Syrah Resources (ASX: SYR): An attractive graphite play

Behzad Golmohammadi Behzad Golmohammadi, March 11, 2022

African graphite and Active Anode Material in the US

Syrah Resources Limited (ASX: SYR), together with its subsidiaries, engages in the exploration, evaluation and development of mineral properties in Mozambique. The company operates through two segments, graphite mining and Battery Anode Material production. Its principal project is the Balama graphite and vanadium project located in the Cabo Delgado province of northern Mozambique. The company produces, distributes and sells natural flake graphite from its Balama graphite project.

In addition, Syrah Resources produces Battery Anode Material through a downstream strategy at its Vidalia project located in the US. It produces Active Anode Material (AAM) for lithium-ion batteries and recarburiser products, which have applications in steelmaking, iron casting and lubricants. Syrah Resources Limited was incorporated in 2007 and is headquartered in Melbourne, Australia.

 

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Syrah is a player in the hot battery materials sector

Let’s take a look at the price chart of Syrah and see what moved the share price after the Corona Crash.

 

Syrah Resources

Syrah Resources, Daily Chart in Semi-log Scale (Source: Metastock)

 

❶ Syrah raises $56m at 90 cents per share for the construction of an Active Anode Material (AAM) plant at Vidalia.

❷ Syrah announces an offtake agreement with Tesla to supply natural graphite AAM.

❸ Equity raising of circa $250m at $1.48 per share.

 

Syrah’s share price rallied from 40 cents in October 2020 to more than $1.00 by the end of that year. This substantial share price increase was in line with the rest of the battery materials sector. The company’s management seized the opportunity and raised $56m at 90 cents per share (Point 1 on the chart). The capital raise slowed down the momentum in the share price and, consequently, the share price spent most of CY21 consolidating its gains.

 

Vidalia project is now well-funded up to production

In December 2021, Syrah announced an offtake agreement with Tesla (point 2 on the chart), which sent the share price flying to $2. Management, however, was quick to take advantage of the opportunity and conducted a massive capital raise of circa $250m at $1.48. This equity raising increased Syrah’s shares on issue by almost 34% and the dilution brought down the share price to its support level at $1.30.

According to the company’s announcement, with the latest capital raise, the Vidalia expansion project is now well-funded until the start of production, including the required working capital. Syrah expects to produce the first AAM at its Vidalia plant in the September 2023 quarter with a production capacity of 11.25ktpa AAM.

Syrah mentions the observable spot natural graphite AAM price range of approximately US$ 5,000 to US$ 7,000. It also estimates an all-in operating cost of US$3,109/t. Assuming the lower end of the price range for AAM, Vidalia is capable of generating about $US22m profits per year, in our view.

 

The risks

The biggest risk to Syrah operations is the country risk, in our view. The company’s graphite mine is in Mozambique. According to a report issued by the Basel Institute on Governance in 2019, of the 125 countries assessed, Mozambique had the highest risk associated with corruption, money laundering and terrorism financing.

Other risks include the fluctuations in the price of graphite and operational risks, which can affect the profitability of the business.

 

How to play Syrah Resources

The area in the green box on the chart is a massive area of price congestion where the share price consolidated for most of 2021, between $1.00 to $1.30. This creates technical buy pressure once the share price falls below $1.30. Around $1.30 presents attractive buying opportunities, in our view. The bottom of the range at $1.00 can be used as a stop-loss level. Based on the potential resistance levels, our targets for the share price are $1.50 and $2.

 

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Frequently Asked Questions about Syrah Resources

  • Does Syrah Resources pay a dividend?

    No, the company is focused on expanding its mining operations in Mozambique and setting up its US manufacturing facility for Active Anode Material.

  • Is SYR a buy right now?

    We believe the stock can be bought between $1.00 and $1.30, with a price target up to $2.00.

  • What does Syrah mine?

    The company mines for graphite, a resource used in a range of different products, including Lithium-ion batteries.

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