Where will the graphite, lithium and cobalt for the battery revolution come from?: Simon Moores

The Mining Report: You have said, “Electrification of transport will not succeed unless the world has cheap, abundant, longer-lasting batteries.” What are the obstacles to obtaining such batteries?

Simon Moores: There are a number. The first is the scaling of battery supply. The megafactories will be needed to drive down costs significantly. Tesla Motors Inc. (TSLA:NASDAQ), LG Chem Ltd. (051910:KSE; LGCLF:OTCPK), Boston-Power Inc., Foxconn Technology Group and, most recently, Chinese electric vehicle producer BYD (1211:HKSE) have all announced plans to build them. Meanwhile majors like Samsung SDI have announced significant expansions of existing operations. The battery industry is preparing for a surge in demand and its next phase of growth.

But these megafactories will need assured quality raw materials, which is the second obstacle. The third is the security of supply for raw materials. This last obstacle is overlooked at the moment, as the battery industry is taking it as a given they will have supply as needed. But when megafactories come on line, demand will soar. Therefore, supply visibility all the way upstream to the mine is crucial to their success. This is what Benchmark specializes in.

TMR: How does the oil price collapse affect current and future demand for battery power?

SM: This is the question everyone’s asking. Without a doubt, a halved oil price has a negative impact on those consumers who want electric vehicles (EVs) in order to save money on gasoline. To be honest, though, the success of Tesla raises the question of how many people are buying EVs for economic reasons today.

Regardless of the short-term effect, I don’t think the oil price collapse will have a long-term impact. I see internal combustion engines and EVs as fundamentally different technologies. Once EVs mature, they will be far more efficient and software-driven than cars powered by internal combustion engines. I actually believe that you will get to a stage where a remote software upgrade will improve the cars’ performance. You are already seeing this with Tesla. Once you reach this stage, the vehicles will actually improve over time—in essence, cars will no longer be a depreciating asset.

TMR: Would you say that Tesla has a fundamentally different target audience than Toyota Motor Corp.’s (TM:NYSE) Prius?

SM: Definitely. The Prius was created and priced for the mass market from day one. At the time “green” and “cool” did not go hand in hand, so many early Prius owners had to live with an eco-label. The car has since proven to be one of the most economical and best overall models on the road. People now have forgotten about the fact that it is a hybrid and it has been accepted in today’s world.

Whereas the Prius took years to shake off the green label, Tesla has made its cars desirable from day one on the basis of performance and design. Tesla has made EVs desirable. The fact its electric is now secondary.

Tesla’s Model S is a quality super car, rather than just a functional vehicle. It has achieved something in EVs similar to the “Apple effect” on consumer electronics. The biggest challenge is yet to come, however, as Tesla now wants to shift this success to the mass market with its Model III launch in 2017—a car that will be powered by Gigafactory batteries.

TMR: We’ve heard that Apple Inc. (AAPL:NASDAQ) is about to enter the EV market. How important would that be?

SM: It hasn’t actually announced anything yet. But the rumor that Apple is getting into the self-driving EV space is supported by a lawsuit filed by A123 Systems Inc. (AONE:NASDAQ), a U.S.-based lithium-ion battery producer, which claims Apple is poaching its staff. As for the possible importance, well, if you thought Tesla was a game-changer, then Apple is another thing entirely.

I was at first surprised by the rumor, but it really makes sense. Apple has $178 billion ($178B) in cash and nowhere to spend it. It has already disrupted the consumer goods market, and now it needs another huge global market ripe for disruption.

TMR: China intends to become the world’s biggest EV market by 2016. What are the long-term implications of this for battery-production growth?

SM: In short, we need more batteries. China’s EV market has already shown exponential growth. In January 2014, about 600 EVs were sold. In December 2014, that number had risen to about 27,000, almost 30 times as many.

It’s too soon to say whether this is a trend, but it does show how hard it is to forecast new markets and how they can creep up on you.

TMR: Is China’s massive expansion of the EV market a top-down directive, or is it market driven?

