GPHOF Graphite One Inc (QX)

Graphite and the US metallurgical Achilles' heel

October 28, 2021 -- InvestorsHub NewsWire -- via Aheadoftheheard.com -- US recognition of the importance of critical minerals goes back over 100 years.

In World War I severe material shortages (tungsten, tin, chromite, optical grade glass, and manila fiber for ropes) played havoc with production schedules and caused lengthy delays in implementing programs. This led to development of the Harbord List – a list of 42 materials deemed critical to the military.

A pre-World War II list of materials contained a total of 29 materials: 14 were strategic materials that 'must be based entirely or in substantial part on sources outside the United States.' There were 15 critical materials that would be easier to source, perhaps even domestically, than the strategic materials.

The 1939 Strategic Materials Act authorized US$100 million to purchase strategic raw materials for a stockpile of 42 strategic and critical materials needed for wartime production.

By 1940, small amounts of chromite, manganese, rubber and tin were procured under the Strategic Materials Act. The purchases certainly weren't enough and all throughout the war effort these and numerous other materials had to be imported in large quantities.

After World War II the United States created the National Defense Stockpile (NDS) to acquire and store critical strategic materials for national defense purposes. The Defense Logistics Agency Strategic Materials (DLA Strategic Materials) oversees operations of the NDS and their primary mission is to "protect the nation against a dangerous and costly dependence upon foreign sources of supply for critical materials in times of national emergency."

The NDS was intended for all essential civilian and military uses in times of emergencies ie guerrilla warfare in Zaire during the 1970s caused the worldwide price of cobalt to increase from $6 to $45 a pound, and a United Nations (UN) trade boycott of Zimbabwe (formerly Rhodesia) stopped legal exports of chromium from the country.

By 1948 the WIB's Munitions Board had developed a list of 51 strategic and critical material groups. By 1950 the number of required materials had expanded to 54 groups, representing 75 commodities.

Let's fast forward a few decades…

A concise summary of US mineral vulnerabilities was presented to the Industrial Readiness Panel of the House Armed Services Committee in 1980 by General Alton D. Slay, Commander, Air Force Systems Command. General Slay pointed out that technological advances had increased the demand for exotic minerals at the same time as legislative and regulatory restrictions had been imposed on the US mining industry.

The 1981 report 'A Congressional Handbook on U.S. Minerals Dependency/Vulnerability' singled out eight materials "for which the industrial health and defense of the United States is most vulnerable to potential supply disruptions" – chromium, cobalt, manganese, the platinum group of metals, titanium, bauxite/aluminum, niobium and tantalum – the first five have been called "the metallurgical Achilles' heel of our civilization."

In 1981, President Reagan announced a "major purchase program for the National Defense Stockpile," saying that it was widely recognized that the nation is vulnerable to sudden shortages in basic raw materials necessary to its defense production base.

In 1984 US Marine Corps Major R.A. Hagerman wrote: "Since World War ll, the United States has become increasingly dependent on foreign sources for almost all non-fuel minerals. The availability of these minerals has an extremely important impact on American industry and, in turn, on US defense capabilities. Without just a few critical minerals, such as cobalt, manganese, chromium and platinum, it would be virtually impossible to produce many defense products such as jet engine, missile components, electronic components, iron, steel, etc. This places the U.S. in a vulnerable position with a direct threat to our defense production capability if the supply of strategic minerals is disrupted by foreign powers."

In 1985, the secretary of the United States Army testified before Congress that America was more than 50% dependent on foreign sources for 23 of 40 critical materials essential to US national security.

The 1988 article "United States Dependence On Imports Of Four Strategic And Critical Minerals: Implications And Policy Alternatives" by G. Kevin Jones was written in regards to what he thought are the most critical minerals upon which the United States is dependent for foreign sources of supply – chromium, cobalt, manganese and the platinum group metals (PGE). 

The May 1989 report "U.S. Strategic and Critical Materials Imports: Dependency and Vulnerability. The Latin American Alternative," deals with over 90 materials identified in the Defense Material inventories as of September 1987. At least 15 of these minerals are considered "key minerals" because the US is over 50% import reliant.

