I’ll be brief, as I’m on my way to Florida shortly to participate in the upcoming Casey Research Recovery Reality Check Summit. I hope to see many of you there, but I know we sold out… and the venue has space for less than one percent of the readers of this service. So I thought I’d mention that you can still benefit from the high-powered program we’ve put together, via the recordings we’ll make available after the conference.
The main thing I want to point out now is that, even though metals, oil, and other commodity prices have been holding at historically high levels (at least in nominal terms), resource stocks have continued taking a beating. That disconnect between underlying prices and stock prices constitutes an opportunity.
One such opportunity a lot of people are asking about is in graphite. My colleague Andrey Dashkov has prepared a look at the graphite market for us – something else we’ll probably discuss at the Summit as well, since it’s such a hot topic. But rather than spoil his punch line, I’ll just turn it over to him.
Senior Metals Investment Strategist
|Rock & Stock Stats||Last||One Month Ago||One Year Ago|
|Gold Producers (GDX)||46.12||49.86||62.10|
|Gold Junior Stocks (GDXJ)||22.40||24.81||41.53|
|Silver Stocks (SIL)||21.01||22.60||29.18|
|TSX (Toronto Stock Exchange)||12,153.69||12,430.70||13,897.48|
Graphite: Time to Invest, or Flavor of the Day?
By Andrey Dashkov, Research Analyst
Graphite has been getting a lot of buzz recently, raising bullish expectations among some investors and even talk of a future bubble. Why? The price has risen steadily over the past couple of years and attracted a lot of attention. Let’s have a look at why some market participants are excited about this mineral and see if it’s worth our investment dollars.
Graphite is an important industrial mineral. As the US Geological Survey reports, “The major uses of natural graphite in 2011 were estimated to be refractory applications and crucibles combined, 33%; foundry operations and steelmaking combined, 26%; brake linings, 7%; batteries and lubricants combined, 5%; and other applications, 29%.” There are different types of natural graphite, each having unique qualities that suit certain applications: crystalline flake graphite; amorphous; and lump graphite. The most desirable and expensive of all three is flake graphite, which is produced from less than a half of the world’s graphite mines and is suitable for high-tech applications. Only synthetic graphite produced from petroleum coke can serve as a substitute for costly flake, but that process is quite expensive due in part to high oil prices.
Although there are predictions about graphite demand exploding because of demand for lithium-ion batteries – where it’s used extensively – by the time electric cars powered by these batteries become popular enough to impact global automotive demand, there’s likely to be technology that will allow cheap production of synthetic graphite. More traditional uses of the mineral are the primary source of current graphite demand, which is mostly dependent upon the health of the global economy. From this standpoint, one must have an optimistic outlook on the economy to be bullish on graphite.
Looking out further, many believe that graphene will be the driver of graphite prices. Graphene is a material derived from graphite and can potentially be one of the strongest, lightest, and highly conductive materials currently known. While the opportunities graphene may open up are extraordinary, it’s too early to make any economic projections for it, especially considering that synthetic graphene has already been produced in a laboratory. This technological progress is good for society, but not so much for graphite mining companies and potentially their stock prices.
Another source of potential demand is in pebble-bed nuclear reactors. The hope is that these will become more efficient and safer than current reactors and hence more widespread. They would require a lot of graphite, but this spread of pebble-bed reactors has not actually happened yet.
The graphite market has been compared to the market for rare earth metals: they’re both deemed “critical” by several countries, and China – one of the world’s leading producers – has tightened supply. In fact, in 2011 about 65% of global graphite mine production came from China, followed by 15% from India. China holds 71% of the global graphite reserves, again followed by India with 14%.
With this domination, China can easily influence the graphite market. The recent trend (since September 2011) has been a consolidation of Chinese producers. And the news from Hunan province is that the 200+ mines currently producing 96% of global amorphous graphite are being consolidated by the government. This move toward consolidation may result in decreased output, which falls in line with other Chinese initiatives, such as in the rare earth market.
Total annual graphite production is estimated at 1.1 million tonnes a year, and projections are that consolidation would take 100,000 tonnes per year production off the market. Amorphous graphite is cheap and is used in traditional industries, such as steelmaking – but if the supply of amorphous graphite falls, end buyers may have to consider switching to flake graphite, which is two to three times more expensive than amorphous. While amorphous graphite costs about US$500-800 per tonne, high-grade flake graphite can fetch as much as US$2,500 per tonne.
Demand for higher-grade graphite would provide additional motivation for miners and explorers – and also for R&D companies to invest in high-grade synthetic graphite.
If China takes the same approach to graphite as it did to rare earths, a politically orchestrated drop in production would likely spur the market’s interest in non-Chinese graphite mining companies, at least in the short term. From a more fundamental perspective, however, we’re reticent to bet on Chinese policies; in the 1990s, global graphite prices crashed when it flooded the market with its domestic output in an attempt to kill competition. As Louis James, our senior metals investment strategist, says, “China giveth and China taketh away.”
