There Are Better Bets Than Zenyatta For Graphite
Jul 16 2013, 04:17 | about: ZENYF.PK, includes: FCSMF.PK, FLNXF.PK, NGPHF.PK, SYAAF.PK
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
In 2010 there were two mining companies with graphite as their primary focus listed on world stock exchanges. Now there are over 80, of which 50 are listed on the Toronto Stock Exchange (TSX).
The interest in graphite exploration and mining was sparked by a rise in graphite prices in 2010, which was primarily a result of cutbacks in production and the introduction of a 20% export tax at Chinese mines. China still accounts for about 70% of the world's production of natural graphite, but Chinese mines are reputed to be running out of economically mineable ore.
After a short period of high prices graphite fell in 2012, but still remains at prices which are about twice what they were in 2008. Much of the excitement around graphite is linked to its use in lithium ion batteries which are used in electric cars such as the Tesla S and the Chevrolet Volt. The 200 mile range Li-ion batteries in the Tesla ( TSLA) contain about 100Kg of graphite in the electrodes of the batteries.
If electric cars reach a 5% market penetration, it would create a market for about 800,000 tonnes per year of battery grade graphite, and at 10% market penetration the market would be around 1,600,000 tonnes per year. This compares to an existing market of 1,000,000 tonnes per year of natural graphite, of which about 40,000 tonnes is used in Li-ion batteries.
However, it is important to note that graphite does not trade on a commodity market like copper or gold, and there are many forms in which graphite is sold, with a range of different prices. Natural graphite is mined and the major use for natural graphite is in refractories. Natural graphites sold into the refractory industry have varying degrees of purity ranging up to 96% graphitic carbon, and are processed relatively cheaply by milling and flotation.
Synthetic graphite is made from petroleum coke and is used mostly in arc furnace electrodes. Synthetic graphite has a higher purity and sells for much higher prices than natural graphite, with prices for graphite electrodes in the range of $7,000/tonne or more.
Lithium ion batteries is one of the few uses where natural and synthetic graphite compete.
Battery grade graphite is greater than 99.95% pure. To achieve those levels of purity natural graphite requires further processing by dissolution of the gangue materials with acids, and/or by thermal processes. The upgrading processes are expensive and usually incur high material losses, sometimes as much as 30%. Because of this extra production expense, battery grade natural graphite can sell for upwards of $10,000/tonne.
Another key feature in the valuation of graphite is the particle size. Larger flakes sell for higher prices, and are more valuable for processing into battery grades because the losses are usually less when processing a larger flake. Particle shape is also important to battery makers, who prefer a spherical, or potato shaped particle rather than a flat or needle shaped particle. Because of this wide range of variables, placing a valuation on a graphite project is not as simple as evaluating a copper or gold project.
One of the junior mining companies whose share price has surged recently is Zenyatta ( ZENYF.PK).
(click to enlarge) 
This time last year Zenyatta was trading for 17 cents. The shares closed yesterday at $3.78, an increase of more than 2000 percent for the year. The company's major property is a graphite deposit in Northern Ontario on which Zenyatta has completed preliminary drilling and is continuing to evaluate the resource with the intent of producing an NI43-101 compliant study in the first quarter of 2014.
The diagram below comes from a company presentation, showing the preliminary drill hole results
(click to enlarge) 
Early drill holes from the deposit appear to show graphite contents of around 6%, at depths ranging from 40 to 400 metres below the surface. Drill results announced last week confirm an extensive presence of graphite ranging from 2.2% to 5.2% at depths ranging from 60 metres to over 500 metres below the surface.
It is useful to compare this deposit to other junior miners who are at more advanced stages in their projects:
Northern Graphite ( NGPHF.PK) has completed a feasibility study on the Bisset Creek graphite property in Ontario, and is proceeding with engineering for the construction of the processing plant. The property includes 69 million tonnes of measured and indicated resources at a grade of 1.74% graphite. Although the ore grades are lower than the grades at most other graphite mines, the ore is close to the surface, new infrastructure requirements are minimal and mining costs will be reasonable. Also, the ore contains a high proportion of large, high grade flake which sells for higher prices.
Focus graphite ( FCSMF.PK) has completed an NI43-101 compliant study for their Lac Knife project in Quebec, indicating 4.9 million tonnes of reserves at 15.76% graphite. This material is present in veins starting at about 8 metres from the surface. The intent is to produce 46,000 tonnes per year of graphite concentrate containing about 95% graphite, about 40% of which will be large flakes (>100 mesh). Focus also intends to process the large flake graphite, on contract with a third party, using a proprietary thermal process to produce 16,900 tpa of battery grade graphite.
