seen it very commonly in the graphite industry yet. (It’s there; just not as widespread or explicit as with other metals).
My favorite business model is the prospect generator model. In this model, junior explorers look for deposits and when they find something promising, they work out a joint venture with senior partners who fund the project’s further exploration, development, and production.
In this way, the junior explorer earns an ongoing income from projects they’ve explored without incurring the massive costs of development and production. As you’ve heard in the past, ongoing income is key for me.
Some companies are accidental prospect generating companies. By that I mean: They find a deposit, can’t afford to bring it to production, so they shop it around and get a partner. But I like the ones who clearly and plainly say they are prospect generators — and state as such on their websites and annual reports — because they don’t waste their efforts on trying to bring the project to production first, and they don’t try to sell the entire project to another company. Their business model clearly states how they intend to make money.
So, why don’t we see the prospect generator model very much in the graphite industry? My theory is: There hasn’t been a lot of money in graphite for many years so there hasn’t been a lot of exploration, and we don’t see a lot of “major” graphite companies with a lot of money to swoop in and grab the most promising deposits. I think we’ll see more of it in the future but not right now.
I really like this model because it brings in that ongoing cash flow that I’ve talked about but it also allows a company to focus on the one thing it does well — exploration — without diluting its focus with other things.
LESSON 10: REASONS TO BE BEARISH ON GRAPHITE
I’ve told you that I’m bullish on graphite. I’m EXTREMELY bullish on graphite. I know many of you are as well. But I don’t ever want to be the kind of investor who is so bullish that I have blinders on and miss the warning signs.
So this is my “devil’s advocate” lesson in which I try to look at the other side of the coin. What would be the reasons that you WOULDN’T want to invest in graphite?
Briefly, I can think of a few:
1. Resource stocks are often speculative — there might be nothing in the ground or there might be something in the ground but it’s not economic to extract!
2. The prices of publicly traded companies aren’t only driven by the value of the company. As we’ve seen with some graphite companies, stock prices are also influenced by overall confidence in the economy.
3. Graphite might be replaced by another material that is better… but just hasn’t been discovered or perfected right now.
4. Graphite stocks might be overhyped, driving prices higher than they should be valued (which may have been the case in 2011 and early 2012.
5. Between the mine and the market are a lot of steps (i.e. mills and production facilities) that might create a false bottleneck.
It’s good to know what the risks are. Here are four articles that I think all graphite investors should read. The make a good case to pause and seriously consider whether or not graphite is the right investment for you. Check them out:
The Next Resource Investment Fad (at ASXNewbie)
Graphite: Time to Invest or Flavor of the Day? (by Casey Research)
Will Graphite Go the Way of Rare Earths? (at Reuters)
Only a Few Graphite Companies Will Win (at Resource Investor) (Note: Mickey Fulp is bullish overall but not on every company out there).
Every investor — even those as bullish as me — should read these articles and keep them in mind when investing.
But don’t worry. I’m not saying that I’m turning bearish. I’m actually more bullish than ever. I just think it’s worth looking at the other point of view.
LESSON 11: REASONS TO BE BULLISH ON GRAPHITE
I am more bullish than ever on graphite and here is one of the reasons: Graphite is gaining popularity on the strength of its use in high tech products and batteries but I don’t think this demand has been factored into stock prices yet.
What many people are missing is just how important graphite is to the more boring industries, including refractories and steelmaking.
According to the US government, 33% of the graphite production went into refractories and crucibles, and an additional 26% went into steelmaking applications (in 2011). A whopping 59% of graphite demand is not driven (yet) by some of the flashier industries. Instead, it is driven by industrial use. (Source)
So if you want to know what the demand of graphite is going to be in the near future, consider what these industries are doing. Are they on the decline? Are they on the rise? Although we’ve had global economic turmoil lately, there is still a need for these industries. And as global economies improve, the need for these industries will rise.
And THEN we can factor in batteries, which Roskill Information Services says will grow at 10% to 12% per year through 2016.
But what about the long-term future of graphite? I’m bullish on the long-term future of graphite because of graphene. You’ve heard me mention it before. It’s an innovation for which two scientists from the University of Manchester won the Nobel Prize in 2010.
So what’s the big deal about graphene? Well I don’t want to get too boring or technical here but graphene is basically a one-atom-thick sheet of graphite. It’s a strong, bendable, two-dimensional material.
