Trends & Ideas

March 13, 2014 Douglas Rowat, Equity Specialist, VP Research & Strategy

Graphite: Sharpen Your Pencils

Investors have been witness over the past several years to one of the most incredible stock price runs in automotive history as Tesla Motors (TSLA-US) is up more than 1,200% since going public in 2010. It broke through the US$50 level in April 2013 and never looked back currently sitting at US$237. The dramatic move, of course, has been driven not only by the markets belief in the cars award-winning design but also in its belief that battery power will be the future of the automotive industry. According to researcher Roskill, production of electric vehicles (EVs) and hybrid electric vehicles (HEVs) globally is expected to ramp up from roughly 2 million last year to more than 5 million by 2020. This implies huge growth in demand for lithium-ion batteries. Lithium-Ion Batteries Batteries and storage currently account for about 25% of graphite consumption, but lithium-ion batteries are widely seen as the main growth driver for the graphite market over the coming decade. Industrial Minerals Magazine forecasts that global graphite demand will increase 9% annually to 2020 to more than 2.5 million tonnes vs only 3% annual growth without batteries. Lithium-ion batteries are smaller, lighter and more powerful than traditional batteries. They also have little memory effect, which means they dont progressively lose their maximum charge, and have a low rate of discharge when not in use. As a result, most consumer devices, such as laptops and cell phones, use lithium-ion batteries as do virtually all EVs and HEVs. Graphite is the anode material (the positive charge) in the battery and there are few substitutes. So-called natural flake graphite, which has higher purity levels, is the main source of what can be used economically in lithium-ion batteries. Synthetic graphite substitutes do exist but they tend to be less effective and less economic particularly as battery sizes increase (a car battery can weigh 1,000 lbs or more, for example). Synthetic graphite is a labour-intensive process that involves applying extreme heat to burn off impurities and can cost three or four times that of natural graphite. Natural graphite remains easily the most cost effective anode material. According to Transparency Market Research, the global lithium-ion battery market was worth US$11.7 bln in 2012 and is expected to reach US$33.1 bln in 2019, growing at a CAGR of 14.4%. The lithium-ion battery market received major positive news in mid-March 2014 when Tesla announced it would be building, somewhere in the US, a massive battery factory (a 10-million square ft. Gigafactory) that would be the worlds largest, capable of producing enough lithium-ion batteries by 2020 to outfit 500,000 electric cars (Teslas 2014 production is forecast by management to be roughly 35,000). This has created a buzz throughout the lithium sector, but roughly 20x more graphite is used in a lithium-ion battery than lithium itself so the longer-term impact may be greater for the graphite market. Some analysts have called Teslas announcement game-changing for the battery industry.

Teslas Gigafactory

May Help Canada Gain Graphite Production Share

2012 World Graphite Mine Production (000 metric tonnes)
10,000

1,000

100

10

Madagascar

Norway

Romania

US = 0

Other

Russia

Sri Lanka

Ukraine

Mexico

Canada

North Korea

Turkey

China

Brazil

India

Source: Tesla company report, US Geological Survey. Graphite production chart: logarithmic scale

Total (rounded)

Trends & Ideas

March 13, 2014 | Page 2 of 2

Canadian Graphite Explorers and Developers

Price Market YTD Return Company Ticker ($) Cap ($) (%) Alabama Graphite Corp ALP 0.31 21.3 350.0 Big North Graphite Corp NRT 0.09 4.5 23.1 Canada Carbon Inc CCB 0.18 13.0 -16.3 Energizer Resources Inc EGZ 0.14 37.3 7.7 Flinders Resources Ltd FDR 0.58 26.8 22.1 Focus Graphite Inc FMS 0.57 61.0 9.6 Graphite One Resources GPH 0.20 23.6 42.9 Mason Graphite Inc LLG 0.87 59.2 3.5 Northern Graphite Corp NGC 0.77 37.8 -4.9 Pistol Bay Mining Inc PST 0.07 1.6 128.6 Saint Jean Carbon Inc SJL 0.05 3.7 -9.1 Standard Graphite Corp SGH 0.10 4.1 81.8 Zenyatta Ventures Ltd ZEN 2.88 159.6 24.1 Source: Bloomberg, Raymond James Ltd. Priced midday March 13, 2014. 6-Mo. Return (%) 23.5 14.3 -35.7 -3.4 3.6 16.3 17.6 151.4 -6.1 45.5 -28.6 11.1 -23.9 1-Yr. Return (%) 10.5 14.3 50.0 -30.0 -4.9 -18.6 14.3 12.8 -33.0 -55.6 400.0 -31.0 33.5 Project Locations Alabama, US Southern Quebec, Southeastern Ontario, Northern Mexico Southern Quebec, Southeastern Ontario Southern Madagascar Central Sweden Central Quebec Alaska, US Northeastern Quebec Southern Ontario Northern BC, Northern Saskatchewan, Southern Ontario Sri Lanka, Quebec Southern Ontario, Southern Quebec Central Ontario

Investment Opportunities The US currently imports virtually all its natural graphite, which makes Canadas proximity a natural fit to satisfy the expected rising demand. China has a long history of applying severe export duties on graphite and t he US is anxious to reduce Chinas tight grip on supply. The US currently receives more than 50% of its graphite from China but only 17% from Canada, according to the US Geological Survey. In 2012, the US State Department declared graphite to be a critical raw material. For Canadian graphite miners, therefore, the strategy is to capitalize on the USs desire to expand its graphite import sources and also potentially capitalize on Teslas desire to source graphite closer to home for its new Gigafactory. Below we screen for Canadian graphite explorers and developers with minimum $1 mln market caps. As with all highly volatile sectors, holding positions as a basket represents the best way to mitigate risk. Graphite miners should all be considered high risk. Risks Graphite has many applications beyond batteries. For instance, it is also used in industrial lubricants and steel furnaces, so weakness in any of these other demand areas may offset the growth in battery demand. China controls most of the worlds supply (7080%), which makes the market vulnerable to unexpected supply responses. New technologies may ultimately create cost-effective substitutes. Many of the Canadian stocks involved in graphite production are small- to micro-cap junior mining companies that exhibit considerable volatility and may suffer from insufficient funding. Bankruptcies should be considered an ongoing risk in the graphite mining sector.

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