The Gold Report: What is the state of the current global
graphite market and what impact might Tesla's construction of a battery
Gigafactory in the desert in Nevada have on future demand for the mineral?
Blair Way: Because graphite is used in many energy-related
applications (including electric vehicles, Pebble Bed Nuclear Reactors, fuel
cells, solar panels and electronics ranging from smartphones to laptops), it
has been categorized as a critical, strategic mineral by several governments
including the United States and Europe.
What does this really mean? At this point in time it means
nothing—graphite is in oversupply and prices are low. However, if China
decided to stop supplying graphite to the world, then the West would be in
trouble. This is highly unlikely to ever happen. As far as the impact of the
Tesla plant on the greater market, that's yet to be defined in detail, but it
will create more demand for graphite, both natural and synthetic.
TGR: How big is the graphite market?
BW: The graphite market combined—the natural flake and synthetic
market—is worth approximately $13 billion ($13B). Synthetic is 90% of that
market, and natural flake graphite is 10%.
TGR: How big is the natural flake graphite market?
BW: The worldwide natural flake graphite market hovers around 1.1
million tons a year (1.1 Mtpa) of which 75% is from China, 11% from India, 6%
from Brazil, 3% from North Korea and 5% from the rest of the world.
Consumption of graphite is also approximately 1.1 Mtpa, and 65% is consumed
in China. The balance of the production is consumed in Brazil and India
(200,000 tons), with 100,000 tons in Europe and 100,000 tons in North
America. Of this 1.1 Mtpa, more than 60% is fine and medium graphite while
the balance of 40% is flake graphite. The majority of this flake graphite is
micronized for the end user.
TGR: How important is it to understand the graphite market in terms
of dollar value?
BW: World production and consumption of natural flake graphite is
often claimed to be almost as large as the nickel market (1.8 Mtpa) by
volume.
The market should be considered by dollar value not just tons per annum.
As a comparison, the 1.1 Mtpa of graphite is worth $1.3B while 1.8 Mtpa of
nickel is worth $26B. As a new entrant to the market, nickel is a
significantly larger market than graphite. So to put the graphite market in
perspective, the non-Chinese natural flake graphite market is a $300 million
($300M) market. This is the market in which all the Western graphite
producers (current and future) are vying for position.
That is why a new graphite production facility must start small and build
relationships in the current market while developing products that can supply
the anticipated future markets. Cash flow for a graphite business must be sensible
in today's market.
Chart provided by Flinders Resources
TGR:What is the size of a big graphite mine and what kind of
revenue stream should investors expect from a natural flake graphite mine
selling into the traditional market?
BW: A large graphite mine would be 10,000–20,000 tons per year
(10–20 Ktpa) and would have a revenue stream of $10–20M. Profit could be in
the range of $3–8M. This is similar in scale to a 10,000–20,000 ounce gold
mine. Any graphite miner claiming a large-scale operation will not be able to
achieve the sales as a new entrant to the market. It is possible that the
mine could grow to a much larger size over time, but the sales must drive
expansion of production. If too much concentrate is produced and it does not
sell, then working capital will diminish quickly and the business will be in
trouble.
TGR: What sort of revenue should you expect from a high-purity
natural flake graphite miner selling into the battery market?
BW: High-purity natural flake graphite can and does displace some
synthetic graphite. The market for synthetic graphite is about 1 Mtpa, which
at prices of $5,000–10,000 per ton indicates a market size of $5–10B
annually. Approximately 50% of the synthetic graphite produced is used for
electrodes in the steel industry. The uses of synthetic graphite are varied,
but for batteries the quantity of natural flake graphite consumed is less
than 100 Ktpa. The synthetic graphite market is as private as the natural
graphite market, so figures quoted can vary greatly. There are multiple new
uses for high-purity graphite beyond conventional batteries, so there is huge
potential for the growing market for high-purity natural flake graphite.
TGR: We often hear about the importance of offtake agreements. Can
you explain to us the important distinction between offtake agreements and
sales agreements?
BW: Offtake agreements are not sales agreements—they are
non-binding agreements to purchase future production if a number of
provisions are met. A sales agreement is a commitment to quantity and price
per ton for a set period of time. Most junior mining companies are not
signing sales agreements because graphite consumers want to lock in prices
below known market prices.
To evaluate the offtakes you have to ask the questions: Did the buyer
invest hard cash in the graphite business to facilitate the start of
production? Does the contract with the buyer protect the producer or the
buyer? Is there a guaranteed minimum or maximum price when the market price
is constantly changing? Is there a minimum price in the agreement? Is it a
take-or-pay agreement? What are the escape clauses for the buyer to get out
of the agreement? Does the agreement cover all grades produced by the
graphite producer, or is it just the grades the buyer requires? What happens
to the products that the buyer is not interested in?
