When it comes to stocks for the clean energy revolution, lithium gets all the love. But graphite flies under the radar. Along with coal and diamonds, graphite is one of three naturally occurring types of carbon.
Graphite has a wide range of uses. It has been used for hundreds of years in pencils, and also goes into lubricants, steelmaking, glass production, building materials, and the nuclear industry but its biggest attraction for many investors these days is its role as a crucial component in lithium-ion batteries that drive electric vehicles (EVs), electronic devices such as smartphones, medical devices and energy storage units.
Although there are competing technologies to the lithium-ion battery in the offing, at present, EVs quite simply do not work without graphite, meaning that the mineral is essential to the growth of clean energy and the mooted net-zero transition. As lithium-ion battery demand grows, graphite demand is also expected to rise from nations around the world.
According to Benchmark Mineral Intelligence, demand for graphite from the battery anode segment could increase by seven times in the next decade, on the back of surging electric car sales and the energy storage trend.
There is natural graphite and synthetic graphite, and an intermediate product, spherical graphite, and the different types have different prices. Natural is not always best: spherical graphite is a superior material for the lithium-ion battery market, because it is more electrically conductive, which is very important for successful anode production. The prices for the different types are usually set by negotiations between supplier and user.
Most graphite comes from China – which dominates both the mining and refining sides of the graphite market – well ahead of Madagascar, Mozambique and Brazil. China produced 850,000 tonnes of the metal in 2022, significantly higher than the amount it produced in the previous three years; according to the US Geological Survey, China accounted for 65% of world graphite mining in 2022.
For the world, this reliance on China is a major concern: this is where some of the ASX-listed graphite companies hope to come into their own in the near future.
Here are two companies that I think are very well-positioned for this growing market – one a producer, and one working toward production.
- Syrah Resources (SYR, 90 cents)
Market capitalisation: $606 million
12-month total return: –43.8%
3-year total return: +46.6% a year
Analysts’ consensus target price: $1.41 (Stock Doctor/Refinitiv, three analysts), $1.55 (FN Arena, three analysts)
Syrah Resources is the big kahuna of the Australian graphite space, as a producer – it has been producing at its Balama operation in Mozambique since 2017, supplying global battery anode and industrial customers. This year, Syrah Resources will become the biggest producer of battery-grade graphite outside China. Superannuation giant AustralianSuper is Syrah’s biggest shareholder, owning 16.5% of the capital.
Balama is a world-class asset, with a high grade (16% total graphite content, or TGC) and a long life – currently assessed at more than 50 years. It gives Syrah the largest integrated natural graphite mine and processing operation globally. (There is also a significant resource at Balama of vanadium, another metal that has many applications in batteries and renewable energy.) Balama is a “market-critical” natural graphite operation, as the largest imported natural graphite supplier to the Chinese anode supply chain.
In 2022, Balama struck record annual graphite production and sales, producing 163,000 tonnes of graphite, and selling 162,000 tonnes, and also achieved a record weighted average price, of US$661 per tonne (CIF, or ‘cost, insurance, and freight,’ a method of exporting goods where the seller pays expenses until the product is completely loaded on a ship.) That price was up 32% on 2021, and almost 70% higher than the gloom of mid-2019.
Syrah is building a plant at Vidalia in the US state of Louisiana to process (and add value to) Balama graphite into high-purity active anode material (AAM) products, with EV maker Tesla the foundation customer. The initial capacity is 11,250 tonnes a year; the plant is expected to be completed in the current quarter, and is scheduled to come online in the September quarter.
Last year, Syrah received a US$220 million grant from the US Department of Energy, as part of a US strategy to boost EV production. Buoyed by this funding, Syrah has announced a plant to quadruple the size of the Vidalia plant, to a production capacity of 45,000 tonnes a year, processing one-quarter of Balama production. The company says the definitive feasibility study (DFS) on the expansion shows it is “technically viable, financially robust and is expected to generate significant value for Syrah.”
