Graphite: What is it?
It’s carbon. Specifically, it’s carbon that the earth has subjected to intense heat and pressure. It’s highly conductive and relatively light weight. Practically, graphite comes in 2 forms: synthetic and natural.
Synthetic Graphite is made in a lab using petroleum products. It takes a great deal of energy to make, so it ends up being expensive and perfect. Synthetic graphite has zero impurities, and is easy to use. You’ll find it in tennis rackets and golf clubs and anything else made by people that order graphite in kilograms.
Any operation that orders its graphite in tons can’t afford to use synthetic graphite. And why should they when natural, mined graphite will do just fine? It’s mainly used in foundries, brake linings. As you’ve no doubt heard from your friendly neighborhood stock promoter, the quickest growing use for graphite is in the lithium battery sector. There are a few different styles of deposits, and the stuff ships as one of three main types. Flake, lump and amorphous.
Physically Speaking, And How Much?
Nothing absorbs and conducts heat while keeping its shape quite the way graphite does, so it isn’t easily substituted for.
Graphite isn’t a metal so it can’t be melted or bent and shaped like copper or aluminum. But particle shape matters to the industrial users of graphite, and so does particle size. Since there is no way to put two pieces of graphite together to make a larger piece, larger particles of consistent shape are more valuable.
The ‘amorphous’ graphite is effectively a powder. It sells for $370/t because its utility is limited. The more useful flake graphite goes for $1240/t and sometimes even more for larger flakes. High-grade lump and chip graphite, produced only in Sri Lanka – is fetching $1890/t in 2017. It’s that high-grade Sri Lankan graphite that we’re here to talk about.
Industrially Speaking – The Birth Of Sri Lankan Graphite
That’s why the “World is Short on Graphite” story isn’t a new one. Spikes in graphite demand create graphite shortages. The first such shortage surrounded industrialization and graphite’s use in foundries.
The crucibles used in the melting and pouring of metals are made of graphite today, as they were during wartime, when the idea of not having enough graphite made the industrial complex nervous. World War One was the first industrial war. Concerned with equipping their metalworks, the British invested in the the exploitation of the finest source of graphite in their empire, on the Island of Ceylon. The jungle island off the coast of India would play an equally pivotal part in the supply of foundry material in WWII, after which the nation gained its independence and was re-named Sri Lanka.
The Post Colonial years were rocky in Sri Lanka. A period of intense on-again, off-again civil war between the Tamil Tigers and the Sri Lankan government began in 1983, and ended only with a peace accord in 2009. In political turmoil, large-scale mine financing is practically impossible, but graphite is un replaceable and high grade veins lend themselves to low-tech methods. The great Sri Lankan graphite deposits that supplied the foundries for two world wars continued to be worked by artisanal miners during the post war years, and are still mined that way in some places today. The purity and size of the graphite veins make them the next best thing to synthetic graphite, which is why it commands a premium.
Presently Speaking, And Looking Forward
In the years following the Civil war, the graphite world has undergone and continues to anticipate something of a seismic shift. Foundry materials are still the primary use of natural graphite, but lithium ion batteries are catching up quickly. Mass proliferation of consumer electronics got the contemporary graphite market moving in 2011, but it really got the market’s attention when Elon Musk’s Tesla Motors figured out how to run 1800 laptop cells in series and use them to power a car.
The USGS is projecting that Tesla’s battery plant will burn through 93,000 tons of graphite per year once they scale up. Where that graphite is meant to come from is still to be determined. For perspective, the total US consumption for all users was 53,000 tons in 2015.
But the batteries for the ~175,000 Teslas on the road today were made in China, and it stands to reason that the lithium ion batteries in non-Tesla electric cars will likely be made there as well. Currently, only 1% of the market, electric vehicles have a long way to grow, and big money is betting that they will. Warren Buffet and Samsung have both taken stakes in the world’s #1 electric car maker, Chinese BYD.
The graphite in Sri Lanka is Special. It occurs in veins, like gold deposits, and has a continuity to it. Instead of graphite flakes disseminated through, rock, the Sri Lankan deposits tend to be large, continuous, high grade faces that are low in impurities and can be extracted in large chips or lumps. Battery anodes are made from spherical graphite.
