Forget today’s softness - all things EVs and ESG mean natural graphite’s future is rosy

From explorers (Kingsland) to developers (Evion) and producers (Syrah), the natural graphite sector is set to recover.

21ST JUL, 23

BARRY FITZGERALD

Independent Journalist

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When a commodity takes a turn for the worst, it can be better to be an explorer for the said commodity rather than being a producer, for a time at any rate.

The explorer with a decent project on its hands continues.to offer leveraged upside from making a meaningful discovery, with time on its side for the said commodity to cycle back upwards at some point.

But the producer caught in a downshift in a commodity price has to cop – and cope – with the market downgrading its value because of slumping cashflows and the cost of maintaining the producing asset so it is ready to fire back up again when the commodity price turns.

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There is a live example of all that panning out at the moment in the ASX in the graphite space, over there in the anode side of batteries for the booming electric vehicle and stationary energy storage sectors.

The contrast is between graphite junior Kingsland and graphite producer Syrah.

Kingsland (KNG) is having a good year, with its shares racing from 15c at the start of the year to 34.5c for a market of $22M (fully diluted) on the strength of initial drill results from its Leliyn graphite project in the Northern Territory.

The company recently pulled in $3.6m from a placement at 32c to take funds on hand to $5.5m, allowing it to keep punching holes into what its managing director Richard Maddocks reckons is a project with Tier 1 potential.

A compliant “exploration target” of 200-250Mt grading 8-11% total graphitic content (16-27Mt contained graphite) has been set by the company which goes to its confidence that it is indeed on to something big.

The exploration target is based on a 5km stretch of a prospective 20km schist, so there is lots of room for Kingsland to work with.

There is lots more work to do before the Tier 1 potential is confirmed, including all important metallurgical testwork because if you have to be in the graphite business, you want to be producing the fines material consumed by the battery sector.

Given the pace of activity, a drilling/assay update is about due, possibly in time for the appearance of Maddocks at next week’s Resources Rising Stars “Twilight Series” investor briefings in Brisbane, Melbourne and Sydney.

Syrah in the meantime is not having a great 2023. A 20% graphite price slump has prompted it to revert to campaign mining at its Balama operation in Mozambique until prices/demand for its natural graphite improves.

Since the release of its quarterly report on July 18 disclosing the move to campaign mining at a fraction of Balama’s installed capacity, Syrah shares have shed 14% of their value.

AustralianSuper, a major backer of the company since 2015 and headed to more than a 20% stake, and the rest of the shareholder base need not panic. Graphite’s current weakness is all about China ramping up the production of synthetic graphite.

It is expected to be a transitory thing as the synthetic route – it involves cooking coke at 3000 degrees for a month – is a filthy business, with rising energy costs and rising ESG concerns on carbons emissions an obvious limiting factor on how big Beijing will let the synthetic operations get.

Apart from anything else, the growth in the synthetic stuff is damaging China’s own domestic natural graphite industry.

Longer-term, forecasts by Benchmark Minerals Intelligence and others still has the graphite market going into deficit supply in response to the accelerating EV uptake.

And because of cost and emissions issues with the synthetic stuff, natural’s market share is forecast by Benchmark to grow from the current 35% to 49% by 2030. It is the emissions associated with the synthetic material which are increasingly becoming a turn-off for auto OEM’s and battery makers, ex-China at any rate.

Completing the comparative circle, it’s why junior explorers like Kingsland are right to be pushing hard on working up a development opportunity in graphite. Syrah in the meantime can look forward to the day when Balama is at full speed