Unknowns Hamper Syrah Resources

This story features SYRAH RESOURCES LIMITED. For more info SHARE ANALYSIS: SYR

Brokers remain divided over the amount of risk to apply to graphite developer Syrah Resources, given the number of unknowns in its battery strategy.

-First output at Balama expected in late 2018, with commercial plant planned for Louisiana
-Near-term pricing risk for flake graphite keeps Morgan Stanley on underweight footing
-Still expected to deliver a sizeable graphite business by 2019
 

By Eva Brocklehurst

Syrah Resources ((SYR)) has indicated a slower development of its battery strategy, with higher capital expenditure and a delay to its Balama project. The company expects demand for its natural graphite to increase to 1mtpa by 2025, with 2019 coinciding with the time frame it expects for the commercialisation of its downstream facility. The company also expects further demand upside potential in the fixed energy storage market.

At the time of the ramp-up of Balama, with first output expected by the fourth quarter of 2018, the company intends to complete a Bankable Feasibility Study (BFS) for a commercial plant to be located in Louisiana, US, for an initial 20,000tpa, expected to be raised to 60,000tpa.

The company plans to sell uncoated and, eventually, coated spherical graphite products and expects the total capital cost of the facility to be US$125-160m. If demand outstrips this capacity, Syrah Resources has ascertained it can make a quick decision on a second commercial plant in the Asian region, although Credit Suisse points out the advantages of this pale in comparison to the US.

Morgan Stanley acknowledges Balama is a world-class reserve and that building downstream processing is a sensible option. Yet the broker envisages near-term pricing risk for flake graphite, which may lead to significant working capital requirements, financing and execution risks that do not appear to be factored into the market at current levels.

Based on the broker's graphite price deck and weightings applied to both its bear and bull case valuations, the equity is considered to be trading above fair value. This keeps the broker on an Underweight rating which, along with a overweight view on the Australian resources sector, makes the stock a relative underweight.

The announcement of any new offtake agreements would likely be positive but the broker notes actual pricing, and the existence of any discounts to achieve offtake contracts, will only be clear once revenue recognition commences. This latest update drives a lower valuation for the stock, although Morgan Stanley accepts that the company is showing a renewed focus on quality and getting its battery strategy right.

The company has signalled it is organising a working capital facility but the broker expects limited cash in 2017 and 2018 will constrain its ability to fund the equity component of the battery strategy.

Credit Suisse is at the other end of the spectrum. Strong US government support and potential incentives such as low-cost power, skilled labour and infrastructure underpin expectations that permits and approvals will come faster. The broker was disappointed by the lack of an update to capital expenditure and operating expenditure numbers versus 17 months ago, but acknowledges that expecting this detail before the BFS was ambitious.

Credit Suisse recognises the uncertainty around market demand for the spherical offering, but points out knowledge is yet to be gained from the BFS in order to provide performance expectations. Still, the broker believes existing offtake agreements signal 2019 will start at 20-30,000tpa and end at least at 60,000tpa.

Credit Suisse accepts the risk of guessing the profile for 2019 and beyond, given this is totally unguided in terms of operating costs at sub-nameplate production, other than that initial scale could be a little higher than guidance for 20,000tpa on commissioning.

Macquarie took the strategy update as a positive development. The broker believes the company has made significant advances and appears well placed to deliver a very sizable global anode material business. While the broker believes the project has been somewhat de-risked, it now takes a more conservative view of what can be achieved. The records continue to tumble on Wall Street. Dow up 67. Valuation falls accordingly, with the broker's target downgraded to $5.40 from $6.60 previously.

Deutsche Bank notes there is nothing in the update that supports the share price slump, as ramp-up delays are common. The company has confirmed its downstream strategy is intact and also that negotiations to sell flake concentrate to existing parties in the battery supply chain are continuing.

Deutsche Bank likes the fact that the company has at least five active discussions under way with new potential downstream customers, which could be a significant catalyst for upside. Moreover, short interest in the stock has more than doubled in the last five months. The broker estimates the current share price implies a flat US$700/t realised price for graphite and ascribes no value to the downstream enterprise whatsoever.

There are three Buy ratings on FNArena's database with one Sell (Morgan Stanley). The consensus target is $5.74, suggesting 103.1% in upside to the last share price. This compares with $6.29 ahead of the update. Targets range from $2.75 (Morgan Stanley) to $7.80 (Credit Suisse).
 

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