Investing in Graphite's Growth: Kevin Puil
Source: Brian Sylvester of
The Critical Metals Report
As the boundaries of technology continually expand, so does
the demand for graphite. With uses developing and supply mainly
controlled by China, prices for graphite should continue to
climb, says Kevin Puil, senior analyst for the Encompass Fund and
portfolio manager with San Francisco-based Malcolm H. Gissen
& Associates. In this exclusive interview with
The Critical Metals Report
Puil shares some junior miners set to soar alongside demand.
The Critical Metals Report:
Over the last two to three years, your firm has had a lot of
success with small-cap mining equities, especially those
involving rare earth elements (REEs). Are you hoping to achieve
similar success with small-cap graphite equities?
I am. Since I joined the firm three years ago, I've always tried
to find great opportunities and put our fund and clients in a
position to benefit from them. This is definitely the case with
China controls the majority of the world's graphite supply and
has implemented export quotas and duties. This has caused the
price of graphite to more than double in some cases. Do you see
more price pressure ahead?
China definitely has a stranglehold on the global graphite
supply, producing nearly 70% of the world's supply. Its 20%
export duty, 17% value added tax and export licensing system
should further tighten supply and drive prices higher.
How do graphite plays differ from rare earth plays?
Rare earths often involve large capital expenditure (capex)
requirements and complex metallurgy. Graphite, on the other hand,
is relatively simple to mine. It's an excellent electrical and
heat conductor and shows up well on electromagnetic surveys,
which offer an inexpensive way to explore for deposits. Most
flake and amorphous graphite is found near the surface, reducing
the risk and uncertainty involved in drilling deep deposits. This
also shortens the time from discovery to production. A good deal
of flake and amorphous graphite is mined using the open-pit
method, which is also comparatively inexpensive. The majority of
graphite is crushed, ground and floated, as opposed to rare
earths, which are often refractory and need to be roasted at a
What are the primary uses for graphite in manufacturing?
Amorphous and lump graphite has long been used in refractories,
steel, brake linings, lubricants and pencils. However, a lot of
attention these days is being placed on flake graphite, which is
sought after for its applications in new technologies like
lithium-ion batteries, fuel cells, solar panels, pebble bed
nuclear reactors and vanadium redox batteries. Less than half of
the graphite produced is of the flake variety, and this, coupled
with the increased demand for this essential mineral, has seen
flake graphite command a much higher price than fine-mesh or
Will new technologies drive growth in the graphite industry?
Absolutely. Currently, there is no substitute for graphite in
many technologies, such as lithium-ion batteries. Between cell
phones, tablets, laptops, hybrid and electric cars, all of which
require a lot of graphite, the industry is growing at 25-30%
annually. Large-scale uses include hybrid cars, which can require
up to 40 pounds of graphite for the battery alone, while the new
Boeing 787 Dreamliner's fuselage is made from a graphite
composite. Vanadium redox batteries are used to store energy
generated from wind turbines and solar panels and require up to
300 tons (t) of graphite per 1,000 megawatts of storage. This is
all flake graphite. In addition, pebble bed nuclear reactors,
which are slated to come online this decade, require 3,000 t of
graphite to start and 1,000 t a year to operate.
There are lots of misconceptions about graphite. Fact or myth?
Natural graphite is more expensive than synthetic graphite.
Myth. Synthetic graphite is more expensive than natural.
Fact or myth? Graphite is used more in steel manufacturing than
That is a fact.
But batteries use more of the large-flake graphite.
Fact or myth? Large-flake graphite deposits generally make for
That's a fact. Most of the large-flake graphite deposits are
found at or near surface and are amenable to open-pit mining.
Fact or myth: Graphite flake size is more important than carbon
They're both important. Most high-tech manufacturers would prefer
to use high-grade (94-99% graphitic carbon), large-flake (+80
mesh) graphite for their products, so they're equally
Fact or myth? Graphite metallurgy is less important than it is
with rare earth deposits.
Graphite metallurgy is simpler to deal with than rare earths.
It's equally important, but less complex.
Do you think we're going to see an explosion in graphite-focused
equities listings, as we did with REEs?
I don't think there will be the same explosion of listings in
graphite as there was in the REE space, but there will definitely
be more as the public becomes aware of the importance of
graphite. However, there aren't as many potential deposits out
there to justify dozens of new companies.
What are some key factors that make Malcolm H. Gissen &
Associates write a check to a small-cap graphite company seeking
I have a personal checklist of factors I consider before
investing in any exploration or mining company. Among others,
some of them include: Is management good? Are they experienced?
Are they capable of developing this project? The deposit has got
to have good grade and quality. I need to see good infrastructure
close by or at a reasonable capex to develop. Permitting has to
be relatively easy. Bottom line: Is it mineable? Do the economics
What are some graphite equities that meet those criteria?
I've taken a position in a couple and am in the process of
evaluating a few more.