So what are the uses for graphene? Well I did some reading around the web and there are some very interesting potential applications for graphene, including:
- Improved distillation for the biofuel and alcoholic beverage industries
- They have the potential to revolutionize the electronics industry with better circuitry and transistors, as well as solar cell development
- Graphene can transform food and water availability because of graphene’s anti-bacterial qualities and its potential use in desalination
- The aspect of graphene that I’m most excited about is its potential use as a durable, flexible touch-screen material, which can turn your iPad or smartphone into a super-thin cloth-like material. In the not-too-distant future, we’ll have wearable computers integrated into our clothing, or we’ll have smartphones that can be folded like a cloth in your pocket… and graphene will play a part in those applications.
Graphene is still relatively new and scientists are finding some exciting ways to use it. While many of these applications are proven or surmised based on the properties of graphene, it still has to be practical and profitable before it will become a reality.
But this is cutting-edge stuff that we might see in the future, which can drive up graphite supply.
LESSON 12: ARE GRAPHITE STOCKS SPECULATIVE?
I received a great question from one of my readers. He asked something that I think might be on the minds of many of you so I’ve included it here as an excellent question for all of us to think about.
He asked (and I’m summarizing a little)… “We’ve recently seen some graphite stocks increase their share price dramatically, and this seems to be because of the discoveries they’ve made. Are these companies becoming less speculative because they now have results?”
And here’s my answer… Companies that are basing their results on specific data of indicated deposits (not just initial drill results and not just inferred results) are less likely to be speculative because they are actually sitting on a deposit. That’s good news and definitely something I like to pay attention to! But there is still some speculation-related risk in those stocks, though. Specifically, the graphite still has to be mined. It might be an excellent deposit but until there is cash flow, the company is a speculative stock. That cash flow might come from a joint venture partner or from actually mining the deposit or even from mining and then milling the deposit.
Of course, that’s just my opinion. You might disagree but I believe that a company is typically speculative until it starts earning money from its deposits.
This is good news and bad news for those of us who are investors: It’s good news because it helps us more easily find stocks that match our investing portfolio. (Hey, I happen to like speculative stocks!). But it’s bad news because it can take a lot of potential investments off of our shortlist if we’re looking to minimize the speculative quality of our portfolio.
LESSON 13: THE DIFFERENCE BETWEEN LUMP GRAPHITE, FLAKE GRAPHITE, AND FINE GRAPHITE
I’ve received a few questions from you about the difference between lump, flake, and fine graphite — what the differences are and why it matters.
Here’s my attempt to explain that… WITHOUT boring you!
First, graphite comes in 3 forms: Lump graphite, amorphous graphite, and flake graphite.
You can think of them along a spectrum: One the one side of the spectrum is lump graphite — it’s bigger. On the other side of the spectrum is the very fine amorphous graphite. And somewhere in the middle is flake graphite.
Now let’s look at them a little closer…
Lump graphite (sometimes called “vein graphite”). This is larger chunks of graphite, and it’s very rare. Approximately only 1% of the world’s graphite production is lump graphite. Most of the lump graphite is mined in Sri Lanka.
Amorphous graphite (sometimes called “fine graphite”). This is very fine particles, almost like coarse dust. Approximately 50% of the world’s graphite production is amorphous graphite. Amorphous graphite is used in low-end applications and this is where we get graphite for pencils.
But the real key to the market is the third one — and this is where investors need to pay attention the most, in my opinion, is…
Flake graphite (sometimes called “crystalline flake graphite”). As its name suggests, this is flaky and angular. Approximately 49% of the world’s graphite production is flake graphite. This is the most important part of the graphite market because most graphite usage that we talk about here at GraphiteInvesting.com (such as lithium ion batteries, for example) comes from flake graphite. I believe that current and future demand will impact the supply of flake graphite the most.
The flake graphite market is further subdivided into multiple categories based on the size of the flakes.
Flake graphite is subdivided into different categories based on size. Companies typically report their graphite size based on “mesh”, (the size of the mesh sieve that is used to screen the graphite) or based on “microns” or “micrometers” (which are measurements of the size of the graphite itself).
Here’s a mesh-to-micron chart to help you convert if you find a report that doesn’t provide both pieces of information.
When reading about a company’s graphite projects, you’ll see words like “jumbo flake”, “large flake”, “medium flake”, and “fine flake” (sometimes called “small flake”) and beside that, you’ll see a number… like “80 mesh” when they measure the mesh or “160 µm” when they measure micrometers.
According to Technology Metals Research, there are no industry standards to determine what makes up a “large” mesh size or a “medium” mesh size or a “fine flake” mesh size but as I did some research around the web, I found some pretty consistent numbers.
