Energy & Commodities

2014 Graphite Outlook: Price Rebound, Supply Shift and New End Uses

China’s recent halting of flake graphite production in Pingdu, Shandong, made headlines, and has many investors wondering how supply may shift. Simon Moores, manager of Industrial Minerals Data, tells The Mining Report that he sees an interesting dynamic unfolding in the graphite space over the next five years. As buyers for steel and battery markets compete for limited graphite supplies, the winners will be companies that can deliver the best, tailor-made products. In the meantime, offtake agreements are signaling a new confidence in the sector.

COMPANIES MENTIONED: CANADA CARBON INC. :FOCUS GRAPHITE INC. : KIBARAN RESOURCES LTD. : NORTHERN GRAPHITE CORPORATION : SYRAH RESOURCES LTD. RELATED COMPANIESENERGIZER RESOURCES INC. MASON GRAPHITE INC. SAINT JEAN CARBON INC.
 

The Mining Report: Simon, China is putting mining on the back burner while it cleans up damage done to the environment by mining and other industrial work. Graphite processing facilities, including those in Shandong Province, have halted flake graphite production. Will that affect prices?

Simon Moores: For sure. We expect the immediate price impact will be minimal. Typically, graphite mining stops during the winter in China, so most international buying already happened in the autumn.

Inside China, we’ve heard that some producers are raising their list prices, taking advantage of the story. The key will be whether those prices stick when buying begins again after the Chinese spring festival in late January/early February. At that point, I anticipate a price reaction.

TMR: It’s estimated that China controls 70% of the world’s graphite production. Is its grasp on the graphite business loosening?

SM: China’s macro policies, certainly on environmental responsibility (including the use of natural resources and improving air quality), are leading to a crackdown on the mining industry. Halting graphite mining, as we’ve seen in Pingdu, is a perfect example of that.

As a result, we could easily see some shift of supply. The temporary closures in Pingdu could be enough to scare buyers into looking elsewhere. That’s already happening. Major graphite buyers are looking all over the world for new sources. If the Pingdu restrictions extend into Heilongjiang Province, buyers could move—not just look—to sources outside of China for the first time since the 1980s.

TMR: In your May 2013 interview, you suggested that prices for flake graphite had bottomed. What happened to the price for standard-grade graphite over the latter half of 2013?

SM: Prices remained flat. We saw slight decreases, but ultimately the trend was flat. We expect to see price improvement in Q1/14 or Q2/14 because of the supply-demand situation. If that’s the case, we’ll know that the second half of H2/12 was the bottom, but there’s been no upturn yet to confirm that.

Screen Shot 2014-01-15 at 7.59.10 AMTMR: What’s your price outlook for 2014 and into 2015 for flake graphite, plus-80 mesh, 94–97% carbon?

SM: This year we expect some improvement, maybe to $1,400-1,500/ton. Should that momentum carry into 2015, prices could improve further, to $1,600-1,800/ton. We don’t expect to see the huge increases we saw back in 2010-2011. That was a unique situation.

TMR: What’s the biggest wildcard facing the graphite space this year?

SM: On the supply side, it’s still China. On the demand side, the wild card is demand from a new sector and that’s batteries.

TMR: What should get investors excited and involved in graphite in 2014?

SM: The fundamentals haven’t changed since the price spike and exploration boom of 2010-2011. The key elements are China’s dominance, China’s mining regulation plans and the emergence of new markets.

I would look at refractories versus batteries. Manufacturers of refractories are trying to get higher quality graphite. Battery manufactures are competing for the same grade—large flake, higher purity graphite. Most of the mines around the world can’t supply sufficient volumes. That presents a great opportunity for anyone trying to build a new mine.

TMR: Readers of The Mining Report are mostly familiar with small-cap graphite explorers and developers. In that sector, what makes a good graphite project?

SM: It’s a balancing act. It comes down to the product the project can produce, who would want to buy it and how economical the resource is. Grade is important. Typically, higher purity in the ground translates directly into a more economical resource. Flake size is also key, because buyers are demanding larger flake (plus-80 mesh and higher) and higher purity (95%, 96%, 97% and 98% C).

The size of the resource is somewhat less important from end user and industry perspectives. After all, industry consumes a maximum of 450,000 tons per year, in a good year. But I can understand that an investor would want to see large, confirmed resources for long-term business plans.

TMR: The first offtake deal has been signed with a junior graphite developer in Canada, Focus Graphite Inc. (FMS:TSX.V). Does that deal legitimize graphite juniors by giving them a role in the bigger picture?