Northern Graphite Corp. (NGC:TSX;
is definitely one of the top companies on my list. It has an
excellent management team. Its entire Bissett Creek deposit in
Ontario is flake graphite, which sets it apart from a lot of the
deposits out there. It has great infrastructure nearby, including
power, gas, roads and a small community. It's good, high-quality
flake graphite that is going to be open pittable. Its operating
costs aren't going to be on the low-end, but its flake size and
purity should ensure that it will fetch a very high price per ton
for its concentrate, making for a very profitable operation. I'm
awaiting its feasibility study, but anticipate that it could be
ready to begin construction next year.
Do you expect to see graphite offtake agreements, as has taken
place in the rare earth space?
Yes; because graphite doesn't trade on an exchange, like copper
futures or gold, end consumers must secure graphite feed from a
producing mine. I absolutely think that you'll see offtake
agreements in the graphite space.
What about Northern Graphite? Given its success in the market to
date, is an offtake agreement probable?
Sure, it could structure an offtake agreement. Because there are
no operating mines in the U.S. and Northern Graphite is close to
lines of transportation and infrastructure, I could see the
company having an offtake agreement with a U.S. company and
easily shipping the concentrate to it. That wouldn't surprise me
I also like
Strategic Energy Resources Ltd. (
, a junior Australian resource company with mineral and oil and
gas projects. One of its projects is the Uley graphite deposit,
one of the largest graphite deposits in the world. It was a
previously producing mine that was shut down in about 1993 due to
weak graphite prices. It's 100% flake graphite and open pittable;
in fact, it's more of an earth-moving operation than a mining
operation. It has a plant on site that will probably have to be
updated a little bit, but Strategic could be up and running next
year. The permits are in place. It has great infrastructure. It's
going to be another low-cost, high-margin operation.
What do you think of its deal with
Mega Graphite Inc. (MEGA)
I think it's a good deal. Strategic is going to spin off 80% of
its graphite deposit to a separate, publicly traded vehicle and
retain 20%. Mega will provide offtakes, marketing, engineering
expertise and access to capital markets for the new entity.
What about on the exploration side?
On the exploration side, I like
Standard Graphite Corp. (SGH:TSX.V)
. It has a large portfolio of 12 graphite projects in Ontario and
Québec, some of which are adjacent to the past-producing Black
Donald graphite mine and Northern Graphite's Bissett Creek
project. It just completed a successful airborne electromagnetic
survey on a large portion of the Québec property and got back
very favorable results-some of the properties lit up like a
Its management team is probably one of the only graphite
exploration companies out there with a head geologist who's got
graphite exploration experience. He discovered
Focus Metals Inc.'s (FMS:TSX.V)
Lac Knife graphite deposit. In addition, the past president of
Hathor Exploration, which was recently purchased by
Rio Tinto (RIO:NYSE; RIO:ASX)
, also joined Standard. It has good projects, decent board
members, good management and a favorable share structure.
Does it need to focus on one property specifically?
Yes, it has several potential flagship properties. It's going to
have to narrow that down and choose which property to go with. I
imagine that it will develop a couple and sell the others off.
But as it stands, Standard probably has the best pipeline of
properties out of any I've seen.
What's another interesting name?
I don't own it, but another one that I like is Focus Metals,
which has the high-grade Lac Knife deposit in Québec. It's a very
large-flake graphite deposit. It could easily be in production
within the next 18 months or so.
Focus is an interesting title for the company given that it has
REE, iron ore, copper-gold and graphite projects. Is it difficult
for companies invested in three different commodities to
communicate its story to the market?
Well, that's one of the reasons I don't own it as of yet. It is
also focused on graphene, a single layer of graphite, which is
highly conductive and stronger than steel. Unfortunately, it's
not commercially economic to produce and use yet.
It may end up spinning out at least one of those plays into some
other company as well. I think when most people think about
Focus, up until very recently, they thought of it as an REE
I certainly did before it came out with graphite. It has a
promising REE deposit in Quebec that it is developing with its
partner, SOQUEM Inc. (private).
What sort of advice would you offer an investor who is new to the
The advice I would give new investors is to do your due
diligence. As with any other mining company, make sure that it
has a decent deposit with all the right ingredients:
infrastructure, management, grade, purity, that it's able to be
mined, that it's economic and that it can be a standalone mine if
it isn't acquired. Keep in mind, only 2-3% of junior exploration
companies actually become mines.
Thanks for your time.
You're welcome, anytime.
has more than 15 years' experience in the investment management
business. He is a portfolio manager at Malcolm H. Gissen &
Associates and is the senior analyst at the Encompass Fund in
San Francisco. He spent the majority of his career working in
Canada before relocating to California. He studied economics at
the University of Victoria and the University of British
Columbia and is a Chartered Financial Analyst.
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1) Brian Sylvester of
The Critical Metals Report
conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are
The Critical Metals Report:
Focus Metals Inc., Northern Graphite Corp., Standard Graphite
Corp. and Strategic Energy Resources Ltd. Streetwise Reports does
not accept stock in exchange for services.
3) Kevin Puil: I personally and/or my family own shares of the
following companies mentioned in this interview: Northern
Graphite Corp. and Standard Graphite Corp. I personally and/or my
family am paid by the following companies mentioned in this
interview: None. I was not paid to do this interview.
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