Wall Street is still abuzz after the announcement in February by Tesla Motors (TSLA) to build a $5-billion lithium-ion battery Gigafactory somewhere in the southwestern United States.
By 2020, the Gigafactory will have the capacity to produce 50 times the amount of batteries shipped in Tesla cars in 2013 – and 20 times the total amount of electric vehicles sold last year.
The announcement certainly lit a fire under Tesla’s stock. (Before you read too much into the move, however, be sure to check out Chief Investment Strategist Louis Basenese’s take on Tesla, first.)
But Tesla’s announcement was also extremely good news for another group of stocks – a sector of stocks that doesn’t boast a sky-high valuation like Tesla.
I’m talking about the graphite industry.
Graphite Demand in Batteries to Double
Graphite is a key component in lithium-ion batteries for cars, not to mention in electronic gadgets such as the iPhone. Each electric car contains about 110 pounds of graphite.
So demand for graphite is already high. But with the giant Gigafactory coming on line in 2017, it’s going to boost demand for graphite even more.
In fact, some industry observers say that Tesla’s factory alone could more than double demand for graphite in batteries.
If operating at capacity by 2020, the plant would consume at least 28,000 tons of spherical graphite every year. That’s the equivalent of 93,000 tons of flake graphite.
Translation: Battery demand for natural graphite would soar by 112% from the current level of 83,000 tons per year. Overall demand for natural graphite would jump by 37%.
Of course, Tesla could opt for synthetic graphite. But that’s a more costly option, so it’s unlikely.
There is a problem, however…
The China Card
Currently, graphite is mostly mined and processed in China. But graphite pollution is severely affecting their environment, so the Chinese are cutting back on production – and closing dozens of mines in the process.
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At the same time, the Gigafactory will require the output of six to nine new graphite mines to supply it.
That’s a real problem, considering that no significant new mines outside of China have been opened since the 1980s.
Luckily, that’s now changing… as new graphite projects are now underway outside of China. And all are being undertaken by junior mining companies.
Here are three companies in particular that seem to be ahead of their peers.
Flinders Resources (Toronto: FDR): This company owns 100% of the Kringle graphite mine in Sweden. It can produce 13,000 tons of large flake graphite per year, and production is expected to restart in July.
Focus Graphite (Toronto: FMS): This company’s Lac Knife deposit in northern Quebec is the richest deposit in the world. Total annual production there, when started, may be in the 45,000 ton-per-year range. It also has the industry’s first offtake deal, a 10-year contract with a Chinese company that will buy 20,000 to 40,000 tons per year.
Northern Graphite (Toronto: NGC): With its very advanced stage large-flake (but low-grade) deposit in Ontario, commercial production for NGC should begin late next year. It’s the only junior company to successfully produce and test spherical graphite for lithium-ion batteries.
If any other interesting graphite plays come up on my radar screen, we’ll be sure to let readers know.
And “the chase” continues,