SM: It legitimizes some of them. The deal was a vote of confidence in the exploration sector. It showed the world that the exploration and development sector have some very good projects and can create a product the market wants and needs.

The Focus Graphite deal covered nearly 100% of the company’s planned production, including fines. Fines are usually a very difficult product to ship because they’re always in excess supply and are of lower quality carbon. There’s less of a market for fines and it has more product competition.

What stood out for me in the Focus Graphite deal is that it came from China. It shows the big buyers in China are looking elsewhere for new supplies. I thought that was the big takeaway, not just for Focus Graphite, but for the whole exploration sector. Focus showed its willingness to work with China as a customer, not necessarily as a competitor.

I think if the exploration industry starts to see China as a market—an opportunity, rather than a threat—more progress would be made.

TMR: How much of an advantage does the offtake deal give Focus over other players in similar positions?

SM: It’s an advantage now, because Focus was the first to announce and it shows a serious, large-scale partner in China. Only one other company has had an offtake since, and that’s Kibaran Resources Ltd. (KNL:ASX) with a Europe-based trader.

TMR: Do you think we will see other, similar deals?

SM: We could, yes. A lot of buyers want to get long-term supply. A lot of players are waiting to get the best deal, whether that means buying a project outright or signing offtake agreements.

TMR: Across the mining space, but particularly in the graphite space, a number of companies are running low on cash. Do you expect any mergers of survival?

SM: I expect the biggest and the best projects will survive. The top companies, the ones you read about, have the best projects. The smaller ones will have to look at merging or folding if they can’t get funding.

As I’ve said before, some in the industry—both producers and buyers—are waiting for a good time to buy a project. It doesn’t have to be a leading project, which could be quite expensive. It could be a smaller project. They’re just waiting for a good deal. So I expect to see some activity in 2014.

TMR: Does Industrial Minerals Data keep track of companies’ cash on hand and the burn rates?

SM: No, we focus on collecting prices and supply-and-demand figures. We track the industry, not individual companies.

TMR: What was the funding scene for the industry in 2013?

SM: Clearly, it was a difficult year for funding. One financing that stood out was Syrah Resources Ltd.’s (ASX: SYR) raising AU$35 million (AU$35M) for its project in Mozambique. I know how difficult it was for all the other projects in the industry, so that was an achievement. It was a big step toward actually building a mine.

TMR: Were there other events that got your attention? I’m thinking of the Sri Lankan government opening up to graphite mining, for example.

SM: Sri Lanka did open up exploration throughout the year by loosening legislation to welcome foreign investment. Many more companies are active there now and they tend to be Australian. The nature of Sri Lanka’s graphite means, in volume terms, it will remain a niche.

TMR: What about the efforts of a research team trying to develop condoms made of latex graphene? Is that possible?

SM: Only theoretically. You can be the first to try it. I won’t.

TMR: So, batteries and steel will remain the primary demand drivers for graphite?

SM: Yes, definitely. Steel refractories will remain the staple for a long time, but the potential for explosive growth will come from batteries. If you have a big market from steel plus big growth percentages coming from batteries—and everyone is competing for the same raw material—it could create an interesting dynamic over the next five years.

TMR: In terms of company news, does any company stand out for doing something different from its competitors?

SM: It was a quiet year in terms of stories. Juniors battled it out on a few fronts, especially the carbon purity stakes of the end product.

The battlegrounds now are over resource size, purity and upgrading the size of reserves.

For example, Canada Carbon Inc. (CCB:TSX.V) has a vein graphite deposit in North America and it has one of the more original approaches. It’s one of the smaller companies, but the company’s niche approach is refreshing and more suited to the graphite industry outside of China.

TMR: Do you prefer a vein deposit to other types of deposits?

SM: Not really; it depends on the market you’re going for.

Canada Carbon is going for a niche, not to take on the whole market. The company is thinking sensibly about alternatives. It doesn’t plan to produce more than 10,000 tons a year.

TMR: Northern Graphite Corporation (NGC:TSX.V; NGPHF:OTCQX) was once the darling of the sector. Its share price had a good run, but has since come off quite a bit. Why?

SM: Northern Graphite did a great job of getting out ahead in the race, publishing a lot of information first. It led the industry in that perspective. Obviously, as more projects come on-stream, there is more competition. If you stick your neck out, some people will have a go at you and other people will respect that. That’s just the hazard of leading the pack, as Northern Graphite did.

