Hykawy says graphite companies must think about what might happen to them “if the Chinese come back and start selling graphite very cheap?” Taking on China? That might sound unlikely given that China is currently in the midst of a big clean up of its graphite industry, but another thing Hykawy is skeptical about is how seriously that endeavour is being taken. “Frankly, the least of China’s worries on the environmental side is graphite mines,” he quipped, adding, “burning coal for electricity is a whole heck of a bigger problem than graphite mines.” So why is China making such a fuss over its clean up? The answer to that question is low graphite prices, if Hykawy is to be believed. “I think the reason they’ve chosen this point in time to deal with some of these environmental issues and close down some of the mines and processing plants is because over the last while the graphite price has been slightly depressed,” he said. “What better time to shut a couple of projects down, take a little capacity out of the system, and drive prices back up?” Graphite companies should thus be making sure they have the type of project that can compete with those in China. “You want a certain set of characteristics,” he explained. “Likely you want an open-pit project, or better — you want a project that’s hosted in material that’s almost free dig. You want something where you can basically put a shovel in the ground, pick up a pile of dirt, then float that immediately with no crushing, with nothing else required to produce that graphite.” It’s also important to have “as pure a material as possible. You want material that out of a simple flotation process is as pure as it can be because that’s going to keep processing costs down.” Ultimately, “if you can keep your costs down to sub-$300, or approximately $250 per tonne, then you can actually compete with the Chinese,” said Hykawy. That said, there is a limit to how much new graphite production the market can handle. Referring back to a recent report put together by his company, Hykawy said that the limit is about 300,000 tonnes of new production by 2020. “Everybody with that price deck makes some amount of money,” he noted. Trends moving forward For his part, Hykawy will be watching the market to try to discern which companies are likely to be able to supply those 300,000 tonnes. He estimates that there are “five or six slots” to fill. That might sound like a low number, but Hykawy ended the conversation by emphasizing that a key trend he’s noticed is that technology users of graphite that are used to buying from China have come to realize in the last couple of years “that China is probably not a viable, long-term reliable supplier.” As a result they’re trying to diversify. Put simply, that means the opportunity is there for companies outside of China. It’s now up to analysts — and investors — to try to determine which will be successful.
VXL Price at posting:
65.5¢ Sentiment: None Disclosure: Not Held
