Set out below is an excerpt from our March 2014 quarterly update to investors.
Please note that the information is suitable only for wholesale investors, as defined by the Australian Corporations Act.
Technical Investing started to research growth in the hybrid motor vehicle industry and lithium ion batteries in 2009. This led to investments in two lithium explorers, both went on to develop production projects and the fund made very good profits on those investments.
In 2012 our interest moved into the graphite sector. There is about 10 times the amount of graphite in a lithium ion battery as there is lithium. The fund made its first “graphite” investment in March 2012.
From March 2012 to June 2013 the emerging company index halved. There was little interest in emerging companies and investor interest was targeting large dividend paying companies. Our investments fell sharply in price. The companies did nothing wrong and in fact many enhanced their work on their projects.
We are now seeing strong interest re-emerging towards this area and have made excellent returns in some graphite investments. We see this area as a theme that will remain strong over the coming years. Whilst share prices will fluctuate the industry itself will grow due to strong underlying growth for the commodity.
Below we wish to give you some insight into this very misunderstood sector.
Graphite (the mineral) consists of parallel sheets of carbon atoms in a hexagonal lattice. It is its hexagonal shape that gives it its unique properties.The individual sheets, one or few atoms in thickness, are called graphene.
The principal properties of graphite are:
– high heat resistance (3550oC melting point)
– strong electrical and thermal conductance
– insoluble in water
The extent of these factors is leading to wider and wider applications developing for this mineral, notably in the areas of green energy and electronics. This promises to drive strong growth over the next decade at a time where supply is constrained and new mines will struggle to meet growing demand.
Natural graphite demand is about 1.1Mt/yr, a volume similar to nickel, with total value approximately $US1B/yr.
Currently, China supplies most of the world’s graphite. China has major issues in production. It has recently formed graphite parks. There is one area in China that produces nearly half the world supply of graphite; that area recently removed 270 small miners and consolidated to one. Many mines were closed with reports that mining volume was substantially reduced.
Note China has already declared several cities electric-motor-bikes-only and there is talk that some cities will become “all electric vehicles”
Graphite’s outstanding properties look to be driving strong demand for new technology applications. The first of these is in batteries where the outlook for growth is strong mainly due to electric vehicles, but also in the growing area of energy storage which is tied to green energy generation.
In the case of electric vehicles, each car uses approximately 20-60kg of graphite which offers significant potential demand growth for this commodity given an expected increase in hybrid electric vehicles and electric vehicles (HEV and EV) production from 1.6m in 2010 to over 16m in 2021.
Other new applications for graphite which offer growth potential in the near term include the electronics industry where graphite sheets are used for heat dissipation. This is important given the trend toward smaller and lighter electronic units. For example, unlike older generations of computers which relied upon internal fans and copper rods to dissipate heat, new generation products use graphite sheets. An iPad has 4 sheets of graphite.
Graphite is also about to be used in nuclear power generation. It is used to coat uranium in the new generation of pebble bed reactors which, unlike traditional reactors, passively shut down in the event of an accident.
For each 1,000MW of capacity approximately 3kt of graphite is required to start and 0.6-1ktpa to maintain a pebble bed reactor. China is currently building 2 pebble reactors of 200MW each with 30 planned by 2020. University of West Virginia estimate that the next generation of pebble based reactors could use 400,000t graphite per annum when up and running.
There are various forms of graphite and our interest is mainly in targeting graphite that can be used in lithium ion batteries. It is estimated that 80% of the graphite used in batteries is “synthetic” or man-made graphite. This sells for north of $20,000/T whereas normal graphite varies from, say, $600/T to $2,000/T. Therefore large flake graphite with next to no impurities that can be used in the battery market or even the new pebble bed nuclear reactor market is the graphite that can attract a very large price premium.
The European Union (EU) consumes 20% of the world’s natural graphite and imports 95% of its needs. Two of our investments are targeting the opening of mines in Sweden.
The EU has classified graphite as a “critical raw material”.
Tesla, the electric car company in the US, has said it will spend up to $5bn to build a battery “giga-factory” to produce enough batteries for Tesla’s estimated 500,000 vehicles by 2020. Panasonic is supposedly putting in $1bn.
A substance you are likely to start to hear more and more about is graphene. It’s the strongest compound discovered (100-300 times stronger than steel), the best conductor of heat at room temperature, the thinnest compound known to man at one atom thick and the lightest material known. It was only discovered in 1987.
If you take graphite to its purest form and then peel off a layer you get graphene. It can be described as a one-atom-thick layer of graphite.
Graphene exceeds the stiffness of diamond and is hundreds of times stronger than steel, yet is extremely light, flexible, conducts heat at room temperature faster than any other material and is the best conductor of electricity known. Researchers and companies are eyeing dozens of potential applications, from faster computer chips and flexible touchscreens to hyper-efficient solar cells, super-capacitors and desalination membranes.
The advancement of hybrid and electric cars has a lot to do with improvements in battery technology. It is battery technology that is still holding up many advances. Graphene is also being used to boost not only the capacity and charge rate of batteries but also the longevity.
Graphene’s issue at the moment is that it has been highly expensive to manufacture, with prices quoted north of $100,000/T. It appears that the current market size is only around 1,500T p.a. However, as the graphs below indicate this could rapidly change – particularly if the cost of its manufacture falls.
The fund has an investment in one Canadian company which has a subsidiary with a pilot plant which claims it can produce graphene very cheaply and they are looking to scale that up.
We also have an Australian company that has recently produced graphene in a laboratory in an Australian university. It appears that process can be scaled up and they are looking to test that now, again the cost of manufacture at this stage appears as though it can be very low.
There is now a huge amount of research being carried out in this area. Exponential growth is occurring in patents:
Published graphene patent applications by year 2000 to 2012
Major technology product companies such as BASF, Samsung, IBM, Hitachi, SanDisk, Fujitsu and Xerox are poised to commercialise developments as is evidenced by prodigious global graphene patent activity.
Over $2.5bn in graphene research funding has been launched in the EU (Sweden) alone in the last 12 months.
Whilst there are many companies claiming they will produce graphite, we believe the number that go into production will be far smaller. The number that can produce graphite at a low price and supply premium end products such as lithium ion batteries will be smaller again. So it’s one area where company selection is very important. The fund currently has five graphite investments. Two are listed in Canada and three in Australia.