Friday, June 19, 2015

Graphene: it is all in the Strategy

In the recent series of articles on graphene we have found a number of companies working on more efficient production processes and as well as applications for this exceptional material.  So beguiling graphene is  -  conductive, strong and pliable.  Scientists and investors alike have thought certainly graphene can provide that all-important ingredient that enhances value and creates profits.  In this post we look at two more companies that claim real progress in commercializing graphene materials. 

Based in the UK, Applied Graphene Materials (AGM:  LON; APGMF:  OTC) reported no sales in 2014 and a net loss of GBP1.9 million (US$2.9 million).  However, management is confident these circumstances will not last.  Applied claimed sending dozens of samples to prospective customers during 2014, and that initial feedback has been ‘encouraging.’  The team is so confident they have moved forward with plans for adding production capacity.  Applied is targeting three separate markets:  advanced composites, functional fluids and coatings. 

Applied’s strategy to commercialize graphene seems to differ from most of the other graphene developers.  Instead of creating an entirely new product, Applied is focused on enhancing existing industrial materials by adding a small portion of graphene.  The company’s engineers cite graphene’s mechanical, barrier and lubricating properties as valuable in increasing impermeability, reducing wear and tear, or increasing efficiency.  In my view, this is an interesting strategy. Potentially, even at low-volume, high-cost production rates, a graphene producer could make a profit by offering higher priced graphene material supplies to a customer that will find the increase in performance worth the investment.

Canada-based graphene developer, Grafoid, Inc., has recorded significant revenue in recent months, although it is not entirely clear it the sales are from its graphene material branded as MesoGraf.  Although privately held, Grafoid’s most significant investor, Focus Graphite (FMS:  V; FCSMF:  OTC), reported that Grafoid had recorded sales of CND$1.9 million (US$1.5 million) in the twelve months ending March 2015, resulting in a loss of CND$8.9 million (US$7.2 million). 

Grafoid’s market strategy is hitched to a series of acquisitions to integrate forward into the supply chain that would use the company’s graphene materials.  A year ago Grafoid paid US$1.3 million for ALCERECO,  an advanced materials technology developer that provides its customers with specialty ceramics and aluminum-scandium materials.  ALCERECO brings considerable engineering capability to Grafoid, including practical knowledge of manufacturing and materials production.   In September 2014, Grafoid bought a 75% position in Braille Battery, Inc., a developer of lithium ion batteries.  No details of the purchase price or Braille Battery sales or profits have been disclosed.  More recently in April 2015, Grafoid announced plans to acquire Ames Rubber Corporation based in the U.S.  Ames supplies materials for coatings, gaskets, moldings and other ‘rubbery’ products.  Grafoid’s CEO characterized the deal as the company’s ‘springboard’ into the rubber and plastics market.  Although the Ames deal is still pending, Grafoid has forged ahead with yet a fourth acquisition of MuAnalysis, Inc., a provider of testing and analytical services to industry, manufacturing and life sciences companies.  It is no surprise that deal terms were not disclosed.

Integrating all of these operations into the Grafoid fold presents something of a challenge.  It may have already taken its toll on Grafoid’s parent and 18% owner, Focus Graphite.  Grafoid’s chief executive officer, Gary Economo, is also the top executive at Focus Graphite.  In early June 2015, Focus Graphite announced the resignation of its chief operating officer due to a ‘divergence of vision.’  Economo has taken over as interim COO for Focus Graphite. 

Some investors might consider shares in Focus Graphite an alternative to a direct investment in Grafoid.  However, it might be wise to let the recent drama at Focus Graphite play out, before taking a stake in what would only be an indirect position in graphene and a significant exposure to Focus Graphite’s yet unproductive graphite mining operations.

 

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

 

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