One cautionary argument about the graphite market is its size: it’s tiny. Smaller markets tend to be more volatile, which can be both positive and negative. A low-liquidity sector like graphite, where there are few companies and the price is still settled mostly via direct negotiations, could deliver outstanding gains if your timing is good. Equally possible is getting crushed by a sudden setback or change in market dynamics.
To be sure, companies are likely to bring more projects online if the current momentum for graphite persists. The timing is tricky, though; we’re at least half a decade away from the new technologies that many investors hope will create a tidal wave of demand for the mineral. These uses are simply not yet being deployed or do not appear to be as widespread as their advocates claim. Thus, placing bets now would require a boatload of patience, along with some confidence that both the finished technology and a strong economy will pan out before the companies invested in run out of steam.
Simply put, by the time a company discovers, develops, and builds a graphite mine, technology may have advanced to the point where prices are low or substitutes are found. A more compelling play in our opinion would be to explore investing in a synthetic graphite company.
(Editor’s note: Many more compelling speculations with high-profit potential will be revealed at the Casey Research Recovery Reality Check Summit in Weston Florida this weekend. And even though you may not be attending, you can still learn all about these under-the-radar plays with the Summit Audio Collection.)
From both technological and economic perspectives, we haven’t yet seen compelling evidence that would persuade us to consider graphite as the “mineral of the future.” The factors frequently mentioned as bullish for graphite are mostly “what if” speculations, which border on sounding too good to be true. And as the saying goes, if something looks too good to be true, it probably is. If the new uses for graphite don’t come to fruition, current end users cannot be relied upon to drive the market for the mineral much higher, at least not in the near- to mid-term – not unless you think the global economy is about to explode into a major growth spurt.
We’d argue that since expectations play an important role in how markets view graphite companies, a lot of the upside in this sector has already been factored into their stock prices.
All this brings us to the realization that while graphite and its derivatives play an important role in the economy, they do not necessarily represent an ideal investment, at least at this point. This doesn’t mean, of course, that there’s not money to be made on graphite plays; graphite, rare earths, and lithium are all critical elements in our modern economy. But to be successful, we recommend looking beyond the buzz.
Current fundamentals – weak job markets, slow economic growth, ongoing sovereign debt crises, and the looming possibility of inflation – keep our interest at bay for right now industrial minerals. Their merits and praise may be well justified, but successful speculators must distinguish fundamentals from fashion.
Gold and Silver HEADLINES
First-Quarter 2012 Gold Statistics (World Gold Council)
The latest gold statistics from the World Gold Council (WGC)reveal three key trends:
- The average gold price continues rising. Quarter-on-quarter returns in US dollar terms amounted to 8.6%, almost twice the ten-year average of 4.5%. The average price during the quarter “was marginally higher than Q4 2011 (+0.2%) and 22% higher on a year-over-year basis, as drivers of gold demand and supply continued to support its long-term trend.”
Gains in gold were seen across all major currencies, with Japanese investors benefiting most: they got a 16.1% return in their local currency.
- Both gold and commodities were volatile. The difference is that gold’s price volatility was positive, in contrast to negative volatility for commodities. “Gold’s annualized volatility measured 20.4% during Q1, registering 21.8% on the upside and only 16.4% on the downside.” Put simply, gold prices fell less sharply than they rose.
- Long-term correlation of gold to equities remains statistically insignificant. The WGC researched the worry many investors seem to have about volatility and came to the conclusion that despite gold’s short-term correlation to equities and other risk assets that we witnessed last quarter, gold doesn’t exhibit any significant long-term correlation with equities.
Syria put its gold reserves on sale, as Western and Arab sanctions targeting its central bank and oil exports took effect.
Reuters reported that gold traders confirmed that Damascus was not only selling gold but doing so at a discount – as much as 15% below market price.
However, it’s difficult to determine who the buyers were and if these deals really took place at all. As quoted by one source, these purchases didn’t go through Dubai because the authorities “were blocking unauthorized trades and few potential buyers were willing to take the risk of these deals.”
Syria has not published economic statistics for almost a year, which makes it impossible to check its gold or forex reserves.
Still think gold isn’t money?
Production costs are the biggest challenge facing Australia’s gold sector, as discussed at the Paydirt 2012 Australian Gold Conference.
“If we do not start constraining our gold production costs, Australia’s costs will be comparable to that of the worst performing country to date, South Africa,” said the director of the Chamber of Minerals and Energy WA Damian Callachor.
Growing energy and labor costs, mine depletion, and the potential for increases in taxes make Australia less attractive for resource investors. There is an ongoing threat that the minerals resource rent tax could be expanded to include gold:
“What the equities market has to factor in is that of the top 10 gold producers in Australia, most of them are very mature mines and will be coming offline over the new few years.”
World gold-mine production has been growing in recent years, but rising costs remain a common issue across the globe.
This Week in International Speculator and BIG GOLD – Key Updates for Subscribers
- A production-stage company announced its first-quarter 2012 operating results. See what we think about it.
- An exploration company announced a private placement last week. Get our opinion on the financing.
- This silver producer announced an update in Reserves, making the stock cheaper.
- Another silver producer wants to acquire a producing silver mine – see why we like it.