Syrah is now working on engineering and procurement of “long-lead-time” items for Vidalia; it has told the market that a potential final investment decision (FID) proposal on the expansion project will be considered by its board by no later than December 2023, and “as soon as customer and financing commitments can be finalised.” Importantly, this large-scale, vertically integrated AAM production facility that will supply the US battery supply chain, giving customers a large-scale non-Asia AAM supply option that is ESG-verifiable – an increasingly crucial component of EV makers’ decision-making.
It’s all systems go – so, why has the share price gone backward since peaking at $2.63 in November 2022?
There has been a proliferation of challenges for Syrah, both macro and company-specific. It could have sold more graphite in 2022, but global supply-chain disruptions made it difficult to obtain shipping containers. Also, the booming EV sales (particularly in China) that brought more supply online from producers have retreated in 2023, on the back of changes in the Chinese subsidy regime and COVID-19 regulations; that has seen large stockpiles of battery minerals mount up at factories and ports. Unsold product inventories also hampered the March quarter. Graphite prices, particularly for Syrah’s natural graphite, have come under pressure – along with lithium prices.
Syrah also had to deal with illegal industrial unrest at Balama in the December quarter, which affected production. But as the company moves back to its target production levels, and lowers costs through economies of scale, the company says it would be able to increase production in response to market demand. Syrah says Balama‘s full capacity is 350,000 tonnes a year – more than twice 2022’s production, even though that was a record figure.
Looking past the shorter-term problems, and into the future of both Balama and Vidalia, Syrah looks to be very attractively priced for investors coming to the stock now. Analysts do not expect the company to be profitable until 2024.
- Renascor Resources (RNU, 19.5 cents)
Market capitalisation: $506 million
12-month total return: –7.1%
3-year total return: +160.7% a year
Analysts’ consensus target price: n/a
Renascor is developing the Siviour purified spherical graphite (PSG) project on the Eyre Peninsula in South Australia, where graphite was first produced in Australia in the late 1800s.
With a total reserve of 51.5 million tonnes at a grade of 7.4% TGC, giving 3.8 million tonnes of contained graphite, and a total mineral resource of 93.5 million tonnes at 7.3% TGC, for 6.9 million tonnes of contained graphite, Renascor describes Siviour as the world’s second largest proven reserve of graphite, and the largest graphite reserve outside Africa.
Renascor plans to integrate the Siviour graphite mine and concentrator with a downstream PSG manufacturing facility, to make an important value-added graphite product, spherical graphite, for lithium-ion battery anode makers worldwide.
The company is working through its Battery Anode Material Study for implementing the manufacturing operation at its site in Port Adelaide. The company expects to complete the study in July. Last month, Renascor kicked-off the procurement process for the “long-lead time items” for the upstream portion of the project, the Siviour mine and concentrator.
The initial planned Stage 1 level of processing is 28,000 tonnes a year of PSG, but Renascor
has already struck multiple non-binding memorandum of understanding (MOU) agreements covering potential offtake of up to 60,000 tonnes a year of PSG, with partners including South Korean conglomerate POSCO, Japan-based trading company Hanwa Corporation, and Chinese anode companies Shanxi Minguang New Material Technology and Jiangxi Zhengtuo New Energy Technology, covering up to 60,000 tonnes a year of PSG, or more than twice the proposed Stage 1 production rate. Renascor says it continues to have discussions with other leading anode, battery and EV manufacturers in Northeast Asia, Europe and North America, for both PSG and graphite concentrate.
The Australian Government, through Export Finance Australia (EFA), has conditionally approved a loan facility of $185 million to fund the development of the Siviour BAM project, under the government’s $2 billion Critical Minerals Facility. On top of that, Renascor’s cash position as at 31 March 2023 was approximately $134 million, meaning the company is well-funded.
While Renascor takes pains to tell the market that that the estimated capital costs will be subject to inflationary pressures, the company expects improvements in productivity and the strong graphite market outlook will ensure the BAM project will continue to demonstrate robust returns, and support a favourable final investment decision (FID) later this year.
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