The Mining Report: What are the key advantages of vein or lump
graphite deposits over flake deposits?
Luisa Moreno: Two advantages of vein or lump
graphite deposits would be the natural high-grade purity of the graphite in
the ground, as well as the relatively low cost of production, most of which
comes from Sri Lanka. Another important point is that it is usually sold at a
premium price relative to natural flake graphite.
TMR: Are there any advantages flake
deposits have over vein deposits?
LM: I think an advantage is that they
have more applications. The flake graphite market is much larger. Vein
deposits are quite rare and make up less than 1% of the market.
TMR: Flake graphite deposits can be
high grade too, can't they?
LM: Flake graphite deposits can be
high grade but you won't find deposits grading 90�99% in the ground. Flake deposits tend to run
2�3% graphite. Some deposits in
Quebec have 16�20% grade. It seems that there's a
correlation between grade and the recovery of larger natural flake. For
instance, Northern
Graphite Corporation (NGC:TSX.V; NGPHF:OTCQX) has a deposit grading about 2%
graphite yet it has been able to recover more large flake relative to others
with higher-grade deposits.
TMR: Which one should an investor
prefer?
LM: To start, investors should look at
these graphite companies just as they would look at any other mining company.
They need to understand the feasibility of the project�the capital requirements, operating costs,
etc. For industrial and critical materials it is also important to understand
size of the market, the project time to market, the type of product it will
produce and how much it could be sold for.
We talked about flake
versus lump graphite deposits, but within the flake type products there are
the finer flake, the medium and the larger flake, and it is important to
understanding how much of each a mine can produce, as they are sold at
different prices. The shape of the flakes and other characteristics also
influence the price and applications. In the case of lump graphite, the
market is estimated to be ~5,000 tons (5 Kt) per
year, but it's relatively rare. If there is a company with a lump or vein
graphite deposit that requires low capital and operating costs, has secured
an offtake agreement and the project has strong economics,
that could potentially be a good investment.
TMR: Where's that 5 Kt
coming from now?
LM: It's coming mainly from Sri Lanka.
AMG Advanced Metallurgical Group
N.V. (AMVMF:OTC) is a major producer. It's a German firm that
owns a subsidiary called Graphit Kropfm�hl, which owns a lump graphite
mine in Sri Lanka. The asset produces about 3 Kt of
the 5 Kt estimated world production. The rest comes
from a private company owned by the Sri Lankan government. Elcora Resources Corp. (ERA:TSX.V) has also secured a lump graphite deposit in Sri Lanka, and expects to
bring the project into production in a short period of time. It seems that
the company is attracting great interest from end-users looking for
additional supply of lump graphite.
TMR: Each electric car uses about 50
kilos of graphite and electric carmaker Tesla Motors Inc. (TSLA:NASDAQ) is proposing a battery-producing plant in the U.S. dubbed the Gigafactory. Graphite juniors are touting a potential
boost in demand for graphite. Should investors believe the hype?
LM: By sourcing materials and
building a Gigafactory in North America, Tesla is
trying to lower the production costs and thus the price of its electric
vehicles (EV). But I don't think the Gigafactory is
a done deal. Investors should closely follow what's going on with Tesla and
understand its business. Standard & Poor's recently rated Tesla's credit
as "junk" and that could certainly affect its ability to raise
funds. I don't think it will deter Tesla from going ahead with its Gigafactory. There will likely be some challenges, but
the company seems determined to build the factory to lower its production
costs and make its advanced electric cars more affordable.
TMR: What was your reaction when you
read Tesla's Gigafactory news release?
LM: When I first read it I thought
that it could potentially be a game-changer, not just for electric cars, but
for the strategic materials sector, namely lithium, graphite, cobalt and
other materials that might be used in the EV batteries.
TMR: Some experts believe it could be
easier for Tesla to rely on synthetic graphite rather than natural graphite.
What's your view?
