8 Graphite Miners Exploring for the “New Black Gold” and the “Next Mining Boom”

Rabid growth investors are constantly in search of “what’s next” to catch fire; be it the “next big thing” in technology or healthcare or the “next” mining or resources boom.  Now we have another candidate for bringing a new mining boom to Australia – graphite.

This material once known primarily for its use in the staid old writing tool the pencil now appears to be in demand for a variety of exciting applications.  Whether or not the hype will eventually prove true, Aussie investors appear to be taking notice.

The following table lists 8 ASX miners involved in the exploration and development of graphite.  All have outperformed the ASX 200 XJO index year over year.  Only one qualifies as a mid-cap miner with a share price north of $1.00, with the remainder existing in junior miner and penny stock territory.  Here is the table.

The share price appreciation and trading volume serve as evidence investors are buying the promise.  Even tiny Archer Exploration (AXE) with a three month average daily volume of 316 thousand shares bests the 237 thousand volume of the most shorted stock on the ASX – Cochlear Limited (COH).

The road to share market riches is often littered with the broken dreams of growth investors who found the “next big thing” did not prove to be so big after all.  So the question is will graphite prove to be the “new black gold”, as its proponents proclaim?

China is the world’s largest producer of graphite and when the Chinese flooded the market in the 1990’s graphite miners elsewhere ran for cover into other minerals.  It wasn’t until 2005 that Chinese graphite supplies began to dwindle and the price of graphite has tripled since, in large part due to the demand for lithium ion batteries to power electric vehicles.

Around 2004 researchers Andre Geim and Konstantin Novoselov from the University of Manchester figured out how to create a potentially revolutionary new material from graphite.  The material is graphene and it does appear to be the real deal.

What is graphene and how can it be used?  The technophiles among you can dig into the structure of carbon atoms and the like, but for most of us simply knowing this material is ultra-thin, stronger than steel, and conducts electricity better than copper is enough to get the investing juices flowing.

Graphene is already the subject of global research aimed at making the material suitable for 3D Printing (Additive Manufacturing) but the potential applications go far beyond that “next big thing” technology.  Researchers in Australia at Monash University along with researchers from US Rice University have developed a graphene coating for copper.  Researchers at MIT (Massachusetts Institute of Technology) in the US have developed a graphene based solar panel.

However, the most exciting possibility for graphene can be seen in the US$3 billion dollar project to develop next-generation chip technology to replace silicon, sponsored by IBM.  Graphene is a leading candidate.  The information age was ushered in by the development of the silicon-based transistor.  Think of the products today powered by silicon chips.

The other driver of graphite mining stock prices is the lithium-ion battery.  The US and China both have stated goals of one million EVs (Electric Vehicles) in operation by 2015.  The batteries to power the EVs need flake graphite.  Industry sources claim that as little as a 5-10% increase in EV market share would double the current global flake graphite production by 2020.

There are some who scoff at the notion of mass market acceptance of EVs.  Others look to the success of US based EV manufacturer Tesla Motors.  Sceptical observers laughed at the company’s first entry into the market, a sport vehicle with a price tag of $109,000.  Bearish investors laughed even more when the company went public in June 2010 and the stock price plunged later as the company experienced mechanical failures in its vehicles leading to fires.  The problems were fixed; a luxury sedan priced at $57,000 was introduced; and the Bulls appear to be getting the last laugh.  From Yahoo here is a price movement chart for Tesla since its inception on the US NASDAQ exchange.

Tesla’s next move is to create an EV for the mass market within three years, priced at around $30,000.  Right now Tesla cannot manufacture enough of its vehicles to meet demand, so sceptics again question how they can possibly penetrate the broader market.  The company’s response has been to begin construction of its own “gigafactory” to drive down the cost of lithium-ion batteries by 30%.

The use of lithium-ion batteries in consumer and industrial tools, cell phones, computers, digital cameras, and a host of other electronic devices is growing as well.  Combine these three drivers – graphene, EV batteries, and electronic and industrial lithium ion batteries – and you have the makings of a potential “perfect storm” for investors.

However, finding the “best of breed” is not an easy task.  So now let’s take a brief look at each of the eight hottest ASX listed graphite miners to see which ones could make the grade.

