Extraordinary Potential In Syrah Resources

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

-Demand from emerging technology
-Very high rates of return
-Permits, offtake well advanced
 

By Eva Brocklehurst

Syrah Resources ((SYR)) has piqued interest for some time, given the potential of a long-life graphite mine at Balama, Mozambique. A definitive feasibility study (DFS) was recently released which is based on a maiden ore reserve of 81mt at 16% making it the largest flake graphite reserve in the world. There is potential for significant operating margins once production gets underway. First production is scheduled for late 2016.

Why graphite? The products suit several growth industries including rechargeable batteries. Demand growth is being driven by rapidly emerging disruptive technology, Credit Suisse observes, principally for energy storage. Syrah Resources plans to produce a range of products to suit existing offtake agreements as well as future potential customers. The graphite has been shown to be suitable for use in carbon anodes and refractory industrial operations as well as anodes for aluminium production.

Syrah Resources has commenced a scoping study for the development of a spherical graphite production facility through which it plans to meet growth in demand for use in lithium ion batteries. This is considered to be a high value opportunity as the products sell for 3-10 times average flake graphite prices.

The DFS projects a US$160/t mine gate cost and margins of US$650/t against a US$1,000/t average graphite price assumption. This exceeds Credit Suisse's assumptions. Spherical graphite production is expected to follow as phase 2 project, with production required in 2017 if sales are to be made to the Tesla Motor factory. This factory requires spherical graphite beyond current world supply.

The broker highlights the fact that the market has become accustomed to modest returns on mining investments, with 15% internal rates of return (IRR) typically targeted and rates as low as 12% often approved. Hence, the Balama phase 1 is outstanding, given it is a 71% IRR project based on the DFS. Credit Suisse continues to assume a more modest graphite price of US$850/t as, despite higher selling prices, market prices are likely to decline as supply increases. Of note, significant displacement of materially higher-cost synthetic graphite is also required before prices decline materially. The broker has an Outperform rating and $7.30 target.

Canaccord Genuity revises its valuation after the DFS, modelling slightly higher establishment capex and a 12-month production ramp up with a Buy rating and $6.85 target. The broker's analysis suggests project economics are most sensitive to a change in the price obtained for graphite fines, as these currently represent 46% of the classified product from the proposed processing facility. Syrah Resource has indicated that 100-150,000 tonnes per annum have been assigned to the re-carburiser market though an memorandum of understanding with Asmet at a price of US$1000/t.

The broker also notes the current development plan excludes the potential for vanadium production. The resource at Balama also represents one of the largest vanadium deposits in the world. A vanadium project is reliant on low-cost power and the broker is mindful that given current problems with reliability of power in the north of Mozambique, this is unlikely to be at the forefront of development considerations before 2018.

For Deutsche Bank it is time to take a close look at the project. Project economics appear very robust and key metrics have either met or exceeded expectations. Country concerns are reduced because of the advanced stage of permits and approvals. There are still some risks with marketing and the broker assumes graphite prices that are 5.0% below the DFS estimate.

The next stage is a funding solution. The DFS will allow the company to finalise arrangements and advance negotiations with customers. Deutsche Bank assumes a $30m capital raising to cover ongoing costs but there is a possibility a larger amount will be considered. Deutsche Bank conservatively assumes a 10% capital over-run with full production rates not expected until 2018. The broker values Balama at $1.28bn and with the project now considerably de-risked, retains a Buy rating and $6.60 target.

Mozambique's new mining act, implemented earlier this year, is more punitive and presents a material value constraint to other graphite explorers in the country but Credit Suisse emphasises this does not apply to Syrah Resources. The company has stated the government has confirmed in writing that the fiscal parameters defined in its lease, already granted, are in place and continue to apply. The land access agreement remains outstanding but the company has been authorised to progress site works.

As far as Credit Suisse can determine, Syrah Resources is the only graphite explorer that has confirmed a reserve based on a high quality, comprehensively drilled resource. Few other early stage explorers have undertaken drilling of any density and few have actual mining leases or test results.
 

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