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Syrah Resources: Near-Term Pain, Graphite Price Upside

Small Caps | Jul 20 2023

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

Analysts remain positive on Syrah Resources despite current weak market conditions for graphite.

-Lower June quarter production and sales for Syrah Resources
-Balama mine remains paused due to a weak graphite market
-Medium-term cost guidance is maintained
-Vidalia expansion: increased costs and potential capital raise

By Mark Woodruff

It has been a tough June quarter for Syrah Resources ((SYR)) as operations have been paused since May at the Balama mine due to weak market conditions, while commissioning has been delayed for the Vidalia expansion and capital cost estimates have risen.

While the share price slumped to new 52-week lows of around 72 cents after the June quarter activities and cashflow report was released, brokers remain generally upbeat, despite setting materially lower 12-month target prices.

Buy-rated Shaw and Partners remains steadfast in its overall industry thesis: medium-term graphite prices must move up to incentivise new production given forecast graphite shortages and a lack of new supply.

Syrah Resources is the only vertically-integrated natural graphite active anode material supplier outside of China.

The Balama mine in Mozambique is the world’s largest graphite resource with a 350ktpa production capacity, and the company is also moving downstream by commissioning the 11.25ktpa Vidalia plant in the US state of Louisiana, with a further expansion to 45ktpa pending.

Tesla is an initial Vidalia customer and has signed up for 8ktpa for an initial term of four years at an undisclosed price and has exercised an option to take an additional 17ktpa from the expanded Vidalia facility.

Moreover, Syrah has non-binding memorandums of understanding (MOU) in place for additional material with Ford, Korean-based SK on Co (battery technologies) and LG Energy Solutions, subject to qualification and testing.

There was only 15kt of graphite production achieved in April (at 50% of capacity) and for the quarter, down from 41kt in the prior quarter, which missed Morgan Stanley’s forecast by -70%.

Both production and sales were down -63% and -43%, respectively, quarter-on-quarter.

Management noted anode material inventory growth in China has recently slowed and the decision to pause production was to both enable downstream inventory consumption and allow for an improvement in natural graphite demand conditions.

In the meantime, the company is focussing on improving plant reliability and implementing operational efficiencies.

Looking forward, the strategy is to sell from inventory until customer demand and price levels warrant sustainable Balama production for re-stocking and/or direct shipment sales.

Understandably, cash costs increased in the June quarter on reduced production volumes (and a higher diesel price) and came in at US$565/t for the period of April activity, while fixed costs continued across the whole period.

At a 10kt per month production rate, management explained, C1 (or basic cash costs) are expected to be in the range of US$580-620/t.

Despite this short-term uptick for costs, the company’s medium-term cost guidance remains unchanged at US$430-480/t.

More positively, the graphite price received during April was US$688/t, up from US$636/t in the March quarter, and 16% ahead of Macquarie’s forecast. The sales mix was weighted towards higher-priced coarse-flake product, for which ex-China prices remained strong.

The company shipped 2kt of fines to Vidalia during the quarter at a transfer price of US$400/t and expects to ship approximately 2kt per month once the Vidalia expansion project commissions.

Vidalia expansion

A final investment decision (FID) is expected in the second half of 2023 on the Vidalia expansion.

Management raised the capital cost of the expansion project by 5% to US$190m from US$180m during the quarter.

While construction is ongoing, final mechanical completion and commissioning of the facility has been delayed to the December quarter from the September quarter due to late supply of domestic piping, explains Shaw and Partners.

A sum of US$127m had been spent by the end of the June quarter.


Syrah is evaluating other funding options for the Vidalia expansion, including commercial bank funding and equity partnerships. Currently, management is negotiating with the US Department of Energy (DOE) to replace a US$220m grant with a larger tenure loan.

Alternative funding includes a significantly higher DOE loan, according to Macquarie, which will lower the equity gap.

This broker anticipates a US$300m DOE loan for the expansion, superseding the DOE grant. It’s assumed a funding gap of US$100m will be filled via an equity raising in the first quarter of 2024 at 70 cents per share.

FNArena’s daily monitoring of Syrah Resources consists of three brokers with two Buy (or equivalent) ratings and one Hold.

The average target price of the three brokers falls to $1.15 from $1.43, suggesting around 47% upside to the latest share price.

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