Northern Graphite battles low prices

There’s no sign of an end to the uncertainty facing Northern Graphite Corp. as the graphite industry continues to struggle with low prices.

According to its most recent quarterly financial report, which was released on Oct. 31, little has changed for the company over the course of the past year. Northern, an Ottawa company, is still looking for financing to build a mine on its Bissett Creek property in Northern Ontario, near North Bay.

Northern’s CEO, Gregory Bowes, say the company hopes construction can begin next year.

But, Jon Hykawy, president of Stormcrow Capital, a Canadian firm that analyses niche markets like graphite, says that may be optimistic.

“At present, with natural flake graphite prices at low levels, it would be very, very difficult for any would-be graphite producer to justify building a mine,” Hykawy says. “The only realistic potential for improvement is either that demand skyrockets, which is unlikely, or that some of the Chinese natural flake graphite production falls out of the market, which is perhaps even less likely.”

Chinese dominance

China currently dominates the global graphite market, but analysts and Western graphite companies agree that its product can be of inconsistent quality. Northern’s website highlights problems in the Chinese market, and suggests that the country will no longer be able to supply enough graphite to dominate the market as it has in the past. That would leave room for companies like Northern to supply graphite to Western companies.

Chris Berry, a minerals analyst and president of the American firm House Mountain Partners, says the Chinese market domination isn’t sustainable in the long-term.

“Reliance on a single origin for a strategic mineral like graphite may lead to long-term problems in global manufacturing supply chains. This explains why you’ve seen so many junior mining companies attempt to advance graphite deposits outside of China in recent years,” Berry says.

Hykawy says Chinese graphite is also hosted in soft rock or clay. North American graphite is hosted in hard rock, which makes removing it more expensive to extract.

China has also dominated the market for so long, because environmental regulations were more lax than in Western countries like Canada. Producing graphite was cheaper and Western companies struggled to compete, adds Berry. This is slowly changing, as China strengthens its environmental regulations, and producing graphite becomes more expensive for its companies.

Graphite prices peaked in 2012, on the tail end of what Berry describes as the “commodity super cycle,” a period from around 2000-2014 where most commodity prices hit highs.

Sliding prices

However, graphite prices have declined since then, and haven’t recovered. The graphite industry is intrinsically tied to the steel industry, as around 70 per cent of graphite goes to the steel industry, and the steel industry is also caught in a downturn.

Northern, as an exploratory company that brings in no revenue, is struggling because of this decline. The value of its shares has fallen since peaking at more than $3 in 2012. They now fluctuate between $0.20 and $0.60.

Northern’s losses in its third quarter report are consistent with the same quarter in 2015. Last year’s quarter resulted in $118,945 in losses and this year’s losses have gone up a little at $169,549, mostly due to increased spending on share-based payments, and office rental payments.

The company is also in the midst of a management shake-up. Its CFO, Stephen Thompson, resigned at the end of October.

“We’ve cut back and minimized expenses while we’re waiting for the graphite price to recover. [Thompson] wanted a full-time job. We had to cut back to part-time, so he went somewhere else to take a full-time job,” Bowes says, who is now acting as interim CFO.

The popularity of graphite

Northern’s future is not entirely grim, however. There are many uses for graphite, as it is an important component in many products in high demand.

“There’s a lot of interest and excitement in graphite because it’s used in lithium ion batteries and electric vehicles, and all that good stuff, but that demand is not yet enough to offset the decline in the steel industry,” Bowes says.

“Nature and synthetic graphite are used in the anode of [lithium ion] batteries. Cell phones, laptops, tablets, power tools . . . are all examples here,” Berry says.

Berry added that this potential pales in comparison to that offered by the electric vehicle market.

“Various estimates show that electric vehicle demand is growing at 60 per cent per year with triple digit growth in countries such as China,” he says.

Hykawy also noted that many of the uses for natural graphite have nothing to do with batteries.

“Mostly, natural graphite is used to make boring things. If the markets for certain metals or other products—like certain types of seals—take off, then the market for natural graphite will go with it,” Hykawy says.

Grappling with mine plans

Even so, Hykawy is still unsure about Northern’s plans to build a mine.

“The project looked a lot more interesting back in 2013 or 2014 when large flake natural graphite concentrate was almost US$1,200 per tonne,” he says, as graphite prices have since declined to under $1,000 per tonne. “I expect in the future they are going to have to make a credible argument regarding the manufacturing of a higher-value downstream product, or there will be little reason to build this mine.”