Friday, July 6, 2012
"Right now is a great time to invest in graphite stocks," Jeff Phillips told me this week.
Jeff is what I call an under-the-radar type of guy. You won't see his name mentioned much in the media. He's not like banking analyst Meredith Whitney or economist Nouriel Roubini – he doesn't seek the spotlight when making bold calls.
Despite his low-key profile, Jeff has a reputation among his peers as one of the market's most successful commodity investors. He's made big money for them investing in rare-earth stocks (for just one example) years before analysts on CNBC began hyping the industry.
I spoke to Jeff last week to get his take on commodities including gold, silver, and rare earths. Five minutes into our conversation, Jeff began telling me about the huge opportunity in a commodity you rarely hear about...
As you probably know, graphite is a mineral used in products like tennis rackets and golf clubs. What you might not know is that graphite is a critical ingredient in lithium-ion batteries – a staple in most mobile electronic products including cell phones, cameras, and tablets. It's also found in nuclear reactors, electric cars, and other industrial applications.
And it's rare... The U.S., Europe, and China have it on their short lists of "critical metals." That means it's susceptible to supply shortages, is used in major industrial industries, and cannot be substituted.
China produces more than 70% of the world's graphite. And over the past few months, China has announced a couple key initiatives that could push graphite prices much higher.
The first is a plan to consolidate over 200 graphite mines in the Hunan province located north of Hong Kong. China officials say this move will help lower emissions and better regulate the industry – which has a terrible safety record. But it will take at least 10% of the total graphite supply off the market.
The Chinese government also imposed a 20% export duty and a 17% valued-added tax for countries looking to import graphite. Europe imports about 95% of its graphite from China. The U.S. imports about 50%.
In short – China is trying to monopolize the entire graphite industry.
Ten to 15 years ago, most graphite mines in Canada and Europe were shut down. Graphite prices were trading at $600 per tonne – not enough for most companies to make a profit.
But over the past two years, graphite prices have moved significantly higher. The current price for average-grade graphite is $2,200 per tonne. That's 260% higher than 10 years ago. With China raising taxes and limiting production, prices could push even higher over the next few years.
That's why Europe and Canada are in a rush to reopen graphite mines.
There are a few dozen junior mining stocks trying to take advantage of this trend. They are in the process of raising cash to develop old graphite mines.
According to Jeff, most of the companies trying to capitalize on this trend will fall flat on their face. Production could be years away for most mines. Plus, it's difficult for these small, non-revenue-generating companies to raise money these days.
But the ones quickest to market will make an absolute fortune – since Europe and the U.S. would look to buy graphite from these companies immediately to avoid paying export duty and value-added taxes.
Jeff believes a few names in this industry could double or even triple over the next few years.
My advice is to search for graphite companies with solid balance sheets. Fully funded companies stand a better chance of weathering the ups and downs in the commodity markets – while trying to get these mines back up to speed.
This industry is only for speculative investors. Yes, you could make a bundle picking the right graphite company. But like Jeff said, most won't make it.
Before jumping into any speculative junior resource position, make sure to read Matt Badiali's four-part series on the sector.
In it, you'll learn how to master the sector's booms and busts, which tools you need to make the proper trade, how to maximize your returns and reduce your risk, and the single most important factor in natural resource investment.
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