NextSource Materials' (OTCQB:NSRCF) Molo graphite project is in the southern tip of Madagascar. It is over 900 square kilometers, situated in a sparsely populated, flat savannah-like setting, ideal for an open-pit mine. The project is fully-permitted, government sanctioned, compliant with Canadian NI 43-101, low in environmental impact, and fully-funded to production.
It is also completely unknown to most outside the industry, and I believe will serve as an excellent proxy for graphite demand in electric vehicle (EV) batteries. As demand for graphite soars - by 14 times within the next ten years by some estimates - NextSource Materials will have a producing mine with high-purity premium graphite ideal for EVs (along with all other high-tech electronics), ready to fill that demand.
In fact, NextSource has already completely sold-out all of its production for the 17,000 tons per year (tpa) Phase I of its mine, through off-take agreements with a European steel maker and one of the largest graphite traders and battery anode suppliers in Japan. In fact, NextSource reports that the graphite provided by NextSource to this battery anode supplier is in the Tesla (TSLA) supply chain. I can't think of a better measure of the quality and purity of NextSource's graphite.
Before diving into my rationale for an investment in NextSource, I'll first describe my reasons for focusing on electric vehicle battery metals in general, and then provide a detailed run-down on what makes NextSource so attractive as an investment.
We can learn a lot from the past. There’s a lot of talk of financial bubbles right now, and justifiably so from just looking at current average price to earnings ratios vs. historical P/E ratios. Like many of you, I found myself struggling with the sense that the party is going to come to an end at some point soon, but not knowing where to turn for companies that will thrive regardless which EV makers survive. Granted, the "party" has already seen a bit of a peak for certain SPACs, especially EV-related SPACs like Nikola (NKLA), Workhorse (WKHS), Lordstown (RIDE), Canoo (GOEV) and QuantumScape (QS). All of these companies have come under fire, for reasons ranging from too-rosy predictions to promoting outright vaporware. While I still believe in companies such as Electric Last Mile Solutions (FIII), which are focused on specific markets where they have a unique advantage (Class 1 commercial vehicles in Electric Last Mile's case), recent competition in certain areas like consumer vehicles and electric pick-ups might provide a glut of choices.
However, as an investor who looks for companies within the context of large multi-year trends, I believe that there’s always a party somewhere - you just need to know where to look.
It may surprise you to know that I’ve turned to junior Canadian mining stocks. That’s right, mostly microcap stocks trading on the Canadian exchanges and on the over-the-counter bulletin board in the United States. Too risky? Hear me out. Honestly, these junior mining stocks cannot be considered a traditional safe investment, but there’s something to be said for the tangible value of a proven and in-demand resource sitting in the ground waiting to be extracted. Kind of like storing your gold in a safe with a stuck door. You know it's going to take some time and money for the technician to get the door pried open, but once they do your gold is all there.
I didn't go searching for Canadian companies, but it so happens that Canada has long been a resource-rich, resource-mining friendly country with a very advanced battery technology and electric vehicle brain trust.
The term “commodities super-cycle” has been dormant ever since the last time it was predicted after the Great Recession and stimulus-fed recovery led to a temporary boost in metals prices that fizzled out much earlier than some predicted.
The term was brought back by Goldman Sachs, who stated recently,
Looking at the 2020s, we believe that similar structural forces to those which drove commodities in the 2000s could be at play.”
This call has been met with both agreement and opposition, but it merits consideration. My thinking is that when you have the following things occurring, the chance of an increase in demand for certain key metals is a given:
Per this Reuters article quoting a UN Working Paper,
A supercycle can be defined as “decades-long, above-trend movements in a wide range of base material prices” deriving from a structural change in demand. The industrialisation of the United States in the late 19th century and post-war reconstruction in Europe and Japan in the 1950s are two prime examples.”
In the United States and globally, the world is embarking on a decarbonization push that will propel the demand for certain key metals, and consequently lead to increased prices of those metals until there is a supply/demand equilibrium.
On March 18, Reuters reported: “The U.S. government is working to help American miners and battery makers expand into Canada, part of a strategy to boost regional production of minerals used to make electric vehicles and counter Chinese dominance."
