Rising graphite prices could be the start of a strong recovery

The forgotten product’s vital role in lithium batteries is set to underpin its renaissance. The bright outlook is a boon for juniors like BlackEarth, which has just released a highly favourable DFS on its Maniry graphite project. And Hammer Metals awaits assays on 25m zone of copper-bearing sulphides in Queensland.

Graphite is having a second coming on the realisation that the key anode material in lithium-ion batteries for the electric vehicle and renewable energy storage revolution is fast approaching a supply deficit.

Like lithium before it over on the cathode side of LiBs, graphite had a false dawn a while back when the wave of demand for LiBs coughed and spluttered for a time. In fact, the first graphite “boom’’ preceded the first lithium boom.

Now that lithium is well and truly into its second boom, increased attention is being paid to graphite which by weight in an LiB, leaves lithium looking like a sprinkle of salt, as Elon Musk might say.

Because the first boom in graphite fizzed out, there wasn’t the required investment in new projects to help meet the coming wave in demand, let alone achieve the new imperative for the world to wean itself off its current dependence on supplies from China.

That latter point has come into sharp focus in recent times with the increased importance governments in the US, Europe and non-China Asia are placing on securing graphite supplies for the global decarbonisation push.

It is not often that governments surf ahead of equity markets to provide financing to encourage a production response for a critical mineral like graphite. But that is what has been happening.

Syrah Resources (ASX: SYR) was recently selected to receive $US220m in grant funding for the expansion of its anode battery materials plant in Louisiana and the Australian government has earmarked $185m in loan facility support for Renascor’s (ASX: RNU) proposed anode battery materials plant on Adelaide’s outskirts.

There are other examples. The point is that it is governments that are getting behind the second graphite boom rather than the market, which continues to have a fixation on the materials needed for the cathode side of LiBs.

The market has nevertheless rewarded Syrah and Renascor for securing government support. Syrah is up 33% since the start of the year while Renascor has put on some 53%.

Just as the lithium boom has trickled down to the explorers and would-be developers, it has got to be thought that the same will be happening in the junior graphite stocks.

Absent any further project-specific government funding, pushing higher for the juniors will likely depend on what the graphite price does from here on.

It hasn’t been too shabby in the past 12 months anyway, with ASX market leader in the space Syrah reporting the basket price for graphite concentrate production from its Balama operation in Mozambique was $US688/t (CIF) in the September quarter. That was up from $US490/t in the previous corresponding period.

The price performance of lithium has been positively spectacular in comparison. But given the forecast graphite supply shortages coming around 2025 – and the imperative for the big auto groups of the US, Europe and Asia to diversify their entire battery supply chains away from China – there is good reason to think the anode material’s improving price trend is here to stay.

That outlook has yet to rub off on the graphite juniors on the ASX in a meaningful way just yet. But some price action to the upside in the near term in response to tightening supply lines could turn that around in a hurry.

BlackEarth (ASX: BEM)

There are about a dozen or so quality ASX graphite juniors poised to ride the graphite thematic. And to their credit they have been plugging away advancing their projects during the tough times to catch the coming wave of demand.

One of those is BlackEarth (BEM). It has been trading flat at around 10.5c for much of the year for a market cap of $29.3m.

But it has just put its hand up for some attention with the release of a definitive feasibility study (DFS) for its Maniry graphite project in southern Madagascar, a country that has been producing graphite for more than 100 years.

It is also a country being called on to help meet the coming supply challenge which BlackEarth outlines by quoting the leading battery materials pricing consultant, Benchmark Mineral Intelligence, in the DFS.

“Benchmark Mineral Intelligence estimates that the major auto makers have committed over $US300 billion to developing EVs and that there are over 200 LiB mega-factories in the pipeline.

“These factories represent over 3,000 GWh of LiB production capacity which in turn equates to over 1,000,000 tonnes of new annual graphite demand by 2025. In short, graphite production has to more than double quickly to meet this demand.

“As a result, the outlook for graphite prices is very bright and the need for secure western sources of supply is critical.”

BlackEarth notes in the DFS that Madagascar has the potential to become the biggest producer outside of China by producing 300,000tpa of concentrate in 2023 from projects across the country.

Maniry is being planned as a two-stage project, with output in the first stage put at 39,000tpa from an $US80m development. Capex of $US24.6m would take production up to 56,400tpa.

NPV after tax was estimated at $US205m and the payback period came in at 3.8 years. The life of the initial project was put at 21 years with expansion options.

Drawing on forecasts by Benchmark and others, a $US1,448/t (FOB) weighted basket price was assumed for the life of the operation which compares with an OPEX estimate of $US658/t.

That’s all very interesting for a company with a $29.3m market cap.

Like Syrah before it, BlackEarth is looking to become an integrated graphite producer, with a scoping study underway into establishing a battery anode materials facility in Europe.

A joint venture in India to produce expandable graphite (fire retardants, foils and other industrial applications) is also part of the integrated/value-added plan.

Hammer Metals (ASX: HMX)

Interesting to note that while the iron ore price has been tanking, the copper price has been edging up to around the $US3.50/lb level.

Steel is critical to providing infrastructure support to the global decarbonisation push. As for copper, there is no decarbonisation without the red metal, as was mentioned last week.

The world is not short of iron ore or iron ore developments if the need arises for more of the stuff. But it is a different story in copper.

As argued last week, there needs to be a substantial increase in copper prices to encourage more exploration and more copper mine developments to meet what BHP calls the coming “take-off’ in copper demand come 2025.

All that is prompting a closer look at the copper juniors by investors. A good exploration result can now fuel a leveraged share price response.

Carnaby (ASX: CNB) is an example. It took off late last year in response to high-grade copper hits at a cluster of prospects that make up what it calls its Greater Duchess project in north-west Queensland’s Mt Isa Inlier.

It is now a $130 million company, with the latest high-grade copper hit coming from its Mount Hope (central) prospect – 60m at 3.1% copper and 0.4g/t gold.

Today’s interest though is in another Mt Isa Inlier junior, Hammer Metals (HMX), trading at 6.9c for a market cap of $56 million. It is waiting on assay results from the first drill hole at its South Hope prospect, 650m south of Carnaby’s Mount Hope.

The hole intersected a 25m zone of copper-bearing sulphides from 75m which a portable XRF reading suggested could be of real interest. But best to wait for the assay results.

Having said that, Hammer already sports a 400,000t copper equivalent resource (including gold, moly and rhenium) across five deposits in the region, and is drilling at properties other than South Hope.

Apart from driving towards achieving critical mass to support a development hub, it is also on the hunt in the region, drilling for large-scale standalone IOCG-type deposits.