Investors should be considering all the serious graphite companies, and that includes Northern Graphite.

TMR: What’s next for graphite investors?

SM: You never quite know in this space, but I think the worst is over. I think we’ll see improvement in 2014 for everyone in the graphite industry. The fundamentals haven’t changed since the boom of 2011: China still dominates. New supply is needed for high-tech markets, which are competing with the traditional steel refractories. No new mines have been built since the 1980s.

Add on to that the diminishing supply, given the new situation in Pingdu, China. Supply, especially for large-flake, high-purity grades, is tighter. Premium products—large-flake, plus-80 and bigger, at purity levels of 95–99% carbon—will be in demand.

We should see some price improvement as well. Usually, when prices improve, that sentiment translates to the rest of the industry. That gets reflected in the investment arena. If that happens, it should encourage more people to return to graphite investing, because the fundamentals are pretty clear.

TMR: In addition to the high-purity producers, what about companies that can provide a value-added product?

SM: This is important. The industry needs value-added products that are hot and fresh out of the kitchen.

But for the pure mining companies, that will be difficult to achieve. Producing spherical graphite, for example, is effectively a second business requiring more capital.

From the raw material perspective, it’s not just about purity. It’s really about the large flake and the purity together. If you look at the plus-45 mesh or higher—the next step down from plus-80—in conjunction with purity in the 95-99% ranges—that product will be in demand. We’ve actually seen a shortage of some of these higher grades in a market where not many people are buying.

TMR: Have management teams in the graphite space adjusted their business models to be more accommodating to the market?

SM: Beginning last year, they started listening more to industry. The responsible companies were asking people what they actually wanted. It’s nearly all about processing technology to get the true value. Companies that follow that route aren’t just making flake graphite; they’re making spherical graphite for batteries. That is a big investment, and also a significant step forward.

TMR: I have to ask about the graphene-graphite debate. Has this industry made progress in developing graphene made from mined graphite?

SM: To be honest, not much. The exploration sector has done most of the legwork on this and has made some inroads, but it’s still a young industry. It’s still risky to say you can make all graphene from flake graphite because there are so many different production routes. It remains a theoretical product without a market.

It’s not necessarily the best company in scientific terms that wins in these things. It’s whoever makes the market inroads now. The graphite-to-graphene companies out there now—Grafoid Inc. (private) would be a good example—are doing the work and creating the market. If those companies are linked to flake graphite projects, that’s a plus for this side of the industry.

TMR: In that case, is Focus providing a model for others to follow?

SM: I think Focus is concentrating on the processing and the technical aspects of it. In the end, it doesn’t matter too much where you get your raw material; it’s about the processing technology that you develop.

I said a few years back that those that hold the technology cards will lead the pack and I still believe that.

TMR: In effect, if you could provide a steady consistent supply of graphene, there will be markets for it. Without the steady supply, there are no markets for graphene. It’s a chicken-and-the-egg situation.

SM: Definitely. That’s why the graphene supply side is pushing to create a market. Some companies are working with paint manufacturers, plastics manufacturers. The first step is discussion between graphene companies and end users about how to use it. You can create a graphene powder, but how do you get it into the end product? How will it improve that product? By how much? What will it cost? Will their customers buy it? Someone will get there eventually, but these things take time.

TMR: And we’ll be here to talk about it. Simon, thanks for your time and your insights.

Simon Moores is manager of Industrial Minerals Data, a business that sets prices for natural graphite and fluorspar industries from offices in London and Shanghai. He has been reporting on, researching and analyzing the non-metallic minerals sector since 2006, when he joined London-based publishing and research house Industrial Minerals. He has specialist knowledge in critical and strategic minerals including graphite, lithium, rare earths and titanium. He led the research and publication of the market study, “The Natural Graphite Report 2012: Data, Analysis and Forecast for the Next Five Years.” He has chaired conferences and given keynote presentations around the world. He has also been interviewed by international press including the London Times regarding Chinese control on world graphite production, and The New York Times with regard to rare earths after breaking the story that China blocked exports to Japan in 2009.

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DISCLOSURE: 
1) Brian Sylvester conducted this interview for The Mining Report and provides services to The Mining Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Mining Report: Northern Graphite Corporation and Focus Graphite Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Simon Moores: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is 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. 
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent. 
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer
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The Best Buying Opportunity of 2014

Up to 16.63% a Year From an Energy Play Obama Hates

Screen Shot 2014-01-14 at 5.51.22 AMThe dust from it causes a deadly lung disease… anthracosilicosis. It’s dirty, smelly and dangerous to mine, and anyone who has ever heated their home with it – and I am one of them – hates it.

