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Heightened Cash Flow Concerns For Syrah

Small Caps | Feb 06 2019

Challenges with Balama graphite production beset Syrah Resources over 2018 and brokers hope for a smoother ride in 2019.

-Production downgrades unrelated to quality of graphite resource or plant design
-Brokers ascertain urgent need to achieve cash flow momentum
-Pricing for the longer term uncertain


By Eva Brocklehurst

While a significant milestone in the declaration of commercial production at Balama occurred for Syrah Resources ((SYR)) in 2018, several setbacks and a downgrade to 2019 guidance have spooked the market.

Balama, Mozambique, appears to have recovered from the interruptions to production that occurred in 2018 and will continue to ramp up over 2019. Developing the market for the company's spherical graphite products is the main challenge brokers foresee.

The production downgrades over 2018 appear unrelated to the quality of the resource or the design of the plant, with most analysts attributing the interruptions to inexperience in operating and maintaining Balama and controlling logistics.

Syrah Resources expects 2019 production of 250,000t versus prior estimates of 250-300,000t. Costs are expected to trend towards US$400/t over the course of the year, from around US$550/t.

While not providing a specific price, the company reported achieved pricing in the December quarter was lower, affected by higher sales of fines. All numbers in the guidance for 2019 fell short of Deutsche Bank's expectations, while UBS believes costs and pricing guidance were the most disappointing.

The position of the mine in the global graphite market remains the key uncertainty, in Macquarie's view. Still, there is a future in the long term, underpinned by the battery anode material (BAM) project in Louisiana, which accounts for around 60% of the broker's valuation.

Meanwhile, natural graphite production was 33,200t, in line with guidance for the December quarter but down -14% quarter on quarter, as fire damage affected the primary classifier unit in October. Sales rose to 37,000t in the quarter, supported by a draw down of inventory, while recoveries improved to 70%.

Overall, mishaps in the past year were disappointing but Credit Suisse believes this overlooks the company's achievements and the opportunity that exists. The company has installed 5000tpa milling capacity for its BAM project. Purification equipment is being installed and the first customer qualification product was dispatched mid-January and phase 1 of the commercial scale feasibility study has been completed.

Balance Sheet

Specifically, the limited balance sheet capacity and expectations of a substantial cash consumption in the March quarter have put the focus squarely on the near term. Positive operating cash flow has been pushed out again, now expected early in the June quarter.

Credit Suisse asserts the company must demonstrate quickly how it can achieve positive momentum and remove concerns about the balance sheet. UBS agrees and suspects, with net outflows likely to take the cash balance below US$50m, attention will return to the need for a debt facility.

Incorporating the production result, lower realised and forecast pricing and a slower ramping up of BAM production to commercial levels, results in meaningful reductions to Macquarie's earnings forecasts of -44% and -56% for 2019 and 2020, respectively. The broker incorporates an increased risk premium in its weighted average cost of capital estimate, to reflect the uncertainty in how the graphite market will evolve.


UBS suspects the market is trying to ascertain a sustainable long-term price for the company's product and factors in a long-term basket price of US$824/t. Credit Suisse expects a medium-term achieved basket price of above US$600/t, as lower-priced 2018 contracts are depleted and sales diversify away from China.

A quality premium is increasingly being paid to reflect a portion of the value in high-purity end market applications. Also, re-basing of the Chinese price is occurring, as China becomes a net importer and competes for graphite with the rest of the world.

There is no question in Credit Suisse's view that Syrah Resources is responsible for pressuring the graphite price, by putting substantial new supply into the market when there is yet to be a significant boost in demand from electric vehicles.

Still, the broker points out, end market access is improving and increased sales at higher prices are expected ex China. Grade will also lift with increasing utilisation of the attrition plant, which can lift great to 98%.

FNArena's database shows three Buy and two Hold ratings. The consensus target is $2.72, suggesting 82.6% upside to the last share price. Targets range from $2.00 (Deutsche Bank) to $4.05 (Credit Suisse).

Note that Syrah is presently the second most shorted stock on the ASX at 16.7%.

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