China’s Export Controls Might Trigger a U.S. Graphite Boom

In the name of “national security”, Beijing has imposed new exports controls on graphite, restricting one of the most critical battery metals to Western markets as China attempts to dominate the global EV market. It’s both a threat and an opportunity. It’s an opportunity if you are a rare graphite processing company with operations in both the U.S. and China.

One of the biggest news pieces on the graphite scene since Beijing’s export restrictions was a proposed SPAC deal in December 2023 that could see Graphex Group (NYSE American: GRFX), with a market cap of $40 million, sell its USA processing business for between $100 million and $200 million. The USA processing business would be spun off as a separate Nasdaq listing.

Graphex isn’t a cash-guzzling mining operation with years-long exploration processes to get through: The USA spinoff will be processing graphite—a first in the country—and that’s where some 85% of the graphite profit is. The company is now moving forward quickly with design and equipment selection for its flagship Detroit graphite processing plant and the hunt is on for additional locations, with major JV and offtake deals apparently underway.

Beijing’s market-dominating move has also helped strengthen Graphex China’s operations in East Asia, where output is now expected to triple by the first quarter of 2025.

Led by veteran energy sector leader John DeMaio, Graphex USA is leading a SPAC deal that not only awards shareholders through a buyout worth multiples of the current market capitalization but also gives investors exposure to the most critical supply line for North America’s massive EV push.

On December 6, Graphex Group (NYSE American: GRFX) and its wholly-owned U.S. subsidiary, Graphex Technologies, LLC entered into a Letter of Intent (LOI) with an independent NASDAQ-listed blank check company to acquire 100% of the equity interest of Graphex Tech. 

The pre-money enterprise value, net of liabilities, for Graphex Tech is anticipated to be between $100 million and $200 million in a deal that is set to close in the first half of 2024.

This is a US-based company that is building its first graphite processing plant in Detroit, Michigan, and is now on the hunt for more locations across the U.S. and Canada.

It’s also in advanced and late-stage testing with the auto industry, battery manufacturers, and OEMs (original equipment manufacturers). And it already has JVs and offtake deals with non-Chinese entities that meet the strict compliance requirements set down by the Biden administration’s Inflation Reduction Act (IRA).

And it’s a critical metals segment that will play a huge role in defining North American security and the energy transition.

Graphite is the biggest—and most critical–component in any lithium-ion battery. It makes up 95-99% of the anode (negative electrode). The average lithium-ion battery contains 15X more graphite than lithium, and for lithium, North America already has a much clearer path to supply not dominated by China.

North America has zero commercial production of refined graphite.

Graphex could end up being the first to domesticate this supply chain.

Right now, it’s in the final stages of the construction of its 15,000-ton-per-annum graphite refining facility in Detroit–the heart of America’s auto industry. First production is expected in the first quarter of 2025.

The Safe China Exposure

The team at Graphex Group (NYSE American: GRFX) has over a decade of experience processing graphite in Asia. The current CTO has designed and built multiple Asian plants, from Korea to China.

All that China-based experience is now being rebuilt in North America, led by Graphex Technologies President John DeMaio– former President, CEO, and Board Member of JouleSmart Solutions, general manager of Siemens Smart Infrastructure, VP of MWH Global, VP of SPG Solar and COO of Thompson Solar Technologies.

From an investor’s point of view, the key to profiting from the graphite supply chain is not mining—it’s processing, which represents over 85% of the value of this segment. And that’s exactly where Graphex USA is focusing. There won’t be any mining overhead expenses– just multi-source, IRA-compliant graphite processing capabilities.

By the third quarter of 2024, Graphex Asia aims to double its graphite production from 10,000 metric tons per year to 20,000 metric tons per year. By the first quarter of 2025, the company aims to triple this to 30,000 metric tons, with bank financing already approved for the production ramp-up. And they are hoping to get ~$5500 per metric ton for that graphite.

And back on the home front in North America, Graphex believes it has multiple raw graphite supply deals lined up to feed its Detroit processing plant—along with other proposed new plants as they come online–in accordance with the IRA sourcing requirements for North American supply that doesn’t come from China.

Late last year, Graphex entered into an LOI with Northern Graphite Corporation (TSXV:NGC) for raw material supply, and signed an MOU with Reforme Group Pty Ltd. And in January this year, they joined forces with Northern Graphite to build a large-scale graphite processing facility in Quebec’s Baie-Comeau region. The partners are now evaluating sites to house a facility that could produce up to 200,000 tons of graphite annually. They also have an LOI with Canada-based Gratomic for raw graphite to evaluate building.

Then, in August this year, they signed the biggest supply deal yet with Syrah Resources’ Balama graphite operation in Mozambique, the largest in existence outside of China, with a production capacity of 350,000 metric tons per year.

Source: Syrah Resources

Both Mozambique and Tanzania are poised to become major graphite miners, home to the fifth- and sixth-largest graphite reserves in the world, respectively.

With Beijing’s restrictions on graphite exports, Graphex represents an interesting way for non-Chinese investors to gain exposure to the China graphite market. Graphex Asia already has the necessary export licenses.

In 2021, China only housed some 22% of global graphite reserves, yet it produced over 79% of the world’s supply because of its processing power. That same year, the U.S. was 100% reliant on foreign sources of processed graphite, one-third of which came from China.  Graphex Group (NYSE American: GRFX) is North America’s first chance at diversifying this supply with an unprecedented domestic solution.

Other miners to keep an eye on in 2024:

Compass Minerals International (NYSE: CMP), based in Overland Park, Kansas, is a leading provider of essential minerals, including salt, sulfate of potash, magnesium chloride, and even sustainable lithium. The company’s diversified product mix serves a wide range of markets, including agriculture, consumer deicing, water conditioning, and various industrial applications.

