20 tonnes of bulk-bagged flake graphite left Valence Industries’ Uley site near Port Lincoln in late March, bound for Port Adelaide and then international customers. ABHR’s Charles Macdonald spoke to Christopher Darby, CEO and managing director, Valence Industries.
Back then the plant fell victim to a tide of cheap Chinese graphite. Not helping was an underperforming front end to the process plant, mistakenly designed to handle rock, rather than the friable and clay-like material of the region.
Processing 1500t tonnes of stockpiled material so far, Valence Industries has tiptoed back into production for a meagre capital cost of $9m.
Importantly, Valence has timed its run, and fundraising efforts, to co-incide with feverish investor interest in the potential uses of graphite in a raft of high-tech electronic, battery and biomedical applications.
While Valence has started small, proving to its customers that it can walk before it runs, it has ambitious plans for a $50m phase two project, which will see it up production from 14,000tpa to 64,000 tpa. This project will see the addition of high-end materials handling and processing facilities in South Australia, a move sure to delight Governments at all levels.
The graphite market
The graphite market amounts to around 1.4 million tonnes per annum in total. China accounts for around 70% of world production.
The material is used in a huge variety of applications. Some are distinctly low-tech, old economy uses, such as in refractories, foundries and lubricants. This sector is growing steadily at 2% to 3% pa, in line with the world economy.
Exciting investors are a range of high-tech applications, such as in lithium-ion batteries, fuel cells, high-end electronics and biomedical applications. Analysts see this sector growing far more rapidly and it has attracted a speculative rush from explorers worldwide with projects on every continent.
Prices for graphite are negotiated directly between the producer and customer, since there is no open market for graphite. There is a posted price for graphite which provides a guideline with respect to longer term trends, but transactions are largely based on direct negotiations between buyers and sellers.
Graphite prices are mainly a function of flake size and purity. Large flake graphite is classified as 180 microns (+80# mesh) and above, whilst high purity is classified as 94% carbon and above. Grades higher than these varieties command premium pricing.
Depending on the ore and milling process, graphite varies by grade, particle-size distribution (or mesh) and moisture content, among other factors. For example a large-flake product might be +80 mesh (0.177 millimetres) with a specified grade of 94% to 99% graphitic carbon, less than 0.5% moisture content, 1.3% volatile matter, 0.01% sulphur and 0.55g/cm3 loose-bulk density.
Some new producers are obsessed with flake size to the exclusion of other attributes.
“Flake size is important,” said Darby. “You can make big flake size smaller but not vice versa. Larger flake size allows different treatment options in customers’ systems.
“However, while flake size is important, it is not the be all and end all.
“The key things are flake size and a low level of contaminants and security of supply.
“In reality you can sell different sizes of graphite providing you know which market it’s going to and you can hit the exact specification levels for each. Different size flakes lead to different price points, and some of the smaller flake sizes, provided you hit the exact purity levels, are very important and very expensive.
“At Uley, we get flake sizes that include plus 35 and plus 25 mesh sizes, so large quantities of very large flake which gives customers a great deal of flexibility.”
Valence is working with the University of Adelaide on graphene research. Graphene, touted as a ‘wonder material’ by some media, is a single atom layer of graphite with all the properties of graphite.
“It has massively interesting future applications,” said Darby. “However, in our view most of those applications will be from a five to 10 year research programme.”
With one gram of graphene able to cover an area of 600 square metres, many of the future graphene opportunities will be niche, high-tech, low volume applications.
“Graphene isn’t a tonne question,” said Darby. “It’s not about shifting tonnes, it’s about getting the right price for a very specialist product.”
The Uley operation
Uley has been exploited from the late 1800s for traditional industrial graphite applications. It supported both World War efforts, producing graphite for lubricants and various other military/industrial uses. Situated 23kms from Port Lincoln, the operation is enmeshed in the local community.
“It has a long tradition in the Port Lincoln area,” said Darby. “Everyone knows ‘Graphite Road’ which leads to the Uley graphite facility where we are. It’s a proud tradition in the local community.”
Uley’s close proximity to Port Lincoln allows a residential workforce. The operation also helps support a light industrial base in the area, encompassing everything from fabrication to diesel engineering.
At Uley, graphite is close to surface, normally from two metres to five metres underground and outcropping in some areas. It is a free digging operation and is, in Darby’s words, a “glorified quarry.”
The pit is 180m wide by 750m long, and operators drive 200m from the edge of the pit to the run of mine stockpile and process plant.
“It’s a small operation and that illustrates the philosophy underpinning the company which is ‘let’s not focus on just shifting tonnes; let’s produce high-end products and sell them for higher value each time we shift them off site.’ If we can physically sell less tonnes but make a better profit margin, that’s a good result for the company,” explained Darby. “We’re constantly trying to produce higher value, longer term relationship product lines for our customers to receive.”
Expansion plans (see later) call for a new pit. According to Darby, the area is not resource constrained. The whole area was under exploration license to Rio Tinto predecessor CRA in the late 1970s and early 1980s.
“We’ve got 75 square kilometres of resource that was drilled by CRA. The resource looks big just on the land we own, and we can keep drilling it out,” said Darby. “In South Australia, at the lower end of the Eyre Peninsula, where we are, we are talking about a purity level in the ground of graphite that is very high but it’s also very good quality in terms of the lack of detrimental elements.
“We are focussed even in traditional markets on specialist players in those markets. It’s all about satisfying very specific customer requirements in different market segments so that you have a diversified customer base in terms of both industries and regions, so you can adjust when there are fluctuations in the markets globally.”
Bulk handling and processing
Valence’s business involves it in moving large volumes of fine material, in different particle sizes and blends.