SM: A bit of both. It does come from the top, as China’s urban pollution is so bad that clean vehicles are essential. But the Chinese are business savvy, and they’re not going to waste a lot of money producing vehicles without a return.

The electric bike market in China shows that it’s a fundamentally different market than anywhere in the world. The Chinese don’t have to be persuaded on switching gasoline for electric—they are far less in love with cars than the West. It’s more of a cost proposition.

TMR: What’s the optimum price point for the widespread adoption of electric vehicles? Is it $50,000, $40,000, $30,000? Lower?

SM: Mass-market EVs need a price that can more than compete against gas powered vehicles. Tesla and General Motors Inc. (GM:NYSE) have both said that they’re aiming for a sub-$35,000 car in 2017 (in 2017 dollars). If they can make EVs profitable at under $30,000, we could see a market shift, with EVs becoming genuinely popular with consumers in all income levels.

The only way you can achieve this is by producing cars, batteries and raw materials through economies of scale.

TMR: Since 2008, economic growth worldwide has hardly been robust. Has this slowed the shift to EVs?

SM: It has because consumers haven’t had the money to spend on them, and they are at present deemed niche or luxury vehicles. For manufacturers, they are more of a PR concept than an actual business proposition.

A weak global economy has also meant that these auto manufacturers haven’t been willing to invest the money in R&D to really innovate their cars or improve their batteries. Nissan Motor Co. Ltd.’s (NSANY:OTCPK;7201:TYO) Leaf came out in 2010, and we haven’t seen much from the traditional manufacturers since.

This gave a window of opportunity for someone to steal the limelight. Progress in EVs is now being led by a disruptor, Tesla, which designs and sells EVs in a completely new way. That’s the upside to a poor economic situation.

TMR: The shift in the U.S. to more efficient, less-polluting cars was driven by government mandates from Washington and from individual states, California in particular. Could we see similar mandates with regards to EVs, with U.S. governments requiring X percent of manufacturers’ fleets to be electric?

SM: Such mandates would obviously have a very positive medium-term impact on the EV space because they would guarantee sales. Ultimately, however, EV producers can’t rely on governments. They need to build vehicles that can compete in quality and price with the vehicles that the average person buys.

TMR: The three metals key to increased battery production are graphite, cobalt and lithium. How is each placed to meet increasing demand?

SM: I’ll consider them individually and start with graphite. The problem here is the ability to produce spherical graphite, which is used to make the anode in the EV battery. Currently, 95+% of the world’s spherical graphite uncoated comes from China. There is no diversification in supply. You can also use synthetic graphite in batteries, so you have a substitution option here. At Benchmark we estimate that there is about a 50/50 split for natural versus synthetic used in batteries.

Lithium is better placed as the battery market has been the number one consumer for the last five years. But the volume of battery-grade lithium isn’t sufficient to supply the megafactories that are planned for the near future. For example, lithium hydroxide, which is also used in batteries along with the more familiar lithium carbonate, has been neglected and is likely to see a squeeze in demand this year. In the long run, however, I expect, that this capacity issue will be corrected.

Cobalt has an even bigger upstream problem than the first two, because 55% of the world’s cobalt now comes from the Democratic Republic of the Congo. In the rest of the world, there’s a selection of very small producers, and their output is overwhelmingly a byproduct.

All three of these industries are structurally inflexible to any major demand shocks. That is something buyers must be aware of.

TMR: We began by talking about cheap, abundant, longer-lasting batteries. Now, even with megafactory economies of scale, wouldn’t the huge quantities of graphite, lithium and cobalt needed for them drive up prices of both the metals and the batteries?

SM: Yes. If the megafactories come on stream in the next two years with little change in the raw material supply, prices will rise and impact the cost of the battery. Currently, the battery industry and the people who supply the raw materials are not working together. There is a disconnect in the supply chain.

Those who are planning these megafactories need to get visibility all the way upstream to the mine. At the moment, they look only for the cathode and anode materials, which they regard as raw materials but are really semi-processed products.