So, what’s a person to do who:
My answer is battery metals.
But which battery metals, and what investment vehicle will give us the greatest opportunity for a return on our investment? Out of the three categories of possibilities: metals futures; metals-specific ETFs; and individual miners, I like the individual miners. (Hoarding nickels for their 75% copper and 25% nickel content doesn’t seem to pencil out, though nickels do have a “melt value” of about 5 1/2 cents.) Metals futures are a pure-play bet, but some of these metal futures aren't traded on a traditional exchange. Metals-specific ETFs or EV battery-specific ETFs exist, but I find their weighting not specific enough for my taste. For example, the Amplify Lithium & Battery Technology ETF (BATT) has an almost 7% holding of Tesla, 4% of NIO (NIO), and 4.2% of BYD (OTCPK:BYDDF) . Now, these companies are all involved in battery manufacturing, but they are not exactly pure-plays on metals, as they all have large consumer brands of EVs.
Here’s the part where I'm going to get a little scienc-y. In order to know which companies to invest in, we have to predict what metals are going to be in demand in batteries used in EVs and in stationary storage and load-balancing equipment.
I thought it would be helpful if I provided a few words about how a battery works before launching into which metals we’re going after. Feel free to skip ahead if you’ve got this down already. I’m trying to make this a simple “Reader’s Digest” version, a note for all of the “Actually,” guys out there to go easy on me in the comments section if I don’t mention ALL of the possible electrolytes, a more technically precise definition of how the lithium ions go through the separator.
Batteries store energy in chemical form for use at a later time.
Some metal atoms such as lithium have loosely bonded electrons in their outer ring which easily jump off. Free electrons generally “want” to go from a place that there are excess electrons to a place that there are fewer electrons or a place where there are atoms that "need" another electron, and thus achieve equilibrium.
Direct current, produced by batteries, is where the electrons flow in one direction, from the negative (a place of excess electrons when a battery is charged) to the positive (a dearth of electrons). Cells (one unit of a battery) have two sides, the positive (+) end being the cathode and the negative (-) end being the anode.
Batteries generally use a different metal for each of the cathode and anode, and the cathode and anode are surrounded by either a solid, liquid or gel solution known as the electrolyte. Chemical reactions in a charged cell dislodge electrons, and these electrons move through the electrolyte and gather in the anode, which results in the anode’s negative charge. Those free electrons look for atoms that are in need of an electron, and when an external wire made of a conductive material (like copper) is attached to the anode and the cathode, these lined up electrons will take the route through the wire (being the only route available to them) from the anode to the cathode to seek to bind with atoms that are wanting electrons. Hence, current. If we put a device (electric motor, light bulb, etc.) in the path of that current, we can make those electrons do work for us.
There are all kinds of different battery chemistries, generally involving the use of two dissimilar metals or chemical alterations of metals that serve as the cathode and anode. The first one that we have written information about was invented by Italian scientist Alessandro Volta in 1799. His “voltaic pile” battery was composed of a stack of zinc and copper discs, separated by cardboard soaked in brine as the electrolyte. The electrolyte is simply a material that is chemically neutral (not positive or negative) and allows for the movement of electrons.
We are mainly going to be looking at lithium-ion batteries in this article, because they are the dominant EV battery chemistry and look to be for a while. The typical lithium-ion cell uses a compound which includes lithium as the cathode. Almost all lithium-ion cells use graphite as the majority of the anode.
Lithium-ion batteries are fairly new on the battery scene, emerging commercially in about the 2000s.
Similar to the brief battery description above, in a lithium-ion cell, during discharge when an external load is applied to the cell, positively charged lithium ions which are nested in the anode want to return to the cathode and do so internally through a separator membrane that only allows the lithium ions through but not their electrons. The electrons have been dislodged from the lithium ions and are lined up on the collection plate of the anode. The electrons cannot return to the cathode through the separator membrane so they take the external route, the negative terminal attached to the anode. The lithium ion and its wayward electron have a happy reunion again at the cathode, when the electron completes its journey outside the battery after having run through the electric motor or whatever was in the particular circuit that was in the electron’s path back to the cathode.
