MoU Could Signal Upside For Syrah Resources

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

Syrah Resources is progressing its graphite business, signing a non-binding MoU with BTR New Energy Materials.

-A subsequent more formal agreement could be a significant upside catalyst
-Sufficient capital for current construction and commissioning schedule
-Concerns linger regarding whether all potential production can be sold
 

By Eva Brocklehurst

Having been in discussions with Chinese battery anode producers for some time, Syrah Resources ((SYR)) is now progressing its graphite business with a non-binding Memorandum of Understanding with BTR New Energy Materials.

BTR is a global supplier of battery anode materials based in Shenzen, China, and has significant exposure to electric vehicle sales. Syrah has indicated the partnership relates to sales and supply chain co-operation.

While details are yet to be divulged, Deutsche Bank interprets the statement to mean that sales imply a concentrate offtake agreement and supply chain co-operation implies greater participation to allow Balama concentrate to be sold to end-markets. This could be by a toll treating arrangement as Syrah's Balama operation is ramped up.

The broker believes a more formal agreement could be the most significant de-risking catalyst for the stock to date, which has struggled to offset management changes, construction delays and concerns around the graphite market over the last six months.

Balama

Deutsche Bank considers the evidence indisputable that the company owns the world's highest quality graphite project, Balama, in Mozambique. The challenge is to identify ways of getting the product to the battery market to avoid displacing tonnage in traditional graphite markets, and influencing spot pricing.

Deutsche Bank notes the company has minimal internal expertise in developing downstream graphite processing, which makes any partnership with BTR a logical one. Overall plant construction at Balama is now 70% complete.

The company has reiterated US$193m guidance for capital expenditure and plans to have a US$50m working capital facility in place in the next quarter. Based on the current construction and commissioning schedule there is sufficient capital on hand, Deutsche Bank observes. If further delays are incurred the company is expected to draw down on the facility late in the third quarter.

Morgan Stanley is positive about the MoU and conversion to a formal offtake agreement would be an upside risk to its forecasts. The broker acknowledges the company's current relationships for the downstream products are sufficient to underpin construction of the spherical plant.

Nevertheless, flake graphite offtakes are required to generate cash flow and fund the construction of the downstream business, the broker asserts. Proportions of coated and uncoated spherical graphite are also important valuation drivers for the company's downstream strategy.

Morgan Stanley has an Equal-weight rating on the stock, maintaining its concerns regarding offtakes while also believing the valuation reflects fair value.

The broker concedes more flake graphite offtake could boost sentiment on the stock, as could a faster ramping up of spherical graphite production in light of the demand. However, the downside includes potential capital requirements for the spherical plant which may require external funding and come at a high cost.

Macquarie, yet to comment on the MoU, noted earlier this year that, while construction at Balama is on track, capital expenditure is creeping higher. This is a lingering concern as, while construction is fully funded, the level of working capital required for ramping up is a risk.

Credit Suisse welcomes the BTR name as a counter party to the company's graphite business, as it implies that significant product testing has been undertaken. While the scope of the arrangement is yet to be finalised, the broker suspects it could extend well beyond sales of flake graphite.

The broker also suggests the announcement addresses market concerns, as it implies further volume offtake. There have been concerns voiced that the company would be unable to sell its potential production.

Moreover, the broker believes the leading position of BTR in China provides a clear source to market Syrah product as this is the world's largest lithium ion and electric vehicle growth market. The company has deferred its sales and marketing update that was planned for April 4 while it seeks to advance commercial discussions with BTR.

FNArena's database has three Buy ratings and one Hold (Morgan Stanley). The consensus target is $5.21, suggesting 79.1% upside to the last share price. Targets range from $2.75 (Morgan Stanley) to $7.80 (Credit Suisse).
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms