graphite industry report

Pattersons 23-08-2013

Graphite - Separating the flake from the carbon

Investment Highlights

The emergence of graphite has come as the equities markets are struggling through a phase where even gold has lost some of its lustre. Thus in the search for meaning and value in the microcap equities space we are tempted by the financial gain of investing in the next critical commodity.

· The remarkable run up in graphite prices since China placed a 20% export tax on the commodity has prompted a rush of junior exploration companies to acquire graphite properties or dust off old geology reports. Like the rapid response to a spike in prices of other specialty metals (lithium, uranium and rare earths) the graphite space will fill with many pretenders and a few contenders.

· The attraction to graphite is due to the scarcity of natural graphite, its unique physical and chemical properties and its growing importance in high technology and green energy applications. Graphite is nontoxic, chemically inert and has high resistance to corrosion. Graphite has low thermal expansion and shrinkage with high thermal shock resistance. Graphite has low density relative to conductive metals. The mineral is flexible, soft, compressible and malleable. It has low frictional resistance and is thermally and electrically conductive. Its melting point is above 3,500°C.

· The growth of the graphite market is dependent on a number of different uses of both amorphous and flake graphite. It is the production of higher purity natural graphite and the discovery of graphene that is really creating excitement. These are likely to lead to developments of new applications for graphite in high-technology fields.

· There have been many comparisons to other specialty commodities such as uranium, lithium and rare earths. China is the dominate player in the graphite market. However, we don’t see Chinese supply as the main risk to future prices but the realisation that the market outside of China is considerably smaller than initially assumed. However we see the diversity of uses for graphite and the potential of natural graphite to be used as a substitute for the significantly larger synthetic graphite market as reducing this risk.

· Current prices provide enough incentive to for new mines to be bought into production and that the graphite market is insufficient to accommodate all the new projects being developed. We believe the most interesting stocks in the graphite space at this very early stage of development are AXE, LMB and SYR.

Figure 1: Highlighted ASX listed graphite stocks

Code Name Price Market Cap Cash Resource Primary Project Ownership Location Development Stage

Price, Market Cap, Cash

AXE Archer Exploration 0.16, 13.178, 12.753 Campoona 100.0% Australia, SA Advanced exploration

LMB Lamboo Resources 0.36, 24.175, 6.115 McIntosh 100.0% Australia, NT Early exploration

SYR Syrah Resources 2.83, 358.626, 3.875 Balama 100.0% Mozambique Early exploration

Source: Interria, company reports & IRESS

Disclosure: Patersons Securities acted as Lead Manager to a Placement for Lamboo Resources that raised $7m in June 2012 and Lead Manager to a Placement for OMI Holdings that raised $0.2m in June 2012. Patersons Securities is acting as Lead Manager to a Placement for OMI Holdings which will raise no less than $3m. It received fees for these services. The analyst holds shares in Lamboo Resources.