Graphite is quietly emerging as a strategic industrial material in short supply, similar to the rare earth commodities. Years of underinvestment in new supplies, and growing demand sources, have caused prices to rise sharply in the past few years. China, as the world's dominant supplier, has significantly curtailed exports in an attempt to exert greater control in the market. As a result, it's not entirely surprising that the EU named graphite as one of 14 critical materials along with the rare earth elements.

A new global rush to find quality graphite supplies has just begun. However, not all graphite is created equally, and there is significant quality variation that determines its price and value, which can range up to a few thousand dollars per ton. When investing in graphite companies, it's essential to find the emerging producers with the right quality graphite to supply the fast growing end markets, assets with proximity to infrastructure, and a management team with skin in the game that can advance the mining project. I believe the two best companies positioned for significant valuation expansion are Northern Graphite (NGPHF.PK)and Zenyatta Ventures (ZENYF.PK).

Graphite, commonly known for its use in No 2 pencils, is quietly finding new applications that are poised to greatly expand its demand in the coming years. Currently, graphite is primarily used in the steel industry where it is added to bricks which line furnaces to provide strength and resistance to heat, used to line ladles and crucibles, and added to steel to increase carbon content. In fact, Japan is the largest world importer of graphite, and will almost certainly boost imports in the coming years as they set to rebuild infrastructure in the wake of the devastating earthquakes they recently experienced. Graphite is also used extensively in the automobile industry in gaskets, brake linings and clutch materials. It has a myriad of other industrial uses including electric motors (carbon brushes), batteries, lubricants and pencils.

However, its largest potential market is for lithium-ion batteries to support increased production of hybrid electric vehicles ("HEV") and electric vehicles ("EV"). It is estimated that there is over 2 to 3 kgs of graphite in a HEV and 25-50 kgs in an EV using lithium-ion batteries. Almost every major automotive producer currently has or is working on an HEV or EV. Examples include the Chevrolet Volt and the Nissan Leaf. Canaccord Capital Inc. estimates that the HEV and EV market will grow to 11 million units by 2015 and that by 2020 the market penetration rate of HEVs and EVs will reach 10-20%. According to Canaccord, this will increase incremental global lithium carbonate demand for battery applications by 286,000 tons. The natural flake graphite required to meet this demand is over 1.5 million tons, which is well above current annual worldwide production of natural flake graphite.