Graphene companies - comparing the two leaders
While the markets are quiet we have chosen to revisit one of our favourite topics; graphene.
Comparing Graphene Stocks - Talga and FGR
I have had a number of clients comment to me about the very strong share price performance of Talga vis a vis First Graphite resulting in market capitalisations of $150m and $33m respectively. My off-the cuff reaction is to say “well, the spread is too great”. Either Talga is to expensive or FGR is too cheap, or both. To help investors understand the differences I have gone though the presentation delivered by Talga at the Goldman-Sachs mid-cap conference this week.
Talga consistently promotes its Swedish graphite as the highest grade resource in the world, under JORC guidelines. Technically that is correct, but it is not the highest grade graphite. Sri Lankan graphite, which has been mined for > 100years, is 3-4 times higher grade. It is frequently produced at grades as high as 95%. The nature of the orebodies doesn’t lend itself to JORC classification, being underground and narrow veined but just because they are statistical outliers it doesn’t mean they don’t exist.
Talga’s statement that it has the potential to be the world’s largest volume, best margin supplier of graphene is simply not accurate. Perhaps it should have thrown in the word “arguably”, because that is as close as it can get to this status. There is a lot of arm waving but very little factual backup.
Both Talga and FGR are employing electrochemical exfoliation techniques to produce graphene. The biggest difference between the two is the yield to graphene, which is a direct function of the quality of the graphite raw material. Talga starts with ore grading 24-25%. It recovers 90% of the graphite and this reports as 90% micro-graphite and 10% graphene. So, for each tonne of plant feed, it produces only 20-30 kg of graphene.
FGR starts with ore that grades 95%. It gets greater than 80% conversion to graphene within 24 hours. That means for each tonne treated it produces 800 kg of graphene. That is dramatically better than what Talga can achieve. With such a high yield, the capex for any FGR plant is tiny and profit margins are enormous. In fact, rather than having to build a large treatment plant, FGR’s process consists of highly efficient modular units that can be manufactured on demand. Also, FGR won’t be producing the truckloads of micro-graphite that Talga will produce, for which it is yet to find a market.
Electrochemical exfoliation is not a patentable process, so disregard statements by any company that says otherwise. Yes, there may be some aspects to which you can attach proprietary rights, but the actual process is available to all and sundry. The magic in the graphene production using this process is the quality of the graphite you put into it. Nothing works as well as Sri Lankan vein graphite.
At the end of the day the best graphene company will be the one that has the best economics. That starts with the highest grade, which influences the capital cost and has implications for quality. Any advancements in applications of graphene, which will expand global demand, will benefit the entire graphene sector. It is great that Talga is working with industry to stimulate demand for graphene, but like any input into manufacturing, the cheapest source is the best source, at any given quality specification.
It is probably true that there isn’t enough Sri Lankan graphite availability to meet the expected demand for graphene in future years, but what you can expect is that graphene sourced from Sri Lankan graphite will give producers the highest profit margins. That is what business is all about.
One final point on the Talga graphite is worth mentioning. The grade is in the order of 25%, whereas many flake graphite companies are quoting grades of 10-15%. Those flake graphite companies will build a plant and concentrate the graphite to 95-99% levels., and ship it to buyers. The waste material is left behind. Talga will not be concentrating the ore prior to shipping. Thus, it will have to transport a
waste component of 75%, presumably from Sweden to Germany. When the ore is processed there will be large volumes of waste material in the that has to be disposed of.
Talga’s process requires a centralised treatment plant, from which it can transport its graphene to market around the world. The transportation costs will not be insignificant given the huge expansion factor of the material. Also, graphene has a limited shelf life before having to be reprocessed to overcome re-agglomeration.
The extreme efficiency of FGR’s Graphene Cell means that the production units can be located on the factory floor of its end users. It is much cheaper to transport the 95% grade ore to the location of the customer and turn it into graphene with just-in-time methodology. It is very elegant and efficient.
Realistically, both Talga and FGR have promising futures. The immediate issue is whether the relative market valuations of $150m and $35m respectively, are appropriate. I was once the second largest shareholder in Talga, but sold out in favour of what I saw as a better business proposition. As we stand today it would seem that I have left a lot on the table, but I’m focusing on the longer term picture. I still believe that anything that Talga can do, FGR can do better. Time will tell.
I first raised money for Talga three years ago, when its market capitalisation was $5m and it was about to go broke. At $150m market capitalisation I suppose you can say it is delivering on expectation, share price wise at least. During that time it has raised approximately $22m.
When I decided to switch to FGR, two years ago, its market capitalisation was also around $5m. Since then FEC has raised the company about $10m. With the market capitalisation of $35m, the share price has some catching up to do. Coincidently, that is the same level that Talga was capitalised at after it had been in the business for two years. It has now been into graphene for three years. It takes time for companies to get their messages out there and win investors over.
http://www.fareastcapital.com.au/imagesDB/newsletter/WeeklyComm29April2017.pdf
(20min delay)