Jumbo flake: 50 mesh or higher
Large flake: 50 mesh to 80 mesh
Medium flake: 80 mesh to 100 mesh
Fine flake (also called small flake): 100 to 300 mesh (anything smaller than this is considered amorphous)
As I mentioned, there might be some small variances in what companies are calling “large” or “jumbo” or “medium” so always check the mesh size or the micron or micrometer size.
Mesh size relates to the number holes per square inch in the mesh used to filter the graphite. One research source (who works for a graphite exploration company) wrote: “80 mesh means 80 holes per square inch. 200 mesh means 200 holes per square inch.” This helps people to understand the exact size of flakes. Large flake graphite doesn’t mean like the size of your corn flakes in your cereal bowl. He also pointed out a great comparison: A typical screen door has about 30-40 holes per square inch, which would make it a “30 to 40 mesh” screen. By comparison, large flake graphite is 2 times smaller than that, or about the width of a human hair.
I’m going to illustrate what we’ve learned so far by comparing a few different companies and the graphite sizes that they report. (Note: This information may change and not all of this information might be an indicated resource. This is provided only as an example and shouldn’t be considered a recommendation to buy or sell)…
Energizer Resources (EGZ) posted on their website about their Molo project: “… the Molo contains flake graphite including jumbo (+50 mesh), large (+80 mesh), medium (-80 to +100 mesh) and small flake (-100 to -200)”.
Flinders Resources (FDR) posted on their website about their Woxna project: “Woxna mine… flake distribution was 40% large flake +160µm, 28% medium flake 75-160 µm; and 32% fine -75 µm”.
Northern Graphite (NGC) posted on their website about their Bissett Creek project: “Almost all production will be high carbon, +80 mesh large flake and over 50% will be +48 and +32 mesh jumbo sized flake”.
Strike Graphite (SRK) posted on their website about their Deep Bay East project: “Recent testing of graphite from Deep Bay West achieved >95% carbon content for all flake sizes +32+50+80+100 and -100. Further treatment was able to achieve >99% purity (Noble Bay Mining Development Inc.)”.
I’ve just provided these as examples of how different companies present their information. You’ll notice there is quite a bit of variation between how they present it so investors need to dig in a bit further to learn more.
Mesh size can range from jumbo flake (which is above 50 mesh) to fine flake (which is 300 mesh and below).
But sometimes while you are looking at different companies and checking out the mesh size of their graphite, you’ll notice that some mesh sizes have a plus sign in front of them and other mesh sizes have a minus sign in front of them. The plus sign means that the particles remained in a sieve of that size while the minus sign means that the particles pass through a sieve of that size.
I tried to find some examples and the very best example I could find is right in Wikipedia: If graphite “…is described as -80/+170… then 90% or more of the material will pass through an 80 mesh sieve and be retained by a 170 mesh sieve”.
So, when we look at Energizer Resources’ mesh size, we see: “jumbo (+50 mesh), large (+80 mesh), medium (-80 to +100 mesh) and small flake (-100 to -200)”
This means that the jumbo flakes stayed in the sieve when the mesh was 50 mesh The large flakes passed through 80 but stayed in 100 mesh The small flake passed through 100 and 200 mesh sieves.
(I’m only mentioning Energizer Resources here as an example, not as a recommendation to buy or sell. I think they do a good job of showing what their graphite results are so I’m using them as an example and I wanted a real company to illustrate this lesson.)
In the big scheme of your due diligence, you might think that the plus or minus signs are a small point but I wanted to at least mention it in case you saw them and wondered what they were all about.
LESSON 14: GRAPHITE PURITY
When measuring the purity of graphite, it’s the amount of carbon in the graphite that is being compared to the amount of other stuff… so sometimes you might see a purity measurement of “92%C”, which means it is 92% carbon.
Purity is important because the purer a graphite product is, the more specialized its usage can be and, therefore, the more that can be charged for the graphite product. However, it costs money to purify graphite and during the purification process as much as 70% of the graphite can be lost. So graphite companies need to decide at what purity their graphite will provide the best return on investment for them and their shareholders.
A lower purity graphite will cost less to produce but will earn less money when sold. A higher purity graphite will cost more to produce, will diminish the supply as it is purified, but will earn much more.
I’ve listed a few of the graphite purities below. It can get quite a bit more detailed than this but I think this is a good start:
- Battery-grade graphite (which will drive up demand in the years to come) requires 99.9% purity.
- High tech (but non-battery uses) can require purity around 99.5%.
- Commercial flake graphite, which can be used for a variety of industrial applications, can be bought for as low as 80% purity but will probably need to be refined further before usage.
So now you should probably be wondering: What are the graphite purities that are being pulled out of the ground? I haven’t seen anything definitive or comprehensive but one company.
