It’s been a while since graphite investors had something to cheer about.
But that finally arrived last month!
As you might recall, President Trump slapped a 93.5% tariff on Chinese graphite, instantly re-rating graphite stocks.
Following that announcement, one of the only non-Chinese ASX miners for this commodity surged 25%: Syrah Resources [SYR].
Other names, like South Aussie developer Renascor Resources [ASX: RNU], jumped 18%.
Kingsland Minerals [ASX: KNG], which holds one of the world’s largest undeveloped resources for this commodity, bumped up more than 20%.
These were all major single-day moves.
But has it caused a change in trend for those graphite stocks massacred over the last 2-3 years?
Mining Memo’s Take
One day of trading certainly doesn’t direct a trend change.
But now that the dust has settled from last month’s excitement, I thought it might be a good time to examine whether there’s more to this opportunity than a one-day spike!
The critical thing to remember here is that graphite has the potential to follow the broad sentiment that’s shifting back to a group of niche commodities dubbed ‘critical minerals.’
That began with Rare Earths earlier in the year.
Lithium followed into June and July…
So, will graphite stocks follow?
Well, perhaps.
The first question to ask as an investor is WHY?
The common theme among this group of minerals is that China dominates global supply, from extraction to processing. That’s well known.
However, the Chinese government’s unrelenting strategy of artificially lowering the market price of these minerals has delivered sector-wide weakness.
Increasing production and maintaining an ample supply.
That’s destroyed the pricing power for international competitors to enter production.
ASX miner Syrah was one victim of China’s price war on critical minerals, forced to put its Mozambique graphite mine on care and maintenance in recent years.
With that in mind, my view on critical minerals remains cautious… I think you need to be highly selective in this market.
As the last few years have shown, China has a mighty grip on controlling prices for critical minerals.
The Middle Kingdom will continue to artificially support its local miners and refiners for far longer than MOST international critical mineral stocks can stay solvent.
It’s a dangerous fight to pick as an investor.
Another risk…
Lenders tend to be more sceptical of critical mineral projects versus commodities like copper, gold, and iron ore, where capex and opex are established and well understood.
Accessing finance from traditional lenders remains out of reach for most critical mineral projects, including graphite stocks.
These are also highly complex and capital-intensive developments that require additional and sophisticated downstream processing.
So, if you are willing to take a small bet on a recovery across this niche group of minerals, focus on those already overcoming this enormous barrier to entry…
Where production is close, or even better, already underway.
Another point
The small handful of critical mineral miners that have made it into production often export their product directly to China for processing.
That side-steps their need to install capital-intensive processing infrastructure.
But in the era of US tariffs, price controls, and supply fragmentation, the opportunity won’t come from selling ore to China…
In my mind, companies need to be installing downstream capacity (themselves) if they are to benefit from the potential geopolitical tailwinds that come from America’s push to prevent China’s control of critical minerals.
And that leaves even fewer critical mineral stocks to select from.
In some cases, there are no downstream suppliers outside China. In that case, I would target advanced developers who can enter production within a reasonable timeframe, say 2-4 years.
The bottom line
If you invest in niche critical minerals, ensure they can sell their products directly to manufacturers in the West or plan to do so.
That can only come with downstream capability being built into their feasibility plans.
Without that key advantage, they cannot bypass the Chinese supply chain. And will not participate in potentially lucrative US and European contracts.
In my mind, that’s the bottom line for investing in niche critical minerals. The core opportunity.
As I highlighted, there are some opportunities ticking all these boxes, but they’re severely limited.
To save you the search, I’ve hand-picked a few of these stocks at my resource advisory service, Diggers & Drillers.
Each one has hit or is planning to hit this single most crucial benchmark:
Undertaking mining AND processing outside China and feeding the Western supply chain.
Until next time.
Regards,
James Cooper,
Mining: Phase One and Diggers and Drillers
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