The Graphite Squeeze Is Flying Under Wall Street's Radar

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Mar 23, 2022, 08:00 ET

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LONDON, March 23, 2022 /PRNewswire/ -- The White House is now more desperate than ever to secure America's supply chain of critical minerals. That includes rare earth elements and battery materials, such as lithium, cobalt, and graphite–all of which are key not only to electric vehicles and energy storage, but to computer components, household appliances, and clean energy technology in general. Mentioned in today's commentary includes: General Motors (NYSE:GM), Ford (NYSE:F), Nio Limited (NYSE:NIO), Xpeng Motors (NYSE:XPEV), Li Auto (NASDAQ:LI).

China controls most of this market …And the only truly effective supply chain security move is to bring it all home. While sparse announcements by junior miners exploring North American venues for new sources of these battery materials offer some hope, they are risky opportunities for investors.

The first company looking to bring one of the most important battery materials back home is Graphex Group Ltd (GRFXY), which has just announced plans to list on the New York Stock Exchange (NYSE).

Graphex has operations at home …But it is also among the top producers in Asia, with key graphite processing facilities parked right next to one of the world's biggest graphite mines. It's been producing for nearly a decade already, and now it's aiming to quadruple production and build a bridge between its Asian and North American operations.

It's a pick for a unique opportunity to get positioned in a major expansion that targets the heart of America's supply chain insecurity–precious battery materials that can make or break the clean energy revolution. And it's an opportunity with less of the kind of risk that comes with betting on junior miners hedging on a discovery of a commercial nature, and then being able to develop it. Graphite isn't a game for new entrants, and Graphex Group is led by veterans with proven production.

Demand for Minerals Like Lithium and Graphite Is Expected To Increase By 4,000%

Over the next few decades, the White House says that global demand for these critical minerals will grow by up to 600%. But more specifically for minerals such as lithium and graphite used in EV batteries, demand will increase by as much as 4,000%.

The problem, says the White House, is that "The U.S. is increasingly dependent on foreign sources for many of the processed versions of these minerals. Globally, China controls most of the market for processing and refining for cobalt, lithium, rare earths and other critical minerals."

EV sales are expected to double this year, auto giants are motivated to avoid battery supply chain disruptions and rising costs of raw materials. And while lithium tends to get a lot of the attention when it comes to the supply squeeze, graphite is another overlooked critical element here, and analysts project that by 2030, graphite demand will be three times higher than supply. That's a concerning situation, especially for battery manufacturers who are looking at a multi-trillion-dollar industry that is marching forward at breakneck speed.

The Graphite Bridge from Asia to North America

The United States currently doesn't produce any graphite at all, and it can't process it, either. All of the processed graphite in the world comes from Asia, and of that 70% of the mined graphite comes from China. China, in turn, is responsible for processing nearly all of the graphite used by any battery manufacturer in the world.

That's a major national security issue and one that Graphex Group is working to help fix.

With its status as one of the Top 5 spherical graphite producers in China and one of the top in the world, Graphex (GRFXY) is looking to become the group that builds the first bridge over the gap between all that Asian production and a lack of U.S. production.

Since 2013, Graphex Group has been operating right next to one of the biggest graphite mines in the world, in China's Heilongjiang Province. Right now, it's producing 10,000 metric tons of spherical graphite–that's battery grade. But plans are in motion to ramp that up to 40,000 metric tons over the next three years.

That's the kind of scaling up that North America desperately needs. And that's exactly what Graphex Group is doing–it's bringing its patented technology home so that North America has a processing facility for battery-grade spherical graphite.

A graphite processing plant is being planned for Michigan, with a final location decision expected by the end of this month, and with operations expected to go online within a year.

The initial targeted capacity for Graphex Group's "made-in-America" plant would be 10,000 metric tons per annum (TPA), with plans to be able to double that to meet growing demand. Localizing the final processing of graphite for EV battery manufacturers–including the 13 American gigafactories in the works–may be vital to supply chain security.

Localizing the final processing of graphite may also accomplish one other big selling point: It could make it exponentially more reliable for American battery manufacturers. The problem for North American graphite miners now coming on the scene is that they don't have any proven processing capabilities that would take their mined flake graphite and turn it into what the battery manufacturers need: uncoated or coated spherical graphite.

That means that even if companies launch more graphite mining operations in the United States, the final end product would still need to be processed in China and our supply chain would likely remain extremely fragile.

Graphex (GRFXY) has announced longer-term plans to partner with auto supply chain companies for the production of coated spherical graphite, with downstream expansion into anode and battery production as well as partner with other global raw graphite miners.

The Critical Game for Veterans Only

Once graphite comes out of the ground, it takes high-tech processing to produce battery-grade anode material. It's a complicated process, particularly when it comes to scaling up operations. It's not a game for new entrants.

Graphex (GRFXY) isn't a new entrant. It's one of the world's top processing companies with long-term contracts with state-owned mines and offtake agreements with major battery manufacturers.

This isn't a high-risk exploration play–it's an expansion play that already has strong margins (28% in 2021) and is now crossing oceans in what could be one of the most important things to happen to U.S. national interest on the critical minerals scene.

It's not just about mining …This is about the end-product that North America hasn't had the capability for before. And it's all being done by what looks to be an extremely well-structured vertical powerhouse along the graphite supply chain.

