The Gold Report | May 29, 2013 04:57AM ET
Growth potential among end-users and underinvestment on the supply side makes graphite an obvious go-long play, according to Simon Moores, manager of Industrial Minerals Data. China's consolidation of graphite production plays a role in that scenario. Now is the time to look for responsible junior graphite miners that base their economics on current (lower) prices, says Moores in this interview with The Metals Report.
The Metals Report: Simon, the Chinese government says it is no longer willing to sacrifice the environment to mine and export commodities. You recently visited several graphite mining operations in China. Is this for real or just paying lip service?
Simon Moores: When you visit these mines and see how dated and wasteful some of their mining practices are, the environmental issues are apparent. But while this stance is partially to benefit the environment, it's also about China wanting to retain raw materials and use them to manufacture higher-value products. China does have some leading graphite producers that are now investing in not only improving their products as well as their mining practices. This is something non-Chinese companies will have to keep track of.
TMR: If China is "going green," what are the ripple effects that graphite investors in the West will feel?
SM: China's "going green" is twofold. Green from the mining side means becoming more efficient with graphite mining and using less hazardous materials for processing the material. This will result in less material being available for export. Buyers outside of China have no choice but to eventually find supplies elsewhere.
From the market side, going green undoubtedly means expanding the electric vehicle market. The growth for batteries, especially lithium-ion batteries, could be explosive. This could transform demand for key raw materials, especially flake graphite.
TMR: What were the biggest takeaways from your visit to China?
SM: The biggest one was China's willingness to control the industry. Its amorphous graphite industry has been consolidated. In Hunan province, the government consolidated close to 230 small-time mines into one company that now controls 50–60% of the production in that area. Another takeaway is that flake graphite is on China's radar. Although it was the amorphous graphite mines that were consolidated, flake graphite, which is the bigger business, was being discussed.
TMR: Some people have speculated that the consolidation strategy in flake graphite could ultimately lead China to flood the market with graphite, much like it did in the mid-'90s, forcing some graphite miners out of business. You disagree. Tell us why.
SM: Today is a completely different situation from the mid-'90s. A generation ago, China was on its way up. It was getting its primary industries underway, growing as quickly as possible, taking in as much revenue as possible. Back then, China could mine cheaply, export cheaply, undercut everybody and get quick money. There was no competition. Now, China needs to move its economy to the next level, to the value-added level. It wants to compete with South Korea, Japan, Europe and the U.S. Cheap exports are not the way to do that.
Its challenge is to appease the mining companies through things like tax breaks on higher-value products to push these companies to develop value-added products such as battery-grade graphite and even the batteries themselves. The car industry is a perfect example. Ten years ago, China didn't have one; now I expect to see Chinese cars on European and North American roads in the next three years.
TMR: China also has a source of flake graphite in North Korea. What is going on there?
SM: China has exported flake graphite from North Korea for the last decade from a mine that once was a joint venture between North and South Korea. It exported about 1,000 tonnes in 2012. The graphite goes to China, where it is blended with other products. This is a captive source for China that has historically been used internally.
TMR: Why is this Korean source being talked about more now?
SM: I am not sure. Our research indicates that China is not getting as much flake graphite from North Korea as previously thought. The problem is that bad information gets around really quickly, especially when it is free. Everyone thought North Korea was sending 30,000 tonnes per year (tpa) of flake graphite to China. We think it was actually less than 1,000 tonnes in 2012. North Korea was considered the fourth-largest producer in the world. If the data are wrong, that could indicate there is a lot less flake graphite in the market than people realized.
The same problem exists with India. The Indian production figures that are freely available for flake graphite indicated production of 140,000 tpa when, according to our research, in the last 12 months it was actually 35,000 tpa. If that is the case, the rest of world production could be well overestimated.
TMR: The price of flake graphite has been dropping since May 2012, mostly owing to softer demand from steel refractories and lubricant markets.How is this affecting the economics of flake graphite projects?
SM: Obviously, lower prices would have a negative effect on projects whose economics were done 12–18 months ago using the very high prices we saw then. Prices have come down about 50% on average from the 2011-2012 peak. On that basis, some companies are already reevaluating.
TMR: Does that invalidate their preliminary economic assessments and other economic studies?
SM: "Invalidate" is probably too strong a word, but the more responsible graphite juniors are revaluating their economics based on lower prices. Typically, these companies use price averages for their analyses. Predicting the future price of graphite price is always guesswork. Whether they take a 12-, 18- or 24-month average, it will be an average, and there will always be problems with that.
But understandably, miners have to use a price and this is where we come in, as the only independents pricing natural graphite.
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3) Simon Moores: I or my family own shares of the following companies mentioned in this interview: None. I personally or my family am paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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