Forget today’s softness - all things EVs and ESG mean natural graphite’s future is rosy

When a commodity takes a turn for the worst, it can be better to be an explorer for the said commodity rather than being a producer, for a time at any rate.

The explorer with a decent project on its hands continues to offer leveraged upside from making a meaningful discovery, with time on its side for the said commodity to cycle back upwards at some point.

But the producer caught in a downshift in a commodity price has to cop – and cope – with the market downgrading its value because of slumping cashflows and the cost of maintaining the producing asset so it is ready to fire back up again when the commodity price turns.

There is a live example of all that panning out at the moment in the ASX in the graphite space, over there in the anode side of batteries for the booming electric vehicle and stationary energy storage sectors.

The contrast is between graphite junior Kingsland and graphite producer Syrah.

Kingsland (KNG) is having a good year, with its shares racing from 15c at the start of the year to 34.5c for a market of $22M (fully diluted) on the strength of initial drill results from its Leliyn graphite project in the Northern Territory.

The company recently pulled in $3.6m from a placement at 32c to take funds on hand to $5.5m, allowing it to keep punching holes into what its managing director Richard Maddocks reckons is a project with Tier 1 potential.

A compliant “exploration target” of 200-250Mt grading 8-11% total graphitic content (16-27Mt contained graphite) has been set by the company which goes to its confidence that it is indeed on to something big.

The exploration target is based on a 5km stretch of a prospective 20km schist, so there is lots of room for Kingsland to work with.

There is lots more work to do before the Tier 1 potential is confirmed, including all important metallurgical testwork because if you have to be in the graphite business, you want to be producing the fines material consumed by the battery sector.

Given the pace of activity, a drilling/assay update is about due, possibly in time for the appearance of Maddocks at next week’s Resources Rising Stars “Twilight Series” investor briefings in Brisbane, Melbourne and Sydney.

Syrah in the meantime is not having a great 2023. A 20% graphite price slump has prompted it to revert to campaign mining at its Balama operation in Mozambique until prices/demand for its natural graphite improves.

Since the release of its quarterly report on July 18 disclosing the move to campaign mining at a fraction of Balama’s installed capacity, Syrah shares have shed 14% of their value.

AustralianSuper, a major backer of the company since 2015 and headed to more than a 20% stake, and the rest of the shareholder base need not panic. Graphite’s current weakness is all about China ramping up the production of synthetic graphite.

It is expected to be a transitory thing as the synthetic route – it involves cooking coke at 3000 degrees for a month – is a filthy business, with rising energy costs and rising ESG concerns on carbons emissions an obvious limiting factor on how big Beijing will let the synthetic operations get.

Apart from anything else, the growth in the synthetic stuff is damaging China’s own domestic natural graphite industry.

Longer-term, forecasts by Benchmark Minerals Intelligence and others still has the graphite market going into deficit supply in response to the accelerating EV uptake.

And because of cost and emissions issues with the synthetic stuff, natural’s market share is forecast by Benchmark to grow from the current 35% to 49% by 2030. It is the emissions associated with the synthetic material which are increasingly becoming a turn-off for auto OEM’s and battery makers, ex-China at any rate.

Completing the comparative circle, it’s why junior explorers like Kingsland are right to be pushing hard on working up a development opportunity in graphite. Syrah in the meantime can look forward to the day when Balama is at full speed.

SOVEREIGN METALS (ASX:SVM):

No less than Rio Tinto is on board with the idea that the natural graphite market’s best days are ahead of it.

The mining major with a growing liking of all things battery materials has just signed on as a strategic partner with Sovereign Metals (ASX:SVM) to advance the world-scale Kasiya rutile-graphite project in sunny Malawi.

Originally a natural rutile project only, graphite is a more recent addition to the Kasiya story. Graphite is new to Rio but mineral sands is not.

And just like natural graphite, natural rutile has the ESG advantage of being a low-carbon alternative for the pigment industry end-users compared with the energy-intensive alternative of upgraded ilmenite or synthetic rutile.

Paint produced in future from Sovereign’s natural rutile is estimated to have up to 35% lower carbon footprint than that produced from ilmenite-upgraded alternatives. It is what the pigment industry wants, and it’s what Rio’s Eurocentric investor base increasingly demands from the company.

Importantly, met work on Kasiya’s graphite has confirmed it is of the battery material type for which demand is growing strongly, notwithstanding the current market weakness and the convergence of pricing between the natural and synthetic material.

Sovereign was mentioned here in March last year on its rutile leg alone when it was trading around the 52c a share mark, which is where it is today. That’s despite Rio’s effective endorsement of Kasiya’s world class potential across both rutile and graphite.

Rio is investing $40.4 million in Sovereign for an initial 15% stake at 48.6c a share, a 10% premium to the 45-day weighted average price to July 14. It is also being issued options exercisable at 53.5c each to be able to go to a 19.99% a stake within 12 months.

There is a broader agreement for Rio to become the operator on arm’s-length terms, and for it to have exclusive marketing rights to 40% of all products.

In addition, Rio will roll up its sleeves to work with Sovereign to qualify graphite product for the value-added spherical graphite market, meaning Rio’s new battery materials lab in suburban Melbourne is about to get a lot busier.

MINERALS 260:

To this day, it is incredible the number of mining executives at both junior and senior levels with an ex-WMC background.

They became ex-WMC after BHP’s takeover of the copper-nickel-gold WMC in 2005 for $9.2 billion. Many were WMC’s best and brightest and could have stayed with BHP if they had wanted. But working for a necessarily bureaucratic company was not for everyone, so they moved on.

There is a repeat of all that underway now following BHP completing its takeover of OZ Minerals for $9.6 billion.

One junior to benefit from the migration process out of BHP by ex-OZ executives is Tim Goyder’s Minerals 260 (MI6), trading at 72c for a market cap of $168m, against which it is holding cash of about $17m.

MI6 has just secured the services of Luke McFadyen as its chief executive officer, who is ex-OZ as its head of portfolio strategy and economics for the last four years. Before that there were stints at Syrah, South32 and the mothership of BHP.

McFadyen arrives at MI6 at an interesting time as the company prepares to chase down the potential of its Aston lithium-rare earth project in WA’s Gascoyne region. It’s where the now $440m Delta Lithium (DLI) has been kicking goals at its Malinda prospect, part of its Yinnetharra project.

Initial work by MI6 suggests that the Malinda trends makes its way into the northern part of its Aston project area. McFadyen debuts as a CEO at the RRS “Twilight Series” next week and the hope of the stock’s followers is that he will be able to talk to a start of drilling not being far off.