Flinders resources ( FLNXF.PK) is a Vancouver based company which has recently restarted the Woxna graphite processing plant located in Sweden. The plant is currently operating using stockpiled material, with the intent of restarting mining operations in 2014. The mine is reported to contain 1.5 million tonnes at 10.4% (measured) and 1 million tonnes at 10.7% (indicated), based on a pit depth of 80 metres. Tests have shown that approximately 40% of the flotation product is large flake with a carbon content greater than 95%, which can be upgraded to battery quality graphite.
Syrah resources ( SYAAF.PK) an Australian based company which trades on the ASX under the symbol SYR, has a graphite project in Mozambique which claims to be the world's largest known graphite deposit. The Balama graphite project has inferred resources of 1.15 billion tonnes of ore at an average grade of 10.2% graphite, equivalent to 117 million tonnes of graphite. Exploration drilling is in progress on this site with the intent of expanding the resource estimate and upgrading it to proven resource. Syrah claims to be able to produce a 97% concentrate with a simple, low cost flotation process. This mine alone would be able to satisfy all of the world's natural graphite demand for the foreseeable future.
Talga Gold, another Australian based company has inferred resources of 7.6 million tonnes grading 24% graphite, close to surface and extending down to 100 metres at a property in Northern Sweden. Potential deposits in the area add up to between 117 and 178 million tonnes of ore.
I have included these companies to illustrate that graphite is a very common mineral, with near-surface deposits present in several locations around the world. There are many other small mining companies drilling for graphite and evaluating graphite deposits of widely varying grades and sizes.
With the exception of Northern Graphite, all of the above companies have deposits which are higher grade than those owned by Zenyatta. The other companies also have deposits which are much closer to the surface than the Zenyatta deposit. In order to reach any graphite at all, the Zenyatta mine will have to remove 20 to 30 metres of overburden, and 5 to 10 metres of limestone. The Zenyatta promotional materials give no indication of the nature of the overburden, and they have not provided any capital or operating cost estimates. It is quite likely that an open pit mine will require shallow slopes for stability in the overburden, and drainage and dewatering of the pit could be a major problem. Mining to the lower levels of the drilled resources will involve a pit on a scale similar to the big copper mines at Bingham Canyon and Chuquicamata. It is quite likely therefore, that the costs of mining the Zenyatta deposit will be significantly higher, perhaps an order of magnitude higher, than the costs associated with rival companies' deposits.
The major claim which Zenyatta makes that differentiates its project from all of the others is that they have a deposit of "hydrothermal" graphite which is similar to the very high grade deposits found in Sri Lanka, and which constitute less than 1% of the world's known graphite resources.
Zenyatta claims to have produced a graphite of 99.95% purity using a low cost flotation and caustic bake process. If that process can be reproduced on a commercial scale, and can produce battery grade graphite without the high costs associated with the processing of other natural flake graphites, then the lower processing cost may be enough to offset the high mining costs. However, development of a mine of that size and depth, including the capital cost for infrastructure for a project that is 70 kms from the nearest major road will require the capture of a significant portion of the battery grade graphite market to justify the production rates that would provide an acceptable financial payback.
The other claim that Zenyatta makes is that their graphite could replace more expensive synthetic graphite. This claim is questionable. Most synthetic graphite is sold as electrodes for arc furnaces (used primarily in steelmaking). These electrodes are made from petroleum coke and pitch, which is first mixed and extruded into a cylindrical shape. Then the cylinders are baked to harden them, and baked again at very high temperatures to graphitise the carbon. They are then machined and the ends are threaded so they can be joined together. The waste from the machining process is sold as synthetic graphite. There is no intermediate graphite product in the electrode making process, and there is no commercial process which makes arc furnace electrodes from synthetic graphite. The other markets for synthetic graphite are relatively small, so there is no big opportunity to replace synthetic graphite in the marketplace.
In conclusion, to believe the Zenyatta story, you have to believe that electric vehicles with lithium ion batteries will capture a significant portion of the automobile market, and that Zenyatta can process their graphite to battery grade specifications at costs which are significantly lower than the processing costs of rival suppliers. My own opinion is that the stock price has risen much higher than is justified based on the available information. It won't be the first time that the stock price of a junior mining company has risen to the stratosphere on pure speculation, and fallen equally quickly when the bubble has burst.
There has been a surge of interest in graphite stocks lately. If you want jump on the bandwagon then Syrah, Focus and Flinders are much safer bets than Zenyatta. |