It is predicted that demand for battery materials will soar in the next decade. In addition to the traditional demand for certain metals in steelmaking, construction, and electronics, the demand for these same metals in EVs and stationary power storage batteries is expected to eclipse the traditional uses, while those traditional uses also continue to grow.
After reviewing most of the main cell technologies that are currently in use in EVs and looking at the future contenders, I’ve decided to focus on the metals that are:
As can be seen in the image below, all of the most common EV batteries are using graphite in the anode. Depending on the cathode chemistry of the cell, the cathode is usually a combination of various amounts of lithium, nickel, manganese, and cobalt. Copper and aluminum are also used in the collection plates attached to the cell electrodes.
I have chosen to focus on lithium, nickel, and graphite, which I believe meet my four requirements above.
Estimates are all over the map about how much of each metal will be required and how much demand will grow within the decade. On this issue, I am a maximalist. I believe demand will outstrip supply more rapidly than most believe.
Even the fairly conservative estimates see demand outstripping supply fairly rapidly.
Below I'll present an overview of lithium, nickel and graphite.
Predicted lithium demand out to 2035:
Source: Benchmark Minerals via Cypress Development Corp
Lithium is a very small percentage of the metal composition of lithium-ion batteries, but plays a key role and perhaps this is why lithium usually gets top billing in the battery name.
Lithium is the metal with the highest tendency to “lose” electrons, making it considered highly reactive. Lithium has only one electron in its outer shell, and that electron is itching to jump off. Lithium is in most cases a component of the cathode and electrolyte.
As seen in the graph above, the world is essentially at a point right now where supply and demand for lithium is matched. Future supply of lithium is well short of demand, which will, if typical economics hold sway, lead to increased prices. After a period of low lithium prices and lack of investment, land which is promising for lithium mining/extraction is currently seeing huge interest.
The majority of lithium-rich lands are found in South America, in what is called the “Lithium Triangle.” Chile, Argentina and Peru all contain lithium-rich lands. There are also lithium-rich areas in North America, which I intend to discuss in a future article. According to one producer, “approximately 85% of world production comes from Chile (Sociedad de Quimica Minera de Chile SA, or SQM, and Rockwood Lithium), Argentina (Orocobre FMC Corp), and Australia (Talison Lithium).”
Lithium can be sourced from either brines, rock deposits, or clay. Brines are trapped bodies of water (natural or made by humans) in salt flats that leech minerals from the soil. When this water evaporates, a lithium-rich concentrate remains. The most common method of lithium extraction from brines is the creation of evaporation ponds, and the sun does the work of evaporating the water. Afterward, the remaining minerals are harvested, filtered, and refined.
Lithium extraction from rock is a traditional hard rock mining, where lithium-containing rock is extracted, ground up, and separated through the use of various chemicals and elements. There are three lithium-containing rock types: spodumene, petalite, and lepidolite. Spodumene is generally the highest value because it tends to contain the highest concentration of lithium.
Brines have become the preferred method of lithium harvesting because of the lower cost of extraction compared to rock mining.
The promise of extraction of lithium from clays is gaining in popularity, as process improvements in extraction and the location of lithium-rich clay in America brings attention to this method.
According to the aptly-named Nickel Institute (I bet these guys know how to party),
The major advantage of using nickel in batteries is that it helps deliver higher energy density and greater storage capacity at a lower cost...Two of the most commonly-used types of batteries, Nickel Cobalt Aluminium (NCA) and Nickel Manganese Cobalt (NMC) use 80% and 33% nickel respectively; newer formulations of NMC are also approaching 80% nickel. Most Li-ion batteries now rely on nickel.”
Per mining.com on March 16, 2021,
Fitch has updated its estimate of the impact of EV battery manufacturing on nickel consumption and now expects nickel demand for EV battery manufacturing to experience an annual average growth rate of 29% over 2021-2030, outpacing both lithium and cobalt demand, the analyst says.”