The media thinks it’s dead and the White House wishes it would disappear, but it isn’t going anywhere. In fact, the world can’t function without it… coal.

The world needs coal. Even the United States, despite the president’s best efforts, has to have it to generate electricity. Last year, 37% of our electric power came from coal. And while more power plants are shifting to natural gas, coal will still be one of our primary sources of electric power for a long, long time.

In the emerging markets, especially China, coal is the fuel for power generation and industry.

It isn’t going anywhere.

A Contrarian Play

….read all about this high return bond play HERE

10 Of The Most Shocking Charts You Will Ever See

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On the heels of continued volatile trading in global markets to start 2014, today a man out of Europe who has been extremely accurate with his calls on the gold market sent King World News a fantastic piece which includes 10 of the most shocking charts you will ever see.  KWN readers around the world will want to view these remarkable charts from Ronald-Peter Stoferle of Incrementum AG out of Lichtenstein.

…view all 10 Charts HERE

Are The Worlds Largest Oil Pools About To Be Unlocked?

With so much excitement over U.S. shale plays lately, it’s hard to justify why investors should be looking anywhere else in the oil and gas space.
 
After all, what other sub-sector offers the kind of big production and returns enjoyed by unconventional shale drillers?
 
But there’s a fundamental shift in value underway in the oil and gas space. One that savvy stock buyers are now moving to get ahead of.
 
It all has to do with share prices. Just look at the chart below from Deutsche Bank—showing how multiples for onshore stocks like shale explorers (orange line) got notably richer in 2013, as compared to their peers offshore. 

offshore mulitple spread

Source: Deutsche Bank

Offshore E&Ps have been all but abandoned. Leaving their share prices to lag the overall sector.
 
And those low valuations are starting to grab attention—at least amongst energy insiders. Pros attracted not only to the cheap assets here—but also the potential for big production adds on the back of emerging technological developments that are revolutionizing offshore development.
 
Insiders like Fieldwood Exploration, who this past October paid $3.75 billion for a package of GOM properties this September. Purchased from oil major Apache—part of a strategic directive by that firm to exit the Gulf.
 
And just this month, Fieldwood took another step into the GOM—paying $750 million for a portfolio of properties from SandRidge Energy. Establishing this upstart firm as the largest asset holder in the Gulf—now producing 125,000 barrels of oil equivalent per day here.
 
Now, you’ve probably never heard of Fieldwood. It’s in fact a brand new company. But the people behind it are some of the biggest names in the energy business.
 
The firm is backed by funding from major energy private equity outfit Riverstone LLC. A well-heeled group whose partners include former BP chief Lord John Browne and former Anadarko CEO James Hackett.
 
Seeing these players going after Apache’s GOM assets is intriguing. And a little perplexing. After all, the Gulf is thought by many to be a play on the decline—with output having fallen nearly 25% over the last four years, to just 1.3 million barrels per day. Certainly not as exciting as the shale revolution that’s happening onshore.
 
The properties that Fieldwood shelled out billions for aren’t even in the high-impact deepwater. They’re in the shallow Continental Shelf. An area where most of the major discoveries were made a half-century ago.
 
Why would the world’s top energy minds stump up such a huge sum for picked-over project acreage?
 
The answer lies in some recent—although little-reported—developments on the Shelf. The kind of undercurrents only oil insiders are watching. For the moment.

Insiders like Riverstone’s James Hackett. An industry pro who has worked the Shelf as head of a succession of major Gulf players—Anadarko, Devon, and Ocean Energy.
 
Knowing the Gulf like no other, Hackett has undoubtedly been following the work of some of his old compatriots—at emerging oil producer Energy XXI (Nasdaq: EXXI).
 
Energy XXI has been a big—although very quiet—success in the Gulf the last several years. The company started with a blind $300 million raise on the AIM in 2005, and then began acquiring assets in the Gulf. Picking up fields from groups like ExxonMobil and Pogo Producing Co.
 
Eight years later, Energy XXI owns five of the fifteen largest oil fields on the Gulf Shelf, holding a combined 1.6 billion barrels of crude.
 
Conventional wisdom however, is that most of the oil left in these aged fields will never come out of the ground. The easy-to-produce crude has long been pumped. Leaving behind only table scraps—not the sort of thing you could build a significant production base around. 