Beyond its current offerings, Compass Minerals is investing in new technologies and methods to enhance the efficiency and environmental sustainability of its operations. The company’s focus on innovation is particularly evident in its approach to lithium extraction, where it aims to capitalize on the growing demand in the electric vehicle market. This strategic direction not only diversifies their portfolio but also positions Compass Minerals as a key player in the transition to a more sustainable global economy.

Freeport-McMoRan Inc. (NYSE: FCX), based in Phoenix, Arizona, is one of the world’s leading mining companies, with significant reserves of copper, gold, and molybdenum. The company’s sizeable asset base includes the Grasberg minerals district in Indonesia, one of the world’s largest copper and gold deposits, and significant mining operations in the Americas. With copper being a critical material in renewable energy and electric vehicle technologies, Freeport-McMoRan stands to benefit from the global push towards greener economies.

Freeport-McMoRan is also actively involved in community engagement and environmental stewardship. The company has implemented various initiatives aimed at reducing its environmental footprint and promoting sustainable mining practices. These efforts include water management, biodiversity conservation, and emission reduction strategies. By focusing on responsible mining, Freeport-McMoRan is not only ensuring compliance with environmental standards but is also contributing to the broader goal of sustainable development in the regions it operates.

Rio Tinto (NYSE: RIO), a global leader in the mining and metals sector, is known for its operational efficiency and commitment to sustainable development. The UK-Australian multinational corporation operates in around 35 countries worldwide and has significant assets across several commodities including aluminum, copper, diamonds, coal, iron ore, and uranium. Rio Tinto’s robust portfolio of world-class assets is further reinforced by strong market fundamentals, especially in the copper and iron ore markets, making it an interesting proposition for potential investors.

In addition to its extensive mining operations, Rio Tinto is a leader in the implementation of cutting-edge technologies and sustainable mining practices. The company’s commitment to reducing its carbon footprint and protecting the environment is evident in its various initiatives, such as investments in renewable energy and efforts to rehabilitate mining sites post-extraction. Rio Tinto’s proactive approach to corporate responsibility and sustainability is an integral part of its business strategy, setting a standard for the mining industry.

FMC Corporation (NYSE: FMC), based in Philadelphia, Pennsylvania, is a global agricultural sciences company that delivers innovative technology to growers around the world. While not a mining company in the traditional sense, FMC has a significant stake in lithium, a critical component in rechargeable batteries and other high-tech applications.

FMC’s commitment to innovation and sustainability is noteworthy, and the company’s agricultural products contribute to increased crop yield and quality, making it a significant player in addressing global food security issues. In recent years, FMC has benefited from robust demand for its crop protection products, driven by higher commodity prices and strong agricultural market fundamentals.

Livent Corporation (NYSE: LTHM), a spin-off from FMC Corporation, is a global leader in lithium technology, powering the electric vehicle revolution. The Philadelphia-based company supplies lithium used in batteries for hybrid and electric vehicles, mobile devices, and other consumer electronics. Livent’s position in the high-growth lithium market, driven by increasing demand for electric vehicles, makes it a compelling option for investors seeking exposure to the green energy transition.

Livent Corporation is expanding its reach in the global lithium market by investing in new technologies and forming strategic partnerships. Their focus on sustainable lithium extraction and processing methods demonstrates a commitment to environmental responsibility. As the demand for lithium continues to grow, Livent’s role in supplying this critical material for electric vehicles and renewable energy storage becomes increasingly significant, positioning them as a key contributor to the green energy transition.

BHP Group (NYSE: BHP), headquartered in Melbourne, Australia, is one of the world’s largest mining companies. It primarily deals in commodities like iron ore, copper, coal, and nickel. BHP is particularly known for its large-scale operations and has significant assets in Australia, North and South America, and other regions. The company’s focus on sustainable mining practices and its diverse portfolio of commodities make it a key player in the global mining industry.

BHP Group’s commitment to sustainability extends to all aspects of its operations. The company is investing in technologies to reduce greenhouse gas emissions and improve water usage efficiency. BHP’s focus on creating sustainable mining practices reflects a broader trend in the industry towards environmental responsibility and could set new standards for mining operations worldwide.

Vale S.A. (NYSE: VALE) headquartered in Rio de Janeiro, Brazil, is one of the world’s largest miners of iron ore and nickel. It also produces copper, coal, manganese, and ferroalloys. Vale has a strong presence in several countries and is known for its large-scale operations, especially in Brazil and Africa. The company’s focus on producing essential minerals for global industries, along with its commitment to sustainable mining practices, makes it an important entity in the resources sector.

Vale’s focus on sustainability is also prominent in its corporate strategy. The company has made significant investments in renewable energy projects and initiatives to reduce carbon emissions in its operations. Vale’s commitment to responsible mining practices and community engagement has been integral in maintaining its position as a leader in the global mining industry, especially in the areas of iron ore and nickel production.

Newmont Corporation (NYSE: NEM) is one of the world’s leading gold mining companies and also a producer of copper, silver, zinc, and lead. Newmont operates in various countries including the United States, Canada, Mexico, Dominican Republic, Peru, Suriname, Argentina, Chile, Australia, and Ghana. The company’s emphasis on responsible mining practices and its extensive portfolio of assets in gold and other minerals make it a significant player in the global mining sector. Additionally, Newmont’s commitment to sustainability and community development initiatives aligns it with modern environmental and social governance criteria.

Newmont Corporation is actively involved in various initiatives to promote sustainable mining practices. These include efforts to minimize the environmental impact of its operations, improve safety standards, and engage with local communities. Newmont’s approach to responsible mining is a key aspect of its business strategy, reflecting its commitment to ethical practices and long-term sustainability in the mining sector.By. Tom KoolIMPORTANT NOTICE AND DISCLAIMER

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