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Why did the Tirupati Graphite (TGR) share price explode last week?

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The Tirupati Graphite (LSE:TGR) share price has seen some explosive growth over the last week. In the space of a few days, the stock jumped more than 40%. And since its listing in December last year, the TGR share price has increased by over 160%. But what caused this massive surge? And should I be adding this business to my portfolio?

What’s going on with the TGR share price?

Tirupati Graphite, as the name suggests, is a graphite producer. It operates two mining and processing facilities across Madagascar called Sahamamy and Vatomina. Collectively these sites produce around 3,000 tonnes of high-quality (96% purity) graphite flake each year, with an additional 9,000-tonne capacity expected to be added in Q2 2021. It is also worth noting that the management team is planning on expanding this capacity to 84,000 tonnes by 2024.

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Graphite has several practical uses, especially in green energy technology. But while the rapid expansion of its production capabilities is impressive, they don’t appear to be the driving force behind the recent growth in the TGR share price. So, what happened?

A story had been published in The Daily Telegraph announcing that Tirupati’s research division had successfully synthesised a new aluminium-graphite composite. This material is stronger than aluminium and significantly more conductive, making it a potential substitute for copper in thermal, power, and propulsion systems.

This may actually be a ground-breaking achievement. Copper has many attractive qualities. However, it has two distinct disadvantages — its cost and, more importantly, its weight. Copper is an incredibly dense material. And so, if this new composite proves to be a viable alternative to the metal, the weight savings for aircraft, electric vehicles, and turbines could be considerable. This, in turn, may lead to a significant boost in efficiency, reducing operational costs as well as the environmental impact these technologies have.

With that in mind, seeing the TGR share price explode on the announcement is understandable to me.

The risks to consider

As exciting as this achievement is, there is still a long road ahead. The new composite material still requires extensive product testing before it can be entered into circulation. Tirupati’s management team have begun collaborating with leading industrial end-users, including Rolls-Royce. But it may be quite sometime before any large-scale manufacturing begins – maybe even years.

Until that time, the company remains firmly reliant on its graphene mining and production business. However, worldwide adoption of this material remains slow. Consequently, in its 2020 financial year, the firm only generated total revenue of around £790,000. By comparison, based on today’s TGR share price, the company’s market capitalisation now stands at about £105m. Needless to say, that’s quite a lofty valuation, especially for an unprofitable business.

The bottom line

As an ex-aerospace engineer, the prospect of a lightweight copper alternative material with similar conductive properties is fascinating. But as an investor, I can’t ignore that the TGR share price looks heavily inflated by investor expectations. Therefore, I’ll be keeping Tirupati on my watch list until more information is released surrounding its product tests.

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Zaven Boyrazian does not own shares in Tirupati Graphite. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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