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Graphite equities due for rerating amid sell-down in battery metals

Under-performing graphite equities are due for a rerating amid a plethora of Australian battery mineral stocks which have been heavily sold down this year, Argonaut Metals Mining and Energy Research Director Matthew Keane said.

Keane told the Technology and Low Emission Minerals Conference in Perth, Australia, on Nov. 13 that while the ASX200 resource stocks have risen 3% this year, buoyed by gold outperforming (up about 6%) and uranium stocks enjoying significant gains courtesy of a rising commodity price, small resources have fallen 4%, led by battery metals.

He said that while graphite equities have underperformed, those issues are company-related rather than sector-related, such as Syrah Resources Ltd.'s ramp-up issues, Tanzania's recent regulatory issues that have only recently improved, and Battery Minerals Ltd. experiencing funding delays in Mozambique.

Yet a price chart from Keane for various forms of flake graphite showed that the larger types have been performing particularly well.

Hexagon Resources Ltd. Managing Director Mike Rosenstreich told S&P Global Market Intelligence on the conference sidelines that he agrees with the potential for a rerating, partially because the market is getting "smarter" in terms of understanding the ramp-up, qualification and specification issues of graphite materials.

"People are more prepared to have a go," he said. "We've spoken to quite a few funds and trading groups, particularly in North America, who want to be in the graphite space because of the growth trajectory, but they struggle with the bespoke nature of graphite products. Graphite hasn't had its day in the sun."

Hexagon's stock fell almost 10% Nov. 13 having only edged up when announcing a joint venture with Mineral Resources Ltd. Nov. 8, despite being what Rosenstreich described as a "derisking deal" for its McIntosh project in Western Australia.

The agreement has Mineral Resources earning 51% in McIntosh, completing a feasibility study by Oct. 14, 2019, developing the project by April 14, 2020, and taking it to commercial production and operating it.

Rosenstreich partly attributed his company's recent sell-off to a "decline in the risk-off," adding that Hexagon was "dragged down" by lithium and cobalt prices coming off about the time of the Mineral Resources announcement.

"If you're going to enjoy the ride up you're got to be able to wear it on the way down. Graphite is a hard story to understand. People are seeing small tonnages associated with anodes and are struggling to see how you're going to sell 100,000 tonnes," he said.

Yet Rosenstreich sees the diversity of demand which confuses some investors as a strength. While there is significant potential demand from electric vehicles, graphite is not reliant on it.

"We're looking for diversity in our offtake which makes for a good solid business, not unlike a polymetallic business," he said.

Keane said the the market was still "at the cusp" of an exponential curve for the electric vehicle story which will buoy several battery minerals, particularly lithium, despite some 400,000 tonnes lithium carbonate equivalent of new and expansion projects on the way — more than the roughly 210,000 tonnes production in 2017.

He said graphite and rare earths are also buoyed by heavy environmental-driven production cuts in China, yet even in the latter basket there have been standouts, citing rare earth producer Lynas Corp. Ltd., which has been achieving record production, significantly reducing debt and improving its balance sheet.

"Disruptive technology is never a linear rise, it's an exponential curve. We're going to see more aggressive and active investment from U.S. and European EV manufacturers like Volkswagen and Daimler trying to compete with Chinese counterparties to secure their strategic minerals," Keane said. "That will bring with it an ex-China focus. China plays a very big role in mineral demand, [comprising] 40% of most of our minerals, but we're going to see an increasing demand for non-Chinese companies sourcing their materials ex-China."