David Skarica, founder of
Addicted to Profits,
says another-bigger-graphite bubble is likely on its way. In this
The Metals Report
, Skarica compares the graphite space with the rare earth and
uranium arenas, making some interesting conclusions about what
kinds of stocks perform best during market-wide roller coaster
movements. However, he warns that the graphite space is different,
with no clear industry leaders and a number of companies with high
potential. His conclusion? Choose carefully.
The Metals Report:
Graphite is a commodity that investors have a tough time pricing.
Where do you go to get graphite price information? Or does the
price even matter?
With graphite, you have to look at the big picture story. There is
no exchange-based market. There is no graphite traded on London
Metals Exchange. Instead, you have to understand the long-term,
underlying fundamentals and the supply/demand picture. The demand
picture is this: A lot of high-tech products use
graphite-especially rechargeable batteries for cars and
electronics. In addition, carbon fiber is a source of demand
because a lot of cars in the future will use carbon fiber to save
weight. The new Boeing 787 jumbo jet uses significant carbon fiber
to reduce weight and save on fuel. Carbon fiber is used extensively
in military equipment. Demand for carbon in these unique
applications will be growing.
The supply of graphite is dominated by China, which controls
over 70% of the world market. There is a risk that China will
remove some export graphite from the market. This is similar to the
situation that has already happened with rare earth element [REE]
supply. Similarly, Russia has a dominant position in the palladium
market and can use that position to suit its strategic and business
goals. China may try something similar with graphite.
Rare earths can't be synthesized, but graphite derivatives like
graphene can be made synthetically from fossil fuel carbon sources.
Is that a concern to you?
It's not a huge concern. Even if synthetic graphite supply
increases, there's a certain elastic demand for the products that
graphite is used in. We all thought that if oil got high enough, we
might be running our cars on natural gas, and that hasn't exactly
happened. On the other hand, the European Union and the U.S. have
stated that graphite is a strategic material for national defense.
We are seeing increased graphite production in the U.S. and Canada
as a result. That's another reason to be bullish on the sector.
Solid demand and limited supply is creating bullish pricing
fundamentals. Even if the price dropped 20-30% from its current
levels, it would be economic to produce in most cases. Every
country wants to produce more graphite. If graphite becomes more
strategic, governments could buy it directly from the producers.
There are a lot of reasons to like the graphite story right
Everything you said makes sense to me. It probably made sense to a
lot of other people two years ago. That's why we had a hot market
in graphite stocks a couple of years ago. What is different
It's still very early in the graphite market. I call these
mini-bubbles or maybe a prelude to a bubble. We saw this in uranium
in the mid-2000s. In that market, former gold stocks would rebrand
themselves as uranium explorers and some went up tenfold. Graphite
probably will turn into a bubble. Even though I'm talking about
these long-term fundamentals, investors will probably want to sell
their graphite holdings in two years. Even though the long-term
fundamentals are going to be good for five, 10 or 15 years, you may
never see the prices of some of these companies hit those highs
again. Even uranium companies had these big, 100%+ run-ups, then
corrections of 40, 50 or 60%. Then the stocks would bottom and
you'd have another big run-up. You're probably going to see a few
of these types of run-ups in the future.
Keep in mind that you have to be very selective with graphite.
First, most of the companies are not big companies. Second, there
are quite a few companies that have a realistic shot at production.
For investors, I consider it a better playing field than uranium
was in the mid-2000s. The uranium market had far higher barriers to
entry because of the cost of uranium mine building and regulation.
In this way, many of the graphite companies are much more
realistic. Right now, most graphite names are still cheap, being
priced at the same depressed levels as the rest of the mining
industry. The risk-reward is positive at the current level. You
just have to do your research, find a couple of solid companies and
then go from there.
Besides graphite, you are interested uranium. What do you like
about uranium in 2013?
Uranium is interesting because we know where it is in the cycle.
Uranium is post- bubble. Even with the Japan crisis, the
fundamentals are good for uranium. Is demand going to kick down a
little bit? Yes. Germany is getting out of nuclear production. But
there's a new government in Japan that says it's still building new
nuclear power plants. The long-term fundamentals are bullish. China
and India are building power plants. The price chart tells a
bullish story for uranium.