A few years back, Elon Musk pointed out that “Although [they’re] called lithium-ion, the actual percentage of lithium in a lithium-ion cell is approximately 2%…Technically, our cells should be called nickel-graphite, because the primary constituent in the cell as a whole is nickel.”
[Note that 2% lithium per Tesla Model S still equates to a lot of lithium per car, perhaps about 24 pounds of the stuff].
According to Michael Beck, Managing Director at Regent Advisors, “Nickel is probably the single most important metal component in battery fabrication. It’s where all of the energy is stored, and increasingly battery chemistries are being refined to allow the inclusion of as much nickel as possible. The more nickel, the higher the energy density of the battery.”
Beck notes there has been little development in Nickel mining capacity since 2007 when prices collapsed. Consequently, he states,
In this intervening almost 12 years there was no material investment in new nickel capacity. The last 12 years has been a drawdown of excess inventory, and that’s coming to an end. The ramp-up of demand is just beginning…It takes 7 to 10 years to bring on new nickel projects…so, you have the makings of a perfect storm. You have a baked-in structural deficit for the next 12 years … you have inventories in the next 18 months going down to almost zero. You also have this new demand source that never existed for nickel.”
Graphite is the unsung hero of the battery world, being the largest component metal in a lithium-ion battery.
Graphite is included in virtually all current commercial battery chemistries. While there are of course batteries in development that do not use graphite, for the foreseeable future, graphite appears to be a lock. QuantumScape’s battery in development uses lithium metal as the anode rather than graphite, but Volkswagen, partnered with QuantumScape, has a product roadmap that puts that battery technology five years away from commercialization. There have also been questions raised about the state of the technology, in a field littered with previous solid-state battery failures due to some thus far intractable scientific difficulties.
Source: NextSource Materials Investor Presentation
Graphite improves conductivity, increases energy density, and acts as a storage medium for the lithium ions when they nest in the anode in a lithium-ion cell.
The key thing to know about graphite is that the quality and size are extremely important component of the price. Whereas gold is gold, for example, natural graphite has a crystalline structure and combines into “flakes”. Depending on the deposit, these flakes can be very small or very large, and there is a huge price difference between the sizes.
Currently, both synthetic graphite and natural graphite are used in EV applications. While synthetic graphite tends to last a bit longer, per Argus Media, “… natural flake graphite remains the preferred material with the highest carbon grades (94-97pc) considered best suited for use in batteries. It is this flake graphite that is then upgraded to 99.9pc purity to make “spherical” graphite used in li-ion batteries. Purified natural flake graphite has a higher crystalline structure and offers better electrical and thermal conductivity than synthetic material…”
Source: Benchmark Mineral Intelligence via NextSource Materials
The ideal graphite deposit for my strategy would be natural graphite with the largest flake suitable for EV batteries, the highest carbon content, the highest purity, and the lowest cost of extraction, in a stable area, with the least potential environmental damage. Easy right? Well, I’ve sifted out my favorite candidates, and present the first one below.
NextSource Materials' Molo graphite project is not far from the modern port city of Fort Dauphin. The port at Fort Dauphin was built about 6 years ago for Rio Tinto which has extensive mining operations there, and it will serve as an ideal port for NextSource’s graphite exports.
NextSource Materials, which has commenced project construction and will be producing within a year, is an excellent company to represent the graphite part of the EV battery equation.
Along with the massive Molo Graphite Project resource is an equally huge vanadium deposit owned by NextSource about 6 miles away. Like the graphite resource, the vanadium is at surface and perfect for open-pit mining. Vanadium looks to be prominently featured in large-scale power storage projects, and NextSource’s vanadium will provide extremely high-quality resources at a low extraction cost for Vanadium Redox Batteries (VRBs). While NextSource has chosen to focus in the immediate term on its graphite resource, when considering an investment in the company I think the vanadium find provides a tremendous additional value down the road.
NextSource discovered the vanadium prospect first, and after discovering the graphite-rich lands, decided to focus on proving up the graphite resource as graphite was gaining more attention as a currently in-demand battery material.
