Sri Lankan Graphite: A Major Opportunity Opens

Sri Lanka, perhaps one of the most promising new frontiers in the graphite sector, is opening its mining sector to foreign investment.

The Asian nation currently produces a very small amount of graphite — about 4,000 metric tons (MT) yearly, according to the US Geological Survey (USGS).

But Sri Lanka’s graphite is a unique product. The country produces lump and chippy dust graphite and is the world’s only source of these particular materials.

Lump and chippy dust graphite are the highest-value graphite products found globally, the USGS notes. In 2012, prices for Sri Lankan lump and chip graphite averaged $1,990 per MT, significantly higher than prices reported for other products, such as flake or amorphous graphite.

Will the opening of the Sri Lankan mining sector give junior companies access to this sought-after commodity?

Opening up

The political environment in Sri Lanka looks to be very positive for new graphite projects.

The government said this month that it will offer significant tax incentives and a liberal regulatory framework to woo incoming investors in the mining sector, The Wall Street Journal reported.

That will include a royalty rate of 5 percent, according to the country’s minister of environment and renewable energy, Susil Premajayantha. The minister added that the government “won’t levy any other charges” — presumably referring to extra taxes on mineral products.

The Sri Lankan mining sector enjoyed a period of strength during the late 1990s, during which time companies like mineral sands producer Iluka Resources (ASX:ILU) actively explored the country.

But Iluka departed Sri Lanka in 2003, citing “accessibility” as a concern, another Wall Street Journal article notes. That was widely seen as a reference to the country’s then-escalating civil war with Tamil separatists.

The war — which went on for the better part of three decades — came to an end in 2009 when a concerted military offensive finished off rebel forces.

That has paved the way for the country to invite foreign investors to come back. Iluka this month told The Wall Street Journal that it is considering a return to Sri Lanka’s deposits.

Other companies are also being attracted by the nation’s rapidly developing infrastructure. Port facilities at Colombo, the capital city, were recently expanded, while a new port and airport are also being constructed in the south of the country.

“[T]he Government continues to pump in billions of rupees to restore infrastructure and improve the lives of ordinary people,” Sri Lanka’s Sunday Observer reported.

Early movers

The change is a major boon for world-be graphite producers.

It’s long been recognized that Sri Lankan graphite deposits are some of the richest on the planet. Under British rule in the early 1900s, the nation was a significant graphite producer and exporter.

But the graphite sector was nationalized in 1971. The private sector was allowed back into Sri Lanka’s graphite industry in the early 1990s, but by that time, problems with the civil war were preventing development on a large scale.

The recently announced opening of the mining sector thus represents the first modern opportunity for foreign companies to pursue Sri Lankan graphite on a significant scale.

At least one junior company is already moving to capitalize on the potential.

Bora Bora Resources (ASX:BBR) went into Sri Lankan graphite last year with a deal to acquire a 75-percent interest in the Matale graphite project.

The Matale project covers 24 square kilometers of tenements lying in the center of Sri Lanka. The lands surround the Kahatagaha Kolongaha graphite mine, a high-grade vein deposit.

Kahatagaha Kolongaha is one of the high-value mines accounting for Sri Lanka’s current output of lump and chip graphite. The mine has been in production since 1872 and reportedly produces a rich product with total graphitic carbon content greater than 90 percent.

Bora Bora notes on its website that it pursued the project because of its “high-grade nature not comparable to any other region of the world.”

Other operators in Sri Lanka include Germany’s Graphit Kropfmühl (ETR:GKR). That company entered the Sri Lankan sector as early as 2000, buying control of the Bogala graphite mine — a historic operation dating back to 1847.

First modern exploration

Part of the attraction of Sri Lankan graphite is the opportunity to pick low-hanging fruit using modern exploration techniques.

With all of the challenges that the sector has faced over the last five decades, little exploration work has been conducted in the country.

That — along with the proven prospectivity of mines like Kahatagaha Kolongaha and Bogala — makes Sri Lanka ripe for discovery.

That is especially true given the potential application of modern geophysical techniques. Electrical surveys are a simple and effective way to check large amounts of ground for graphitic targets. By looking at the underexplored ground around Sri Lanka’s major mines, incoming explorers have a high probability of making significant finds.

Of course, the Sri Lankan sector is not without its challenges, with one of the main ones at the moment being local partnership requirements.

Bora Bora Resources for instance, is acquiring a 75-percent interest in its concessions, with the balance being held by a Sri Lankan partner.

Such local content is currently a legal requirement in the country, although it remains to be seen whether these rules will be changed as part of reforms to the mining sector.

Companies currently wishing to enter the country will need to be tactful in choosing local groups as partners, meaning that those operators with a good working knowledge of the country and its business groups will benefit.

But for those who can navigate these waters, the prize is large — both in potential scale and in value.

Securities Disclosure: I, Dave Forest, do not hold equity interest in any companies mentioned in this article.