One of the great misunderstandings in the market is the role of materials in the electrification of the automotive powertrain. LIthium-ion is often used to describe electric vehicle batteries, mostly because people are familiar with technology from batteries used in electronic goods. But a few facts show the material most needed for electrification is for graphite.
Elon Musk recently noted that a Tesla (TSLA) Model 3 battery contains about 5 kilograms of lithium. Chemistries vary greatly, but according to mining.com, the average EV battery contains 70 kg of graphite. Consequently, there is much more than 10x as much graphite in an EV battery as there is lithium. Graphite composes the vast majority of the anode, while there are many differing chemistries used on the cathode side.
In terms of macro analysis for any metal, I defer to the excellent research from Benchmark Mineral Intelligence:
"We predict demand for graphite over the next decade will grow at an annual compound rate of 10.5% but supply will lag, expanding at only 5.7% per annum."
This supply-demand disparity has shown up in the market, of course, as Benchmark notes:
"According to Benchmark's Flake Graphite Price Assessment for October, China FOB 94-95% purity -100 Mesh sizes are up 31% over the past year, last trading at $765 a tonne."
Graphite is hot right now, and remember that the environmental benefits of current EVs are questionable if lowering carbon density is the true goal. Locally sourced materials lower the hydrocarbon footprint of making an EV battery. That footprint can be quite large if the graphite is mined in Mozambique and placed on a ship powered by hydrocarbons to China for processing. There are also local-content requirements in the EV-friendly Inflation Reduction Act.
As a result, I think it is worth updating two emerging graphite plays, Lomiko Metals (LMRMF) and Westwater Resources (WWR) , that I have featured in earlier columns.
I have known Lomiko's executive chairman, serial entrepreneur Paul Gill, for some time. Recently I had the opportunity to speak with Lomiko's CEO, Belinda Labatte, and COO Gordana Slepcev.
Earlier this week Lomiko published the most recent results (seventh round) from the drilling program at its La Loutre graphite play in Quebec. Lomiko also recently completed a private placement of C$1.2 million.
Lomiko reported the following results from La Loutre:
- Consistent, near-surface graphite mineralization
- Strong graphite values and significant widths in all 10 drill holes
- Best interval of 6.00% Cg over 45.0m from 55.0 to 100.0m in hole LL-22-062, including 7.41% Cg over 33.0m from 65.5 to 98.5m
All of which means there is graphite in that part of Quebec. With competitors such as Nouveau Monde (NMG) nearby and support from the local First Nations community (KZA tribe), there is no reason that graphite will not be extracted.
As a microcap, Lomiko will need to raise additional capital to advance the process. That dilution is not necessarily great for the stock price (Lomiko is quoted at $0.03 a share on the Toronto exchange now), but the long-term payoff is strong. Lomiko's Preliminary Economic Analysis, filed in July 2021, showed a 28.3% IRR (internal rate of return) for the La Loutre mine.
Also this week, Westwater Resources announced that it had completed the initial assessment on its Coosa Graphite property in Alabama. A few months ago I met with Westwater Executive Chairman Terence Cryan and CEO Chad Potter. They were excited to report that WWR is moving full steam ahead with its project in Alabama. Westwater will begin testing and commissioning for processing graphite (sourced from a non-Chinese producer) in its Kellyton facility near Tuscaloosa by the end of 2023. WWR plans to have its own mining operation in Coosa up and running by 2028.
Westwater's initial assessment was based on a greater number of drilled holes (205) than Lomiko's and was completed over a larger surface area.but showed a lower carbon density than Lomiko's La Loutre. Graphite is an allotrope of carbon, so carbon density is key. Westwater's Coosa analysis showed a total integrated Grade Cg of 2.89% and an inferred Grade Cg of 3.09%.
With Lomiko sporting a market cap of C$8.6 million and Westwater accorded a market value of $46 million, these are emerging companies. But as the carcasses of Big Tech names lie strewn across the Nasdaq, companies such as Lomiko and Westwater have real assets. I am not sure if Meta Platforms (META) does, and Elon has shown us that Twitter definitely does not.
Resource plays require patience, and higher interest rates produce lower present values for any company's future projects. But that doesn't mean they won't be completed. I'm confident that both Lomiko and Westwater will be producing graphite by the end of this decade. Also, I know the auto original equipment makers (my former coverage industry on the sell-side) are angling to buy that graphite before it is even produced to support their increased production of EVs.
As evidence of this, Westwater's most recent release noted:
"The Company is working with approximately 40 potential customers across a number of markets including automotive companies and lithium-ion battery manufacturers."
Graphite demand is real, so keep an eye on Lomiko and Westwater.
(Please note that due to factors including low market capitalization and/or insufficient public float, we consider LMRMF and WWR to be micro-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.)