Cameco Corp. (
) has been basing between $16 and roughly $22 for the past year or
so. This is called a phase 1 base. Usually, this base is followed
by a long, large move higher. I am looking for something like that
from Cameco. The reason that I focus on Cameco is that it is the
bellwether for the industry. For most people, Cameco provides
enough sector exposure.
Are there any other stories that you think investors should
If you like the rare earth story and want a simple way to play it,
Molycorp Inc. (
) is an excellent way to play it. Molycorp fell from $70 down to a
low of $6. It's about $9 right now. It's one of these maximum
pessimism plays. It's a nice way of playing the alternative metals
with the market leader-albeit in a relatively small market.
This brings us back to an issue in the graphite market. In the
REE sector, we have Molycorp as the market leading stock. In
uranium, we have Cameco as the industry bellwether. Both are highly
liquid stocks traded on the New York Stock Exchange. However, in
graphite, we have several smaller companies to choose from and no
clear market leader, and certainly nothing with the market
liquidity of Molycorp or Cameco.
When looking at the maximum pessimism trades, it gets to the
point where even industry-leading large caps get extremely
depressed. Under those conditions, if you see solidification in
demand for their commodities, then share prices and the broader
market could turn around. That could make Molycorp a five- or
six-bagger, with Cameco potentially a three- or four-bagger. So you
have the potentials for big gains in well-financed large companies
that you know aren't going under.
Producers with real plant and equipment, huge deposits and a track
In 2001-2002, you could buy a lot of these big-tier producers, like
an Eldorado Gold Corp. (
), which was trading at $0.25-0.50. In 2000-2001, there was really
no point in buying juniors. You should have just bought the
producers. They were all really cheap. Then when they had their
first move, from late 2000 to about early 2003, then you could have
shifted that money into the juniors, which were just starting to
move. When markets are depressed, it is best to buy the seniors,
and you can just feel your way around. If things solidify, and it
looks like there's more demand, then you go into the juniors.
But it may take a long time for the uranium and REE bubbles to
re-inflate, and it's not a given they ever will. In that case, many
or most of the juniors will simply not come back. How many of the
smallest startups came back from the dot-com bubble? Many of the
best-performing tech companies recently were companies that emerged
the tech bubble. The obvious example is Apple, which did nothing in
the 1990s. Many of the biggest names in tech didn't even go public
until after 2000. Google is an example. It's the same thing in
uranium or REEs. If you invest in junior uranium or rare earth
companies now, they might not exist in the future. There might be
new initial public offerings that come out.
Any closing thoughts?
I believe that graphite is a legitimate story that will turn into a
legitimate boom. The best part of the graphite story is while there
is a dearth of quality companies, there is a number of companies
that will realistically become good, profitable producers. This is
unlike the uranium equity market of a few years ago, when most of
the companies were going to go by the wayside.
The graphite story has a long way to go. If the re-inflation
trend starts because of Japan, Europe and the U.S. printing money,
then that is just one more tailwind pushing the graphite market
higher. The same macro trends apply to the large caps in uranium
and REEs, like Molycorp and Cameco. At today's prices, they
represent good value. They've fallen between 60-80% from their
highs, they're very depressed and they have good potential to be
turnaround plays, if re-inflation kicks in.
Thanks for your analysis; it has been interesting.
This interview was conducted by Alec Gimurtu of
The Metals Report
and can be read in its entirety at
or on our
At the age of 18,
became the youngest person to pass the Canadian Securities Course.
He is the author
of Stock Market Panic! How to Prosper in the Coming Bear Market,
The Contrarian Who Saved the World,
The Great Super Cycle: Profit from the Coming Inflation Tidal Wave
and Dollar Devaluation.
In 1998, he started Addicted to Profits, a newsletter focused
on technical analysis of markets.
1) Alec Gimurtu of
The Metals Report
conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview:
Eldorado Gold Corp.
2) The following companies mentioned in the interview are sponsors
The Metals Report:
None. Interviews are edited for clarity.
3) David Skarica: I personally and/or my family own shares of the
following companies mentioned in this interview: Eldorado Gold
Corp. I personally and/or my family am paid by the following
companies mentioned in this interview: None. I was not paid by
Streetwise Reports for participating in this interview.
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
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