Syrah Resources (ASX:SYR): The good, the bad and the ugly

Ujjwal Maheshwari Ujjwal Maheshwari, November 2, 2023

Has Syrah Resources (ASX: SYR) turned a corner? Although it has shed nearly two thirds of its value in the first 10 months of 2023, it has rebounded from its September lows and gained nearly 25% in the month of September.

The surge occurred in the last two weeks of October due to the issuance of Chinese export licenses for graphite which plays a critical role in battery production. This development has sparked a significant market interest in the company. But is this the start of a broader uptrend, or just a dead cat bounce?


Syrah Resources (ASX:SYR) share price chart, log scale (Source: TradingView)


Why there’s always been interest in Syrah

Simply put, because Syrah is one of the largest graphite companies on the ASX. And there is significant interest in graphite due to its use in battery applications, especially electric vehicles. It is also important in steelmaking, iron casting and lubricants.

Syrah has a project in Mozambique called Balama which has been in production since late 2017 and is the biggest graphite mine in the world. It has a 108Mt reserve at 16% Total Graphitic Content (TGC).

This company also hangs its hat on an Active Anode Material (AAM) plant in the US state of Louisiana which it is building and about to commence production on. Syrah has a binding offtake agreement with Tesla as well as a potential agreements with Ford and Samsung, not to mention significant funding from the US Department of Energy.



The challenges

Syrah has not been without problems, however. The first is that price of graphite has fluctuated substantially and this has made a significant difference to the viability of its projects. It has hit the pause button on Balama several times, most recently in early September.

The second is that it has operational problems at Balama. Keep in mind that the company started production right after the Preliminary Feasibility Study (PFS), it did not do a Definitive Feasibility Study (DFS) as most other companies do.

Third, it has struggled due to perceptions of sovereign risk in Mozambique where Balama is.

Fourth, investor discontent with the stock over all of the above. The stock has been kicked out of the ASX 200, a move that would have resulted in many institutional shareholders selling. It has also had to raise $150m in convertible notes to Australiansuper.

Syrah’s plight has led to significant short positions in its shares, with potential holdings as high as 11%. These short positions signify investor skepticism about the company’s prospects.


Is there upside now?

Maybe, but there’s no guarantee. The company will need to sort out its operational issues and the price of graphite will need to stabilise – these are non-negotiables.

UBS analysts suggest a potential 50% surge in spot prices for graphite, driven by heightened demand from electric vehicle manufacturers favouring cost-effective lithium iron phosphate batteries.

And despite production issues, things haven’t been that bad from a sales standpoint. During the last quarter, the company reported improved sales of natural graphite and heightened demand from Chinese anode customers. Notably, 23kt of natural graphite was sold to third-party buyers, with the remaining 4kt sent to the company’s Vidalia plant in the United States. The production campaign produced 18kt at a recovery rate of 73%, which improved to 82% in the final two weeks.

In September, the cost of Balama C1 was $484 per tonne, with fixed expenditures reaching $4 million per month throughout the closure period. The weighted average sales price was $528 per tonne, with minor changes owing to sales mix and market circumstances.

Syrah had US$81 million in cash at the end of the quarter, including US$31 million in restricted funds. Furthermore, the firm has prospective financial alternatives that might help improve its balance sheet. The company plans to continue operating Balama in campaign mode for the December quarter, focusing on high-capacity production campaigns followed by periods of curtailment based on inventory levels and sales demand.


Analysts’ Revision and Investor Caution

Analysts covering Syrah Resources have recently downgraded their revenue and earnings per share forecasts for the year. This indicates a noticeable decline in analyst sentiment towards the business.

The consensus revenue estimate for 2023 is now US$85 million, representing a near 50% decrease from the previous 12 months’ sales figures. Ouch. As for the bottom line, its EPS loss is expected to double.

However, 2024 is expected to see revenue nearly triple to $250m, the EBITDA line to improve from $78m in the red to $4m in the black and the EPS position to improve slightly.

Then turning to 2025, $357.8m in revenue, $115.1m in EBITDA and a narrow 4c per share EPS loss.

So this could be one for investors with two traits – patience and trust. Yes, this may be true of all stocks but particularly for companies like Syrah that are down in the doldrums.

Sir John Templeton said the most dangerous words in investing were ‘It’s different this time’. Whether or not Syrah gains will be whether or not this statement rings true right here and right now.


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