TMR: You’ve argued that we have likely seen “peak graphite supply” in China. Will this result in a race to new production outside China?

SM: I think we’re already seeing that from the juniors and from some private companies. The world is too dependent on China for battery-grade graphite and needs supply diversification if batteries are going to fulfill the potential of being a new, major global industry.

TMR: How will this new boom in graphite compare to the boom of five years ago?

SM: Back in 2010, the boom was all about the resource: the location, its size and the size of the flakes. Now the industry has matured. The juniors now know that success, in the main, requires three things. First, they need a good-quality resource. Second, they need clear goals in sales, marketing and processing. Third, they need a profitable selling price on a par with the Chinese export price for graphite. Medium-flake graphite exported from China sells now for about $1,000 per ton. Large-flake graphite of 94–95% carbon sells for about $1,250 per ton. If the juniors can compete with those prices or the prices of semi-processed products, such as spherical graphite, they’ll have a great chance of success.

TMR: Would you comment on the prospects of specific juniors with regard to meeting the increasing demand for graphite?

SM: At Benchmark we don’t endorse or invest in any junior stocks. We view the industry from our independent perspective in relation to predicting when new supply will be coming into the market. There have been a number of recent news developments in this sector.

Many people have been talking about Syrah Resources Ltd. (SYR:ASX) and its Balama project in Mozambique. The company signed an 80,000 ton offtake deal with Chalieco, a subsidiary of Chinalco (ACH:NYSE), to sell into the aluminum industry. This is a new market for flake graphite that shows that China is looking to lock up foreign raw material. The company also announced preliminary plans to establish two spherical graphite plants in Africa and the U.S., which shows its intention to position itself for supplying a surge in battery production.

In February 2015, Energizer Resources Inc. (EGZ:TSX.V; ENZR:OTCQX) released its Bankable Feasibility Study (BFS) for its Molo flake graphite deposit in Mozambique that it has been progressing for some time. The BFS outlines the costs for the project and shows that the new generation of projects can compete on cost with China.

Focus Graphite Inc. (FMS:TSX.V; FCSMF:OTCQX; FKC:FSE), which has the Lac Knife project in Quebec, has done much testing on coated spherical graphite. This is an example of having a strategy beyond the resource and looking at serving a market from the user perspective. It is also another company that is looking to capitalize a battery sector that is evolving.

Northern Graphite Corporation (NGC:TSX.V; NGPHF:OTCQX) is another one of only a handful of companies that have created battery-grade spherical graphite sourced from its Bissett Creek project in Canada. It is positioning itself to serve this market, but also in its March 2 press release reminded the industry of its intention to serve existing industrial sectors of refractories and expandable graphite.

Canada Carbon Inc. (CCB:TSX.V) has three graphite projects in Quebec, including two past-producing mines. The company has been doing work on the Miller project and is going down the high-purity graphite route. Canada Carbon is finding a niche in the graphite space and this gives it several options, such as nuclear-grade graphite or other specialist markets.

From a fundraising perspective, Mason Graphite Inc. (LLG:TSX.V; MGPHF:OTCQX), with its Lac Gueret project in Quebec, has been active in a very tough market. I was in Vancouver in February, and the consensus was that we could be in the worst slump of all time, certainly if it continues for another 18 months. To raise money for a niche mineral in this environment is an achievement.

Great Lakes Graphite Inc. (GLK:TSX.V; GLKIF:OTCPK; 8GL:FSE) has been focusing recently on launching Great Lakes Innovations, the company that is investing in the restart of a micronization facility. The plant has a capacity to produce 10,000 tonnes of product and gives the company value added capabilities to go with its Lochaber project 30 kilometers from Ottawa.

Finally, from Graphite One Resources Inc. (GPH:TSX.V) the industry is awaiting the release of its first preliminary economic assessment (PEA), which is expected mid-2015 and will give a clear picture of how the company can position itself in the growth markets. The company has also just updated its resource estimate on the Graphite Creek project in Alaska in a build up to the PEA announcement.

