Rolling Along on Graphene

Based on Toronto, Canada upstart Gratomic, Inc. (GRAT:  TSX-V) is trying to bring energy efficiency to the tires on which we motor around the world.  It is an unusual objective given that Gratomic is a mining company.  The company owns 62% interest in a graphite mine in Namibia and is sole owner of a graphite mining project near Buckingham in the province of Quebec.  In this day and age, mining costs gobble up profits with such voracious appetite, that graphite miners have been driven down the supply chain to offer more refined and higher priced products.  Gratomic has seized on graphene.

Graphene is a single layer of carbon atoms called an allotrope.  These atoms are lined up in a two-dimensional hexagonal lattice with each carbon atom creating a vertex in the hexagon.  It has all sorts desirable properties such as heat resistance and electrical conductivity.  Consequently, engineers have found a number of applications for graphene in energy, pharmaceutical, automotive and aerospace sectors.  Graphene has gained such interest that industry research firm Market Research Future estimated in 2018 that the market for graphene would grow at the phenomenal pace of 43% on a compound annual basis through 2023. 

Such market prognostications are so very tempting to investors.  Unfortunately, there is more to the graphene story than marketability.  Graphene is not so easily produced.  Expensive equipment is required regardless of whether the exfoliation or chemical vapor deposition method is used.  Production processes that require higher temperatures or toxic chemicals, pile up costs and add environmental or safety risks.  It costs tens of thousands of dollars to make a piece of graphite the size of a postage stamp. 

High cost tempers the engineers’ zeal for adding graphene to conventional designs.  Consequently, the market for graphene is not likely to break the billion dollar level until well into the current decade.  A survey of market size estimates by Statistica suggests the global market value for graphene is expected to reach $800 million by 2024.

Gratomic Tire Tread

Cost issues notwithstanding, Gratomic is rolling forward with their graphene-based tires.  The company is collaborating with Perpetuus Carbon Technologies Ltd., a U.K.-based graphene developer.  Before the start of the partnership in 2017, Perpetuus had already patented a plasma-based technology for an environmentally-friendly method for producing graphene.  Perpetuus also has experience in scaling up production to the volumes that would be necessary to supply the tire manufacturing industry.  Graphite from Gratomic’s mine in Namibia provides an important missing component for the partnership.

In October 2019, Gratomic announced successful road tests of its Gratomic Tires made from rubber polymers enhanced with surface engineered graphenes produced by Perpetuus with Gratomic graphite.  The tests proved a 30% increase in wear resistance compared to tires on the market today and a 30% improvement in fuel economy.  Interestingly, braking distances on wet or icy roads were also improved by as much as 40%.

Gratomic and Perpetuus have not yet brought their tires to market.  Industry research firm reports the tire industry was valued at $155.3 billion in 2018, making it clear that the duo is targeting a very large market indeed.  The lengthening life of vehicles is driving demand for automotive tires.  Of course, performance is a critical factor, particularly the chance to improve fuel efficiency.  The industry is dominated by three large manufacturers, Michelin, Bridgestone and Goodyear.  In combination the three represent more than a third of the world tire market. Pirelli, Dunlop and Continental follow closely behind, revealing the degree of concentration in the tire market.  Grapping a bit of market share might mean forming a relationship with one of these high profile players.

Investors might be tempted to take a long position in Gratomic, speculating on the management’s ability to bring commercialize a graphene application.  Even if the Gratomic Tire technology does not revolutionize tire making, a few shares could provide fascinating cocktail party conversation. 

Unless the investor has money to throw away, it might be better to look more carefully at Gratomic.  The company has not yet disclosed in detail the costs of its production process with Perpetuus.  Thus it is difficult to project profits for the tire technology.  Furthermore it is not possible to conclude whether the performance and fuel efficiency improvements Gratomic is claiming are enough to justify the resources used to produce the graphene and the tire polymers.  It does not make sense to invest capital in a business that emits more greenhouse gases through its production process than its technology is going to save in the end-use application.

In November 2019, on the wave of excitement over the success its graphene tire tests, Gratomic raised $2.5 million in new capital through a private placement.  This materials company is more likely that not to return to the capital market for more help.  Anyone considering GRAT would be well served by answers to the tough questions about true costs.

The next post will discuss investment potential in another novel graphene application.

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.