Topic: Mining Stocks

How to profit from graphite mining

Graphite mining stocks could show strong returns if demand for graphite keeps expanding.

Graphite mining is one speculative way for investors to diversify their mining portfolios.

Many investors are interested in graphite because it is used in the lithium-ion batteries that power electric cars. But it has a number of other profitable uses, as well. For example, when added to steel, it increases its carbon content and makes it stronger. In the automobile industry, graphite is used in gaskets, brake linings and clutch materials. It also has a range of other industrial uses, including in components of electric motors, batteries, lubricants and pencils. Graphite is increasingly used in electronic devices, such as smartphones, flat-panel displays, laptops and tablets.

China now produces about 70% of the world’s graphite. It keeps about 60% of its output for its own use.

What is graphite?

Graphite is one of two naturally occurring crystalline forms of carbon (the other is diamond). Graphite stocks are the companies that own a graphite mine (one of which we look at below), and also firms that develop or use graphene (a material made from several layers of graphite) to develop products (like IBM).

Graphite is a soft, greyish-black mineral with a metallic sheen. A graphite crystal is made up of loosely stacked one-atom-thick layers, much like a deck of cards. These layers can slide around, which makes graphite a good lubricant.

 

Graphite demand will likely continue to rise as demand for new electronic devices increases. There are potential graphite mines and graphite deposits in Canada and around the world. These deposits could be brought profitably into production if prices rise high enough.

As well, higher prices would likely spur manufacturers who use graphite to look for substitutes (including synthetic graphite in certain applications), and to increase recycling.


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A speculative graphite mining pick

Northern Graphite first sold shares to the public in April 2011, when it raised $4 million by issuing 8 million common shares at $0.50 each. The company is now listed on the Toronto Venture exchange under the symbol NGC.

Northern Graphite believes that its deposit contains large crystal-graphite flakes, which command a premium price. The company continues to drill to further define the deposit. It has also reported positive results from a test to determine whether the ore can be processed into high-quality graphite concentrate that is ready for sale.

Higher prices of graphite would likely spur manufacturers who use graphite to look for substitutes (including synthetic graphite in certain applications) and to increase recycling. All of this could affect longer-term demand for the company’s graphite if it brings a mine into production.

We don’t cover Northern Graphite in any of our newsletters, but we’ll keep an eye on it for members of Pat McKeough’s Inner Circle. But meanwhile, the best way to invest in graphite at this early stage is through major technology companies like IBM, who are funding the next stage of its research into graphene computer chips. Graphene’s extremely high conductivity would make it ideal for this use.

Here are 5 things we look for when we recommend mining stocks—including graphite mining stocks:

  1. We generally stay away from mining stocks operating in insecure and politically unstable regions like the Congo and Venezuela, or in countries with little respect for property rights and the rule of law, like Russia or Mongolia. Mining is inherently a politically vulnerable business; you can’t move the mine to another country, and local citizens sometimes believe that a foreign mining company is robbing them of their birthright, even though they probably need the foreign company’s capital and expertise to get any value out of the ground. We like to see graphite mining stocks in countries like the U.S. and Canada if the demand for graphite rises.
  2. When we recommend pure-exploration graphite and other mines, we prefer those that operate in an area with geology that is similar to that of nearby producing mines.
  3. We look for well-financed junior mines with no immediate need to sell shares at low prices, since that would dilute existing investors’ interests. The best junior mines, including graphite mines, have a major partner who has agreed to pay for the drilling or other exploration or development, in exchange for an interest in the property.
  4. We like mining stocks with a strong balance sheet and low debt.
  5. We want to see favourable factors, like attractive geology, before we recommend any mining stocks that operate in hostile environments, like the high Arctic.

Have you invested in a graphite mines? Has it been a profitable investment? Share your experience with us in the comments.

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