LM: The two aspects that Tesla likely
will be looking at are performance of the materials and cost. If natural
graphite can compete with synthetic graphite on cost and performance in
lithium-ion batteries, I think natural graphite has a good chance to secure a
position in Tesla's supply chain.
TMR: What are some publicly traded
companies that have graphite projects that could meet Tesla's requirements?
LM: In the natural graphite space most
of the listed companies have essentially flake graphite type deposits and it
has been suggested that at the moment flake graphite has a more direct
application in lithium-ion batteries. The most advanced company in the flake
graphite space is Northern Graphite. It was the first graphite company listed
on the Toronto Stock Exchange (TSX) to complete a feasibility study. Northern
is now pursuing financing for its plant.
Another company that just
completed a feasibility study is Focus Graphite Inc. (FMS:TSX.V; FCSMF:OTCQX; FKC:FSE). The company's Lac Knife deposit has
relatively high grades, and metallurgical tests show that Focus can recover a
good percentage of the large flake, which carries a higher price and could
potentially be used in lithium-ion batteries. Focus is the only TSX-listed
graphite company that has been able to secure an offtake agreement (up to 40 Kt per year) with an end-user. I think that's very
positive.
TMR: Focus has a project in Qu�bec. Northern has a project in Ontario. Are they
in a better position because they are North American-based companies?
LM: Tesla has indicated that it would
prefer to source its battery materials in North America, so these companies
would likely be favored over companies that are not in North America. That
said, if Tesla can achieve the sales that it believes it can by 2020, that could launch a new trend where we could see an
increase in the sales of EVs across the board, not just with Tesla.
Recently Tesla CEO Elon Musk indicated that he is willing to share Tesla's
intellectual property with other companies. Tesla is clearly trying to
generate a much wider adoption of these vehicles, and we may see an increase
in the adoption of EVs not just in North America, but also in Europe and
Asia. While North American graphite projects could be favored by Tesla in its
Gigafactory, other projects with sound economics
would be in a very good position going forward as well.
TMR: We should note that you don't
cover any graphite companies but that you may at some point. Lithium is also
used in EV batteries. Could this factory also possibly change the economic
outcome of certain companies in the lithium space?
LM: Certainly. EVs use more lithium
and more graphite than hybrids. If we see a greater adoption of EVs, we would
definitely see an increase in demand for lithium carbonate and lithium
hydroxide�the lithium products that go into
these batteries.
Our forecast for lithium
is based on the sales of hybrid vehicles only, which could reach 3.8 million
(3.8M) per year by 2020 versus less than 2M now.
Current estimated annual
lithium demand is roughly 170�180 Kt. If EV adoption rates meet
projections, estimates suggest that demand could go north of 250 Kt by 2020. That is a significant increase and it will
offer the opportunity for new projects to be developed.
TMR: How many EVs are currently being
produced?
LM: Industry estimates indicate that
there are currently over 400,000 EVs on the road, compared to about 100,000
EVs in 2012. It seems that EV sales have doubled every year for the last
three years and if this trend continues, over 1 million EVs may be on the
road in three years.
TMR: Do you cover any lithium
companies?
LM: We cover RB Energy Inc. (RBI:TSX), which was formed as a result of
the merger between Sirocco Mining, an iodine mining company with assets in
South America, and Canada Lithium, which has the Qu�bec lithium deposit. RB Energy is advancing the
Qu�bec mine and plant and expects to
reach annualized name plate capacity of 20 Kt by
the end of this year.
TMR: RB Energy recently closed a $22M
bought-deal financing. What will the funds be used
for?
LM: It's for working capital, as well
as for improvements at the plant. When the new management took over the
Quebec lithium project, it decided to slow down commissioning to make plant
improvements that would lower costs. Those include an ore sorter, as well as
a gas pipeline.
TMR: Do you cover other lithium
companies?
LM: The other name that we cover is Nemaska Lithium Inc. (NMX:TSX.V; NMKEF:OTCQX). Nemaska has the Whabouchi project, the second-highest lithium grade
deposit in the world. It's also in Qu�bec and has 20 million tons in
Measured and Indicated resources. It is a project that we are watching very closely.