From the active producers’ side, there is GK, Graphit Kropfmühl, which is owned by AMG Mining AG, one of the world’s major processors of graphite and producers of specialist graphite products. The company recently sold a 30% stake to private investors, and the impetus from this deal will push GK into the new graphite markets.

At the end of 2014, U.S.-based Asbury Carbons Inc. (privately held) officially opened its graphite and carbon plant in Europe. The plant in the Netherlands is a major investment for the company as it extends its presence for the first time outside of North America. This foothold in Europe will mature in the next 18 months and will be one to watch.

Flinders Resources Ltd. (FDR:TSX.V) is actually producing now from its Woxna graphite mine in Sweden. It has a very different challenge to those not in production and that is to actually sell product into the market, negotiate contracts and find new customers. Flinders is Europe’s first flake graphite mine since the late 1990s and in essence doubles the continent’s capacity to around 20,000 tons per annum.

StratMin Global Resources Plc (STGR:AIM) was the only other junior company that graduated into production last year. The company is now selling flake graphite to customers and in February sold +80 (large flake) and +50 (extra large flake) to the global market.

Australia’s Valence Industries Ltd. (VXL:ASX) has restarted the Uley flake graphite plant and is now producing from stockpiles. The company announced recently it has signed a number of contacts for a total of 8,000 tonnes. The product ranges from extra-large +35 mesh to fine powder of -300 mesh.

TMR: If you compare the graphite industry with the gold industry, gold is pretty simple. Does the market understand the complexity of the problems involved with graphite, the questions of flake type, flake size, purity, type of product and the necessity of offtakes?

SM: Much of the market probably doesn’t understand it yet. But the more advanced and more experienced juniors do. Many of these companies have spent the last three years working closely with end users to develop their projects, and this close connection to the end market, especially with regard to specialist graphite products, is critical. This is a make-or-break issue.

TMR: Tesla is committed to ethical cobalt sourcing, which would rule out supply from the Congo. But the Congo, which currently supplies 55% of world cobalt, is not included in the Dodd-Frank restrictions on critical metals. So we can expect that country to continue to supply the battery industry, yes?

SM: Correct. The Dodd-Frank legislation only applies to the U.S., and it only says that public companies have to report where they source conflict minerals from, i.e., tin, tantalum, tungsten and gold. It is not a trade ban. We really think cobalt wasn’t listed because it would have caused significant disruption to what is a niche but important market.

But with such a large proportion of supply coming from one country, and no major secondary options on the same scale, the majority of the battery industry has little choice but to use material sourced here, usually via the refineries based in China.

TMR: What are the alternatives to Congo for cobalt?

SM: It’s important to understand that 60% of the world’s cobalt-refining capacity is in China. There are environmental and supply restrictions and problems all the way along the supply chain for cobalt because it has been neglected for a generation, as have so many other critical minerals. Now the upsurge in the battery market has forced the world to confront these problems.

There aren’t many cobalt companies out there. It’s easier to find graphite and lithium as they are not rare minerals, so there’s more of these companies listed. Cobalt, and certainly primary cobalt deposits, are much more difficult to find.

TMR: Which juniors are poised to benefit from the rush to find non-African supply?

SM: There are currently three companies based in North America: Global Cobalt Corp. (GCO:TSX.V), Fortune Minerals Ltd. (FT:TSX) and Formation Metals Inc. (FCO:TSX). All three are focusing on developing cobalt assets but out of all three major battery raw materials to date, cobalt has been the most overlooked.

But investors have an information problem. You can’t get very reliable data out of the Congo, and this makes it difficult to evaluate these projects on an economic basis. That said, the fact that there are few options for new sources plays strongly into the hands of those juniors developing projects on a supply security basis for North America.

TMR: With regard to lithium, Tesla is in Nevada, and there’s been an assumption that it will look for suppliers as close as possible to its Gigafactory. Is this a given?

SM: It’s not, because the team at Tesla that’s developing the Gigafactory, especially on the raw-materials side, is savvy and very aware of the fact that it’s a game of economics. They will insist on getting from suppliers the right quality of minerals, at the right volume, and at the right price.

