Headquartered in Toronto, Great Lakes Graphite Inc. (TSX:GLK.V) (OTC:GLKIF) is an industrial minerals company that is currently focused on marketing and supplying value-added graphite products to customers in North America. In 2016, the company joined the graphite supply chain by fulfilling several orders for synthetic graphite, which was sourced from Brazil. Having secured the use of a portion of an industrial facility, which is located in Matheson, Ontario, Great Lakes Graphite is now poised to offer micronized and purified natural flake graphite products. In the future, management plans to develop and produce natural graphite from its 100%-owned Lochaber Graphite Project in the Province of Québec.
Great Lakes Graphite has received multiple purchase orders for micronized synthesized graphite from a Texas-based industrial customer and also has delivered graphite product to local Canadian companies. In the most recent financial report (third fiscal quarter ended July 31, 2016), Great Lakes Graphite reported its first graphite sales (net of costs) of CDN$7,782, which at most encompassed four purchase orders. Subsequent to the third fiscal quarter end, the company announced the receipt of at least 13 additional purchase orders representing at least 260 tons of micronized synthesized graphite. We eagerly await the fiscal year-end report.
The company’s customer in Texas ordered 400 tons of micronized synthetic graphite during calendar 2016 and has indicated that at least twice that amount is expected to be required this year. The management of Great Lakes Graphite anticipates selling 3,500 tons of graphite products during 2017. Longer-term, management indicates that the targeted annual capacity of the Matheson facility is 10,000-to-12,000 tons.
Management is pursuing a business strategy of providing value-added, higher-margin, micronized and purified graphite directly to customers. For now, management has opted to forgo the costly strategy of the conventional resource model of developing a graphite mine and constructing a graphite processing plant. However, in due course, management anticipates micronizing and purifying graphite at its low-cost Matheson facility, and ultimately converting flake concentrate from its Lochaber Graphite Project to premium-grade spherical purified graphite.
A key core competency is the company’s direct marketing effort to existing and potential customers. It is well known that in the industrial minerals space, the keys to success are processing capabilities and the business development efforts of marketing and sales. Great Lakes Graphite’s marketing approach is a well-planned program of creating relationships with end-users of graphite, which includes a thorough understanding of each potential customer’s specific graphite requirements and an extensive prospective customer sampling program.
The company continually provides samples of graphite products for qualification to potential customers across a range of targeted industries. At times, a customized solution is required, which, with collaboration, Great Lakes Graphite is eager to design the specific graphite product that delivers the required performance characteristics. For example, in December 2016, Great Lakes Graphite announced that samples of high-purity micronized graphite had been provided to X Energy, LLC for evaluation in the design of the Xe-100, a pebble-fuel, high-temperature, gas-cooled reactor.
The company understands the unique procurement processes for graphite products and attempts to build and solidify strong relationships with customers. The repeat purchase orders from the Texas-based industrial customer (mentioned above) are a testimony to this customer relations effort.
Management is also opportunistic. With its customer-centric model, the company discovered a potential customer with a specific graphite requirement for micronized synthetic graphite. With an innovative approach of aggressively pursuing fast paths to revenue and cash flow growth, management responded to this market demand and seized the opportunity. The company was able to fulfill the customer’s requirements by sourcing the material from Brazil through a supply agreement. Management’s flexibility to act opportunistically in response to customer requirements bodes well for future sales growth and good customer relations.
Great Lakes Graphite is offering natural flake micronized graphite, high-purity natural flake micronized graphite and synthetic micronized graphite in four industry standard sizes (45, 25, 15 and 10 microns). Moreover, the company is able deliver graphite material in other particle sizes, including blends, to precisely meet customer specifications. The products can also be packaged as the customer requests, but normally in industry-standard 15 kg, 25 kg, 25 lb. and 50 lb. double-lined bags, which are palletized and shrink-wrapped for delivery.
Graphite Market Primer
According to a report entitled Global Market Study on Graphite: Battery Segment to Witness Highest Growth by 2020 published by Persistence Market Research in December 2016, the global graphite market is expected to grow from $13.62 billion in 2013 to $17.56 billion by the end of 2020, primarily due to the rise of technologically advanced applications for graphite, especially in lithium-ion batteries for the automotive and aerospace industries, along with portable consumer electronic applications such as smart phones, laptops, tablets and power tools. The demand dynamics for graphite are complicated since multiple dissimilar product groups, each driven by different economic forces, require graphite in one of its various forms. However, simplistically, the demand and pricing of graphite stabilizes and increases up the value chain from flake graphite to high-purity, micronized flake graphite with coated spherical graphite commanding the highest prices.
Demand for graphite from traditional markets (such as refractories, brake linings, clutch facings, pencils, batteries and lubricants) has been lackluster. Roughly 40% of graphite usage is directed toward foundry applications, particularly as an additive in the manufacture steel and producing castings. About 14% is used in the manufacture of automotive brake linings in order to create controlled slippage and another 14% as high temperature lubricants for furnace chain drives.
Graphite is especially valued as an industrial mineral due to its lubricating properties. Graphite is Sp2 hybridized carbon in which carbon atoms are arranged in a hexagonal pattern and are bonded cooperatively with strong covalent bonds in a planar structure. The delocalized bonds perpendicular (normal) to the planes are weak, allowing the planes to slide over each other, which gives graphite its much desired attribute of lubricity.
Over the next few years, the demand for upgraded graphite products is poised to increase dramatically. The increasing adoption of lithium-ion batteries and the construction of gigafactories, like Tesla’s facility outside Sparks Nevada where battery cell production began just this month, are expected to significantly increase the demand for graphite. Hitachi Chemical is planning to invest up to $90 million to expand their graphite anode capacity from 20,000 tonnes to 100,000 tonnes over four years. The anode-related graphite market is expected to evolve further as lithium-ion batteries continue to transition from simple power cells to complex packs with multi-metal cathodes paired to blended anodes. Also, incremental demand is expected from photovoltaic batteries of solar power systems, for carbon-graphite plates in fuel cells and from pebble-bed, graphite-moderated, gas-cooled nuclear reactors.
In late-December 2016, China’s Ministry of Commerce announced that its 20% export duty on natural flake and amorphous graphite concentrate would be removed in 2017. Though China’s action is expected to pressure graphite prices, value-added processed graphite (expandable and spherical) were not subject to the export duty; and therefore, their prices are expected to be generally unaffected.
Great Lakes Graphite is well positioned to benefit both from an improvement in demand of value-added micronized graphite, from development of its low-cost Matheson facility and ultimately the advancement of its 100%-owned Lochaber Graphite Project. Management is executing its low-cost, go-to-market business strategy, acquiring customers and beginning to generate sales. Nevertheless, the company is in the early stage of its development with additional customers being needed to reach management’s production goals and further exploration being required to upgrade and expand the NI 43-101-compliant inferred mineral resource estimate at Lochaber. As management is not anticipating profit from operations in the near-term, the company will continue to require equity and/or debt financing to fund operations. We look forward to the fiscal year-end financial and MD&A reports, which will better enable us to develop a valuation model. Currently, Great Lakes Graphite has a market capitalization of approximately CDN$11.1 million with 123,444,330 million shares outstanding.
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