2023-10-23 08:43:06 ET
Summary
- China strengthens control over graphite exports, a key mineral in electric vehicle production, as part of its ongoing trade war with the US.
- Nouveau Monde Graphite, a North American miner, experiences a stock rally on the news.
- The move by China could lead to strategic agreements and investments in Nouveau Monde, positioning the company to benefit from the growing demand for graphite in the EV sector.
China continues its tit-for-tat protectionist war with the United States by strengthening its control over graphite exports, one of the key minerals in electric vehicle production. Nouveau Monde Graphite (NMG) (NOU:CA) is a North American miner whose stock rallied on the news. This article studies the implications for the company and the sector.
China steps up its control of the graphite sector
China said it was looking after its "national security and interests," by applying dual-use export controls on certain types of graphite. The dual-use tag is used on items that can also be used in military technology.
The move by Beijing came days after President Biden's administration increased their own curbs on microchips , restricting the sale of processors to the Chinese market. U.S. Ambassador Nicholas Burns said the new efforts were needed to close loopholes.
Commerce Department Secretary Gina Raimondo said the plan was to block China's access to "advanced semiconductors that could fuel breakthroughs in artificial intelligence and sophisticated computers that are critical to (Chinese) military applications." Reuters said that China is the top graphite producer in the world and it also "refines more than 90% of the world's graphite into the material that is used in virtually all EV battery anodes."
James Lee, t KB Securities Co., told Bloomberg the development "shocking." "China used its last, strongest card for negotiation with the US, in terms of regulating the EV industry," he said. The US could now reciprocate with its own measures, such as restricting the use of Chinese batteries in vehicles produced by Tesla Inc."
This is a key component in the manufacture of electric vehicles and domestic EV companies in the U.S. will be studying their supply chains again.
Nouveau Monde gets a stock rally on China news
Nouveau Monde is a North American company focused on graphite mining for battery minerals and the stock rallied 31% on the week. The company has a world-class graphite deposit north of Montreal, Quebec.
The company was listed on the New York Stock Exchange in March of this year. The Pallinghurst Group , headquartered in London, is focused on investments along the value chain of electrification in lithium, platinum, nickel, and graphite. So, any automaker striking an agreement with Nouveau Monde for graphite could have close relations with other minerals used in EVs.
Eric Desaulniers, CEO of Nouveau Monde, said: "We have produced about 500 tonnes of product so far that can reach 98% and sometimes 99% purity just after a simple flotation process to qualify our product with customers. The grade of the deposit is 4.5% carbon graphite, similar to what is produced in China, the biggest producer of flake graphite with about 70% of the market."NMG is expected to produce 100,000 tonnes per year, according to Pallinghurst, with a mining life of 30 years.
A recent announcement said that the company is working with Caterpillar ( CAT ) to test mining equipment for its fully-electric mine, which will be "zero exhaust". NMG is setting its sights on clean mining, which will appeal to customers and local authorities.
Sector Outlook and Financial Statements
Statista has forecast a nearly fourfold increase in lithium-ion battery demand by 2023.
Their data also shows that China led the graphite mine production globally with 850,000 metric tonnes. African nations Madagascar and Mozambique are second and third respectively with 170,000 and 110,000 respectively, so NMG could be among the top producers when its mine is running to capacity.
After Brazil with its 87,000 metric tonnes comes Russia and Canada with 15,000 each, so this is a market heavily dominated by China. According to the supply chain group, Alliance for Automotive Innovation, almost one-third of the graphite currently consumed in the United States comes from China. The new curbs will come into effect by December 1, so it would not be a surprise to hear of a strategic agreement with NMG for its future production. The price of graphite could also rise ahead of that date as battery producers seek to build their inventories.
At the current market price, Nouveau Monde has a market capitalization of $167M.
The China news comes after the company made a small profit in the latest financial statements to the end of June 2023. A C$1.3 million net income was higher than the C$14 million loss for the same period a year earlier. However, the collective loss for the six months to the end of June was around C$20 million, but C$6 million of that was from a change in the value of derivatives. The company also invested C$10 million in property, plant and equipment. The China news will likely spur NMG to move as quickly as possible to get production ramping up and that could see new investment, alongside the potential for strategic deals with EV customers.
Risks to the investment thesis
Graphite is a dominant mineral in the manufacture of batteries and with the whole world moving to electric vehicles, one can only assume that the mineral will become more scarce and expensive.
There are other technologies that could take over from graphite and that would hurt the outlook for NMG. However, silicon is the current challenger and Graphex CEO John DeMaio spoke to Charged EVs of its limitations.
"Silicon has some very desirable properties-it stores significant amounts of energy, it's very conductive, it's lighter-but there are some challenges with it. So all the workable batteries that are out there now use graphite on the anode side, and they will for-as we see it-the foreseeable future."
He added that silicon expands during charging and said:
"Silicon can grow up to 400% of its original size, and that expansion creates a challenge for the physical properties of battery technology. If you have 800 to 1,800 individual cells that make up an EV battery, if each one expands, obviously you're going to have a real problem with constraining that."
So, the near-term demand for graphite does not look to be a problem for Nouveau Monde.
Conclusion
China's announcement that it will curb graphite exports is a big hit to the EV sector at a time when price wars dominate the sector. With a huge dominance in graphite production, China has a grip over the future of EV manufacturing but Western countries are fully committed to electrification and will have to find friendly suppliers. The next two producers with some dominance are African countries and that adds logistical concerns. As Nouveau Monde mining starts production, the company is well placed to benefit and could see new investment support or strategic deals with EV producers to bring its deposit to the market faster. The market dynamics look favorable for NMG at a low market cap and investors should definitely consider the company as it could become instrumental to the pace of EV manufacturing in the U.S.
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Nouveau Monde Rallies On China's Graphite Export Curbs