by Debra Fiakas CFA
The series on graphite resource development is completed with a
discussion of the companies that are currently in production.
The U.S. Geological Survey estimates 1.2 million metric tons of
flake graphite are produced annually. The vast majority
- 780,000 metric tons - are produced in
China. India and Brazil follow with 170,000 metric tons and
80,000 metric tons, respectively. North America, which seems
to show so much promise to the graphite resource developers that
have been featured over the past few articles, is currently only
contributing 30,000 metric tons per year to the graphite supply
stream.
For investors the clutch of graphite producers offers interesting
alternatives to play the growing demand for lithium ion batteries
and the graphite materials required to produce them.
SGL Group (SGL: DE) is
a global producer of carbon-based products, including graphite
materials. The company operates 41 production sites around the
world, of which 22 are in Europe, 11 in North America and 8 in
Asia. Historically graphite electrodes for the steel industry
have been at the core of the company’s production, but the company’s
newer Graphite Materials & Systems division is targeting
high-grow industries such as semiconductors and batteries. The
company’s Composite Fibers and Materials division also has a
partnership with BMW, which is using carbon composites with greater
intensity for automotive body and frame components.
Just like the smaller graphite resource developers such as Northern
Graphite, Nouveau Monde and Ontario Graphite, SGL Group may be
gearing up for the wave of new demand for spherical graphite from
battery manufacturers. The anodes in lithium ion batteries
require a particular shape and purity that is best met by highly
refined graphite particles. The graphite ore is refined in a
step called ‘micronization,’ shaped through ‘spheronization, and
then coated with a metal layer. In August 2016, SGL Group
announced plans to invest in a coating line for its production
facility in St. Marys, Pennsylvania. The company cited the
need for coated graphite materials used for manufacturing wafers
used in light emitting diode production, but noted in the future
“other graphite-based solutions could be enhanced by coatings.”
A restructuring effort appears to be completed, leaving SGL a
leaner, more focused operation. Yet in 2015, SGL Group
reported slightly lower sales of €1.5 billion (USD$1.7 billion)
compared to the previous year, producing an operating profit of
€32.6 million (USD$36.5 million) before non-recurring charges
totaling €160.9 million (USD$180.2 million) related to restructuring
charges and impairment losses.
SGL Group shares trade on the Frankfurt Exchange at 0.78 times sales
or 5.94 times book value. Of course, the price-earnings
multiple is negative. The stock has trailed off over the last
few years, as the top-line has weakened and losses persist.
The restructuring effort and new market focus is expected to bring
the company back to profitability. With a debt-to-equity ratio
of 1.85, the company has not had the flexibility some investors
might prefer for a company in transition. The stock is now
trading near the midpoint of its 52-week low and high.
If Germany’s SGL Group is unappealing, investors can turn to
France’s Imerys S.A. (NK: PA),
a self-described supplier of minerals-based industrial
solutions. Its products include ceramics, pigments, graphite,
carbons and other materials. Importantly, Imerys is one of two
companies in North America with current graphite production from its
Lac-des-Iles mine north of Montreal. Graphite ore production
from Lac-des-Iles is further refined at Terrebonne, Canada for use
in the automotive, battery and polymer industries.
The company has fared a bit better in the current economy than SGL
Group and has remained profitable. Imerys reported a 13%
operating margin in the last twelve months. We believe this is
due in part to a well diversified product line offering significant
added value to customers. Higher profits have also helped
fortify the balance sheet, which is leveraged to 85.9
debt-to-equity. Still Imerys is trading at a
multiple of 65.0 times trailing earnings. Even with a dividend
yield of 2.7%, the valuation seems a bit steep.
Likely the output from Lac-des-Iles mine represents a good share of
the 30,000 metric tons produced annually in Canada. Some of
the balance could be natural flake graphite production from Eagle
Graphite’s Black Crystal project in British Columbia. The
company plans to produce 2,100 metric tons in 2016, and estimates
production could increase to 7,500 metric tons by 2019. While
relatively new to the sector, Eagle Graphite
(AMPFF: OTC/QB or EGA: V) has already established
its credibility with potential customers in the battery
industry. Test samples of spheronized graphite from the Black
Crystal project exceeded the 99.95% purity level required from
lithium ion batteries.
Eagle is more of a graphite/battery pure-play than SGL or Imerys,
but the company has yet to produce significant sales and, of course,
there are no profits. While Eagle is several steps ahead of
the other graphite resource developers in North America, the stock
is still priced like an option on its assets.
Another perhaps more appealing pure-play on battery graphite is in
the shares of Elcora
Advanced Materials Corp. (ECORF: OTC/QB or ERA: V).
The Sakura graphite mine in Sri Lanka has been in production in the
past, reaching 18,000 metric tons annually under the name
Ragedara. More recently the mine has produced about 500 metric
tons per year. Elcora has set up a processing facility near
the mine and claims output with purity over 99%.
To impress potential battery sector customers, the company recently
reported results from ‘C20’ tests, which on the simplest terms
indicate a battery’s capacity or amp hour rating when discharged
over twenty hours. The tests established that the reversible
capacity of the Elcora graphite used in the battery anode is very
high and well suited for lithium ion battery applications.
Last month the company also introduced a proprietary technology
aimed at simplifying the graphite refinement process. While
not providing specifics the announcement claimed Elcora’s approach
could eliminate most of the advanced preparation stages for
micronizing and spheronizing materials for turning out spherical
graphite. We note that Elcora’s processing facility near
Sakura mine is set up to complete the initial steps such as
grinding, flotation and dewatering.
An article about investment opportunities in current graphite
production would be incomplete without a nod to Leading Edge
Materials (LMF: V or LEMIF: OTC/QB), the
combination of Flinders Resources and Tasman Metals Ltd. in August
2016. The company began producing graphite from its Woxna
project in Sweden in 2014, targeting an annual production rate of
10,000 metric tons. Unfortunately, low selling prices forced
the company to suspend production in July 2015. The halt at
Woxna may have provided part of the incentive for Flinders
management team to look for an alliance with Tasman and its Norra
Karr rare earth project in Sweden. The two projects could give
Leading Edge a triple threat in the battery market with graphite,
lithium and aluminum materials output.
Source: Statistica
The halt at Woxna has put Leading Edge shares back below a ‘dollar’
after hitting a five-year high of CDN$2.81 in 2012. Indeed,
the share price appears to have followed the same trajectory as
graphite prices. In the chart below reveals the erosion of
reported prices from 2011 to 2014, during which time price fell by
an average of 49%. Statistic has publish a forecast of prices
through the 2020 time frame, suggesting that the worst will likely
be arrive in 2017. Then demand for graphite for lithium ion
batteries is expected to drive prices for large flake graphite to
unprecedented levels. Lesser graphite materials are expected
to experience improved pricing as well, but are not expected to
recover to even to price levels at the beginning of the previous
decade when the world’s economies were attempting recovery from
recession.
Selling prices will likely dictate the future for these ‘senior’
producers as well as the rest of the graphite developers. As
demand begins to put pressure on prices, all of these companies will
dust off production equipment. Investors have alternatives for
taking a stake in the graphite drama. Alternatively, the stake
could be a long position in all the stocks. With the exception
of Imerys and SGL Group, the stocks are low enough in price to make
that feasible for even an individual investor.
Debra Fiakas is the Managing
Director of Crystal Equity
Research, an alternative
research resource on small capitalization companies in selected
industries.
Neither the author of the Small Cap
Strategist web log,
Crystal Equity Research nor its affiliates have a beneficial
interest in the companies mentioned herein.