It's in the early stages, but it has great potential.
TMR: Is having the second-highest grade
deposit in the world enough to get a small modular plant built near James Bay
in Qu�bec?
LM: The grade alone wouldn't do it,
but the fact that Nemaska has a sizeable deposit
close to good infrastructure�hydropower, road access�and a positive feasibility study, means it
could potentially build an economically competitive lithium mine and plant in
Quebec.
TMR: In a June research update you
listed four rare earth elements (REE) companies that recently arranged
financings. These financings occurred at near record low share prices. One
even offered a half a warrant with its deal. Is this simply life in the rare
earths space right now or poor management?
LM: I think it's
life in the mining space. If we look at the performance of most mining
companies, especially the juniors, they've been struggling for a while. The
REE juniors are no exception. Some investors are looking more at more
advanced projects like Largo
Resources Ltd. (LGO:TSX.V), which has a vanadium deposit that is close to reaching production,
or Orbite Aluminae Inc.
(ORT:TSX) and RB Energy, which are also close to commercial production.
Companies with projects that only have a preliminary economic assessment or
prefeasibility study and require $15�25M or more to reach the
feasibility stage are finding it difficult to raise funds.
TMR: Are there signs the REE market
could improve sooner rather than later?
LM: According to global economic
estimates, we should see an increase in economic growth in the West, as well
as in China, through the next couple of years. If we see that, I think that
will be good news for REEs, as well as other critical metals. There could be
a little light at the end of the tunnel here.
TMR: Some recent reports suggest that
China may replace REE quotas with taxes. Please tell us more about the
potential impact on the market.
LM: The World Trade Organization (WTO)
ruled against China and its use of quotas. If China decides to comply with
the recommendations of the WTO, I think that increasing taxes on REE exports
or adopting tariffs would be effective ways China could still impose its
policies.
China is determined to use
rare earths resources to benefit its economy. China was supplying more than
90% of the world's REEs but only has about 36% of the world's resources.
TMR: Do you see the Gigafactory
having any impact on REE demand?
LM: It is likely, as electrified
vehicles use larger quantities of rare earth elements in magnets for their
electric motors and in their more complex automotive systems.
TMR: A recent research report suggests
that REE demand will grow at 6�10% annually through 2020. What
accounts for that growth?
LM: It appears that some end-users are
still using the stockpile material that they accumulated in 2011. Once those
stockpiles diminish further we will see more end-users coming back to the
market.
The other part of that is
the normal growth in the economy. Demand for electronic products�cell phones, tablets, etc.�is in double digits in emerging markets. If
we see the economic growth that's expected in the West and an increase in
demand from emerging markets, over the next six years we may see a significant
increase in REE demand.
TMR: Roughly speaking, how many
development-stage REE projects reaching production would that growth in
demand support?
LM: It depends. Some projects have
production targets of 3 Kt, others 20 Kt. There is
definitely opportunity for a few projects. We might see the need for about
100 Kt of new REE supply by 2020 if the global
economy improves in a sustainable fashion. Asia is going to take some of the
new supply as the consumption of China relative to the rest of the world may
not change. I believe we should continue to see China as the largest
consumer, followed by Japan.
TMR: What are some REE developers that
you cover that are positioned to meet that demand?
LM: Some of the companies that may be
well positioned are those that have been able to complete a positive
feasibility study and those that have made significant advances in their
metallurgy, examples include Avalon Rare Metals Inc. (AVL:TSX; AVL:NYSE; AVARF:OTCQX) and Matamec Explorations Inc. (MAT:TSX.V;
MRHEF:OTCQX). Matamec is optimizing its metallurgical tests, while
Avalon is focused on financing. Those two companies seem relatively well
positioned to capture a significant increase in demand.
