Risks abound for technology metals investors being kept in the dark about pricing while some exploration executives are deluding themselves about graphite grade and flake size, market players say.

Mike Rosenstreich, managing director of emerging specialty metals junior Hexagon Resources Ltd., said many people don't understand the immature, fragmented, segmented and "very opaque" nature of the graphite market, which a BDO Australia analyst said was causing confusion among investors.

BDO corporate finance partner Adam Myers told S&P Global Market Intelligence that the pricing structure of technology metals was private as they are traded under contracts, so "what you [see] in the public domain versus how the companies negotiate is very hard to get a handle on."

"The average [technology metals] investor really is a little bit blind. It's a difficult space to be in, and it takes a lot of work by the investor to truly understand how that company is positioned," Myers said.

"For someone at the early stage of the process, there is an opaque nature to it, so you're really backing your management teams and their reputations in the market."

Rosenstreich said his company would work through that issue as it progressed through the memorandum of understanding it signed with China National Building Material Co. Ltd. subsidiary China National Building Materials - General Technology Co. Ltd. to purchase 30% of planned primary production from the junior's McIntosh graphite project in Western Australia.

The parties also agreed to negotiate project finance, prepayment and other debt facilities to expedite project construction.

"We are looking at specific products with specific specifications for them, and we know what the size of those markets are, and we're looking to see if our products fit them, and how we compare on a cost basis, and our preliminary reviews are very encouraging," Rosenstreich told S&P Global Market Intelligence.

"A lot of that is around displacing synthetic graphite."

The four different types of lithium-ion batteries use a mix of commodities including cobalt, nickel, aluminum and manganese.

Patersons Securities senior resources analyst Simon Tonkin told attendees at the RIU Explorers Conference in Fremantle, Western Australia on Feb. 21 that graphite and other technology metals like lithium had performed spectacularly in 2017, with more positivity expected in 2018.

He said the Patersons Lithium Index had soared 69% over the past 12 months, while the lithium price rose by about 30%.

"Our view is that with the emergence of electric vehicles, we'll see significant increase for [lithium] demand as soon as the mid-2020s, but in the short term we could see supply outstrip demand," Tonkin said.

Various lithium stocks were hit hard in January 2018 when Sociedad Quimica y Minera de Chile SA announced it would increase production of the commodity by four to six times after resolving a royalty dispute in Chile. However, Patersons believes that will take years to eventuate, and will be at a significantly higher cost than the current production, making it less competitive.

Tonkin said Australia has the third-highest lithium reserves behind China and Chile, and production is ramping up from the likes of Mineral Resources Ltd. and Pilbara Minerals Ltd. in Western Australia.

Yet the graphite story was also strong at the Fremantle conference, as there are about 11 to 12 grams of graphite in a lithium-ion battery and about 6 to 7 of those grams are synthetic; the rest is flake graphite.

Rosenstreich noted synthetic graphite's very consistent quality and purity, whereas flake graphite, coming from a natural source, needs to be refined and purified.

Hexagon wants exposure to a diversified product, revenue stream and industries, yet he says many of his peers are sending the wrong message.

"At a conference like this, the people who say they have the biggest flake or highest grade, biggest resource, lowest strip ratio … quite frankly, they don't get it, because the cost advantage that they perceive becomes irrelevant when you look at the downstream costs," he said on the conference sidelines.

Hexagon's early stage test work is indicating that to purify a tonne of graphite from its deposit to 99.999% — far exceeding the battery requirements — will be cheaper than what it currently costs the Chinese to purify their material using chemical and acid leaches.

However, China is having environmental issues with that process.

Tests also suggest that it will be about one-fifth to one-eighth cheaper to purify Hexagon's material than it will be using other thermal and/or chemical techniques.