There is little to no hedging of graphite because it is not a publicly
traded commodity, and it is very unlikely a trader will hedge for a producer.
If a trader does offer to buy at a set price it would be at historically low
prices. This will benefit the trader and not the producer. Typical refractory
customers do not buy graphite in large enough quantities to justify locking
in prices. They can also stockpile if required to ride out higher pricing.
Even high graphite prices do not have a huge impact on overall pricing of the
end product because graphite, by cost, is a small part of the cost of the
products.
TGR: One of the buzzwords we hear when companies in the graphite
space tell their story is "graphene" and the potential for their
company to one day produce it. How important should graphene exposure be to
an investor or speculator when deciding what companies in the graphite space
to invest in?
BW: Graphene is 10–20 years away from being commercially viable, so
one cannot justify a graphite mine based on the graphene market. The graphene
market will take an extremely long time to develop products for everyday use.
Additionally, a small amount of graphite goes a long way in making graphene.
There are two kinds of graphene. One is made from chemical vapor
deposition, in which a graphene coating is made on top of another substrate,
then the substrate is removed, leaving only the graphene. Most of the
graphene being used today is made that way. That is the graphene the
electronic industry wants because it's ultra-high purity and can be easily
controlled.
Feeding the Mill. Photo provided by Flinders Resources
The lower-cost way uses natural graphite as the precursor. That market
will take longer to develop, but it will be a bigger market because that kind
of graphene can be used in the more practical, higher-volume products that we
use every day. As a graphite producer, it is important to be part of the
R&D process and to drive it towards commercialization. Flinders Resources
Ltd. (FDR:TSX.V) is an active part of this R&D process supplying
graphite to research facilities.
Graphene will not have positive impacts on a graphite producer's cash flow
until commercialization has taken place and there is a real market for it.
Graphene will be produced by specialists, not miners. Miners will supply the
materials to enable graphene manufacturing.
TGR: What should be on an investor's checklist when considering a
potential investment or speculation in the graphite space?
BW: Production of graphite is only one step to becoming a graphite
producer. Sales must be secured to ensure all concentrate produced will sell.
The market is a closed market and if sales are not secured for production,
selling product is extremely difficult. Can the company sell its product at a
profit?
There are four key elements to determine the quality of a graphite
company:
1) Capital costs of the project:
Capital expenditures (capex) is a huge driver and this is what really
kills a project–especially a low-revenue business like graphite. Consider
many nickel laterite projects and how typically the first owner runs out of
cash, and it is the second or even third owner that actually makes the
business work. The capex kills the first owner almost every time. Aluminum is
similar too. Both these commodities have a huge market to supply; graphite
does not. The scale for graphite is much smaller, but the same elements of
capex are at play.
2) Marketing/production rate:
Bigger is not better—except it is often required to justify high capex.
The market does not support the mega graphite projects (anything over 10–20
Ktpa). If the company cannot make money at modest rates, the project will
most likely fail. The marketing section of most feasibility studies to date
do not have a credible source of information. If a gold project was to sign
off its own marketing section of a feasibility study claiming to use an
average selling price of gold at $2,000 per ounce, there would be an uproar.
That is what appears to be happening in graphite for most studies.
There are no expert traders who can or will provide an independent opinion
on the market for a particular project's product. If they did, it would not
serve the project well. That is one of the reasons we approached the Woxna
project in Sweden the way we have—to test the market in real time to be sure
we understand it. You could never do this for a base metal or precious metal,
but the scale of graphite is such you can and we have. Being a graphite
producer and selling into the market means we know more than most about the
market.
3) Operating cost (Opex):
Can the product be sold at a profit for all fractions of the production?
Every deposit produces a mixed bag of concentrate with fine, medium and large
flakes. The large flakes will naturally have the higher carbon content and
the medium less and fine less again. The quantity of each will have a big
impact on the average selling price. Sometimes the fines do not sell at
all–or for very little. This can increase the cost of the higher value
concentrate. All producers hoping to start up must have a high-purity
strategy. They will not be profitable until they can value add all the
concentrates.
4) Value adding the concentrate to increase margins:
Does the company have a credible high-purity strategy–a flow sheet defined
and tested? Anyone can purify with a leaching plant or thermal, but it can be
very costly. The flow sheet must not only prove technical success but also be
economic. It must be less than $1,500/ton to produce to 99%+ carbon. This is
rarely, if ever, discussed in the high-level, high-purity strategies. To ask
a lab to confirm it can be done is almost worthless; the economics must be
defined. All graphite samples can be purified to 99%+. The company must have
done the work to define the economics and how to build and operate the
high-purity plant. To discuss what purity can be achieved through flotation
is a start, as the higher the carbon content feeding the HP plant, the lower
the cost of the HP concentrate.
