Battery Metals

Graphite Investing

Eagle Graphite CEO Jamie Deith talks about the importance of a North America-based supply chain, as well as graphite demand and supply fundamentals.

In a graphite market with ever-rising demand, Eagle Graphite (TSXV:EGA,FWB:NJGP) sees itself as uniquely positioned to be a premier supplier in North America. In this interview, Eagle Graphite CEO Jamie Deith talks about the importance of a North America-based supply chain, as well as graphite demand and supply fundamentals.
Eagle Graphite owns one of only two natural flake graphite production facilities located in Canada or the US. The Black Crystal quarry and processing plant, located 35 kilometers west of Nelson, BC, is production-ready with permits and a five-year quarry plan in place.
Black Crystal is the only graphite producer in Western North America’s burgeoning electric vehicle market. The quarry host material is naturally suited to low-energy, low-environmental-impact processing that produces high-purity graphite flake products for use in conventional and emerging industries.
Eagle Graphite is currently focused on two key elements of its long-term business strategy. Through exploration at both the established quarry site and at new exploration targets immediately adjacent to the plant facility, Eagle Graphite plans to expand its 2014 resource estimate. In a period where global supply of graphite is limited and new sources of demand are joining an already significant demand base, Eagle Graphite hopes to use its unique position as a North American producer to help address the market’s needs now and in the future.
Below is a transcript of our interview with Eagle Graphite CEO Jamie Deith. It has been edited for clarity and brevity.
Investing News Network: Please give our investor audience an overview of the current state of the graphite market in terms of demand/supply fundamentals, price outlooks, who is supplying the market and which industries are impacting demand.
Eagle Graphite CEO Jamie Deith: The graphite market is currently seeing an acute shortage in supply, and prices are exploding upward. This is possibly the most unbalanced graphite market in decades.
Graphite is an incredibly versatile mineral that has multiple uses in almost every industry. The three biggest factors currently affecting natural graphite markets and rising prices are demand from steelmaking, reduced supply from China and demand from electric vehicle manufacturers. At Eagle Graphite, we are fielding more supply requests than ever from buyers around the globe looking for immediate sources of graphite.
The first big factor, steelmaking, uses flake graphite to strengthen bricks in blast furnaces. For decades, this has been flake graphite’s primary application at about 40 percent of total demand. Graphite demand could always be predicted based on the levels of steel production. This year, we have seen a global resurgence of steel production, and graphite supplies are simply not able to keep up. In fact, China’s Belt and Road Initiative and the upcoming reconstruction in the Southern US states will exacerbate the shortage for some time to come.
China produces approximately 70 percent of the world’s entire flake graphite supply, and in the past the market has relied upon China to scale up its output to offset increases in demand. However, the Chinese government has decided to crack down on environmentally irresponsible practices. For some graphite producers, this means higher capital and operating costs, while others are shutting down outright because the cost of operating responsibly is simply too high.
I was recently informed by a Chinese supplier that they may have absolutely no graphite available at any price for some of the standard grades. At the same time, Eagle Graphite is being approached by Chinese graphite buyers who can no longer meet their needs with domestic supply, and they think the Chinese government has made it too difficult to produce graphite in “the traditional way.” Requests to send Canadian graphite to China were unthinkable in the past, so I would say this is emblematic of change in the market.
Finally, electric vehicle production has grown to the point where it is drawing significantly on graphite supplies. A few years ago, electric vehicles were consuming only 2 or 3 percent of available graphite, and batteries were a non-factor compared to the slumping steel market. The exponential growth of electric vehicle production is finally translating to significant demand, and I would estimate that their production now consumes 10 percent of global graphite supply. This share is steadily increasing, and at this rate of growth, electric vehicles will soon use more graphite than all other applications combined.

