Graphite Producers: the Senior Class

The series on graphite resource development is completed with a discussion of the companies that are currently in production.  The U.S. Geological Survey estimates 1.2 million metric tons of flake graphite are produced annually.  The vast majority  -  780,000 metric tons  -  are produced in China.  India and Brazil follow with 170,000 metric tons and 80,000 metric tons, respectively.  North America, which seems to show so much promise to the graphite resource developers that have been featured over the past few articles, is currently only contributing 30,000 metric tons per year to the graphite supply stream. 

For investors the clutch of graphite producers offers interesting alternatives to play the growing demand for lithium ion batteries and the graphite materials required to produce them.

SGL Group (SGL:  DE) is a global producer of carbon-based products, including graphite materials.  The company operates 41 production sites around the world, of which 22 are in Europe, 11 in North America and 8 in Asia.  Historically graphite electrodes for the steel industry have been at the core of the company’s production, but the company’s newer Graphite Materials & Systems division is targeting high-grow industries such as semiconductors and batteries.  The company’s Composite Fibers and Materials division also has a partnership with BMW, which is using carbon composites with greater intensity for automotive body and frame components.

Just like the smaller graphite resource developers such as Northern Graphite, Nouveau Monde and Ontario Graphite, SGL Group may be gearing up for the wave of new demand for spherical graphite from battery manufacturers.  The anodes in lithium ion batteries require a particular shape and purity that is best met by highly refined graphite particles.  The graphite ore is refined in a step called ‘micronization,’ shaped through ‘spheronization, and then coated with a metal layer.  In August 2016, SGL Group announced plans to invest in a coating line for its production facility in St. Marys, Pennsylvania.  The company cited the need for coated graphite materials used for manufacturing wafers used in light emitting diode production, but noted in the future “other graphite-based solutions could be enhanced by coatings.”

A restructuring effort appears to be completed, leaving SGL a leaner, more focused operation.  Yet in 2015, SGL Group reported slightly lower sales of €1.5 billion (USD$1.7 billion) compared to the previous year, producing an operating profit of €32.6 million (USD$36.5 million) before non-recurring charges totaling €160.9 million (USD$180.2 million) related to restructuring charges and impairment losses. 

SGL Group shares trade on the Frankfurt Exchange at 0.78 times sales or 5.94 times book value.  Of course, the price-earnings multiple is negative.  The stock has trailed off over the last few years, as the top-line has weakened and losses persist.  The restructuring effort and new market focus is expected to bring the company back to profitability.  With a debt-to-equity ratio of 1.85, the company has not had the flexibility some investors might prefer for a company in transition.  The stock is now trading near the midpoint of its 52-week low and high.

If Germany’s SGL Group is unappealing, investors can turn to France’s Imerys S.A. (NK:  PA), a self-described supplier of minerals-based industrial solutions.  Its products include ceramics, pigments, graphite, carbons and other materials.  Importantly, Imerys is one of two companies in North America with current graphite production from its Lac-des-Iles mine north of Montreal.  Graphite ore production from Lac-des-Iles is further refined at Terrebonne, Canada for use in the automotive, battery and polymer industries.

The company has fared a bit better in the current economy than SGL Group and has remained profitable.  Imerys reported a 13% operating margin in the last twelve months.  We believe this is due in part to a well diversified product line offering significant added value to customers.  Higher profits have also helped fortify the balance sheet, which is leveraged to 85.9 debt-to-equity.     Still Imerys is trading at a multiple of 65.0 times trailing earnings.  Even with a dividend yield of 2.7%, the valuation seems a bit steep. 

Likely the output from Lac-des-Iles mine represents a good share of the 30,000 metric tons produced annually in Canada.  Some of the balance could be natural flake graphite production from Eagle Graphite’s Black Crystal project in British Columbia.  The company plans to produce 2,100 metric tons in 2016, and estimates production could increase to 7,500 metric tons by 2019.  While relatively new to the sector, Eagle Graphite (AMPFF:  OTC/QB or EGA: V) has already established its credibility with potential customers in the battery industry.  Test samples of spheronized graphite from the Black Crystal project exceeded the 99.95% purity level required from lithium ion batteries. 

Eagle is more of a graphite/battery pure-play than SGL or Imerys, but the company has yet to produce significant sales and, of course, there are no profits.  While Eagle is several steps ahead of the other graphite resource developers in North America, the stock is still priced like an option on its assets.

Another perhaps more appealing pure-play on battery graphite is in the shares of Elcora Advanced Materials Corp. (ECORF:  OTC/QB or ERA: V).  The Sakura graphite mine in Sri Lanka has been in production in the past, reaching 18,000 metric tons annually under the name Ragedara.  More recently the mine has produced about 500 metric tons per year.  Elcora has set up a processing facility near the mine and claims output with purity over 99%. 

To impress potential battery sector customers, the company recently reported results from ‘C20’ tests, which on the simplest terms indicate a battery’s capacity or amp hour rating when discharged over twenty hours.  The tests established that the reversible capacity of the Elcora graphite used in the battery anode is very high and well suited for lithium ion battery applications.  Last month the company also introduced a proprietary technology aimed at simplifying the graphite refinement process.  While not providing specifics the announcement claimed Elcora’s approach could eliminate most of the advanced preparation stages for micronizing and spheronizing materials for turning out spherical graphite.  We note that Elcora’s processing facility near Sakura mine is set up to complete the initial steps such as grinding, flotation and dewatering.

An article about investment opportunities in current graphite production would be incomplete without a nod to Leading Edge Materials (LMF:  V or LEMIF:  OTC/QB), the combination of Flinders Resources and Tasman Metals Ltd. in August 2016.  The company began producing graphite from its Woxna project in Sweden in 2014, targeting an annual production rate of 10,000 metric tons.  Unfortunately, low selling prices forced the company to suspend production in July 2015.  The halt at Woxna may have provided part of the incentive for Flinders management team to look for an alliance with Tasman and its Norra Karr rare earth project in Sweden.  The two projects could give Leading Edge a triple threat in the battery market with graphite, lithium and aluminum materials output. 

Source:  Statistica

The halt at Woxna has put Leading Edge shares back below a ‘dollar’ after hitting a five-year high of CDN$2.81 in 2012.  Indeed, the share price appears to have followed the same trajectory as graphite prices.  In the chart below reveals the erosion of reported prices from 2011 to 2014, during which time price fell by an average of 49%.  Statistic has publish a forecast of prices through the 2020 time frame, suggesting that the worst will likely be arrive in 2017.  Then demand for graphite for lithium ion batteries is expected to drive prices for large flake graphite to unprecedented levels.  Lesser graphite materials are expected to experience improved pricing as well, but are not expected to recover to even to price levels at the beginning of the previous decade when the world’s economies were attempting recovery from recession.

Selling prices will likely dictate the future for these ‘senior’ producers as well as the rest of the graphite developers.  As demand begins to put pressure on prices, all of these companies will dust off production equipment.  Investors have alternatives for taking a stake in the graphite drama.  Alternatively, the stake could be a long position in all the stocks.  With the exception of Imerys and SGL Group, the stocks are low enough in price to make that feasible for even an individual investor.

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.