Flakes are king in the graphite space, where large flake commands a substantial premium. But the path to production can be long and twisted, with many moving parts. Resource and tech investor Ron Struthers met up with The Critical Metals Report and walked us through the funhouse of graphite investment. Read on to find out which companies look good in every mirror.

The Critical Metals Report: Ron, as a resource and tech-focused investor, you were clued into the graphite investment thesis before Wall Street caught on. How did you approach the market?

Ron Struthers: I was fortunate in that I had been familiar for many years with a graphite deposit in Northern Ontario so I was aware of the mineral's uses. I first realized the extent of graphite's potential in late 2010 when prices started to firm up. However, the timing was not right until graphite prices took off, which happened when the market became aware of the mineral's high carbon purity and the fact that there is a lot more graphite in a lithium-ion battery than there is lithium. High carbon is also used to make graphene, which is finding its way into a lot of high-tech applications. In addition to the big demand for lithium batteries in electric cars, graphene is used in cellphones and other battery-operated tech equipment. That is when I started looking around for other good graphite deposits, and discovered it's a pretty small market.

TCMR: Of the companies in the graphite universe – which ranges from 12 to 40 companies – how many might succeed?

RS: Over the course of the next 10 years or more, there could be quite a few success stories. However, it takes a long time to get a new mine up and running and with such a small market, one or two new graphite mines could substantially alter the supply-and-demand picture. I would advise investors to stick to companies that can get a new mine up and running sooner rather than later. That would allow the first companies to lock in better prices before other producers increase supply, potentially causing prices to drop off.

TCMR: Gareth Hatch recently echoed your thinking when he cautioned TCMR readers to evaluate the supply-and-demand projections carefully. Will the expected growth in electric vehicles and green energy be enough to support the market?

RS: Yes, I think so. The markets graphite is used for are expanding significantly.

The electric car could be critical. Although we have not yet seen it in the US or Canada on a large scale, electric cars are really big in China, which is now the world's largest auto market. Some 50 to 100 companies are developing electric cars, electric bikes and electric golf carts. Again, it is such a small market that one or two new graphite mines could create a situation where supply gets ahead of demand for a while and prices come down.

TCMR: If prices come down, would that be a short-term correction while demand catches up to supply or is that an indication of a bubble?

RS: I do not think graphite is a bubble. Longer term, I think we will see much higher graphite prices, along with most commodity prices. I would interpret price drops as a correction.

TCMR: China supplies roughly 70% of the world's graphite. Would a slowdown in the Chinese economy mean less domestic consumption and as a result have an effect on export prices?

RS: China's gung-ho approach to electric cars could really boost demand no matter what happens to the economy. And its economy is still growing, although at 5-7% instead of in the double digits. China is also curtailing graphite exports, which might squeeze the market even more. In 2011, a number of Chinese state-owned enterprises were closed to preserve China's graphite resources. China also imposed a 20% export duty plus a 17% value added tax, and instituted export licensing to ensure more supply stays for China's domestic economy. This approach to graphite is similar to what it has done with other metals and commodities. China is curtailing exports out of concern for its own long-term supply.

TCMR: Large-flake graphite is more valuable than lead or zinc, which makes flake size a consideration in evaluating a company. Do you focus mainly on flake size, resource size, grade, management, offtake agreements or all of the above?

RS: All of the above are important, but flake size and grade are very important. Flake size is important because you get much higher prices for larger flake. A large-flake graphite mine can command a 50% higher price, maybe more. Today, large flake is fetching prices above $2,500 a ton; more than $1 a pound. You can compare that to the lead and zinc. Grade is always important, because grade will bring down the overall mining costs.

Source: http://www.resourceinvestor.com/2012/08/22/big-flakes-finish-first-in-graphite-ron-struthers?ref=hp