NextSource has designed a modular plant that will have a nameplate capacity of 17,000 tons per annum of graphite for just the first phase. According to NextSource, their cost to build the plant is the lowest of any competing project. Phase II will add 45,000 tons to their graphite output. The total Phase I cost is only $24 Million (and is fully-funded), and the total Phase II cost is budgeted at a very reasonable $40 Million.
With a nine-month build time plus commissioning, NextSource will be producing their premium flake graphite in April of next year.
NextSource claims an extraction cost in the lowest quartile of all graphite miners, competitive with China(!). Here is an estimate from the company of those economics:
Source: NextSource Materials Investor Presentation
NextSource states that the graphite at Molo is immediately at surface, in a low population density area with low environmental impact, and negligible waste. Their technical studies were undertaken in compliance with global financial and scientific organizations attesting to their accuracy and suitability.
Companies checking the full extent of their supply chain for adherence to ESG principles will be pleased by NextSource’s entire graphite extraction process and focus on responsible mining practices.
NextSource recently announced full financing of mine construction, which will get them initially to 17,000 tpa. The bombshell in this deal is who has agreed to finance it: None other than Sir Mick Davis, the former CEO of XTRATA, which merged with Glencore in 2013 to become one of the largest mining companies in the world. Sir Mick Davis has also become Chairman of the Board of NextSource. Per the March 15 press release announcing these developments, NextSource described Sir Mick’s latest project, an investment fund named Vision Blue, whose purpose is “…to assemble a portfolio of strategically significant investments in high-quality, responsibly managed and proven battery material mining assets. NextSource Materials is Vision Blue's first major investment into their strategic portfolio.”
No doubt having somebody of Sir Mick’s reputation in the world of mining and finance becoming such a large part of the company will serve to further elevate NextSource’s visibility.
What's more, NextSource has willing buyers already lined up. An off-take agreement signed with a major Japanese graphite trader and a deal with a European steelmaker will take up all of Phase 1 production and it a good chunk of Phase II.
NextSource’s natural graphite has been tested by end-user markets and verified by them to be suitable for all the highest demand uses including EV batteries, graphite foils, and graphene inks. NextSource’s flake graphite includes a range of sizes, with a full 52% measuring in the large to jumbo range. NextSource’s trademarked SuperFlake®, based on its mesh size and carbon content (96-98%), will command premium pricing.
On April 12, 2021, NextSource entered into a binding three-way partnership with its Japanese graphite trading partner and one of the leading processors of spheronized and purified graphite (“SPG”) for EVs, to build a complete SPG facility. The SPG will be used to produce EV battery anodes.
The factory will be 100% owned and operated by NextSource, and will be located either in Europe, North America, or South Africa. The location of this new facility is key to the deal, as it provides a vertically-integrated source of SPG outside of China, something for which many EV manufacturers operating outside of China are looking.
NextSource prominently mentions that these partners supply most of the Japanese EV makers and Tesla’s battery suppliers with SPG for use in battery anodes. In other words, the graphite-based battery anodes are going into batteries intended for Teslas. Not a bad indicator of the superior quality of NextSource’s SuperFlake® graphite.
According to NextSource, the new anode facility
is an exact duplicate of the facility that is currently processing value-added spheronized and purified graphite for lithium-ion batteries by one of current suppliers to Tesla and other international OEMs.”
NextSource currently has a market capitalization of approximately $200 Million US.
They have 718 Million shares outstanding based on the March 15, 2021 Material Change Report regarding the investment by Sir Mick Davis in NextSource. Upon Sir Mick’s second private placement investment in NextSource, his Vision Blue fund will own a 47% fully-diluted stake.
On December 29, 2020, NextSource announced shareholder approval to effect a share consolidation in a ratio of between one-for-five and one-for-ten prior to the one-year anniversary of the meeting. The company may decide not to reverse-split the stock, but might choose to do so at the appropriate time to uplist to the Nasdaq or NYSE.