Asbury has this posted on their website and I think it’s pretty helpful: “Flake graphite from Madagascar is typically 85-90% carbon… Graphite from Canada runs 90-97% carbon and graphite from China 90-96% carbon.”
To pick on Energizer Resources again (since they helpfully post this info on their site), they are actually showing a higher purity of graphite out of Madagascar than what Asbury reported. You can read on their website what their purity is and how they are planning to improve purity: “Deposit possesses a unique metallurgical characteristic that delivers ‘jumbo’ flake (+50 mesh) with simple mechanical separation at 93% purity… Energizer’s process flow sheet is being designed with 2 additional streams; one to include a flotation circuit for upgrading remaining material to 95% purity as well as an end-module for upgrading to 99%+ purity for battery applications…”
So when you are looking at different graphite companies, compare the purity of the graphite that they are pulling out of the ground and watch for what their plans are to possibly add value to the graphite by purifying it further.
LESSON 15: US DEPENDENCE ON FOREIGN GRAPHITE
One of the reasons that graphite gets a lot of attention is because the US is almost entirely dependent on graphite imports to serve its needs. Adding to the problem is that China supplies somewhere between 70% and 80% of the graphite market… and it is tightening up its export of this essential mineral.
There are several graphite companies around the world in mining-friendly jurisdictions (i.e. Canada and Madagascar, for example).
But some of you have been asking about graphite companies in the USA. There ARE graphite companies in the US that are actively exploring for graphite.
I’ve listed them below in alphabetical order:
Alabama Graphite Corp (CNSX: ALP) [http://alabamagraphite.co/] – Mining in Alabama
Graphite Corp (OTC: GRPH) [ http://www.graphite-corp.com/ ] – Mining in Alabama and Montana
GraphiteOne (TSX-V: GPH) [ http://www.graphiteoneresources.com/ ] – Mining in Alaska (Disclosure: I own this)
USA Graphite (OTC: USGT) [ http://www.usa-graphite.com/ ] – Mining in Nevada
Before you rush out to buy them to cash in on the US graphite market, here are a couple of things to keep in mind:
- These companies are thinly traded and/or traded over-the-counter or on alternative exchanges.
- If they are exploring now, be aware that it can take YEARS and a lot of money to get a mine into production… assuming that there are results
- Humorously, a couple of these companies have been promoted as “the ONLY US graphite company”. Although they might be slicing the market in different ways, you should be aware that there is more than one graphite company at work in the US.
Obviously you have to do what is right for your portfolio but I think there are better investments out there right now that have a better chance of growth in the shorter term that you probably want to look at first.
LESSON 16: GRAPHITE INVESTING DUE DILIGENCE
A while ago, I was talking with a group of friends about various stocks that we were invested in. After our discussion, one friend went out and bought some graphite stocks. (Note: I never recommend stocks. I think you know by now that I’m a huge advocate of doing due diligence).
So he bought one particular graphite stock and guess what happened: It went down. And then down again. And then down some more.
The last time I talked to my friend, he was quick to point out that his stock had gone down, not up… the opposite direction he wanted it to go. Although he was polite to me, I think he was a little annoyed at the direction the stock had taken.
I know he’s not the only one who has been frustrated by the direction of graphite stock prices. I think most of us have had the same experience with at least some of our graphite stocks. We bought the stocks hoping they would go up but they went down instead.
He asked me what I thought about the stock and what I was going to do with my holdings since the price went down, I told him an answer that I think annoyed him a little: I said, “Great! I’m going to double-down on the stock!”
My reasons were simple:
1. The fundamentals for that particular stock hadn’t changed and yet it was cheaper. (According to Warren Buffett, that’s a good time to buy!)
2. My timeline for holding the stock (based on my research) was not a few weeks or a few months… but rather a few years.
Honestly, there are some times when I see a stock go down and I think “I just need to sell this dog and take my losses!” But that is a knee-jerk reaction to owning stocks and it’s not always a smart thing to do.
Some of you have been asking me for guidance about when to buy or sell stocks. Obviously I can’t give you SPECIFIC advice (I barely know you) but next week I will give you something I think you’ll find useful. It’s a sort-of framework I use to help me figure out whether to buy or sell a stock that I already own. Before I give you this framework, I want to hammer home this critical point: Every investing decision needs to be an informed decision. Do your due diligence first… and always.
My friend was a little annoyed at the direction of the stock price of a graphite stock he bought. Perfectly understandable. Frankly, he didn’t do any due diligence and he bought it with the naïve expectation of an immediate pop in price.
