EVs poised to send graphite price into overdrive amid big supply deficit

There are not many bones being dished up in the commodities market at the moment. So it is case of accept them gratefully when they do come along.

The lead graphite stock Syrah (ASX: SYR) did so a couple of weeks ago when UBS analysts got excited about the outlook for natural graphite, as distinct from the filthy synthetic stuff that really should be killed off in a decarbonising world.

Year-to-date has not been happy times for natural graphite, with prices off by as much as 30%, reducing Syrah to campaign mining at its Balama operation in Mozambique.

It has a nameplate capacity of 350,000tpa but is producing nowhere near that while the graphite price is down in the dumps. But according to UBS, happier times are on the way.

In note on Syrah on September 29 when the stock was 45c - it was a $2 stock at the start of the year – UBS slapped a $1.10 price target on the stock.

Syrah last traded at 49c so it can be said not everyone is on board with the story, except perhaps its long-time back, AustralianSuper.

UBS wasn’t looking at the here and now though in graphite. It was more a case of what is coming for the battery anode material from one of the biggest investment thematics of our time – the electric vehicle revolution.

It is the one that BHP’s chief development officer Johan van Jaarsveld put into context at the Melbourne Mining Club last week.

“We estimate there could be over 400 million electric vehicles globally in 2030 – up from 16 million today.’’

He was talking up copper (an extra 26Mt of copper is needed to build them), but he might as well have been talking about graphite.

UBS said its own optimism on the global EV outlook, coupled with its assessment of the natural graphite “opportunity”, meant it was “positive” on the outlook for graphite and Syrah.

“With EV demand growth expected to lift by five times to 2030e, we see accompanying robust growth for global battery demand (7 times to 4.5TWh by 2030e) and, in turn, anode material for which graphite is a feedstock,” the broker said.

“Combined with the potential for increasing natural graphite anode share in the battery (about 30% today versus UBSe of 50% by 2030e), we see natural graphite demand lifting 6x to more than 6Mt.”

That equates to 17 projects the size of Balama, at nameplate capacity.

It is not going to happen by 2030, that’s for sure. To have an even remote chance, the natural graphite price needs to start incentivising new projects and production.

UBS expects the natural graphite price to recover from about $US570 to $US850/t in the long-term.

It expects Syrah output to follow the market higher, modelling sales of 85/100,000tpa in CY23/24E against an average C1 cost of $US640/t before hitting 350,000tpa nameplate (finally) in 2025e, and with a C1 cost of $US460/t.

Finally, it is worth remembering that our friends in China account for about 60% of the world’s mined graphite and nearly 90% of active anode material that goes into batteries (Syrah is close to commissioning one in the US with the help of government funding).

Little wonder then that given the demand outlook and China’s dominance, graphite has made its way on to government strategic and/or critical minerals lists around the non-Chinese world, including here in Australia.

Kingsland Minerals (ASX: KNG)

All that augurs well for the ASX-listed junior that has been making noise in the graphite space in the Pine Creek region of the Northern Territory – Kingsland Minerals.

It last traded at 21c for a market cap of $12.2 million, which is kind of interesting as its Leliyn graphite discovery has the hallmarks of becoming a world-class orebody.

Thick and shallow hits from surface from drilling along a 5km section of a 20km-long graphitic schist, along with historic data, has allowed the company to publish an “exploration target” of 200-250Mt grading 8.11% graphite for 16Mt-27Mt of contained graphite.

That is not in Balama’s league (a 1 billion tonne resource grading 12% graphite) but the Pine Creek location wins out over remote Mozambique.

Apart from the infrastructure and services to be found in Pine Creek itself servicing the region’s mines, Leliyn sits all of 25km from a rail line to Darwin (490km by road to the Port of Nacala for Syrah).

Kingsland is working towards announcing a maiden resource estimate for Leliyn in the March quarter next year.

It is likely to account for a big chunk of the exploration target area (5km) and will be very much the start of the story as the area gets fully drilled out. Then there is the remaining 15km of prospective graphitic schist to come.

And while talking about strategic and/or critical minerals, how about gallium? Our Chinese friends have followed through on a threat to punish the US for its technology access pushback by limiting exports of the critical chip-making metal.

Well, exports fell to zero in August. It is mentioned here because Leliyn has by-product gallium potential with assays including 266m grading 15g/t of gallium from surface recently reported by Kingsland.

Gallium, when available, sells for more $A700/kg (70c a gram), so potentially at least, it could be a handy by-product contributor to the main game of graphite. So maybe Leliyn can be thought of as being doubly critical.

Having said that, to confirm Leliyn’s world class credentials, all important metallurgical testwork now underway needs to be completed.

CZR Resources (ASX: CZR)

It has been one of the great mysteries as to why iron ore has been performing so strongly while nearly all other commodities have been wilting in response to sluggish demand from the key buyer of all commodities nowadays, China.

Both Rio Tinto and BHP have been out and about in recent days explaining why iron ore, so far at least, seems to be different. It is all to do with the changing steel use mix in China.

While both were talking their own book – they still depend on iron ore for upwards of 65% of their earnings – their commentary on China’s steel mix use did make a lot of sense.

In Rio’s words it goes like this: China steel demand remains resilient as growth drivers shift from the bashed up property sector to other sectors. Growth in demand from transport (11%) and utilities (27%) have been soaking up the weakness from property, with auto production (7%) and air conditioners (16%) also contributing.

All that is by way of background to the impressive numbers in the definitive feasibility study released during the week by Mark Creasy’s CZR Resources into the development of its Robe Mesa iron ore project in the Pilbara.

The likely release of the DFS was mentioned here last week when CSR was a 14c stock.

It has since scooted off to 18c for a market cap of $42 million. That is not a lot for a company on to a project with an internal rate of return (IRR) of 62%, base case life of mine EBITDA of $824 million, free cash flow of $419m, and a NPV (8%) of $256m.

Leverage to iron ore prices is extreme. Plug in current iron ore prices and the IRR zooms off to 159%. So what Rio and BHP have been saying about resilience in iron ore prices is kind of important in assessing where to now for the CZR share price.

Rio for one will be taking a look at the DFS numbers as CZR’s orebody is shared with Rio across the boundary fence. Rio has been resource definition drilling up to the boundary fence so it seems it is earmarked for development at some point.

While CZR has its own development plans, it would be easier and more efficient all round for the pair to come to some sort of joint development agreement, perhaps leveraging off Rio’s existing infrastructure in the region. Failing that, a Rio takeover of the whole thing.