Another company that has
made significant improvements in metallurgy is Northern Minerals Ltd. (NTU:ASX). Northern is now working toward a feasibility study. The company has
a unique Xenotime REE deposit in Australia that
favors the heavy rare earth elements (HREE). Without any chemical treatments,
Northern has been able to produce a concentrate, unique to its deposit type,
which is about 20% total rare earth oxides (TREO). Most others are not able
to concentrate to those levels, so that's positive.
Another company with some
positive results is Commerce
Resources Corp. (CCE:TSX.V; D7H:FSE; CMRZF:OTCQX), which has the Ashram deposit in
Qu�bec. The company recently has shown
that it can produce a concentrate running 40% TREO. Commerce introduced a
leaching step and with that it has been able to achieve a much higher grade
concentrate. Both companies have shown positive metallurgy results.
TMR: Avalon recently did a deal with
Solvay SA (SOLB:NYSE; SOLB:BRU) to eventually process
in France concentrates from Avalon's Nechalacho REE
project. What are your thoughts on that news?
LM: We saw a benefit in that Avalon
should be able to decrease its capital costs by not having to build a
separation facility. Also, the company will be effectively decreasing
technical risk by entering this agreement with Solvay, which has rare earth
refining experience. We're still waiting for an updated feasibility report
from Avalon to give us a better sense of what the new capital and operating
costs will be; the feasibility should be completed this year.
TMR: Can you get us up to date on what
is happening in Alaska?
LM: The Alaskan state government has
proposed a $144M bond that would help finance the development of Ucore Rare Metals Inc.'s (UCU:TSX.V;
UURAF:OTCQX) Bokan-Dotson
Ridge REE project. I think it's unprecedented. We haven't before seen local
support such as what Ucore has received in Alaska.
It shows that the Alaska government recognizes the Ucore
project as strategic for the state and, likely, the U.S. The financing
arrangement has been signed into law and is contingent upon the completion of
a feasibility study for the Bokan project and
positive due diligence by the Alaska Industrial Development and Export
Authority (AIDEA). Ucore has received some funding
as well from the Department of Energy and is working with different research
groups in the U.S.
Ucore's deposit leans toward HREEs so the
company would be able to produce some of the less common and more critical
elements. Ultimately the company still has to complete a feasibility study
and prove that the metallurgy is feasible; Ucore is
diligently advancing forward the feasibility study.
TMR: Do you have some parting thoughts
for critical metals investors?
LM: Over the previous five years or so
industrial metals and minerals have been increasingly adopted for use in
advanced technologies. For instance, europium and thulium are used in LCD
screens. High purity alumina and some rare earths are used in LED lights,
which are replacing less efficient incandescent lights. Some rare earths are
used to make magnets that go into motors. And these metals are being used to
create even lighter strong metals. For instance, scandium and aluminum alloys
have strength similar to titanium with the lightness of aluminum. There are
so many different applications, but essentially these strategic materials are
being used to improve our technologies and they're here to stay.
TMR: Thank you for taking the time to
talk with us, Luisa.
Luisa
Moreno is
a mining and metals analyst with Euro Pacific Canada. She covers industry
metals with a major focus on electric and energy metal companies. She has
been a guest speaker on television and at international conferences. Moreno
has published reports on rare earths and other critical metals and has been
quoted in newspapers and industry blogs. She holds bachelor and master
degrees in physics engineering, as well as a Ph.D. in materials and mechanics
from Imperial College, London.
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DISCLOSURE: 1) Brian
Sylvester conducted this interview for Streetwise Reports LLC, publisher of The
Gold Report, The Energy Report, The Life Sciences Report and The
Mining Report, and provides services to Streetwise Reports as an
independent contractor. He owns, or his family owns, shares of the following
companies mentioned in this interview: None
2) The following companies mentioned in the interview are sponsors of
Streetwise Reports: Commerce Resources Corp., Focus Graphite Inc., Largo
Resources Ltd., Nemaska Lithium Inc., Northern
Minerals Ltd. and Ucore Rare Metals Inc. Streetwise
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