* Graphite-linked shares leap on hopes of battery demand
* Stock moves similar to recent rare earth rally
* Analysts skeptical about sustainability of boom
By Julie Gordon
TORONTO, May 6 (Reuters) - Louis James, a mining investment strategist at Casey Research's office outside Seattle, first started to hear the odd question about graphite a year ago.
Today the buzz is deafening, he says, and shares of companies involved in graphite - a once-obscure segment of the mining industry - have soared, probably to unsustainable highs.
Natural graphite is expected to become the material of choice to make advanced lithium ion batteries that power smartphones and tablet computers, as well as hybrid and electric vehicles, among other products. Most of the world's supply of natural graphite currently comes from China.
Like rare earths two years ago, graphite is red hot, and the excitement has the shares of small Canadian miners exploring for the stuff doubling and even tripling almost overnight.
"If that isn't the 'Flavor of the Day,' I don't know what is," James says.
Shares of Northern Graphite Corp have climbed to C$2.51 from C$0.95 on the TSX Venture Exchange since the beginning of the year. Zenyatta Ventures Ltd has climbed from 14 Canadian cents to 59 Canadian cents, while Focus Metals Inc has jumped 40 percent to 97 Canadian cents.
While the attention is not entire unwarranted - natural flake graphite prices have nearly tripled in the last two years after more than 20 years of stagnation - many experts believe the sector is already headed for bubble territory.
"In a three-month period we had prices double, just that quickly," said Stephen Riddle, chief executive of Asbury Carbon, which makes natural and synthetic graphite products. "It's kind of like how the stock market works - it was on perceived future demand."
Prices rose last year in part on concerns that China, which produces some 70 percent of global supply, will choke off exports much as it did with the rare earths. Meanwhile, demand for graphite is expected to surge. That's a tempting imbalance that many investors might find hard to resist.
But experts say concerns over China are overblown. In contrast to rare earths, there are plenty of alternative sources of graphite around the world. Indeed, only 51 percent of natural graphite imported into the United States from 2007 to 2010 came from China, with nearly 40 percent coming from Canada and Mexico, according to the U.S. Geological Survey.
Riddle said his company, which has been in business for four generations, has had no trouble finding graphite supplies, and prices are even softening.
The second big question mark hovering over the segment is synthetics. Battery makers actually prefer synthetics because quality is easier to control and they can be produced most anywhere. In fact, the battery industry accounted for less than 5 percent of natural graphite demand in 2011.
"The uptake in battery growth is a little over hyped, I think, given that most of the graphite demand today for lithium ion batteries is for synthetic graphite," said Jonathan Lee, a battery materials analyst with Byron Capital Markets.
That may change, however. Synthetic graphite can cost more than $20,000 a tonne, while unprocessed flake graphite costs $1,500 to $3,000 a tonne. Add in processing and coating, and the price is about $8,000 a tonne, meaning natural graphite represents major cost savings.
The price differential has analysts and would-be miners speculating that as demand for lithium ion batteries grows and battery makers need to buy more graphite, they will eventually choose cheaper natural flake over synthetic.
"Do I think there's an inevitable switchover? Yes," said Lee. "However, I do think that will take time, and I don't think that it is imminent."
Graphite, which is highly conductive and can withstand intense heat, is now used primarily in refractories for steel making and in crucibles to hold molten metals.
That means any companies that are successful in bringing a graphite mine into production in the near term will look to do business with those traditional customers.
Even so, analysts believe there is space for more graphite production outside China in order to stabilize the market. Already companies in Brazil are expanding output, while two closely held Canadian miners are coming online soon.
"It comes down to people having to be very judicious on companies and projects," said Mackie Research analyst Matt Gowing. "There's only going to be room for a limited number of players."
Northern Graphite, Focus Metals and Energizer Resources Inc are often mentioned by analysts as promising development-stage companies.
Investors who are still eager to join the graphite rush should consider the rare earth boom and bust before jumping in, industry experts warn.
Rare earths were pushed from obscurity into the mainstream in 2010 as China, which then produced more than 95 percent of global supply of the group of 17 metals, clamped down on exports. This sent prices sky-rocketing.
Almost overnight hundreds of companies popped up promoting plans to mine the obscure metals, which are essential for making everything from Apple Inc's iPhone and Toyota Motor Corp's Prius cars.
Shares of many rare-earth companies, most of whom held nothing more than early-stage exploration properties, tripled between April 2010 and April 2011. The bubble burst in mid-2011 when rare earth prices started to tumble.
By April 2012, most would-be rare earth miners were worth less than where they started two years earlier. Some see history repeating itself with graphite.
"You want to be very skeptical of any graphite company that was a rare earth company last week and an uranium company last year," said James.
"You could double your money on a company that has nothing. However, there's no way to tell when a 'Flavor of the Day' will become a 'Flavor of Yesterday.'" (Reporting by Julie Gordon; Editing by Frank McGurty and Jeffrey Hodgson)