"The United States has consistently maintained that a strong domestic minerals and metals industry is an essential contributor to the nation's economic and security interests…The United States has a fundamental interest in maintaining a competitive minerals and metals sector that will continue to contribute significantly to the nation's economic strength and military security. The industry represents an $87 billion enterprise that employs over 500,000 U.S. workers and provides the material foundation for U.S. manufacturing." The 1980 National Academy of Sciences executive summary of "Competitiveness of the U.S. Minerals and Metals Industry"

Despite all of this, in 1992 Congress directed that the bulk of the strategic and critical materials the US had accumulated in the National Defense Stockpile be sold.

The primary purpose of the National Defense Stockpile was to decrease the risk of dependence on foreign or single suppliers of strategic and critical materials used in defense, essential civilian, and essential industrial applications. The NDS Program allowed for decreasing risk by maintaining a domestically held inventory of necessary materials.

While much of the rest of the world was scrambling to tie up control of strategic minerals America deliberately hamstrung itself.

Danger Will Rogers Danger

"Continued growth in consumption resources is being driven by growth in China and the rest of Asia. Chinese companies are increasingly acquiring assets, as are Indian companies, prompting other global miners into a race to secure mineral assets of their own." George Fang, Standard Bank's Head of Mining and Metals China

In his 1989 book "The Rise and Fall of Great Powers" historian Paul Kennedy argues that a country with a growing economy prefers to become wealthy instead of funneling its economic output into the military. While China's, and other developing countries military might has grown there is no doubt their greatest concern is to secure the needed energy and raw commodities necessary to continue their economic expansion.

The global mining industry is facing stiff new competition in getting deals done. The new competitor's for the world's resources have a mandate to secure long term resource deals for domestic use and have the financing capabilities any major mining company, or for that matter any government, would be envious of.

China's state owned enterprises (SOE) and sovereign wealth funds (SWF) were armed with hundreds of billions of US dollars from the country's foreign reserves and sent out to scour the globe for resources – they went on the hunt to fuel China's exploding economy:

• SOE/SWFs have no problem dealing in straight cash and operating in what some might consider high risk areas
• The Chinese have a longer term horizon for their ultimate payoff because they are mostly after off-take supply agreements from early stage development projects
• The Chinese government funds infrastructure projects that secure the cooperation of the host country with regard to mine development and off-take agreements
• Thanks to the trillions of foreign exchange  reserves it currently holds China offers loans at highly competitive interest rates. For example, the Export-Import Bank of China (Exim Bank) gave the Angolan government three loans at interest rates ranging from LIBOR (London Interbank Offered Rate – the rate banks charge each other on loans) plus 1.25 percent, up to LIBOR plus 1.75 percent, as well Exim Bank offered generous grace periods and long repayment terms

The future production from the deposits that the Chinese, Indians and others have acquired and developed through state-owned entities flows directly back to their respective countries bypassing the global commodity markets.

Critical to the economic and national security of the United States

Things began to change under former President Trump, it had to - the US is  100% reliant on imports of 13 critical minerals.

In 2017 former President Trump signed an executive order to encourage the exploration and development of new US sources of these metals.

In December 2017, the U.S. Geological Survey released its Professional Paper 1802 titled "Critical Mineral Resources of the United States— Economic and Environmental Geology and Prospects for Future Supply". 

A critical mineral is defined as a mineral:

• Identified to be a nonfuel mineral or mineral material essential to the economic and national security of the United States
• From a supply chain that is vulnerable to disruption
• That serves an essential function in the manufacturing of a product, the absence of which would have substantial consequences for the U.S. economy or national security

The report represented the U.S. Government's most comprehensive assessment of the nation's mineral resource profile and potential, serving to inform federal mineral policy.  The report lists 23 metals and minerals that are critical to "the national economy and national security of the United States."

In 2018, the US Government's Critical Minerals List was published.

"The United States is heavily reliant on imports of certain mineral commodities that are vital to the Nation's security and economic prosperity. This dependency of the United States on foreign sources creates a strategic vulnerability for both its economy and military to adverse foreign government action, natural disaster, and other events that can disrupt supply of these key minerals."

On February 24, 2021, President Joe Biden signed an executive order (EO) aimed at strengthening critical U.S. supply chains. Graphite was identified as one of four minerals considered essential to the nation's "national security, foreign policy and economy."