“We have a process whereby we take a general concentrate from our physical facilities at Port Lincoln and we blend and package them over in Port Adelaide,” said Darby. “Near Port Adelaide we will have a facility that takes those foundation stock lines coming from site, and creates specialist blends by reference to their purity levels, size and the packaging they can ultimately go into.”
Once into full production, Valence will offer its customers a lot of options, with up to 200 stock keeping units (SKU) planned to come out of the Port Adelaide facility. Current output, in the commissioning phase, is available only in one tonne bulk bags. However, later, there will be bags of 10kg, 25kg, and other sizes, as well as anti-static tins and barrels, and specialist bags of all types.
In terms of processing, one of Valence’s first moves on re-commencing operations was to fix up the front end of the old process plant.
“Back then, they hadn’t designed the front end of their plant right,” said Darby. “It was designed for rock rather than our very nice friable soil. They’d not fully thought out the engineering design at that time. In the first round of our process we blew away the front end of the plant and designed it to deal with a friable, clay-like soil. Once you do that you can have a very efficient process but if you haven’t designed it to deal with clay in the first place you’re not going to run very efficiently.”
More generally, the operation adopts equipment used in industries such as kaolin and other fine powder industries. It involves screening, particle size analysis, bagging, packaging, palletising and containerising.
Customers: cautious beasts that need re-assurance
In conversation with Darby, it emerges that graphite customers are cautious creatures who will demand lengthy qualification processes, to ensure that a producer’s product meets their plant’s requirements, before signing long term contracts.
“The qualification process involves testing for detrimental elements stuck on to graphite that leads to greater or lesser uptake from customers because they can or can’t use it in their manufacturing processes,” said Darby.
Qualification can take three, six, nine or over twelve months, depending on the application. Higher value applications typically tend to have longer qualification times.
Samples start small and get larger, going from grams to kilograms to tonnes with some customers demanding samples of 20t plus. Qualification must be from the actual plant output, not just a lab scale facility.
Valence has provided qualification samples to 15 customers and is advancing to multi-tonne trial orders, with full qualification completed for six customers already.
In terms of sales, Valence has six refractory and foundry customers in Europe and the Asia Pacific.
“The company’s sales strategy is focussed initially on rapid qualification industries while longer qualification customers complete their product qualification process,” said Darby.
These orders are expected to reach 8,000t or 100% of Valence’s 2015 output and are priced at an average of $1,667/t (US$1,400/t). The company also has MoUs for volumes of over 29,000t over periods between two and three years.
In general terms, Darby believes that customers are looking for more reliable and safer production sources, the inference being that some customers have been burned by Chinese suppliers turning off supply.
“They want to know supply won’t be interrupted and want quality production,” he said. “Quality production has declined over the last three years.”
Advanced materials handling, processing and micronisation
Under its phase two expansion plans, Valence aims to increase its production capacity to 39,000tpa in 2016, from 14,000tpa now, ramping up to 64,000tpa between 2018 and 2019.
A new process plant and mining area will cost around $37m over three years, while an advanced product handling and high purity micronizing plant will come in at a further $13m.
These new facilities will allow the company to produce higher value products worth up to $4,774/t (US$3,800).
“Stage two has four key parts running concurrently,” explained Darby. “The first part is opening up our new pit, the new mining part to provide new dirt; the second part is to increase our capacity at our site from 14,000 to 39,000 tonnes per annum and then allow a future increase to 64,000; the third part is advanced materials handling which is a blending, classifying, packaging and logistics handling facility in Port Adelaide; the fourth part is the advanced manufacturing facility which is to take our traditional graphites and increase their product purity level, for a number of products, from 99.5% to 99.95% purity, but also to provide very specific micron size material from those high purity products.
“Every tonne you can shift over to being an advanced manufactured tonne is a much better idea for the business. It also means you are no longer just focussed on tonnes; you’re actually trying to be more and more specialist about what you do each time.”
Investors still nervous, however
Financially, Valence still has a hard road to hoe. The firm lost $3.7m in the six months to end December, not surprising as it re-establishes facilities and equipment and starts sales.
In September 2014, the company raised around $11.7m via the issue of shares at 70 cents each.
In May 2015, Valence raised another $2.1m in a placement, this time at 29 cents per share and, as ABHR went to press, was seeking another $9.4m in a rights issue at the same price.
In May, Valence also announced that it had struck a “binding heads of agreement” – a precursor to a binding contract – for a debt facility of $94m with Chimaera Capital Management of Singapore.
“We’re negotiating finances as we speak. We expect to have that finance locked up soon and then to be able to move forward through various stages of detailed engineering design and construction to have those facilities operating in 2016.”
Darby hopes that as the company hits its various milestones it will be re-rated.
Commissioning, underway since late 2014, will continue from the run of mine stockpile as the firm ramps up production. Valence expects to hit full production capacity by the third quarter of this year.
“We might start mining from the Uley Pit II in the final quarter of this year so we start providing some high grade materials,” said Darby. “At the moment the stockpile is six to nine percent graphitic carbon. The new pit has grades of 12.9%; that will be a better outcome for the plant.”
Darby put the company’s share discount down to its transition from the exciting, blue sky stage to actual production.
“You see that adjustment often in stocks that move from pre-production to actual production,” said Darby. “People wait on first production. The second issue is securing finance for our expansion programme; once we make an announcement on that then our stock should adjust.”
Valence Industries was spun out of parent company Strategic Energy Resources (SER) in late 2013. SER is still the largest shareholder in the company with an 11.67% holding. Other major holders include HSBC, Macquarie Private Wealth and IOOF.
Chris Darby has spent five years in the graphite industry and 20 years in mining. This time includes exposure to advanced manufacturing.