“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”- Sir Winston Churchill – November 1942
I have studied the evolution of the graphite market for the past 15 months. It is fair to say that Sir Winston Churchill’s words are as true in 2012 as they were 70 years ago. We have just returned from a world tour of speaking engagements in Germany, Canada, and the US. Graphite was the topic du jour. There is a great deal of “graphite curiosity” around the world, about how to take advantage of its exploding interest. This desire for education has been responsible for the near-parabolic rise in the share prices of junior mining companies now exploring for graphite.
We have constructed a proprietary market capitalization-weighted index of junior mining companies involved in graphite exploration. The chart speaks for itself:
Source: Bloomberg
We are strongly of the opinion that while Discovery Investors can still profit from the interest in graphite, the initial move, “Phase I,” is over. We caution selectivity as the order of the day in the graphite space. The chart above seems to confirm our belief. Graphite topped out in early April 2012.
By Phase I, we refer to the initial phase of the lifecycle of most junior mining companies where the interest, a function of the “mystery” surrounding a new mineral or metal, serves as a powerful force to bid share prices higher. This occurs till these “mysteries” are understood. As a project moves from the exploration to the development phase, the share price often “goes sideways” as early investors take profits and sit on the sideline as a company evolves towards a production decision.
What Got Us Here?
The lifecycle of a junior miner exploring for graphite is no different. It has been interesting to watch this market develop. It seems to have developed incredibly quickly relative to some of graphite’s young cousins like rare earth elements. We believe there are still profits to be had here as the macro themes which brought graphite to the fore initially are very much intact.
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