"The United States needs resilient, diverse, and secure supply chains to ensure our economic prosperity and national security. Pandemics and other biological threats, cyber-attacks, climate shocks and extreme weather events, terrorist attacks, geopolitical and economic competition, and other conditions can reduce critical manufacturing capacity and the availability and integrity of critical goods, products, and services."

The EO identifies three technology sectors as critical supply chains:

• Advanced semiconductors
• High-capacity batteries, including Electric Vehicle (EV) batteries
• Pharmaceuticals

The EO also identifies "critical minerals and other… strategic materials" as a fourth supply chain, essential to technology manufacturing and the Defense Industrial Base. 

Graphite is a critical mineral and an essential material for both the renewable and EV Battery sectors, and for advanced semiconductor manufacturing.  

Graphite is:

• One of 14 Listed Minerals for which the U.S. is 100% import-dependent
• One of 9 Listed Minerals meeting all 6 of the industrial/defense sector indicators identified by the U.S. Government report
• One of 4 Listed Minerals for which the U.S. is 100% import-dependent while meeting all 6 industrial/defense sector indicators
• One of 3 Listed minerals which meet all industrial/defense sector indicators – and for which China is the leading global producer and leading U.S. supplier

The U.S Government's Draft Critical Minerals List report on graphite stated that "China is by far the largest producer of natural graphite, accounting for roughly two-thirds of world production. Only 4 percent of the world's natural graphite comes from North America, with no U.S. production in decades. Although natural graphite was not produced in the United States in 2016, about 98 U.S. firms, primarily in the Northeastern and Great Lakes regions, consumed graphite in various forms from imported sources for use in brake linings, foundry operations, lubricants, refractory applications, and steelmaking.  Graphite's use in rechargeable batteries, as well as technologies under development (such as large-scale fuel-cell applications), could consume as much graphite as all other uses combined."

There is no substitute for graphite in an EV battery and lithium-ion batteries are expected to be the technology that runs electric vehicles for the foreseeable future, making graphite indispensable to the global shift towards clean energy.

The mineral is sourced from only a few places. China currently is the world's biggest producer, with 650,000 tonnes of mined graphite in 2020, representing nearly 70% of global supply.

After China, the next leading graphite producers are Mozambique, Brazil, Madagascar, Canada and India. The United States does not produce any natural graphite and therefore must rely solely on imports to satisfy domestic demand.

2020 mined graphite production. Source: USGS

The level of foreign dependence has increased over the years. The US imported 38,900 tonnes of graphite in 2016 and 70,700t in 2018.

According to the USGS, in 2020 the US imported 42,000 tons, of which 71% was high-purity flake graphite, 28% was amorphous, and 1% was lump and chip graphite. The top importers were China (33%), Mexico (23%), Canada (17%) and India (9%). But remember, the US is not 33% dependent on China for its battery-grade graphite, but 100%, since China controls all spherical graphite processing.

It's thought that the increased use of lithium-ion batteries could gobble up well over 1.6 million tonnes of flake graphite per year (out of a total 2020 market, all uses, of 1.1Mt) — only flake graphite, upgraded to 99.9% purity, and synthetic graphite (made from petroleum coke, a very expensive process) can be used in lithium-ion batteries.

The USGS believes that large-scale fuel cell applications are being developed that could consume as much graphite as all other uses combined.

Can the mining industry crank out more graphite every year to match this demand? Color me skeptical. Between 2018 and 2019, world mine production actually declined by 20,000 tonnes, or 1.8%. Global production in 2019 and 2020 was exactly the same, 1.1 million tonnes.

Currently there are no producing graphite mines in the United States, and only 10,000 tonnes a year is being mined from two facilities in Canada. The fact is, for the United States to develop a "mine to battery" supply chain at home, it currently has no choice but to import its raw materials from foreign countries.

For battery-grade graphite, that means China, which is growing increasingly adversarial, in terms of trade, foreign policy and militarily.

Even if the US wants to keep importing its graphite, doubts have been raised over whether China could keep up with surging global demand. The top producer has already taken steps to retain its graphite resources by restricting its export quota and imposed a 20% export duty.

