* Graphite-linked shares leap on hopes of battery demand
* Stock moves similar to recent rare earth rally
* Analysts skeptical about sustainability of boom
By Julie Gordon
TORONTO, May 6 Louis James, a mining investment
strategist at Casey Research's office outside Seattle, first
started to hear the odd question about graphite a year ago.
Today the buzz is deafening, he says, and shares of
companies involved in graphite - a once-obscure segment of the
mining industry - have soared, probably to unsustainable highs.
Natural graphite is expected to become the material of
choice to make advanced lithium ion batteries that power
smartphones and tablet computers, as well as hybrid and electric
vehicles, among other products. Most of the world's supply of
natural graphite currently comes from China.
Like rare earths two years ago, graphite is red hot, and the
excitement has the shares of small Canadian miners exploring for
the stuff doubling and even tripling almost overnight.
"If that isn't the 'Flavor of the Day,' I don't know what
is," James says.
Shares of Northern Graphite Corp have climbed to
C$2.51 from C$0.95 on the TSX Venture Exchange since the
beginning of the year. Zenyatta Ventures Ltd has climbed
from 14 Canadian cents to 59 Canadian cents, while Focus Metals
Inc has jumped 40 percent to 97 Canadian cents.
While the attention is not entire unwarranted - natural
flake graphite prices have nearly tripled in the last two years
after more than 20 years of stagnation - many experts believe
the sector is already headed for bubble territory.
"In a three-month period we had prices double, just that
quickly," said Stephen Riddle, chief executive of Asbury Carbon,
which makes natural and synthetic graphite products. "It's kind
of like how the stock market works - it was on perceived future
Prices rose last year in part on concerns that China, which
produces some 70 percent of global supply, will choke off
exports much as it did with the rare earths. Meanwhile, demand
for graphite is expected to surge. That's a tempting imbalance
that many investors might find hard to resist.
But experts say concerns over China are overblown. In
contrast to rare earths, there are plenty of alternative sources
of graphite around the world. Indeed, only 51 percent of natural
graphite imported into the United States from 2007 to 2010 came
from China, with nearly 40 percent coming from Canada and
Mexico, according to the U.S. Geological Survey.
Riddle said his company, which has been in business for four
generations, has had no trouble finding graphite supplies, and
prices are even softening.
The second big question mark hovering over the segment is
synthetics. Battery makers actually prefer synthetics because
quality is easier to control and they can be produced most
anywhere. In fact, the battery industry accounted for less than
5 percent of natural graphite demand in 2011.
"The uptake in battery growth is a little over hyped, I
think, given that most of the graphite demand today for lithium
ion batteries is for synthetic graphite," said Jonathan Lee, a
battery materials analyst with Byron Capital Markets.
That may change, however. Synthetic graphite can cost more
than $20,000 a tonne, while unprocessed flake graphite costs
$1,500 to $3,000 a tonne. Add in processing and coating, and the
price is about $8,000 a tonne, meaning natural graphite
represents major cost savings.
The price differential has analysts and would-be miners
speculating that as demand for lithium ion batteries grows and
battery makers need to buy more graphite, they will eventually
choose cheaper natural flake over synthetic.
"Do I think there's an inevitable switchover? Yes," said
Lee. "However, I do think that will take time, and I don't think
that it is imminent."
Graphite, which is highly conductive and can withstand
intense heat, is now used primarily in refractories for steel
making and in crucibles to hold molten metals.
That means any companies that are successful in bringing a
graphite mine into production in the near term will look to do
business with those traditional customers.
Even so, analysts believe there is space for more graphite
production outside China in order to stabilize the market.
Already companies in Brazil are expanding output, while two
closely held Canadian miners are coming online soon.
"It comes down to people having to be very judicious on
companies and projects," said Mackie Research analyst Matt
Gowing. "There's only going to be room for a limited number of
Northern Graphite, Focus Metals and Energizer Resources Inc
are often mentioned by analysts as promising
Investors who are still eager to join the graphite rush
should consider the rare earth boom and bust before jumping in,
industry experts warn.
Rare earths were pushed from obscurity into the mainstream
in 2010 as China, which then produced more than 95 percent of
global supply of the group of 17 metals, clamped down on
exports. This sent prices sky-rocketing.
Almost overnight hundreds of companies popped up promoting
plans to mine the obscure metals, which are essential for making
everything from Apple Inc's iPhone and Toyota Motor Corp's Prius
Shares of many rare-earth companies, most of whom held
nothing more than early-stage exploration properties, tripled
between April 2010 and April 2011. The bubble burst in mid-2011
when rare earth prices started to tumble.
By April 2012, most would-be rare earth miners were worth
less than where they started two years earlier. Some see history
repeating itself with graphite.
"You want to be very skeptical of any graphite company that
was a rare earth company last week and an uranium company last
year," said James.
"You could double your money on a company that has nothing.
However, there's no way to tell when a 'Flavor of the Day' will
become a 'Flavor of Yesterday.'"