Graphite Grown Ups

Grand View Research, another industry research group, estimates that the graphite market could reach $93 billion by 2025, boosted mostly by new demand for electric vehicle batteries as well as batteries for electronic devices and grid-storage systems.  According to Technavio, an industry research firm, the graphite industry is estimated to grow more than 5% annually through 2025, largely on new demand for highly purified graphite material used in lithium ion battery anodes.

Among the immediate beneficiaries of this growth trend are the established graphite producers and those among the most recent entrants that have begun ringing up sales to customers.

Graphite Intermediate Products of Mersen, SA

Grand Old Lady

Founded in 1880, France’s Imerys (NK:  Paris) has a lengthy history of mining graphite and producing carbon products.  The company has a history of growth through acquisition.  A couple of its most recent deals is of particular interest to investors in the graphite sector.  In 2016, Imerys strengthened its natural graphite mining resources through a joint venture in Namibia.  The company’s natural graphite resource in Canada is nearly played out.  Then in February 2017, Imerys acquired Japan’s Nippon Power Graphite with its patented chemical vapor deposition coating process.  The moves strengthened Imerys position in supplying high-value anode material to the electric vehicle battery market. 

SELECTED GRAPHITE MINERS
Company Name	SYM	Price	Mkt Cap	Sales	Operating Margin
Entegris (POCO Graphite)	ENTG:  Nasdaq	$40.61	$5.5B	$1.6B	19.9%
Fangda Carbon New Materials	600516:  Shanghai	$4.12	$7.4B	$1.8B	59.8%
GrafTech International	EAF:  NYSE	$13.93	$4.1B	$1.9B	59.3%
Imerys, SA	NK:  Paris	$54.90	$4.4B	$5.2B	12.0%
Mersen, SA	MRN:  Paris	$35,48	$728.1M	$987.8M	10.28%
Nippon Carbon Co. Ltd.	5302:  Tokyo	$48.15	$530M	$410M	32.1%
SGL (Carbon) Group AG	SGL:  DE	$9.05	$1.1B	$1.3B	2.4%
Showa Denko Carbon	4004:  Tokyo	$37.84	$5.5B	$8.4B	6.01%
Sinosteel Jilin Carbon Co.	000928:  Shenzhen	$1.12	$1.4B	$2.2B	13.7%
Syrah Resources	SYR:  ASX	$0.89	$304.1M	$860K	neg
Tokai Carbon Company	5301:  Tokyo	$13.13	$2.8B	$2.1B	32.2%
Toyo Tanso  Company	5310:  Tokyo	$19.63	$410.0M	$347.5M	15.7%
US Dollars

Backward Integration

Upstream graphite producers are not the only players in the sector to grasp the power of integration.  Showa Denko (4004:  Tokyo), a producer of graphite anode material, acquired the synthetic graphite operation of SGL Group (SGL:  DE).  Investors will have to wait for the merits of that deal to unfold, especially given the building interest for the lower-cost, higher-purity natural graphite materials for batteries.

Instead, Entegris (ENTG:  Nasdaq) may have had the better approach, acquiring Texas-based POCO Graphite with its capacity to process high-valued added graphite.  Entegris offers a portfolio of produces for purifying and handling materials critical to the semiconductor and other technology industries. 

Repositioning

The Showa Denko-SGL deal is particularly interesting against the backdrop of the flurry of deal making by SGL.  The German ‘carbon’ company has been remaking itself with a series of deals, the most recent of which was of sufficient importance for SGL to trigger a name change from ‘SGL Carbon’ to ‘SGL Group.’  SGL acquired shares from Tokai Carbon in the SGL Tokai process technology joint venture.  SGL management clearly sees process as important as property in the graphite sector. 

Two other deals provide further insight into SGL’s strategy.   In November 2017, SGL shed its carbon electrode, cathode and furnace lining business to Triton Funds, an investor in middle industrial businesses in Europe.  With a fist full of cash from that deal, SGL bought BMW Groups 49% interest in the SGL-BMW carbon fibers joint venture.  The two back to back moves make it clear SGL intends to step away from the messier end of the carbon business and double down on the higher-value added products.

Grown-up Table

Syrah Resources (SYR:  ASX) is among the most recent players to take a seat at the grown-up table of producing graphite players.  The Australian company has only recently begun to produce graphite from its Balama natural graphite mine, but the 73 kilotons shipped in 2018, was enough to give distinction to this long aspiring graphite resource developer. 

Syrah also has the battery end-market on its mind and has produced low volumes of unpurified spherical graphite from its Balama resource using pilot plants in China and Australia.  The company is targeting the U.S. market and has begun development of battery anode materials processing site in Louisiana in order to assume the profile of a domestic producer.  Syrah intends to produce up to 60 kilotons per year of battery anode material in the U.S.   There have been a few stumbles in the Syrah’s initial steps as Louisiana communities fret over water supplies, swamp and river contamination from plant effluent and environmental concerns over harmful chemicals Syrah plans to use for purifying the graphite.  Most likely the company will regain its footing and move forward.

Summary

Among those graphite industry players in the list above, Entegris trades are the best value with a price multiple of 4.4 times forward earnings.  However, for investors that want a stake in a company that brings graphite out of the ground and is delivering earnings to the bottom line, the best value is found in France’s Imerys.  Its common stock is currently trading at 6.9 times trailing earnings.  The stock 4.8% forward dividend yield represent icing on the cake.

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.