In short, the days of affordable, abundant graphite from China are numbered, adding further urgency for the US to develop its own supply.

The demand for graphite is only headed in one direction. A White House report on critical supply chains showed that graphite demand for clean energy applications will require 25 times more graphite by 2040 than was produced worldwide in 2020.

We have clearly reached a point when much more graphite needs to be discovered and mined.

Graphite One

Earlier this year, the Federal Permitting Improvement Steering Committee (FPISC) granted High-Priority Infrastructure Project (HPIP) status to Graphite One Inc. (TSXV:GPH, OTCQX:GPHOF), which is aiming to develop America's first high-grade producer of coated spherical graphite (CSG) integrated with a domestic graphite resource at Graphite Creek, Alaska.

The HPIP designation allows Graphite One to list on the US government's Federal Permitting Dashboard, which ensures that the various federal permitting agencies coordinate their reviews of projects as a means of streamlining the approval process.

Graphite Creek is the highest-grade and largest known flake graphite deposit in the US, spanning 18 km.

The Graphite Creek property is located 55 km north of Nome, Alaska.

The project is envisioned as a vertically integrated enterprise to mine, process and manufacture Coated Spherical Graphite ("CSG") for the lithium-ion electric vehicle battery market. Graphite One aims to become the first US vertically integrated domestic producer to serve the US EV battery market.

The latest resource estimate (March 2019) for Graphite Creek showed 10.95 million tonnes of measured and indicated resources at a graphite grade of 7.8% Cg, for some 850,000 tonnes of contained graphite. Another 91.9 million tonnes were tagged as inferred resources, with an average grade of 8.0% Cg containing 7.3 million tonnes.

A preliminary economic assessment (PEA) for the project envisions a 40-year operation with a mineral processing plant capable of producing 60,000 tonnes of graphite concentrate (at 95% purity) per year.

"With the recent $21-million in funding, our efforts have progressed towards completion of the PFS for the largest known and highest-grade graphite deposit in the United States. The 2021 field program also initiated the drilling and additional data collection needed to begin work on the FS after the PFS is completed. We are very pleased with the successful execution of the 2021 field program as historical drilling, coupled with the new data, clearly demonstrates the predictability and consistency of high-grade, near-surface graphite. With the concepts and conclusions outlined in the PEA suggesting a 40-year mine life, the Graphite Creek deposit continues to show potential to be an essential long-life component of the graphite supply chain, one of four critical minerals that are on the U.S. National Defense stockpile list. While the PEA demonstrated the project's economic viability, we expect these further studies with their optimized plans for the mine and processing facilities to support improved economics." Anthony Huston, chief executive officer of Graphite One.

Once in full production, Graphite One's proposed graphite products manufacturing plant — the second link in its proposed supply chain strategy — is expected to turn graphite concentrates into 41,850 tonnes of battery-grade coated spherical graphite and 13,500 tonnes of graphite powders per year.

Material produced from Graphite Creek would be almost sufficient to supply the entire nation's graphite demand given current import totals.

But these production figures were based on resource estimates prior to the 2019 update, leaving room for potentially higher production.

Conclusion

Many do not realize do not realize that without graphite, lithium-ion batteries cannot be made. There is no substitution for graphite in a lithium battery anode, making graphite as crucial to the green-energy transition as lithium itself.

That fact should sound the alarm for those following graphite demand and supply.

For many years the United States didn't mind being dependent on out-of-country suppliers for critical minerals like graphite. It was convenient. But today convenience is being replaced with understanding the role of critical minerals in a nation's economic health and military strength.

Critical minerals are finally getting the attention they deserve.

Graphite One is a company on the move with the largest and highest-grade flake graphite deposit in the United States.

What GPH has discovered so far though is only a small portion of the geological trend under consideration. I believe Graphite Creek will become a mine and that its production will supply a large percentage of US domestic graphite demand. I therefore see GPH as an important link in America's burgeoning "mine to battery" supply chain which is why I own shares.

Graphite One Inc.
TSXV:GPH, OTCQX:GPHOF
Cdn$1.56, 2021.10.26
Shares Outstanding 81.5m
Market cap Cdn$129.9m
GPH website

Richard (Rick) Mills

aheadoftheherd.com

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