Graphite stocks have been whacked. But the supply-demand balance is thought to be turning, prompting senior analysts to tip a recovery in graphite prices. This could see the next generation of producers such as Battery Minerals and Kibaran spring to life. Plus, pending base metals BFS could re-rate Orion shares.
Leading graphite stock Syrah Resources (SYR) has been beaten up something shocking ever since it turned on its Balama operation in Mozambique.
The fall from grace – it’s down from $2.80 a year ago to $1.07 this week – has a lot to do with teething problems at the concentrate processing plant.
But the real issue is that the $US1, 000/t average price for Balama concentrates forecast in the May 2015 feasibility study has proved to be complete nonsense.
In its most recent production downgrade – yes, there’s been more than a few - Syrah let slip that its weighted average price for the current June quarter was expected to be all of $US466/t, down a little from $US469/t in the preceding March quarter.
Given average cash operating costs in the 2015 feasibility study were put at $US286/t, Balama is lucky to be washing its face.
It’s why the cash burn is being closely watched. It was taken as a positive that in the recent production downgrade, Syrah was at least able to say its expected cash position at June 30 would be $US43m as guided.
Despite the gloom around the stock, things are not as bad as a realised selling price of less than half that indicated in the feasibility study might suggest.
Otherwise there would be no explaining why Credit Suisse in a June 10 note was happy to have a $3.30 a share price target on the stock. UBS was not quite as bold with its June 7 share price target of $2.40 a share, but at least it is a multiple of the current share price.
The fancy share price targets reflect Syrah being given the benefit of the doubt when it comes to the company bagging the benefits of the Balama “production improvement plan” in the September quarter after previously saying they would arrive in the June quarter.
The potential for increasing sales of higher-priced coarse flake from the current 14% of the product mix towards the eventual 30% target was also a factor in the share price targets, as was the run-out of legacy supply contracts from when Balama product was in the acceptance phase.
But more importantly, the analysts are tipping higher prices. Credit Suisse was tipping $US550/t in the September quarter and UBS reckons the realised price for 2019 will come in at $US508/t.
It’s the bellwether
The world scale of the Balama deposit and the operation’s under-utilised annual capacity of 380,000t of graphite concentrates mean it is very much wearing the bell for the flock of graphite stocks looking to get into production.
If what is supposed to be the biggest and best is struggling in the original electric vehicle revolution-themed commodity to turn a dollar, what hope do they have of raising the finance to get their projects into production?
But as suggested above, it could well be that the things are coming good on the price front for graphite.
Some estimate that five Balama’s will need to be developed in quick order to satisfy demand from the anode side of the lithium ion batteries which are powering the EV revolution and the storage of renewable energy sources.
For that to happen there has to be incentive price to do so, and that is a price that will need to be around the $US750/t mark.
Apart from the sheer scale of the demand coming from EVs and renewable energy storage, geo—politics has well and truly swung graphite’s way. It was one of the 35 strategic metals that the US confirmed this week that it has supply concerns about.
There is an added piquancy to it all for graphite given the backdrop of the US-China trade war, threats by China to hold back rare earth supplies and the huge protests in Hong Kong about the former British colony being pulled closer and closer to the Beijing way of doing things.
China controls the graphite market and its downstream processing into products for the steel industry and the battery materials market. So more of the same will only sharpen the Western World’s intent for non-Chinese sources to blossom. But incentive pricing will be required.
It is assumed that China will want to keep its grip on the graphite market for as long as it can.
But with its own domestic production under environmental and cost pressure, China itself will need to see Balama hit its straps, as well as more geographically diverse supply sources coming on stream as the years roll by.
All that is good news for those juniors with “ready to go” projects, but for the sake of project financing, like Battery Minerals (BAT) trading at 1.7c and Kibaran Resources (KNL) trading at 13.5c.
The recovery in graphite pricing is not going to happen overnight. But it is coming. Syrah’s struggle at these prices tells us that.
As an aside, Kibaran distinguished itself from the pack earlier this week by unveiling plans for a $US23m graphite-processing plant at Kwinana in WA.
Central to the proposition is its patented EcoGraf technology which does away with the use of particularly nasty hydroflouric acid in the purification process. While it is working on a graphite mine development in Tanzania, feedstock for the Kwinana plant could be sourced from anywhere.
It is a potential move up the value chain and critically, could offer the Western World an alternative to having to rely on China for their battery making materials to drive the EV and energy storage revolution.
And that’s not a bad thing in the current environment.
Orion Minerals’ CEO Walter Shamu flew all the way from Johannesburg to be at last week’s Resources Rising Stars conference on the Gold Coast and he was looking forward to donning his togs and having a swim at the beach in his spare time.
So imagine his disappointment that swimming was off the agenda, such was the bitter chill which prevailed all week.
Still, Shamu was able to warm up the punters at the conference with the news that Orion (ORN) was close to releasing its bankable feasibility study into the development of its flagship Prieska zinc-copper project in South Africa’s Northern Cape Province.
In a market for juniors running seriously short of re-rating events, the pending release of the BFS stands as one to watch.
“Within 2 years we’ve completed a scoping study based on a resource we have drilled out which showed that we could produce a plan (the feasibility study) to take us in to production,’’ Shamu said.
Prieska now boasts a 30m tonne resource grading 3.7% zinc and 1.2% copper, making it one of the 30 biggest VMS deposits in the world.
More to the point is that the scoping study pointed to a robust operation that will benefit from a modern mining method, and the infrastructure and development access left behind when Prieska was last mined in 1991.
Near-term base metal developments are rare things and assuming South Africa Inc lines up to get Prieska back in to production with financing support as most suspect, and the BFS confirms the project’s key metrics, Orion’s current 2.7c share price for a market cap of $56m will come in to sharp focus.
Hi Barry, thanks for the article on Graphite. Have you considered TON, Triton Minerals in this sector and the amount of reserves they hold ? I believe they are one of the biggest in the world and have two off take agreements with China. They are also in talks with South Korea for 3rd and 4th off take agreements. They have the largest known Vanadium resources as well. Share price 6c Market cap only $60m Your thoughts ? Thank you Paul https://www.tritonminerals.com/projects