The list of once-obscure metals and minerals that are becoming "strategic" seems to be growing daily. However, population growth and rising living standards in developing countries are driving demand for most raw materials. In this exclusive interview with The Critical Metals Report, Institute for the Analysis of Global Security Senior Fellow Jack Lifton explains how increasing demand and harder-to-mine deposits are raising prices on these essential materials.
The Critical Metals Report: In the last five years, investors discovered lithium and the rare earths. What will be the next big thing?
Jack Lifton: The answer is graphite. Graphite has traditionally been considered a boring, mundane industrial mineral, evoking thoughts of pencils, golf clubs and tennis racquets. Investors should think again. Traditional demand for graphite in the steel and automotive industries is growing 5% annually, and graphite prices have tripled. New applications such as heat sinks in computers, lithium-ion batteries, fuel cells, and nuclear and solar power are all big users of graphite. These consumers are beginning to place substantial demands on existing production—and over 70% of that production is from China, which is no longer selling this resource cheaply to the rest of the world as the country's easy-to-mine, near-surface deposits are becoming exhausted.
Graphite's criticality and potential scarcity has been recognized by both the United States and the European Union, which have each declared graphite a supply-critical mineral. Recently, the British Geological Survey ranked graphite right behind the rare earths and substantially ahead of lithium in terms of supply criticality. Clearly, there is much more to graphite than pencils.
TCMR: What mining companies could fill this growing demand in the coming years?
JL: There is only a handful. Northern Graphite Corporation (NGC:TSX; NGPHF:OTCQX) is, in my opinion, the leading public graphite company. Northern Graphite has the "three Ps" of investing in junior resource companies: people, property and price.
Seven members of Northern Graphite's board and management team have significant senior management experience with mining and exploration companies and are widely known and respected in the mining and investment communities. CEO Gregory Bowes was senior vice president of Orezone Gold Corp. (ORE.TSX) and Ron Little, a director, is Orezone's CEO and founder. Orezone drilled off a 5 million ounce gold deposit in Burkina Faso, Africa, completed a bankable feasibility study and permitting, and started construction before its Essakane project was taken over by IAMgold Corp (IMG.TSX) in a $350M transaction. Iain Scarr, another Northern Graphite director, was commercial director of Rio Tinto's (RIO:NYSE; RIO:ASX) industrial minerals division for many years and is now vice president of corporate development at Toronto-based Lithium One Inc. (LI:TSX.V). Jay Chmelauskas, a director, is CEO and a director of Vancouver-based Western Lithium USA Corp. (WLC:TSX; WLCDF:OTCQX). Don Baxter, president, was mine superintendent at the Kearney Graphite mine in Ontario when it operated in the 1990s and was CEO of Ontario Graphite, which is presently attempting to reactivate the mine, before being lured away by Northern Graphite. George Hawley, technical advisor, started in the graphite business more than 40 years ago and is a leading minerals industry expert.
Northern Graphite's Bissett Creek graphite project has a number of significant advantages over other graphite deposits. It is located about two hours east of Ottawa, the nation's capital, and 10 miles from the TransCanada highway and associated natural gas pipeline, power lines and small communities where workers can live. It is five hours by truck from the port of Montreal and less than one day by truck from the major steel and automotive centers in the northeast United States.
Bissett Creek itself is a very large, low-grade deposit that is located right at the surface, which means it will be mined by simple open pit methods and will have a very low waste-to-ore ratio. It is also very flat lying and therefore production can be expanded by moving laterally rather than going deeper, which is much more expensive. North Graphite's original NI 43-101 report contemplated an operation producing 20,000 tons of graphite per year for over 40 years. Since that time, the resource has more than doubled and it is still open to the north and down dip. This indicates the deposit could support production of 70-80,000 tons per year and still have a mine life of more than 20 years. We do not know of any other graphite deposit in the world that has this degree of scalability and believe that at this production level it would be the largest graphite mine in the world. This feature should make it very attractive to potential strategic partners that want to secure a stable source of long-term supply to meet growing demand.
Another feature that makes Bissett Creek quite unique is that almost 100% of production will be large-flake (+80 mesh), high-purity graphite. Recent metallurgical test results have shown that 50% of production will be even larger, +48 mesh jumbo flake, which will result in premium pricing. We believe Bissett Creek will produce concentrates that have the highest average value per ton in the industry. While Bissett Creek will not be the lowest cost operation due to its relatively low grade, its near-surface nature and low strip ratio will help to balance this disadvantage out, meaning that costs will be in the middle of the pack. Bissett Creek should generate the highest margin per-ton of concentrate in the industry.
Northern Graphite expects to complete a bankable feasibility study in the first quarter of 2012; full permitting should be completed shortly thereafter. It will take approximately $80M and one year to build the mine, so Bissett Creek could potentially be in production in mid-2013. With the bankable study and permitting near at hand, Northern Graphite has a substantial head start on many other companies that have yet to commence either.
Northern conducted its IPO in April of 2011 at CDN $0.50 per share and closed the year at $0.94, which is fairly good performance considering that the TSX Venture Exchange was down about 40% over the same time period. However, with only 37.4M shares outstanding and 45.8M fully diluted, the company has a market capitalization of less than $40M. We consider this very cheap considering the quality of both management and the asset itself, as well as the advanced stage of the project. The company has a minable, diluted resource of over 1.3 Mt of graphite in the indicated and inferred categories, and almost all is large flake, high purity. Accordingly, the market is valuing the company at less than $30 per ton for a product that sells for close to $3,000 per ton and has a margin well over 50%. As the bankable feasibility study and permitting are completed in the near term and the investment profile of graphite goes mainstream, we expect the share price to move substantially higher.