Electric Vehicle Producers Are Set To Grow In The Coming Years

General Motors (NYSE:GM) is a bona fide Detroit superstar in automotive production. And now it is branching out and ditching internal combustion engines, other legacy automakers will likely follow suit. Though General Motors has been around for a long time, this is a turning point for the company. They're making their best efforts to curb emissions, and it will likely pay off over time.

In a major announcement last year, the highest-selling U.S. automaker said it would offer 30 all-electric models globally by the middle of this decade. A total of 40 percent of the company's U.S. models offered will be battery electric vehicles (BEVs) by the end of 2025.

Ford (NYSE:F) is another Detroit heavyweight making major waves in the electric vehicle world. In addition to brand-new all-electric versions of its best-sellers, the F-150 and iconic Mustang, it's also making major moves to carve out its own position in the hydrogen race, as well.

Ford shocked the markets last year, beating investor favorite Tesla as the top performing automaker, as it doubled down on an all-electric future. 2021 was "truly a breakthrough year for Ford … easily the most important year strategically for the company since the financial crisis," Morgan Stanley analyst Adam Jonas told CNBC.

Chinese EV Makers Are Back In Fashion

Nio Limited (NYSE:NIO), one of Tesla's biggest rivals in China, is looking to take on the king in its back yard. The company is ramping up sales and trimming its financials and starting to make headway domestically. And while it saw a bit of a setback as the wider-Chinese market dipped, support from the government could help ease investors' concerns.

Nio isn't just producing electric vehicles, either. It's also making major waves in the battery market. Nio plans to build 4,000 battery-swapping stations worldwide by 2025, Reuters has reported, citing the company's president Qin Lihong.

Another Chinese automaker, Xpeng Motors (NYSE:XPEV), is also looking to carve out its own places in the super-competitive EV market. It has developed an all-electric, fully autonomous car that can be ordered with a few taps on your phone. It features a range of 250 miles and will get you from point A to B in less time than it would take to hail a cab or drive yourself. This game-changing company is set to disrupt the world's automotive industry with unmatched convenience and accessibility.

Xpeng has also been drawing plenty of interest from Big Money, managing to raise nearly a billion dollars from heavy hitters such as Alibaba, Abu Dhabi's sovereign wealth fund Mubadala Qatar Investment Authority, Hillhouse Capital, and Sequoia Capital China.

Li Auto (NASDAQ:LI) is also gaining traction in the exploding Chinese market. And while it may not be a veteran in the market like Tesla or even NIO, it's quickly making waves on Wall Street as the Chinese government vows to support its internationally listed companies. Backed by tech giants Meituan and Bytedance, Li has taken a different approach to the electric vehicle market. Instead of opting for pure-electric cars, it is giving consumers a choice with its innovative crossover hybrid SUV. This popular vehicle can be powered with gasoline or electricity, helping ease one of the biggest worries associated with electric vehicle adoption: a lack of charging infrastructure.

Li Auto, along with a number of other Chinese companies, has taken a beating this year, falling by 28% since January. But investors would be wise to not shrug off Chinese companies just yet.

By. Michael Kern

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Forward-Looking Statements

This publication contains forward-looking information which is subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ from those projected in the forward-looking statements. Forward looking statements in this publication include that the global energy transition will continue as anticipated and that electric vehicles will continue to grow in market share and acceptance; that demand for electric vehicle batteries and the component materials and minerals used to produce electric vehicle batteries will continue to grow significantly; that the market for graphite and related products will continue to expand and achieve double digit growth in the next several years ;that there will be shortages in China, U.S. and globally of the graphite necessary to produce electric vehicle batteries; that Graphex Group Limited (the "Company") can leverage its existing operations and reputation in China to capture market share of global graphite demand; that the Company can expand its business operations to the U.S. and European markets and gain significant market share for the supply of graphite for electric vehicle batteries; that the Company can leverage its proximity to graphite mines to expand its operations and capture market share for global graphite demand; that the Company can achieve its business plans and objectives as anticipated. These forward-looking statements are subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those projected in the forward-looking information. Risks that could change or prevent these statements from coming to fruition include that the global energy transition may not continue as anticipated and that other types of alternative energy vehicles may be developed and gain market share over current types of electric vehicles; that demand for electric vehicle batteries as currently produced and the component materials and minerals used to currently produce electric vehicle batteries may be less than expected for various reasons including the development of alternative materials and technologies; that the market for graphite and related products may not expand and achieve growth as anticipated; that for various reasons, including production of graphite or alternative technologies by other competitors of the Company, there may not be shortages of or increases in demand for graphite in China, U.S. and/or globally as expected or at all; that the Company may be unable to leverage its existing operations and reputation in China to capture substantial market share of global graphite demand; that the Company may be unsuccessful in the expansion of its business operations to the U.S. and European markets and fail to gain significant market share for the supply of graphite for electric vehicle batteries in China and/or globally; that the Company may be unable to leverage its proximity to graphite mines to expand its operations and capture market share for domestic and global graphite demand; that the business of the Company may be unsuccessful for various reasons. The forward-looking information contained herein is given as of the date hereof and we assume no responsibility to update or revise such information to reflect new events or circumstances, except as required by law.

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