Tirupati Graphite PLC (LON: TGR) shares are up a couple of percent in London today on the news that their Madagascar graphite mining project at Sahamamy continues to go to plan. Equipment ordered has arrived – no sure thing these days given shipping constraints – and further expansion is being commissioned. So, all looks good.
We’ve talked before here about Tirupati Graphite, (and again about Tirupati here) and noted that, as above, they seem to be getting on with the business of mining graphite rather successfully. As we’ve also noted before about mining companies there are a number of stages that have to be gone through. Is there something worth mining there? Can it be mined, can we finance mining it? We might think that getting a yes to all of those and then actually mining is the end of it. But there’s one more consideration we’ve got to take into account.
Tirupati’s success with graphite is going to depend, intimately, on what everyone else is going with graphite. The important point is here, in this from Tirupati’s stock market update: “to increase total production capacity in Madagascar to 84,000 tpa by end 2024; believed to represent c.5-7% of current global demand”.
This is a vital point about any miner for minor materials. Yes, sure, we all know that the electric vehicle revolution is going to mean increased demand for graphite. It’s one of the new “must have” materials alongside lanthanum, cobalt and lithium. But an increase in demand isn’t enough to ensure that a producer is going to be profitable in their production. What also matters is how much new supply comes to market? It is, after all, the balance of supply and demand that determines price, not one or the other exclusively.
If we’re thinking about some small gold mine somewhere then we know that the global gold market is so large that this new production isn’t going to change it. Perhaps by US cents per ounce, OK, but no more than that. Actually, so much gold is recycled that new production has near no impact upon the global price.
This is not true of minor metals. When China restricted experts of rare earths back in 2010 the opening of both Molycorp (the Mountain Pass mine) and Lynas cratered global rare earths prices. Just two new mines were enough to more than cover expended demand. Lithium mines that got funded in the 2013 boom struggle to profit now – the expansion in production ran ahead of predicted demand.
This could happen with graphite, it might not. That’s the big uncertainty here about Tirupati. How many other people are prospecting for, financing, opening graphite mines? Note that this one mine is 5 to 7% of global demand. Tirupati’s profitability is going to depend upon how many other people also add 5 or 7% of global demand to global production. We don’t know which way it’s going to go for Tirupati Graphite but it’s something we always have to consider concerning minor metals and mining. Not just how good our target company is or isn’t, but what’s everyone else doing at the same time?
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Tim Worstall is a freelance writer specialising in economics and the financial markets.