So he was frustrated when I told him I was happy with the price going down because I was buying more of the stock: The fundamentals hadn’t changed (actually, they had improved) plus my timeline to hold the stock is years, not weeks.
How can investors value a junior resource company so that they know whether or not they should invest in it? On my personal blog, AaronHoos.com, I’ve written two blog posts that you will find helpful to answer these due diligence questions…
How to do your own due diligence: This post is a good general post that guides the potential investor through a series of questions to examine how they are likely to invest, what their risk tolerance is, what their timeline is, etc.
How to do due diligence on a junior resource company: This post guides the potential investor through a close examination of a junior resource company. (It was written to help you look at any junior resource company, not just graphite companies).
Prerequisite: I have done my due diligence on the stocks in my portfolio. As a result, I understand the fundamentals of that stock (such as: The resource being mined, the supply/demand fundamentals for the resource, the management team of the company, the development plan of the resource, and the financials of the company). And, of course I pay attention to the stock price.
I try to stay on top of this information – both the fundamentals and the stock price. When one of those elements change, that is a signal to me that I need to make another buy/sell decision and I go through this framework to help me make the decision:
If the stock price has gone up, I ask whether the fundamentals have changed.
- If the stock price has gone up and the fundamentals have changed in a way I don’t like, I will probably sell.
- If the stock price has gone up and the fundamentals have stayed the same or improved in a way that I like, I will consider holding. (Or, if the price is still within range of what I’m comfortable with, then I might choose to buy more). Some people choose to sell at this point, and that’s okay but if I feel the price is going to continue to rise, I want to ride the elevator as high as it can go.
If the stock price has gone down, I ask whether the fundamentals have changed.
- If the stock price has gone down and the fundamentals have changed in a way I don’t like, I’ll probably sell.
- If the stock price has gone down and the fundamentals have stayed the same or improved, then I will probably hold or even buy more.
It’s not a perfect framework. But no decision-making tool ever is. Its purpose is not to decide for me. Rather, its purpose is to make me slow down and think before I act rashly. I may choose not to do what this framework concludes but at least I stopped for a minute to think about it.
One of the biggest risks of this decision-making tool is that market sentiment can sometimes impact stock prices without regard to the fundamentals (at least, in the short term). So a crappy company can become a big winner in the short term while some of the good stocks stay depressed. But in the long term, I’m a big believer in these things working themselves out.
So some of you are asking me what I’m doing since graphite stocks haven’t skyrocketed in price. Here’s what I’m doing: I’ve revisiting my due diligence and I’m seeing if the fundamentals have changed. And if I’m happy with the fundamentals, I’m doubling down.
LESSON 17: WHAT IS THE FUTURE OF GRAPHITE?
The graphite markets haven’t been kind. Graphite stocks have gone up and then plummeted. Not really a crash but kind of a slow fizzle.
When a stock is blowing up, it’s hard to keep your cool. I was working at a stockbrokerage when the tech bubble burst in 1999/2000 and the phones rang off the hook as investors jumped ship. When the markets (or specific stocks) blow up, it’s easy to just sell out and grab what cash you can.
(Disclosure: I am not a stockbroker anymore. I never recommend to buy or sell specific stocks).
When I buy a stock for the first time, I know that there will be days when I think “why did I ever buy that stock?” and “I need to SELL SELL SELL!!!” I know there will be those days because, frankly, we all have them, don’t we?
Doing your due diligence is good but that doesn’t completely erase the risk of owning a stock (i.e. a company can do something stupid or the uneducated masses of investors can turn against a stock or the whole market by overreacting to a small piece of bad news).
So one of the first things I do as soon as I buy a stock is this: I write down why I bought the stock and how long I want to hold it for before I think it will increase in value.
For one graphite stock I bought, I wrote the following while I was waiting for confirmation that my order was filled: “I like the graphite story in general, I like this company’s management team, they have a great deposit and the infrastructure is already there. I expect to hold this until at least 2015.”
I also sometimes make notes about the stock price, financials, the mesh size of the graphite, and other notes.
At the time, it’s just a nice reminder so that I don’t get buyer’s remorse as soon as I buy.
But later, when the market is crumbling or that specific stock price is going in the opposite direction, I look at my notes and I ask myself: “Has any of this changed?” And I go through the framework I sent last week.
There have been several times when this review has helped me to keep my wits about me when I want to cash out and run away.
Have you written down why you hold your stocks? If you haven’t, you might be more susceptible to the influences of bad news and negative market sentiment. If I can make a suggestion to you, it’s this: Take a moment right now to go through your portfolio and write down the reason why you bought specific graphite stocks.