Hi guys,
I’ll talk a little about graphite oversupply but just a few points before that
1) Half cent movements – The half-1 cent movements continue. Nothing too surprising here and we’ve discussed them before. Glad to see that falls are on very low volume
2) Macro – There was a lot of macro news recently ranging from
Chinese equity markets hammering, Greece issues, weak global equity markets, etc. It is important to note that while Chinese equity market has been hammered recently, it went up from something like 2000 to 5000 in 1 year, and the fall should be understood against that backdrop of a 150% earlier rise. Interestingly it crashed today again before soaring 6%
I’m definitely not suggesting that macro fears should be taken lightly and quite on the contrary. I’ve mentioned 100’s of times that macro issues are my main fears and if those fears materialize, then there will be a sell off in everything. We got just a glimpse recently into some issues and the impact on the markets. Like I've said before, if all my fears materialise, then this is like a picnic.
I’m pleased to see that TON held reasonably well in the face of severe overall global market sentiment.
3) Weak commodities in general – It is not just equity indices which were lower globally but commodities in general that also took a hammering.
Gold moved to a multi month low. Iron had the biggest 1 day plunge on record, yesterday. So in the face of weak commodities, once again, TON has held reasonably well
4) Oversupply of graphite – I’ll now come to the main issue that I wanted to discuss. We have heard all possible scenarios of the road ahead with some people claiming that there will be a graphite boom to others predicting that there will be a graphite bust. The truth is that no one knows for sure.
I’ll examine the scenario of a bust here with real life examples in another sector that I'm familiar with.
A) Iron ore bust
I’ve recently analysed RIO Tinto, FMG and the iron ore sector in general.
Like I mentioned there, it has gone exactly as I thought it could go, over the last year. I don’t generally like to comment any negative stuff anywhere as many people take it personally but I finally had to get it out of my system on Monday - nothing negative on FMG in particular but many with the sector.
Since my Monday analysis, iron has since had a massive crash of around 16% in 2-3 days including last night’s 10.1% biggest one day fall on record. I won’t claim to have predicted this however as you guys know, most of my thoughts are always longer term oriented.
They were the thoughts of the past year which I should have probably expressed much earlier. Today was a bizarre day with iron miners falling and then soaring - probably due to the sudden rise in Chinese markets.
FMG and iron ore macro analysis
http://hotcopper.com.au/threads/fmg-pros-and-cons.2548635/?post_id=15589127
RIO analysis
http://hotcopper.com.au/threads/rio-pros-and-cons.2550087/?post_id=15604097
It is good to understand the scenario both from the point of the company expanding and the other companies.
We all know that one of the main reasons that iron ore is also falling is the rapid expansion by RIO and BHP leading to oversupply of iron on the market. Another reason is that demand for iron itself was weak and price was falling and Rio and BHP’s contention was that they were simply protecting their market share.
If you read both my FMG and RIO analysis, you will see that some of the important factors in the iron ore industry are costs, management, mine life, cash and debt.
RIO can continue to survive and thrive only because they score on all grounds.
FMG is suffering because it still has to
reduce costs dramatically and also because debt is too high.
Smaller juniors would have the same issues as FMG and some might also have mine life issues.
It should be clear however that these are some of the main determining factors.
B) Graphite
Now let us presume that some people’s fears do materialize and graphite does indeed have similar issues of price crashing in coming years.
By no means, am I suggesting that iron and graphite can be compared directly but it is always good to learn from the lessons of another sector.
If indeed prices do collapse, then I still feel that at least, the above would continue to be very important factors. Let us examine them from TON’s point of view
i) Management – All of us who have met BB and / or AJ have been very impressed. So management definitely gets top rating. Here are also my earlier comments on Catlow, one of the most high profile appointments in the industry
http://hotcopper.com.au/threads/ann...-development.2529752/page-40?post_id=15422708
ii)
Mine life – Mine life till eternity lol. Zero issues on this front
iii)
Cost – In all probability, TON is going to be a low cost miner. I’ve also analysed shipping costs in the past
http://hotcopper.com.au/threads/investing-in-mozambique.2525965/page-21?post_id=15385968
If my understanding of shipping costs are right, then this could be a critical point going forward and TON could really score due to its China focus and hence lower shipping costs. Other companies not as focused on China would end up with higher total costs. Even excluding shipping, TON is still going to be one of the lower cost producers based on initial analysis.
So, in the event of a price crash in graphite, TON would still be making a profit in all probability. Note also that as far as I know,
TON is the only graphite miner with floor prices, which is a huge positive in case of a price crash
iv)
Cash and debt – IMO, this is one area that TON and all graphite miners in general would have to be very careful in the coming years. If there is a graphite boom before the bust, then many miners might try to rapidly expand and might collapse later on. Needless to say, all miners would have to handle this issue carefully.
TON in particular needs to be extra careful as while our peer has tied its hands for a couple of years in China, TON might have the temptation to expand too rapidly in China in the meantime. This could be a double edged sword and TON might need to engage in cautious expansion.
@jackarooz has commented on pre-sale of graphite in the past and I fully agree with him. I too feel that ideally TON should try to engage in some pre-sale and get funds. I feel that it would be better if any funds for expansion come from our partners who are better funded and we can repay them in graphite and / or pre-sell the graphite as jackarooz mentioned and obtain funds first.
I won’t comment more as our experienced team of AJ/BB and Catlow obviously know more about how to handle these issues than me and I’m very happy with the team we have on board.
5) Conclusion
Above are just some of the factors. Needless to say, that we would have to tweak the analysis much more to analysis the graphite industry but the above points IMO would be some critical factors and TON does seem to score well so far.
I just thought I’ll get the above analysis out since many of us would be familiar with the iron story recently and a comparison might be easier to understand.
Nothing else to mention with regards to share price. Lots of announcements are due in future which have been elaborated by others, and share price could rise anytime overnight.
Cheers
