Graphite Miners are Not a Play on Graphene
Back in 2004, carbon nanotubes were all the rage among investors. Fast forward to today and now the buzzword is graphene. We’ve talked before about why there are few viable investments to be had in graphene at the moment. However since graphene is produced from graphite, many graphite mining companies are claiming that they are a play on graphene since the demand for graphene is expected to drive the demand for graphite. To evaluate the merits of this claim, let’s first take a look at the below chart from the USGS which shows the top-5 global producers of graphite:
While China produces over 70% of the world’s graphite, they have been exporting less in recent years to support domestic demand. Even though Canada actually produces just 3% of the amount of graphite that China does, you’ve probably heard more about Canadian graphite companies since the Canadian market is very accessible to investors. This helps explain why the 20 or so ASX-listed graphite companies, most of which are only at the exploration phase, have experienced surging share prices over the past several years.
So what is graphite used for? Natural graphite is used mostly for applications that involve extremely high heat and require materials that will not melt or disintegrate. This is why the majority of graphite consumed is used in the production of steel. Other uses include car components such as brake pads and lithium-ion batteries.
But what about graphene? Let’s look at the production of volume graphene by some of the leading producers. Angstron’s annual production volume is 300 metric tons per year. XG Sciences is producing 80 tons per year of graphene nanoplatelets. Vorbeck is producing graphene ink in the 40 ton capacity now. Applied Graphene Materials (LON:AGM) is producing about 1 ton per year of graphene. That’s a total of around 420 tons which is just 1.6% of the graphite produced in Canada or .05% of the graphite produced by China. These numbers just aren’t meaningful enough to drive the demand for graphite. With large flake graphite selling for around $2,500 a ton, these numbers aren’t economically meaningful either. While China’s graphite export policies or the Tesla lithium battery factory may be probable causes for the price of graphite to increase, graphene production isn’t one of them.
For a moment let’s pretend that the commercial adoption of graphene will significantly increase the demand for graphite consequently increasing the price of this commodity all things being equal. We can then expect that companies who produce graphite will benefit from an increase in profitability since the product they produce will sell at a higher price. If this is the case, which mining companies should one invest in?
Not all mining companies are created equal. Mining is a very capital intensive business. The first question to ask would be “is the company actually producing and selling graphite?”. If graphite is actually being dug out of the ground and sold, this means that the large upfront capital expenditures (capex) to establish the operation have been financed and that the graphite produced is of a grade and price point to make the operation commercially viable (but not necessarily profitable). If the mining company is not producing graphite, the next question would be “what needs to take place for the company to begin producing and selling graphite?”. Many companies will simply own mining rights to a piece of land which may be permanent or of a fixed duration. They then need capital to explore these properties and to demonstrate to potential investors that mining is economically viable and the potential of the mine can justify the large upfront capex needed to become operational. These companies are oftentimes many years away from producing. Other companies are in the advanced stages of their project development having already received a vote of confidence from investors who provided the upfront capex with production expected to come online in months or 1 to 2 years. While less risky than non-producers, these projects still bear very high levels of risk for investors. One thing is for certain, however. Of all the junior graphite mining companies with promises of future riches to be had for investors, there will be many pretenders and few contenders.
Invest in graphite miners because you believe lithium batteries will drive demand for graphite. Invest in graphite miners because you believe that China plans to hoard 70% of the world’s graphite. Invest in graphite miners just because you’re bullish on graphite. But don’t invest in graphite miners because you believe it’s somehow a play on graphene.