Not perfect spheres, but rather spheroids – roundish graphite pieces that hold electrons once they’ve been discharged from the lithium electrode so that they can be loaded back into the lithium electrode on re-charge. Impurities are a problem in the graphite world.
Samsung never spelled out the specific manufacturing defect behind the Galaxy Note S7 battery explosions that continue to keep the phones off of commercial airlines, but material inconsistencies are certainly a possibility. Chinese graphite comes out of dirty, low-tech, operations which sell it to central aggregators, who then sell it up the chain to battery manufacturers. Generally speaking: it’s easier to ship high-carbon graphite when it’s being produced from high-purity deposits.
Brass Tacks and The Upshot
The high-purity graphite that comes out of Sri Lanka deposits is what Ceylon Graphite is after.
Here’s their plan:
The company has title to 116 exploration “grids” in Sri Lanka. Some of those grids contain old workings or evidence of previous operation, others don’t. Ceylon has devised a $525,000 exploration plan that should give them a reasonable look at the potential of those grids in short order. Graphite is highly conductive, and that makes it easy to find with modern geophysics.
Ceylon’s plan is to identify potential graphite veins with geophysical surveys, then drill the EM anomalies with simple 2-hole setups. The strategy appears to be: use a $525,000 exploration program to turn Sri-Lankan jungle with anecdotal but unknown graphite potential into Sri-Lankan jungle with identified but undefined graphite potential. It’s a strategy that I like, because the value difference between local legend and identified graphite structures could be considerable. If the program finds enough targets and structures, the company will likely look at further de-risking the deposits and moving them further along the path to feasibility.
Between the ubiquity of battery powered devices and the excitement behind electric cars, I think that small-cap investors sometimes lose track of just how small the graphite market is. World production of graphite in 2015 was 1.9M tons. For perspective, the world produced 19M tons of copper and 57M tons of aluminum in the same period. With one small exception (shout out to Eagle Graphite, Nelson, BC), there are no stand-alone graphite companies who are producers. The big companies that produce graphite all deal in other industrial metals, too, like chalk and silica. It’s handy to think of graphite as an industrial material, instead of as a metal.
Ceylon has set up a timeline designed to put them in control of virgin, high-grade graphite deposits, right at the time that a ramp-up in battery transportation makes graphite as relevant as copper or, dare I say petroleum. If the foretold EV battery explosion ends up being late or slow, discoveries of significance at Ceylon’s Sri Lanka grids will likely still be relevant and valuable. As I wrote in the opener to the LiCo article, the big value jump in mine building happens at the discovery phase.
Ceylon’s deck reports 51.5 million shares outstanding, and 26 million warrants for a fully diluted total of 78 million shares. The last financing had 15 million warrants at $0.30, with a cute little acceleration clause that kicks in if and when CYL trades above $0.50 for 20 consecutive trading days (why don’t more companies do that?). The company reported $1M in cash at the end of 2016, so the warrant exercise could make for a built-in financing.
Ceylon trades like a stock that’s still looking for direction. The first trades were in January, but it didn’t get any serious volume until late April. CYL is $0.21 as I write this, but has traded as high as $0.43. The swings are big and it hasn’t found a rhythm quite yet. It’s safe to say that the market doesn’t quite know what to make of it, and that’s typical of companies looking for early discoveries. I expect that it will take a few bird-in-hand discovery holes to get institutions and big-money retail interested and have it find its level at a higher price. For now, at least we’re seeing action.
There is news flow from the ongoing exploration program. The company bought their own drill rig and geophysical equipment to get the job done, which is often the kind of thing that has to be done in remote areas where contractors are hard to come by. Come to think of it, the cost and logistics of maintaining one’s own gear sounds cheap compared with mobilizing and keeping a contractor in Sri Lanka. Their backers are no doubt anxious to see the rate at which they produced feet of drill core.
As far as discovery-stage graphite bets go, an investor could do a lot worse than Ceylon.
They’re in a known area with potential for high-grade material. Efficient work and a bit of good luck could find them something to build on in short order, and any kind of real or perceived tide swell in graphite brought on by EV production will likely float the Ceylon boat as much as the others.
— Braden Maccke
FULL DISCLOSURE: Ceylon Graphite is an Equity.Guru marketing client