But Energy XXI’s results defy these doubts. As the chart below shows, the company has increased proved reserves at its Shelf fields by nearly 200% since taking them over. 

reserves growth

How is such growth possible in a “played out” area like the Shelf?
 
The answer is simple: unconventional drilling.
 
Look at the quantum leap in Energy XXI’s reserves during the last year. The company’s proved reserves surged almost 50%, or nearly 60 million barrels of oil equivalent. Reserves value also leapt by 50%–to over $6 billion.
 
That jump coincides with the company taking a revolutionary tack—becoming one of the first companies to drill directional wells, AKA horizontals, into big GOM oil pools.
 
Horizontal drilling has a number of advantages. As the diagram below shows, horizontal wells put more well bore in contact with the reservoir formation. Meaning it’s easier for crude to flow into the well than with a conventional, vertical hole.

horizontal program

This means bigger production rates. With Energy XXI seeing initial production of approximately 1,500 b/d from its recent directional wells.
 
But horizontal wells don’t just pull crude out of the reservoir faster. Early results suggest that this advanced drilling will ultimately produce more total barrels out of the aged fields here. Creating billions of dollars in new reserves.
 
Look at some of the numbers. Recovery rates for crude oil pools in the Gulf have historically run about 45%. Meaning that more than half of a pool’s oil in place was left behind when operators plugged and abandoned a well.
 
Management at Energy XXI believes that its current drill campaign will increase recoveries by 5%. You can see the difference in the production curve below—from one of the company’s recent presentations. The red line at the right represents the forecast production curve using traditional drilling techniques. The black line above is the improved production profile from horizontal wells. And the shaded area in between is the increase in total recovered reserves. 

year-over-year

That extra 5% recovery makes a big difference when you’re talking about oil pools containing billions of barrels in place. A 5% increase in recoveries across Energy XXI’s Gulf holdings equates to at least 80 million additional barrels.
 
And that 5% is just the company’s initial target for recovery increases. As management learns more about the effects of advanced drilling on the reservoirs here, they believe recoveries can be taken even higher. Potentially unlocking hundreds of millions of new barrels—on their properties alone.
 
Applied across the Gulf, such advanced technology will add billions of barrels in new reserves. At very low discovery costs (we know the oil is there, we just need to poke better holes in it). During the past year, every $1 that Energy XXI spent on development created $2 in proved reserves. A phenomenal performance.
 
These stellar results beg the question—why have drillers in the GOM waited this long to apply horizontal drilling?
 
The answers lies in some recent revolutions in drilling technology. Techniques that are unlocking the old Gulf oil plays in ways few investors have realized. Yet.
 
In Part II of this series we’ll look at exactly how this drilling technology works—and where it will create the next major investment opportunities in the “new” offshore oil industry.

TIME MAG CONTRADICTS SELF BLAMING GLOBAL WARMING FOR COLD SNAP

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Bryan Walsh, a senior editor at Time Magazine, engaged in a series of half-truths and anti-science speculation Monday to blame the cold temperatures hitting much of the country this week on man-made Global Warming. Apparently, temperatures reverting back to pre-Climate Change hysteria norms is proof of Climate Change, or something.

The only problem with Walsh’s attempt to further his hoax is that science disagrees with his phony claim that this cold snap has anything to do with Climate Change, Global Warming, or whatever these Truthers are calling it this week.  

If you want a real laugh, the infamous Polar Vortex Walsh is blaming on Global Warming today is the same infamous Polar Vortex Time Magazine blamed on Global Cooling in 1974.

Walsh’s deception gets especially oily when he laments the “Sea ice is vanishing from the Arctic thanks to climate change.” Why doesn’t Walsh inform his readers that in the Antarctic ice has hit record levels? Maybe because it is an inconvenient truth.

As I wrote over the weekend, there are all kinds of reasons to not to believe in Global Warming…

…the cover-ups, the media bias, the outright lies; the science just being plain old wrong; the absurdity of using a hundred-or-so years of data on a planet billions of years old;  the oh-so bizarre coincidence that the only solution to the “crisis” is to check off every item on the Marxist wish-list; the fact that Global Warming Believers live their lives like the rest of us instead of preparing for imminent catastrophe…

And let’s not forget the oily shift in branding from Global Cooling to Global Warming to Climate Change…

And we can now add to that Time Magazine’s flip-flopping, half-truth dishonesty.

If these Global Warming Truthers had a case, they wouldn’t hide facts and engage in anti-science fear-mongering.

Follow John Nolte on Twitter @NolteNC

 Click Youtube for messaga on wind chill