However, to get lithium sourced in Nevada for batteries made in Nevada that then go into cars manufactured in California would be a mine-to-market, made in the U.S.A. story that’s very attractive to Tesla on a political and public relations level.

TMR: Should Tesla decide to source lithium in Nevada, which companies would benefit?

SM: Western Lithium USA Corp. (WLC:TSX; WLCDF:OTCQX) is the closest source to the Gigafactory and is actually up and running, not yet with lithium production but in hectorite clay, which is used in oil and gas drilling. Western is seeking to develop its lithium production line and will look at both the carbonate and hydroxide options as most exploration-stage companies are now.

Currently, the only place in North America where lithium is produced is Rockwood Lithium GmbH’s Silver Peak site in Nevada. Next door to this is Pure Energy Minerals Ltd. (PE:TSX.V), which is undertaking a detailed drilling program of Clayton Valley.

Also located close to the Silver Peak facility is Ultra Lithium Inc. (ULI:TSX.V), which is developing its South Big Smokey Valley project 16 miles from Clayton Valley.

The battery megafactory trend and Tesla’s Gigafactory will most definitely be on all of these companies’ radars and vice versa. But this is not necessarily a question of proximity; more important is stable supply, at the right specification, at the right price.

TMR: Which other lithium companies elsewhere in the world are poised to benefit from the megafactories?

SM: Orocobre Ltd. (ORL:TSX; ORE:ASX) is the newest producer in the space. The company commissioned its Olaroz facility in Argentina in February and is the first brine junior to enter lithium production from the boom that started in 2009.

It’s now 2015, and only now are we seeing the first new tonnages coming onto the market to challenge the established producers: Sociedad Química y Minera de Chile S.A. (SQM:NYSE; SQM-B:SSX; SQM-A:SSX), FMC Lithium Corp. (FMC:NYSE), Rockwood Lithium and Talison Lithium.

It has taken the company seven years to get from registration to production. That itself should come as a warning to any new, major buyers of these raw materials.

TMR: There is an enormous amount of lithium where Chile meets Argentina, and there are quite a few juniors with brine projects there. Given the estimates of how much lithium will be needed to supply the burgeoning battery market, is this a rising tide that will lift all Andean boats?

SM: It should because this is the lowest-cost production area in the world. But I think this is a bullish story for all lithium juniors anywhere. Tesla’s Gigafactory will be buying lithium hydroxide, but if it came on stream today at capacity, there just wouldn’t be enough.

And it’s not just about getting the lithium onto the market, but developing the technology and know-how to produce the battery-grade materials at the right volumes. That’s the challenge Orocobre faces and one for any new producer looking to enter this ever changing market. This will challenge the established producers as well, as they must increase capacity in line with demand, and not overshoot, in order to keep the price healthy. They can’t invest too much too soon. It’s all a question of timing and getting the balance right.

TMR: What is your general advice for investors seeking to benefit from the battery revolution?

SM: I can’t give investment advice because I’m not qualified, and I don’t invest in any of these companies because it’s against the policy for any Benchmark employees to do so as an independent source of analysis in the sector.

But I will say that investors in raw materials always tend to look upstream at the minerals. They always speak of a gold story or a graphite story, for example, with very little focus downstream at the sectors that are buying these raw materials.

If investors looked more downstream and mapped out these growth sectors and actual plant by plant expansions, that will give a very good indication of whether a certain mineral or metal is the right one to invest in.

This industry is a medium- to long-term prospect. Any investor looking for short-term returns from critical minerals and metals is playing a high-risk strategy.

TMR: Simon, thank you for your time and your insights.

Simon Moores is managing director of Benchmark Mineral Intelligence, an online publishing and consultancy business specializing in critical minerals and metals, disruptive technology and emerging markets. Moores has also worked as a business journalist focusing on non-metallic minerals such as lithium, graphite, rare earths, potash, TiO2 pigment and feedstocks (rutile, ilmenite).

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1) Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
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