Pencil this graphite miner into your juniors portfolio

More and more, it seems, people are waking up to the importance of graphite.

Some of this simply reflects its increased demand as a raw material in the manufacture of brake pads, aerospace components and many other products. But graphite is also attracting attention for its increased use in new high-tech applications, according to Mike Kachanovsky, a freelance writer and analyst of junior mining and exploration stocks.

Consider the growing importance of graphene. Derived from graphite, graphene is a sheet of pure carbon held by molecular bonds so firm that it can be only one atom in thickness, yet enormously durable nonetheless.

Lightweight, but strong

Despite its light weight and extreme flexibility, graphene is literally the strongest and thinnest material in existence. Not surprisingly, there are many research and development efforts underway around the world to find commercial applications for this wonder material.

There’s also at least one publicly traded company that hopes to cash in on demand for graphene. That company is Elcora Resources Corp. (ERA-TSX/VEN) which has a 40 per cent stake in Sakura, a company that’s now mining graphite in Sri Lanka.

Headquartered in Halifax, Elcora hopes to refine high-quality raw graphite into value-added graphene that can be sold to end users as commercial development ramps up. Elcora’s arrangement with Sakura is a good fit for several reasons. For starters, Sri Lanka is finally emerging from a long and disruptive civil war. So it’s now once again open for business.

Infrastructure in place

Moreover, Sakura’s mine, Ragedara, has the infrastructure in place to support the resumption of small-scale operations. In addition, Elcora is positioned to deliver much-needed funding for upgrading the mine, as well as for building a plant to produce higher value graphite.

For its part, Elcora hopes to begin small scale production of pure, large flake graphite — a premium grade that now fetches thousands of dollars a tonne. But to produce graphite in large flakes, the company must find a process both to enrich and purify the raw mine output without it being crushed.

In short, Elcora hopes to become a boutique supplier in a tiny market, while still posting very profitable margins.

Elcora itself is now lab-testing samples from Ragedara. And if the samples prove out, the door will be opened to off-take agreements with end users. Indeed, the company has been talking to several outfits that are looking for graphite that’s both large flake and pure.

Most of the junior miners in the graphite sub-sector are exploration or concept stocks. And such companies must surmount many hurdles before they get a crack at generating real revenue or earnings. But given its business plan, Elcora has a head start on the pack. It’s also now working toward its second phase of development to become a graphene producer.

By controlling its destiny through direct production leverage, the company can become an in-house supplier of a premium graphite product just as the commercial roll out for graphene starts gaining momentum.

Controls must be strict

Although graphene can be generated in a lab, strict controls must be in place to ensure it meets the requirements for some high-tech applications.

This synthetic graphite sells for over $10 a gram — a price that’s OK for high margin products. But to be economic, many new products that may use graphene will need a much lower cost base, although this gives a company like Elcora the chance to step up and deliver a low cost alternative.

Substance is ideal

Raw graphite can also be used to make bulk graphene. Although imperfect in terms of the crystal matrix, graphene is ideal for retaining the high strength, as well as the conductivity, that’s needed for industrial fabrication.

Using a process that’s already well documented, Elcora can produce bulk graphene from graphite it mines, while delivering it to end users at a fraction of the cost.

Production of graphene in bulk would open the door to the development of new plastics, a substrate for three-dimensional printers, high-tech battery replacements, along with other products that would be more efficient than those now on the shelf.

For example, a graphene plastic blend can be 100 times stronger than conventional steel, but much lighter and easier to work with.

Still, to be competitive, the graphene that’s used must be delivered at a low price point. To its credit, Elcora remains uniquely positioned, given the high quality of its resource base, as well as its potential to mine a relatively small amount each year, yet continue to be cost-effective.

But there are still a lot of moving parts to this story — parts that carry higher levels of overall risk. So, the question comes down to this: will speculators get a potential gain that will make Elcora’s risk profile tolerable? Given the company’s strong upside, as well as its low market cap, Elcora is one story that could have a happy ending.

 

 

Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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