Lamboo Resources Limited (LMB), like several of the miners in the table, has a diversified resource base including copper, gold, molybdenum, and silver in addition to its McIntosh flake graphite project in Western Australia.  The company also has graphite exploration projects in South Korea.  A valid question investors raise about diversified junior miners like Lamboo is financing multiple exploration activities.  Lamboo claims it is focusing on the graphite project, and anticipates an 80% increase in demand in the next seven years.

On 11 February the company announced its successful capital raise was oversubscribed.  On 27 February the company expanded the raise due to increased investor demand following an announcement of highly positive drilling results from one of its graphite projects in South Korea.  Investors, buoyed by the news, ignored dilution risks and sent the stock price soaring.  Here is a one year price movement chart for LMB showing the move.

Lamboo continued releasing positive announcements on its graphite operations.  With a presence in Australia and South Korea, the company announced on 7 July a proposed merger with an existing Chinese graphite mining and processing company, China Sciences Hengdate Graphite Company.  While this should be a positive for the company long term, the announcement also included the possibility of the newly combined company listing on a major Asian exchange; leading to the chance LMB may abandon the ASX.  However, the merger gives Lamboo critical components of success many of the other juniors lack – existing customers and actual production.  Some analysts are already cautioning investors to look for binding sales agreements as well as flake quality and time to production.

Triton Minerals (TON) is another diversified junior with gold exploration projects in the Frasier Range in Western Australia.  However, it is Triton’s substantial graphite acreage in Mozambique that is drawing investor attention.  Triton has active drilling programs in three projects there, releasing positive drilling results that didn’t budge the share price much until 4 June when the company announced “enormous graphite intercepts” at the Nicanda Hill site in Mozambique, with the promise of more to come.  The share price began to rise from around $0.18 to $0.90 before tailing off.  However, the positive drilling results keep coming but investors appear less impressed as the share price has fallen.  At this point, investors should be watching the timeline from exploration to hard resource estimates to production.  Here is a one year price chart for TON.

Talga Resources (TLG) was plodding along with its gold exploration assets when it announced on 28 February of 2012 the acquisition of the iron ore and graphite assets of a Swedish mining company, Teck Resources.  The share price rose but Talga investors have seen hard times since, rebounding in early 2014 when the company announced a successful capital raise.  Here is a five year chart for TLG.

Talga has multiple graphite projects in Sweden but it is the Nunasvaara deposit that appears most promising, with graphite flake said to have the highest grade of any deposit on the planet.  In addition, this project has a dual graphite/graphene focus and Talga has actually sold sample grade graphene to a German 3D Printing Company in late July.  In its most recent company update Talga management stated the company would be producing larger graphene sample sizes from mid-2015, with full scale development to follow.

While Kibaran Resources (KNL) still has nickel projects in Tanzania Africa, the company changed its name from Kibaran Nickel in 2012 to reflect its new focus on graphite exploration and development in Africa.  This is another junior miner linking its graphite production to graphene development.  Kibaran has had two successful capital raises in the first half of 2014, neither of which led to a significant decline in the share price.  Kibaran’s progress announcements continually emphasize the “large flake” characteristics of its deposits and the flagship Epanko project in Tanzania.  In December 2013, the company became the first ASX graphite miner to sign a binding off-take agreement for graphite sales.  The deal with a European graphite trader is a positive signal that the production potential is there.  In essence, an off-take agreement is a sale prior to the commencement of actual production or even prior to the completion of a production facility.

Some investors might fear Kibaran appears to betting the ranch on graphene.  On 10 July the company announced an alliance with privately held 3D Group to form a joint company called 3D Graphtec Industries, for the express purpose of pursuing applications of graphite and graphene in 3D Printing, another “next big thing” some say will usher in a new industrial revolution.

On 21 July the company released additional positive results from the Epanko Project, but the share price began to fall.  Here is a one year chart for KNL.