TGR: As an investor/speculator, what questions would you have for
companies when evaluating their feasibility (FS) and preliminary feasibility
study (PFS)?
BW: These are requirements under the NI 43-101 regulatory framework
for all Toronto Stock Exchange-listed public companies. It is a requirement
of greenfield projects to demonstrate technical and economic viability. A
feasibility study is the final study before commencing detailed design and
construction of the project, so it must include the permits to construct and
operate the mine and facility. These studies are designed for large projects
such as gold, copper, silver, nickel or zinc projects. Typically these are
mines and processing facilities that cost hundreds of millions of dollars to
build and generate revenues of hundreds of million dollars a year. A PFS can
cost in excess of $5M and an FS can cost upwards of $10–20M for the most
basic of projects.
When conducting a PFS or FS for a graphite project, these study costs are
prohibitive. The revenue stream for the largest graphite mine in production
today would be about $30M a year. This is the largest graphite mine in the
world and it is located in China. The next largest mine is about 10 Ktpa, and
that equates to a revenue stream of $10M a year. You will see many FS and PFS
for graphite companies creating large revenue stream models as this is the
only way to rationalize the capital costs to get these facilities in
operation and build an impressive story for promotion. This is the challenge
for graphite.
TGR: How relevant is the marketing component of a graphite study?
BW: In my opinion the marketing sections in the FS and PFS
technical reports published by public companies are rubbish. There is no
authority to go to for understanding the graphite business. There are a
number of providers who publish reports on the graphite business, selling
these reports for over $5,000, but the actual information on the market and
actual buyers is minimal to non-existent. The reports are based on voluntary
surveys sent to private businesses that are not obliged to supply accurate
data, and in some cases it is beneficial to provide incorrect data.
The Woxna Processing Facility. Photo provided by Flinders Resources
These private organizations do not want their business to be known so they
provide misinformation; the reports lack accurate data. Often the marketing
sections of the studies published by graphite companies are signed off by insiders
of the company. I have seen the marketing section signed off by the CEO—this
is not independent and is highly biased. It is almost impossible to get real
marketing information because the traders benefit by the confidential nature
of the market. The commercial publications are paid-for publications, and
they are not bound by any regulations to be reporting facts.
When you study these detailed reports on the production, which are also
based on very poor information gathering techniques, and marketing you find
limited detail on the actual end users and who buys the products and what
they pay for it. This is due to the confidential nature of the graphite
market. There is no way to accurately understand it without being in the
business and selling product into the market.
TGR: Can you share some insight into what to look out for when
interpreting metallurgical results?
BW: Many companies press release the results of bench scale or
"pilot plant" test work and how they are achieving carbon contents
as high as 97% or even 98% from flotation. These results are achievable in a
full scale flotation plant but the engineering firm must have demonstrated
experience in designing and building a graphite processing plant.
Another important point is the "pilot plants" purported to
belong to the various companies claiming to have operated a pilot plant are
actually modular plants constructed by a lab using the various components
they have in inventory. This "pilot plant" is assembled using these
components and then dismantled once the test is complete. This is not the
same as many companies in other commodities that actually build small plants
that test the flow sheet at reasonable scale on their sites. No graphite
company has done this to date.
Flake size distribution in the lab-scale tests can vary quite
significantly to the real-world, full-scale facility. Flotation of graphite
is tricky. The natural flakes float best but as the feed is processed, more
fine material is created during milling, and intermediate grinding impacts
flake size distribution negatively. What this means is it is most likely that
flotation will produce a mixed bag of flake sizes. Generally a 30–40%
distribution of each fraction is expected. Each ore will perform slightly
differently but there will always be a decent percentage of fine and medium
flakes. The problem with this is that impurities also float into these medium
and fines, which reduces carbon content to the low 90% range or even into the
80s for the fines. This results in a number of products when sorted into
fine, medium and coarse and the associated carbon content of the fines in the
mid-80s, mediums in the low 90s and large at 94%. The large flake is most
valuable and the medium and fine will bring the average selling price down. It
is unrealistic to expect to produce coarse, medium and fine concentrates all
at 94%.
TGR: How important is flake size?
BW: Flake size is important primarily because during flotation the
flakes liberate (float) most efficiently and these will yield the highest
carbon content. As the flake size diminishes, typically the entrained
impurities increase and the carbon content goes down. Customers specify large
flake often to ensure they get the carbon content, even though they often
grind or micronize the flake graphite for their processes.
