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Graphite, Lithium and REEs

Developments in EV batteries are adding demand for scarce resources...
LUISA MORENO is a mining and metals analyst with Euro Pacific Canada, with a major focus on electric and energy metal companies.
A guest speaker on television and at international conferences, Moreno holds a PhD in materials and mechanics from Imperial College, London, and has published reports on rare earths and other critical metals quoted in newspapers and industry blogs.
Here she tells The Gold Report's sister title, The Mining Report, about the bigger role now played in industry by graphite, lithium and rare earth elements...
The Mining Report: What are the key advantages of vein or lump graphite deposits over flake deposits?
Luisa Moreno: Two advantages of vein or lump graphite deposits would be the natural high-grade purity of the graphite in the ground, as well as the relatively low cost of production, most of which comes from Sri Lanka. Another important point is that it is usually sold at a premium price relative to natural flake graphite.
TMR: Are there any advantages flake deposits have over vein deposits?
Luisa Moreno: I think an advantage is that they have more applications. The flake graphite market is much larger. Vein deposits are quite rare and make up less than 1% of the market.
TMR: Flake graphite deposits can be high grade too, can't they?
Luisa Moreno: Flake graphite deposits can be high grade but you won't find deposits grading 90-99% in the ground. Flake deposits tend to run 2-3% graphite. Some deposits in Quebec have 16-20% grade. It seems that there's a correlation between grade and the recovery of larger natural flake. 
TMR: Which one should an investor prefer?
Luisa Moreno: To start, investors should look at these graphite companies just as they would look at any other mining company. They need to understand the feasibility of the project – the capital requirements, operating costs, etc. For industrial and critical materials it is also important to understand size of the market, the project time to market, the type of product it will produce and how much it could be sold for.
We talked about flake versus lump graphite deposits, but within the flake type products there are the finer flake, the medium and the larger flake, and it is important to understanding how much of each a mine can produce, as they are sold at different prices. The shape of the flakes and other characteristics also influence the price and applications. In the case of lump graphite, the market is estimated to be around 5,000 tons per year, but it's relatively rare. If there is a company with a lump or vein graphite deposit that requires low capital and operating costs, has secured an offtake agreement and the project has strong economics – that could potentially be a good investment.
TMR: Where's that 5,000 tons coming from now?
Luisa Moreno: It's coming mainly from Sri Lanka. The asset produces about 3,000 of the 5,000 estimated world production. The rest comes from a private company owned by the Sri Lankan government. 
TMR: We should note that you don't cover any graphite companies but that you may at some point. Lithium is also used in electric vehicle (EV) batteries. Could a large factory also possibly change the economic outcome of certain companies in the lithium space?
Luisa Moreno: Certainly. EVs use more lithium and more graphite than hybrids. If we see a greater adoption of EVs, we would definitely see an increase in demand for lithium carbonate and lithium hydroxide – the lithium products that go into these batteries.
Our forecast for lithium is based on the sales of hybrid vehicles only, which could reach 3.8 million per year by 2020 versus less than 2 million now.
Current estimated annual lithium demand is roughly 170-180,000 tons. If EV adoption rates meet projections, estimates suggest that demand could go north of 250,000 by 2020. That is a significant increase and it will offer the opportunity for new projects to be developed.
TMR: How many EVs are currently being produced?
Luisa Moreno: Industry estimates indicate that there are currently over 400,000 EVs on the road, compared to about 100,000 EVs in 2012. It seems that EV sales have doubled every year for the last three years and if this trend continues, over 1 million EVs may be on the road in three years.
TMR: Is having the second-highest grade deposit in the world enough to get a small modular plant built near James Bay in Québec?
Luisa Moreno: The grade alone wouldn't do it, but the fact that a sizeable deposit close to good infrastructure – hydropower, road access – and a positive feasibility study, means it could potentially build an economically competitive lithium mine and plant in Quebec.
TMR: In a June research update you listed four rare earth elements (REE) companies that recently arranged financings. These financings occurred at near record low share prices. One even offered a half a warrant with its deal. Is this simply life in the rare earths space right now or poor management?
Luisa Moreno: I think it's life in the mining space. If we look at the performance of most mining companies, especially the juniors, they've been struggling for a while. The REE juniors are no exception. Companies with projects that only have a preliminary economic assessment or prefeasibility study and require $15-25 million or more to reach the feasibility stage are finding it difficult to raise funds.
TMR: Are there signs the REE market could improve sooner rather than later?
Luisa Moreno: According to global economic estimates, we should see an increase in economic growth in the West, as well as in China, through the next couple of years. If we see that, I think that will be good news for REEs, as well as other critical metals. There could be a little light at the end of the tunnel here.
TMR: Some recent reports suggest that China may replace REE quotas with taxes. Please tell us more about the potential impact on the market.
Luisa Moreno: The World Trade Organization (WTO) ruled against China and its use of quotas. If China decides to comply with the recommendations of the WTO, I think that increasing taxes on REE exports or adopting tariffs would be effective ways China could still impose its policies.
China is determined to use rare earths resources to benefit its economy. China was supplying more than 90% of the world's REEs but only has about 36% of the world's resources.
TMR: A recent research report suggests that REE demand will grow at 6-10% annually through 2020. What accounts for that growth?
Luisa Moreno: It appears that some end-users are still using the stockpile material that they accumulated in 2011. Once those stockpiles diminish further we will see more end-users coming back to the market.
The other part of that is the normal growth in the economy. Demand for electronic products – cell phones, tablets, etc. – is in double digits in emerging markets. If we see the economic growth that's expected in the West and an increase in demand from emerging markets, over the next six years we may see a significant increase in REE demand.
TMR: Roughly speaking, how many development-stage REE projects reaching production would that growth in demand support?
Luisa Moreno: It depends. Some projects have production targets of 3,000 tons, others 20,000 tons. There is definitely opportunity for a few projects. We might see the need for about 100,000 tons of new REE supply by 2020 if the global economy improves in a sustainable fashion. Asia is going to take some of the new supply as the consumption of China relative to the rest of the world may not change. I believe we should continue to see China as the largest consumer, followed by Japan.
TMR: Can you get us up to date on what is happening in Alaska?
Luisa Moreno: The Alaskan state government has proposed a $144 million bond that would help finance the development of Bokan-Dotson Ridge REE project. I think it's unprecedented. We haven't before seen local support such as what has happened in Alaska. It shows that the Alaska government recognizes the project as strategic for the state and, likely, the US The financing arrangement has been signed into law and is contingent upon the completion of a feasibility study for the Bokan project and positive due diligence by the Alaska Industrial Development and Export Authority (AIDEA). 
TMR: Do you have some parting thoughts for critical metals investors?
Luisa Moreno: Over the previous five years or so industrial metals and minerals have been increasingly adopted for use in advanced technologies. For instance, Europium and thulium are used in LCD screens. High purity alumina and some rare earths are used in LED lights, which are replacing less efficient incandescent lights. Some rare earths are used to make magnets that go into motors. And these metals are being used to create even lighter strong metals. For instance, scandium and aluminum alloys have strength similar to titanium with the lightness of aluminum. There are so many different applications, but essentially these strategic materials are being used to improve our technologies and they're here to stay.
TMR: Thank you for taking the time to talk with us, Luisa.

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