Stock charts tell stories. While the day to day price fluctuations of a particular stock are mainly statistical noise, the longer term picture of a stock’s progress is often captured in a chart. So is market sentiment.
Consider the chart at the top of this article. Two companies, Nemaska Lithium (T.NMX) and Canada Carbon (V.CCB). I wrote about Nemaska Lithium in December 2015 just before it began its run from $.40 to a high of $1.97 reached in May 2016. Nemaska has dropped back a bit and is now trading in a range between $1.20 and $1.50.
The other company, Canada Carbon, traded flat throughout 2016 and on into 2017. What’s the difference?
Both companies are in the business of developing mines and processes for what might be described as technical or strategic minerals: Nemaska is developing a hard rock lithium deposit in Northern Quebec, Canada Carbon is developing a very high purity graphite deposit in Southern Quebec. Both companies have a material which requires processing to bring to market. Nemaska uses a process it has patented to turn spodumene concentrate into high purity lithium hydroxide and carbonate. Canada Carbon uses a proprietary process to turn the high purity graphite it plans to mine at its Miller graphite deposit into ultra-high purity “nuclear graphite” for use in the rapidly growing nuclear reactor industry.
So why does Nemaska have a market capitalization of $422 million while Canada Carbon’s is $24.9 million? And, from an investor’s perspective, is Nemaska overvalued or is Canada Carbon undervalued?
ln late 2015 and early 2016 lithium enjoyed, as the fashionistas say, “a moment”. Juniors flocked to the lithium space – brine or hard rock – and investors enjoyed significant gains on companies which had exposure to the lithium market. Dreams of electric cars powered by banks of Li-ion (the Li being the periodic table symbol for lithium) were paraded out with each Tesla announcement. As lithium enjoyed the spotlight, 2011’s feature mineral, graphite, languished backstage. Even though a Li-ion battery takes many times the graphite to make as it does lithium, graphite lost a lot of its sex appeal for investors.
Which might explain part of the divergence between Nemaska and Canada Carbon. But the key development, the moment that Nemaska made a step change from a $.40 cent stock to a $1.50 stock can be precisely dated. On May 11, 2016, Nemaska signed an agreement with Johnson Matthey Battery Materials in which Johnson Matthey gave Nemaska cash up front for lithium salts to be produced by Nemaska. This was a commercial offtake agreement and a huge stride forward for Nemaska.
As importantly, it was an agreement which the market could understand. The agreement itself had been announced in November of 2015; but announcing an agreement and actually signing one are two different things. All of a sudden Nemaska became a “real” company with a “real” product and a “real” customer for that product. It did not take the market long to re-value Nemaska in light of this new reality. Nemaska shares achieved lift off and have remained in orbit ever since.
Canada Carbon, while it may actually be closer to permitted production than Nemaska, works in a different marketplace with different milestones and a different set of potentials.
While the marketplace for lithium salts, lithium metal and other lithium products is relatively transparent with prices set in open markets, the marketplace for “nuclear graphite” is very private with nuclear contractors making arrangements quietly. Lithium supply is steady and, if the number of companies entering the lithium exploration business is any indication, likely to grow quickly to meet expanding demand. The “nuclear graphite” market, on the other hand, is expanding ahead of supply. Currently, the bulk of nuclear graphite is actually synthetic graphite made by removing impurities from petroleum coke through a long process of heating at +2800 degrees Celsius. Environmentally this is a long way from green and very little, if any, additional synthetic graphite supply is expected to come online.
X-energy, LLCA nuclear pebble
The supply squeeze for nuclear graphite is exacerbated by the fact that there are over sixty nuclear reactors currently under construction all over the world and a couple of dozen more reactors which are undergoing refurbishment or upgrading. Sourcing ultra-high purity graphite is a key piece of the nuclear reactor puzzle.
Positioning to supply the nuclear graphite market requires third party certification of the purity of the natural graphite on offer. Canada Carbon has been engaged with ASTM International, an international testing and standards body, to develop standard purity testing procedures for nuclear graphite. Canada Carbon’s purified Miller graphite has been used as ASTM’s test material as it develops this standard procedure. When that standard is published, Canada Carbon will be able to apply to have a specific batch of its purified graphite certified as a reference standard material. At that point, Canada Carbon’s graphite will be the only natural graphite in the world to have qualified under the new international purity standard for nuclear graphite.
In terms of moving to a position to actually mine and produce their respective products, Canada Carbon and Nemaska are in very similar places. Each has some permitting left to do. Canada Carbon needs to obtain its environmental certification expected in Q4 2017 and should be able to mine and process graphite in early 2018. Canada Carbon will, however, be quarrying the marble on its property before the graphite permitting process is complete. Nemaska and Canada Carbon still have feasibility studies to prepare and may need additional financing to get their mines into production. However, Canada Carbon’s projected mine CAPEX is only a fraction of that required by Nemaska.
So, the essential difference between the two companies seems to be that Nemaska has an offtake agreement with a significant customer and Canada Carbon does not. Will that difference last? It’s unlikely because as the supply of synthetic nuclear grade is exhausted, reactor builders need to source the graphite without which their reactors simply can’t be built.
Look again at the chart at the top of this article. Nemaska’s 400 million dollar market cap was largely the result of a single offtake agreement. If Canada Carbon’s investment in ultra-high purity nuclear graphite is as shrewd as it appears to be, a similar sort of agreement, possibly for more money will start the countdown for Canada Carbon’s liftoff.
What would an off-take agreement for Canada Carbon look like? It is difficult to get precise pricing information on nuclear graphite but we catch a glimpse in a 2016 Secutor Report on Canada Carbon. Secutor found a nuclear graphite transaction from 2006 in which “SGL Group, one of the worldwide leading manufacturers of carbon-based products, noted it had “…signed an order with the South African manufacturer PBMR Ltd. for the delivery of specialty graphite as well as carbon fiber material for a demonstration reactor…For each reactor, this means under 1,300 tonnes of specialty graphite at a value of some 40 million euros in the form of graphite blocks as a heat shield and a radiation reflector to surround the reactor core…”
In that same report, Canada Carbon’s ultra-high purity graphite is compared to SGL Group’s: Canada Carbon’s graphite has substantially lower contaminant levels that the SGL Group’s, .99 ppm versus 4.53 ppm.
The SGL Group sold its nuclear graphite, based on the exchange rate at the time, for over USD $38,000 per tonne.
The amount of nuclear graphite a particular, modern, reactor uses varies significantly depending on design, however, if you assume 1000 tonnes at $38,000 you would see an off-take on the order of $38,000,000 USD. Roughly four times the size of the off-take which created the step change in Nemaska’s market cap.
This back of the envelope calculation ignores first, the much higher purity of the Canada Carbon nuclear graphite, second the tightening of the supply of synthetic nuclear graphite which has occurred over the last decade. Both factors will tend to raise the price Canada Carbon will obtain for its graphite. By how much is pretty speculative until a negotiation is concluded.
Most investors would have loved to have had Nemaska in the portfolios in April 2016. That rocket has left the launch pad but Canada Carbon is rolling towards its own liftoff. History does not repeat itself, but it often rhymes: the step change we saw when Nemaska landed its off take agreement should be echoed when Canada Carbon announces and signs its first nuclear graphite customer.
At time of writing Canada Carbon was trading at $.26 with 95,729,074 shares outstanding for a market cap of 24.9 million dollars