All told, graphite has hit an inflection point where there is not enough production capacity to meet the surge in demand today, let alone the anticipated growth in graphite demand in the longer term.
INN: Why is the battery industry experiencing weakness in the supply chain for battery-grade graphite materials?
JD: Lithium-ion battery makers currently rely entirely on purified graphite from China. In part, this is because Chinese suppliers have been allowed to use toxic purification methods without proper environmental controls. With Beijing cracking down on pollution and shortages already emerging in China, the battery supply chain will soon be in trouble.
Good sense would dictate moving away from such a fragile dependency by sourcing from politically stable jurisdictions outside of China, with the insistence that graphite be purified in a responsible manner.
Rising uncertainty in global trade relationships makes diversification an even greater imperative. Graphite is a relatively cheap part of electric vehicle batteries, but without it production would have to be halted. It makes no sense for graphite users, carmakers especially, to leave themselves open to a raw material shortage as a result of an autocratic government stopping supply or because a rebel militia blockades a key access road. A secure source of supply is much cheaper than an unexpected shutdown.
INN: The junior resource sector has seen an uptick in graphite exploration projects in the past few years. Shouldn’t this increase in future projects help curb the supply crunch?
JD: Eventually, yes, but this will still take time. It takes years and a lot of money to advance a project from the exploration stage to production. Many mines go into production only to find that the extracted graphite is nowhere near as good as that depicted in their business models.
Five years ago, North America had approximately a dozen public graphite exploration companies claiming to be three years away from production. Since that time, absolutely none of them have started or been able to finance construction. They are all still three years away from production and they don’t have the money to get started. The situation today is the same as it has been for the last 10 years: Eagle Graphite is the only company in its peer group that is capable of producing graphite for its customers. We are still the only public junior in North America with permits, infrastructure and production capacity.
It is important to note that there are many graphite applications that have to draw from the same pool of global supply. As a result, graphite supply is becoming collectively tight for all of those applications, not just the ones driving the increase in demand. I cannot remember another time in the last decade when we received this many supply requests from such a diverse group of end users. Whether it be for refractories, sound insulation or car gaskets, all manufacturers are feeling the effects of shortages, and we are one of very few companies they can turn to for help.
INN: Where do you see future demand for graphite coming from?
JD: I believe that for the immediate future, we will have our hands full just keeping up with traditional sources of demand. These include steelmaking, lubricants and the innumerable other applications that will continue to need graphite for decades into the future. Globally this requirement is at approximately 350,000 tonnes of graphite per year, with total production capacity being very close to this. With steelmaking and the overall global economy on the upswing, the demand is already consuming existing production capacity.
In terms of sustained new demand, the big story is lithium-ion batteries and the complete restructuring of the transportation industry that is underway. Governments around the world have effectively mandated the end date for internal-combustion cars. In some countries you won’t be able to buy a gasoline car in 2025, and around 40 percent of the world’s population lives in countries where fossil cars are set to be banished by 2040. As more and more electric vehicles are built to fill the gap, graphite consumption for batteries will grow too. Yearly demand for graphite for batteries will go up from around 30,000 tonnes to as much as 60,000 tonnes over the next year. These are 30,000 tonnes of new production that need to come online just to prevent the market from going into further shortage. Eventually batteries will come to dominate graphite demand, and global production capacity will have to grow to over 10 times its current size before the draw from battery production even begins to slow down.
INN: Why is a North America-based supply chain important?
JD: Steel production is already considered to be strategically critical, and batteries are not far behind. Together, these applications will need ever-increasing quantities of graphite in the coming decades. When the supply of raw materials is tight, there is no suitable substitute for a stable domestic source of supply. If there is an overdependence on overseas suppliers, governments like China’s will have the power to shut down exports to North America and leave our end users empty handed. They might do this for geopolitical reasons, to give an unfair advantage to their own domestic manufacturing or as leverage in a trade dispute. When and if that happens, manufacturers who ensure that they have some of their supply coming from North America will be able to carry on while their competitors have no access to available supply.
INN: Please tell us about Eagle Graphite’s US$30-million financing currently underway, and what it means for the Black Crystal quarry and plant.
JD: In July, we became the only listed graphite junior in North America to line up a financing facility of this nature. It is actually three facilities rolled into one — an equipment loan, a term loan and convertible debt — in nearly equal parts that add up to a total of US$30 million. Rather than executing the full amounts up front, we plan to close incrementally as we grow, probably just a few million at first.
In its entirety the financing is sufficient for us to resume production and carry us through a first-stage expansion of our capacity. Expansion is required so that we can continue to meet existing demand and develop additional capacity for new business. Our offtake partner in the steel supply chain has indicated that they would like to upsize our contract to as much as 12,500 tonnes of graphite per year — three times our current capacity — and we also envision additional demand from other buyers. Many of those buyers need specialized formulations that sell for a significant premium, and by being able to supply them years before any other competitor, we intend to carve out a very profitable market position.
INN: What catalysts can investors look forward to for Eagle Graphite in the coming 12 to 18 months?
JD: We will be using the proceeds from financings to materially increase our resource estimates, further optimize our process flow, commission a preliminary economic assessment and expand both our production capacity and our product range to include premium products. These steps are all important, but the giant differentiator for Eagle Graphite is our unique position as the only player in our peer group with production capacity at a time when the market desperately needs more graphite.
As we resume and ramp up production, we plan to finalize our expanded offtake agreement in the steelmaking industry, while adding at least two additional supply agreements in completely different sectors, potentially including a significant battery customer. As the North American market grows, we intend to capture an ever-increasing share of graphite revenues. With no other listed North American juniors even financed for construction yet, we see no competing producers in this group for at least three years. In the context of a graphite supply shortage, three years might as well be a lifetime, and we will be moving ahead the entire time. It is going to be an exciting period for us and our fellow shareholders.
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