In researching the graphite space, it seems everyone is intently focused on batteries, batteries, batteries. The February announcement of Tesla’s giga-factory set off a wave…more like a tsunami, of analysis and commentary about the positive implications for flake graphite demand. Less noticed by graphite investors, but well understood by car enthusiasts is the slew of new electric and hybrid vehicles coming by the end of the decade. The next giga-factory announcements could be coming from BMW or Mercedes, not Tesla. However, also potentially impactful for graphite demand in batteries is this June 2nd news story,

“Ford and Samsung’s SDI group today announced research on new battery technology designed to trim weight and improve efficiency on cars, trucks, and other automobiles. The two companies showed off a new dual-battery system that combines lithium-ion with lead-acid batteries to extend the life of the lead-acid battery on cars with start-stop engines.”

According to the article, Ford already incorporates the start-stop engines in 70% of its cars. Even if only a small amount of graphite per dual-battery is introduced into Ford’s annual sales of hundreds of thousands of cars, that could be meaningful, especially if other car makers adopt dual-battery systems. In addition to the batteries used in vehicles, another burgeoning field for graphite is in large-scale energy storage. The rapid growth of wind and solar energy has sharpened the focus on ways of storing massive amounts of energy when the wind isn’t blowing or the sun shining. Large-scale energy storage is the Holy grail of the renewables movement, but it’s been a tough nut to crack. Graphite plays a prominent role in many of the proposed solutions.

It’s Not Just About the Batteries…China a Powerful Force

While the battery and energy storage markets are key components of my bullish view of graphite demand, it’s just one part of the story. Perhaps more important is what’s happening in China regarding BOTH supply and demand. China has a severe pollution problem. Therefore, it’s stamping out small, inefficient, polluting mines and factories. We’ve seen this movie before, when China closed thousands of coal mines it subsequently switched from a large exporter of coal to a net importer. We could literally be seeing that same dynamic unfolding in graphite over the next 5-10 years.

The scrutiny is now squarely on graphite mines in the key producing province of Heilongjiang, where an ambitious State-mandated mine consolidation plan was announced in April. According to Simon Moores, Heilongjiang alone accounted for as much as 29% of global flake graphite production in 2013. Clearly, China is causing serious concerns for end users seeking security of supply. On the demand side, the Chinese are using more and exporting less. Look no further than Australian-listed Syrah Resource’s blockbuster off-take deal with Chinalco.

Syrah’s giant Mozambique deposit was considered by many pundits to be a daunting overhang, i.e. so big it would flood the market. Not only is China’s Chinalco proposing to take upwards of 100k tonnes of Syrah’s future output – that flake graphite is headed for a massive new end-market… aluminum anodes. Commenting on the news, Credit Suisse pointed out that aluminum anodes is a 13 million tonnes market, nearly 11 times the size of the natural graphite market. If Chinalco, the 4th-largest aluminum producer in the world, finds graphite to be superior to petroleum coke and anthracite in anodes, other aluminum producers might as well. Therefore, on both the demand and supply fronts the fundamental outlook for graphite is looking bright.

A way to Play the Graphite Renaissance — Graphite One Resources

There are a relatively few number of graphite juniors that have decent shots of making it big in the next 18-36 months. Some well known names include Syrah, Mason Graphite, Energizer Resources, Triton Minerals, Focus Graphite, Flinders Resources, Northern Graphite and Zenyatta. However, a U.S. graphite junior flying under the radar is Graphite One Resources (TSXV: GPH | OTCQX: GPHOF). According to the company, “… Graphite One has defined North America’s largest high-grade, large flake graphite deposit.” From a total of 285 million Inferred metric tonnes “Mt,” is 12.76 million Mt of in-situ flake graphite (includes 8.6 million Mt @ 12.8% Graphitic Carbon Grade, “Cg” at-near-surface, equal to 1.1 million Mt of graphite). That’s on just a quarter of the deposit’s strike length!

Not only does Graphite One stack up well to those better known peers on some key metrics, it trades at a cheap valuation of just C$ 18 million, (C$0.14/share on 6/20/14). This, for a company that I believe is sitting on a highly economic deposit with a Net Present Value, “NPV” possibly reaching into the hundred(s) of millions of dollars. [Note: my opinion only] Graphite One is committed to releasing a Preliminary Economic Assessment, “PEA” by early next year. Reviewing peer PEAs from companies like Northern Graphite, Energizer Resources, Focus and Mason as a rough guide, Graphite One could be looking at a project with very low operating costs due to its high-grade, at-surface deposit and the economies of scale from a potentially large operation.

The following chart shows the top 10 graphite companies by market cap. The average of the top 10 is C$122 million, (or C$67 million not including Syrah Resources). As noted, Graphite One’s market cap is just C$ 18 million, a 73% discount to the $67 million average (not including Syrah).

The combination of a high-grade, large flake, near-surface deposit, possibly contributing to a long-term production profile, in the safe jurisdiction of Alaska, USA, places the company’s project as one of the top in 6 coming online anywhere in the world. First production is expected in 3-4 years.

Importantly, and unique to Graphite One, its project could benefit in a very meaningful way from a State of Alaska loan under the same program that Ucore Rare Metals signed off on last month. Ucore is slated to receive $145 million of proceeds from bonds issued to finance key infrastructure and construction of the company’s Alaskan project. A similar loan approval for Graphite One would be a game-changer and truly set it apart from global peers.

Conclusion

2014 has been a tremendously important year for graphite news, and the news has been almost exclusively bullish for on both the demand and supply fronts. The demand for batteries that use graphite could be far greater than even the promise of Tesla’s giga-factory. On the supply side, China has explicitly announced plans to clean up dirty industries, of which graphite mining is a prime offender. Further, China is exporting less graphite and importing more. Although several graphite juniors look like attractive investments and are likely to move higher with a rising tide, one of my favorites is U.S. player Graphite One. Even if Graphite One’s valuation were to double relative to peers, it would still be trading at close to a 50% discount to the average market cap. Therefore, I believe that Graphite One’s stock has more upside and probably less downside than peers.