VSA Capital - Graphite poised for gains

Paul Renken's Gold, Graphite and REE Names Poised for Gains
June 22 2015

http://ow.ly/OEoQl

Paul Renken, mining analyst with London-based VSA Capital, spends much of his time researching small and micro-cap resource equities and the commodities central to their business models so we don't have to. In this interview with The Gold Report, Renken suggests some of his favorite graphite and rare earth names, as well as a handful of gold equity picks.

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TGR: Changing the subject, a major component in batteries, which are on investors' radar due to Tesla Motors Inc.'s (TSLA:NASDAQ) Nevada-based Gigafactory, is graphite, especially large-flake graphite. China also has major battery manufacturing facilities in the works. Is there a shortage of large-flake graphite in China?

PR: Yes and no. There is a shortage of what you would call the "premium" material. But, no, there isn't an overall shortage of flake graphite. The graphite market is still about 90% dominated by the finer flake or amorphous-size material, which goes into the refractory market and not the battery market, which takes the coarser flake material. In fact, a number of producers are grinding larger flake material into finer sizes because that's what 90% of the offtake market demands. Unfortunately, because of the softening Chinese economy, large-flake prices are down about 30% in the last nine months, whereas the prices for finer sizes are only down about 15%.

TGR: Do you see China becoming a net importer of graphite?

PR: I see China importing specific grades of graphite. Most of the mines there have worked through the easy material and now, due to new regulatory requirements and higher production costs, it is difficult to find certain grades and qualities of graphite.

TGR: What do you look for in a graphite company?

PR: I want two things. First, I want to know whether a particular company has a clear vision of the target market for its product and supply. The impurities in a particular graphite deposit will limit the end users. If you have a natural, high concentration in elemental graphite, as in some of the vein deposits in Sri Lanka, you have a ready-made market regardless of the flake size. On the other hand, you may have a large deposit with a lot of embedded silica or other waste material, which could make the graphite costly to upgrade.

"Syrah Resources Ltd.'s Balama graphite and vanadium deposit is so large it could produce all the graphite needed in the world for the next 100 years."
Second, I want a company that can bring its contained carbon grade up into the high 90% range, where it would fetch premium pricing. Once graphite falls below 90% carbon, you end up with low concentrate pricing due to impurities. That makes a huge difference in the production margins.

TGR: Which graphite companies have a clear vision of the market they're looking to supply?

PR: We follow a couple of names. Flinders Resources Ltd. (FDR:TSX.V) brought an old graphite deposit in Sweden back into production. Its marketplace, at least for now, is in the refractory market, which requires the finer-size grades of graphite.

We also follow a company on the Australian Securities Exchange called Talga Resources Ltd. (TLG:ASX). Talga's Vittangi deposit is also in Scandinavia. It's a near-surface deposit with grades of over 16% graphite, which is three to four times the average grade of other deposits around the world. It's only exceeded by a couple of vein graphite deposits in Sri Lanka. It has a natural grade advantage, and should be able to compete on a coarse-flake graphite basis with anyone in Europe.

TGR: Any others?

PR: Syrah Resources Ltd. (SYR:ASX) comes to mind. We follow Syrah, but not because the deposit is particularly interesting in terms of geology or grade. The bottom line is that its Balama graphite and vanadium deposit in Mozambique is so large it could essentially produce all the graphite needed in the world for the next 100 years, according to any reasonable outlook.

TGR: Is Balama meeting expectations?

PR: Syrah is taking a measured approach because if it produces as much as it possibly could, it would flood the market. All of these graphite producers and their deposits are unique in metallurgy, and in what it takes to get to the grades that offtakers want. There can't be a cookie-cutter approach from one deposit to the next; each has to be carefully engineered.

TGR: Do you have at least one more?

PR: StratMin Global Resources Plc (STGR:AIM), a small-scale producer in Madagascar, is listed on the London AIM Exchange. That's an interesting situation because the company has boosted its concentrates up to 94% purity, which is close to premium-pricing grade. Its position in Madagascar should provide some cost advantage in delivering carbon to refractory or battery businesses to either South Africa or India. We watch StratMin pretty closely.

TGR: Do companies like Syrah and StratMin have a certain advantage given that it is not that difficult for them to ship product to China from southern Africa?

PR: The graphite market is small enough that the logistical distance isn't so much of an issue as the quality of graphite produced at individual operations. If there is more than adequate supply, like there is now, then whoever gives you the best quality at the best price gets your order, and everybody else has to wait. When there is a shortage, compromises can be made in terms of concentrate grade or how far you have to ship.