Even spherical (SP) graphite, which often is thought must come from large
flake, is misunderstood. SP is very fine graphite due to the mechanical
process to create it. It must be natural flake graphite but it does not need
to be large or even medium flake.
Some customers do require large flake sizes, but that is less significant
than what is published in the industry. Carbon content is the most important
factor in defining the value of the graphite concentrate. Some customers will
pay a premium for micronized natural flake with high carbon content. The
important issue is what fraction of the total concentrate product is high
carbon content?
TGR: What are the flake size designations?
BW: Coarse, natural flake graphite is plus-50 mesh/300 μ, medium
flake is plus-80 mesh/180 μ and fine flake is minus-80 mesh/180 μ.
TGR: How are prices for natural flake today?
BW: Prices are down for all natural flake graphite. This is due to
the drop in demand, which is a direct result of the decline in the steel
sector. Current medium to large flake 94% graphite is selling for less than
$700 per ton and, in some cases, just not selling as there is a surplus of
concentrate currently. Buyers are making low offers to producers to secure
cheap concentrate for the future market.
TGR: How important is resource size?
BW: The resource size is not as important as many would like the
public to believe. Graphite is not that rare so it is quite easy to find a
large deposit that would deliver 10–20 years life of mine for a 10–20 Ktpa
business. It is important to keep in mind the size of the graphite market
when compared to the size of the resource. For example, 100% of the graphite
market in Europe could be met by a resource of 1 Mt at 10% Cg. So 10 years
and 100% European supply is 10Mt at 10% Cg. This is for 100% of the market
which, of course, is unrealistic. A new entrant to a market would be lucky to
get 10–20% market share. To identify hundreds of millions of tons of resource
is not as valuable as is the case for base metals or precious metals.
TGR: How important is the grade of the resource?
BW: The resource grade is important primarily due to mining costs.
The lower the grade, the more material that must be moved to produce a
concentrate. Typically a lower grade deposit will be more costly to mine.
Anything under 5% is a concern given that there are many graphite deposits in
the world with higher grades.
TGR: When analyzing any deposit, we always look for the fatal flaw.
What is really important in a graphite deposit?
BW: The location, configuration and metallurgy of the deposit are
critical. The deposit must be near all key infrastructure, including sealed
roads, inexpensive electricity, port facilities, and preferably an existing
processing facility. To include the cost for roads, electricity or long
transportation distances to port and customers in capex will severely impact
a new graphite project. These three elements will have a significant negative
impact on both capex and opex. Sunk cost on the infrastructure is the most
cost effective way for a graphite business to establish itself. Equally
important is access to a decent work force and skilled labor for maintaining
the mine and processing facility.
The deposit must be easy to mine–high grade and low stripping ratios are
critical. The metallurgy of the deposit is hardest to understand–who is
actually testing the deposit? Have they ever designed an operating graphite
plant? What experience is there to actually assess the metallurgy and design
an efficient full scale flow sheet?
TGR: How do you purify natural flake graphite? Do you use a
chemical leach or thermal?
BW: Leaching is the chemical breaking down of impurities in a
flotation concentrate and typically uses hydrofluoric, hydrochloric and
sulphuric acid as a minimum to achieve the high-purity concentrations. These
acids must be used to consume the impurities that cannot be removed by
flotation. This can be costly and the cost per ton of 99.9% concentrate can
range from $500–3,000/ton, depending on concentrate feed carbon content,
mineralogical compositions, operation conditions, permitting requirements and
availability of acids.
Thermal purification is simply the heating of a concentrate in a special
oven to 3,000 to 4,000˚ C to burn off all impurities. This is simpler but
generally more costly because of the high energy requirements to heat the
concentrate. The costs of this can vary from $1,500–10,000/ton, depending on
energy cost.
TGR: Where does Flinders fit in the graphite mining landscape?
BW: Flinders Resources is the only Western public company with a
permitted, fully operational modern mine and production facility able to
produce natural flake graphite and is in a strong position to place itself as
a supplier of choice for the rapidly expanding and game changing lithium-ion
battery energy storage.
The company has been working on optimizing a flow sheet to produce
high-purity graphite that was substantially developed in the early 2000s by
the previous owner of the Woxna project. We are negotiating with existing
high-purity technological providers.
Flinders has a market cap of less than CA$10M; CA$4M is backed by cash.
With a fully constructed, permitted and producing plant and mine, zero debt
and cash on hand, the company is well positioned to leverage its first-mover
advantage to concentrate its resources on research to produce high-purity
grade graphite and initiate the relevant permitting.
TGR: Thank you, Blair, for your time.
Chart provided by Flinders Resources