With Sir Mick’s funds now in place in common stock, I see this as a big support for the shares, as I always like to be riding with insiders with skin in the game. Granted, Vision Blue’s stake was acquired at a considerably lower price, but it is the investment from Vision Blue that sparked an upward revaluation of the stock price of NextSource. Now, with financing, all the pieces are in place for NextSource to take advantage of the coming graphite super-cycle, right when massive demand starts to kick in.
As a junior miner, NextSource is not currently revenue-producing. They are funded to construction however through a total financing package of $29.5 Million U.S. committed by Vision Blue Resources. As mentioned, this funding will allow NextSource to fund Phase I of their mine, estimating $20.5 Million U.S. in revenues in year one. In year 3 onward, revenues are estimated to be $54.4 Million, not including the higher margin wholly owned and operated SPG anode facility.
As of their yearly financial statements, filed on February 16, 2021, at the end of December 2020 NextSource had just under $1 Million U.S. on its balance sheet and negligible debt. The company had been operating on a shoestring budget, subsisting on a small $1.5 Million U.S. private placement and associated warrants in July 2020, while it approached financiers to commit to fund construction of its modular mine.
Upon mine Phase I mine start-up, NextSource will have an immediate operating margin of about 50% based on their presentation estimating a graphite selling price of $1,208/ton and OPEX of $566/ton (FOB Mada). Estimates are not including added revenues from creating SPG and battery anodes, and also assume graphite prices remain at their current levels. Based on the anticipated demand, I'm betting that graphite prices will be much higher.
There are many risks with junior mining stocks. He are what I consider the main ones, above and beyond financial and operational risks that are present in every sector:
Reviewing this checklist of risks against NextSource, I believe that it falls on the lower risk end of the spectrum. One could make an argument for a higher risk when considering the jurisdiction of the property, the Republic of Madagascar. In the last decade there has been a tumultuous leadership history, though the democratic electoral process has resumed once again in Madagascar, and the political climate has become more settled. In addition, the pandemic has not spared Madagascar, just as it has not spared many countries around the globe. Despite the difficulties, Madagascar has a long history of hosting large mining operations, even throughout the past period of leadership tumult. Sumitomo is majority shareholder of an $8 Billion nickel and cobalt mining operation on the island, with Sherritt and KORES. Rio Tinto’s $1 Billion mineral sands project is operating a short distance from NextSource’s Molo graphite site.
I believe the global mass adoption of electric vehicles is a certainty, given their lower total cost of ownership, increases in range, and imminent price-parity with internal combustion engine vehicles. Additionally, the environmental benefits obtained from mass adoption of EVs (given environmentally sound product sourcing and power generation) is motivating governments worldwide to incentivize EV production and use.
As an investor who desires the leverage of pure-plays in a sector, it has become somewhat difficult to sift through the many new EV companies and pick the ones that will stand the test of time.
For that reason, I’ve decided to load my EV portfolio with companies that mine metals that are essential in all EV batteries. While there are considerable risks inherent in junior mining companies, through detailed research I believe I’ve found a basket of excellent companies that will provide outstanding returns during the EV revolution, without any need to rely on the vagaries of consumer tastes, or who wins the EV wars (the new SPAC upstarts; the entrenched Big Three; the German behemoths; or China’s rapidly-growing EV producers). By investing in the right battery metals miners during the coming super-cycle, we can win no matter what.
NextSource Materials, at its current small market capitalization looks to be a winner. It has financing in place, anticipated near-term production, off-take agreements already signed for every ounce of graphite, low production costs and excellent margins. In addition, NextSource's graphite is in Tesla's supply chain, validating its quality.
Stay tuned for additional battery materials articles, covering graphite, nickel and lithium producers.
This article was written by
Disclosure: I am/we are long NSRCF, FIII. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am not registered as an investment advisor in the United States or in any other jurisdiction. Information in this article is presented “as is,” without warranty of any kind – whether express or implied. I make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. All expressions of opinion are subject to change without notice, and I do not undertake to update or supplement this report or any of the information contained herein. This article is for entertainment only and not investment advice. This is not an offer to sell or a solicitation of an offer to buy any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction. I have not received any form of compensation from the companies that I have written about in this article, nor have I received any form of compensation from company affiliates or other company shareholders.