On 18 August Kibaran released the results of a Scoping Study, or financial feasibility study, of the Epanko Deposit.  In summary, the study found that Epanko is “an economically robust graphite deposit capable of producing premium quality large flake graphite which has no limitations to its industrial use.” The study also shows the project with an NPV (Net Present Value) of $231 million and a substantial mine life of 27 years.  KNL management was quick to point out the study encompassed only 50% of the total Epanko Deposit.

Immediately after the release of the study, Kibaran announced a restructuring of its Board of Directors in order to “fast-track” development of the Epanko Project.

Syrah Resources (SYR) is the most diversified miner in the table with interests in Southeast Africa and Australia in uranium, copper, nickel, vanadium, coal, mineral sands, diamonds, as well as graphite.  However, the company states its core project is the Balama Graphite and Vanadium Project in Mozambique.  Vanadium is also used in Lithium-Ion batteries.

In Q2 of 2012 Syrah signed offtake agreements with a company in China and another in the UK for graphite and vanadium.  The share price has been moving upward for some time but spiked upward substantially on rumors the company is a takeover target for one of the world’s largest vanadium producers, Glencore, a multi-national mining and resource conglomerate.

Syrah released the results of a Scoping Study on vanadium in the Balama Project on 30 July which management claims shows the vanadium resources in the Balama are close to four times larger than those in the Glencore owned Rhovan Project in South Africa.  Right now Syrah appears to be more of a vanadium play than a graphite play.

The remaining three stocks in the table saw only modest price appreciation year over year.  However, there may be value there.  Of particular interest is the “penny dreadful” Strategic Energy Resources (SER).  This company had a producing graphite mine but after years of struggling with fluctuating prices and Chinese competition, SER spun off the graphite mine into a company called Valence Industries (VXL) but maintained an ownership interest and will receive 1.5% royalty from Valence revenues.  VXL began trading on the ASX on 6 January 2014 with a share price of $0.20 and has risen to $0.56 as of 21 August.

A share price comparison of the two makes one wonder what SER management could have been thinking.  Here is the chart.

VXL is definitely worth a spot on a watch list, if not a Speculative Buy.  As of this date, it is the only operational graphite mine in Australia.

So what was SER thinking?  In a Letter to Shareholders at the end of May management explained the move as a means of securing an ongoing revenue stream without the burden of capital expenditures, allowing SER to concentrate on the commercialization of graphene.  The company also announced the formation of a wholly owned subsidiary, Graphitec Pty Ltd which will continue the company’s collaborative relationship with Monash University on the development of graphene.  On 10 June the company announced a formal agreement with Monash and on 6 August the company issued a press release announcing that researchers at Monash have had a breakthrough in the use of graphene for possible drug delivery and early disease detection. Over the past three months the SER share price is up 120%.

While most of the other miners in the table have chosen graphite assets as a core focus, Archer Exploration (AXE) and Buxton Resources (BUX) are both committed to continuing to explore a range of assets in search of the quixotic “world class discovery”.  Buxton has a promising graphite project at Yalbra in Western Australia, along with exploration projects in nickel, nickel-copper sulphide, magnetite, and gold.

While the company is pursuing multiple exploration avenues, investors appear to be focused on the progress of the Yalbra Graphite project.  Buxton’s share price has been more volatile than the other miners, with most of the upward spikes correlating with news from Yalbra.  Here is a one year price chart for BUX.

The first spike came after a trading halt and the 13 January announcement of high grade medium and coarse flake granite at Yalbra.  The company reported similar positive results on 21 May, 25 July, 5 August, and 21 August.

Archer Exploration (AXE) has magnesite, manganese, copper, gold and uranium exploration projects along with its graphite assets.  Right now the company is actively pursuing its graphite, manganese and magnesite assets.  In addition the company is funding graphene research at the University of Adelaide for commercial application utilizing Archer’s graphite deposits in South Australia.  On 21 May Archer acquired the South Australia graphite assets of Monax Mining (MOX), comprised of the more desirable large flake type of graphite.  In an 11 August presentation Archer management claimed recent JORC results (Joint Ore Reserves Committee) show the company’s three graphite assets combined have Australia’s “largest graphite resource.”

While correlation does not imply causation, it is interesting to note that the two stocks in the table pursuing multiple exploration projects have seen more volatile moves in share price.  Here is a one year chart for AXE.

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